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XVII Юридический форум России
19 марта 2021 г. в Москве состоится XVII Юридический форум России. Организатор – «Ведомости. Конференции».
Полный текст

Pharmaceutical industry: the wind of change

The pharmaceutical industry is going through a series of regulatory changes. Hardly had companies adapted to the Law on Medicine Circulation, when a new Law on the Fundamentals of Public Healthcare came into force. The third antimonopoly package, which became effective at the beginning of 2012, brought a fresh need for adjustment. We will discuss the way the third antimonopoly package has affected the pharmaceutical industry, as well as its practical nuances and pitfalls, with Natalia TOTAHEVAGE, Johnson & Johnson’s Strategic Partner Relations Director for Russia, CIS and CEE. Natalia is also a member of the Non-Profit Partnership “Promotion of Competition” and serves on the Federal Antimonopoly Service’s Expert Board for Promoting Competition in the Social Sector and Healthcare.

Natalia, do you think that the third antimonopoly package is generally a good thing for the pharmaceutical and medical product market as a whole?

– The third antimonopoly package makes many provisions of the Law on the Protection of Competition (the ‘Competition Law’) easier to understand. Among other things, it introduces new definitions, lifts some of the restrictions and sets clear criteria for certain types of antimonopoly violations, including coordinating economic activity.
This will help the Federal Antimonopoly Service and courts in various regions interpret the Competition Law in a consistent manner, which will certainly create more predictable and transparent rules for businesses.

Under the third antimonopoly package, an agency contract is not treated as a vertical agreement. What impact will that have on businesses trading in medicines and medical products?

– It means that an agency contract is no longer subject to the restrictions imposed to vertical agreements, save for some other limitations that may apply in particular cases.
This may give foreign pharmaceutical companies and medical product manufacturers greater flexibility in developing their business models. It is particularly the case for those of them who are not importing or selling their products through a subsidiary to gain a share of the Russian market.   

Vertical agreements may now set a maximum price for resale. What do you think will be the result of such price-related amendments?

– First of all, allowing this is in line with the social aims of antimonopoly legislation. It is the consumer who is supposed to benefit from it by purchasing products at a lower price. The possibility to fix the maximum price for resale must be supported by specific examples.
Nevertheless, some issues remain unresolved, such as whether it would be legitimate to set a maximum price for resale in a contract between a seller that is a business organisation and a buyer that is also a business organisation if the latter is going to resell the product to a retailer for subsequent resale to individual customers and if the maximum price is to be shown, among other things, on consumer packaging?
This example is of particular importance for pharmaceutical companies and companies selling medical products that are used directly by consumers. The companies that plan to apply the new provision should probably ask the Federal Antimonopoly Service (‘FAS’) for additional clarifications.

The third antimonopoly package clarifies the definition of economic activity coordination. Is that amendment going to make life easier for the pharmaceutical industry?

– For a long time, the concept of coordinating economic activity used to be interpreted in differing ways depending on the particular circumstances of the case. This allowed for pharmaceutical companies to be held liable for violations because of a broad interpretation of that concept and incorrect treatment of what businesses were doing, including of the way companies were implementing distributor agreements as regards product promotion.
New criteria for violations will make things easier both for the antitrust authorities, in terms of holding such businesses liable for coordination, and for companies, in terms of implementing their marketing strategies in Russia.

Natalia, what is your take on the new powers given to the Federal Antimonopoly Service, such as to send an antimonopoly violation warning or to issue an improvement notice to discontinue acts/omissions that violate antimonopoly legislation?
– In my view, preventing potential offences makes life easier both for antimonopoly authorities, as they do not have to spend their resources on investigating violations, and for companies, who do not have to pay fines.
However, I do not think warnings are going to be widely used in the pharmaceutical sector. Due to the specifics of their business, pharmaceutical companies tend to avoid making public announcements about their intended moves on the market.
By contrast, improvement notices will have a positive impact on the practices prevailing in the pharmaceutical industry.
Given that market share thresholds for achieving a dominant position are relatively low, including where a dominant position is held collectively, and product interchangeability criteria are vague (for example for medical products), we can have a following situation. Guided by its corporate policies, a company with an insignificant market share refuses to enter into a contract or includes in its contractual offer a product which the other party does not need (this is referred to as bundled sales). It is subsequently classified, on formal grounds, as having a dominant position during the respective period of time. An improvement notice will help companies that have committed such violations to take prompt action to correct them and to avoid committing them in future.

A draft version of what is called the fourth antimonopoly package, which is already available, requires companies to publish their trading policies. How will these amendments affect the market for pharmaceuticals and medical products?

– What is now often referred to as the ‘fourth’ antimonopoly package only contains the proposed amendments which were not included in the third package and which FAS would like to publish once again for discussion in greater detail.
The suggestion that companies be required to publish their trading policies is due to the fact that dominant players on the market have very non-transparent criteria for selecting customers. In the event of refusals to enter into contracts, FAS suggests that companies resort to a self-regulatory procedure whereby all refusals must be published on the supplier’s website, while a customer who has received a refusal will be entitled to seek a court determination as to whether the refusal was economically justified.
I think that rather than aiming to put their business under total control, FAS wants to give those monopolies who have already violated antitrust law an incentive to create transparent rules on highly concentrated markets.
Having said that, it is important not to go to extremes and make companies disclose their know-how to third parties as part of publishing their trading policies. If the proposed amendment is to be enacted, it should therefore be corrected in this respect.

The Federal Antimonopoly Service is considering allowing monopolies to refuse to enter into contracts with companies whose executives have been held criminally liable for serious and particularly serious crimes. Can you please comment on this initiative?

– I have recently spoken on antimonopoly issues at a trade forum. When preparing to my presentation, I consulted the Russian Criminal Code to see if taking and giving bribes (articles 290 and 291, respectively) were classified as serious and particularly serious crimes, and this proved to be the case for all types of such offences.
If we look at foreign companies that are within the extraterritorial reach of overseas anti-corruption laws (like the FCPA in the US), any improper payment and/or promise of one made by a distributor for the purpose of obtaining or retaining business will trigger a refusal to enter into a contract with such a distributor. Therefore, a right to refuse to enter into a contract is in line with foreign law.
This will help eradicate sales-related corruption, including sales in the healthcare sector.

In your opinion, how has the market for pharmaceuticals and medical products been affected by the Law on the Fundamentals of Public Healthcare that came into force late in 2011?

– Federal Law No. 323-FZ dated 21 November 2011 On the Fundamentals of Public Healthcare in the Russian Federation (the ‘Law’) aims to solve a host of problems that have accumulated in the Russian healthcare sector. It makes an attempt to set a three-year timeframe for state guarantee schemes and to introduce mandatory standards and procedures for medical services. However, it fails to fully address many issues.
For instance, it may prevent state guarantee schemes from covering any medical products, apart from human implants, used by low-income households where this is not part of medical services provided by hospitals and outpatient clinics financed from the Federal Mandatory Medical Insurance Fund. This should be corrected.
The Law also includes provisions that deal with the sales of medical products rather than public healthcare. The sales of medical products should be governed by a separate piece of legislation, the Medical Products Law, which is already being drafted by a working group at the request of the Russian Government.
The new law also restricts relations between medical and pharmaceutical staff with pharmaceutical companies and medical product manufacturers. By and large, we are in favour of such restrictions as they are used by most countries.
However, some of the provisions of article 74 of the Law are worded unclearly and simply contain reference rules, and we would not like this to prevent the medical community from being kept up-to-date on innovative technology and products. This is particularly the case for the medical product market, where the innovation lifecycle is between 12 and 18 months. This is the period when improved versions of medical products are developed. Russian doctors should have an opportunity to undergo training in how to use cutting-edge medical technology, including where support for such training schemes comes from private companies, especially if those schemes receive little or no state funding. This has absolutely nothing to do with doctors subsequently becoming biased towards the products of a specific company as they gain access to new technology without undertaking to recommend or use the products of a particular manufacturer.
The Law provides for perfect ‘checks and balances’ tools that allow doctors to remain independent. For example, doctors may make a conflict of interests statement.
There is currently a discussion as to whether the licensing of pharmaceutical business should be abolished. Natalia, do you think that abolishing licences will have an impact on the competitive environment?

– Abolishing licences should not lead to uncontrolled sales of medicines. They ought to be kept under control. We hope that the new methods of control will be more effective and targeted, which would help make such measures less formal and more cost-effective.

Do you think that Russia’s accession to the WTO is going to have any impact on the Russian market for pharmaceuticals and medical products?

– The harmonisation of customs duties under WTO rules is quite an important issue for many industries, including the pharmaceutical sector. Here is what I would like to point out as an officer of a foreign  company which imports the greater part of the products it sells in Russia, apart from certain groups of locally produced items.
Missing from the documents that are to be ratified for Russia’s WTO accession is a fundamental agreement whereby foreign products would have non-discriminatory access to government procurement. This may affect the outcome of the Pharma – 2020 Strategy and other documents that are designed to lay the foundations of this country’s pharmaceutical security by creating incentives for manufacturers to transfer their medicine production to Russia.
At the same time, work must be carried on to improve the tariff regulation and harmonisation of customs-related VAT on components, including those for medical products, so as to ensure that the transfer of manufacturing to Russia will not make such products more expensive.

Natalia, thank you for your helpful and informative comments.

The interview was conducted by Oksana Bodryagina
Head of Information
Competition and Law Journal


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