In September 2016, the Antimonopoly Committee of Ukraine (the “AMC”) handed down a significant decision holding a major global pharmaceutical company and its four Ukrainian distributors liable for uncompetitive conduct that resulted in overcharging for drugs in Ukrainian public tenders.

The decision appears to be an important precedent shedding light on the AMC’s approach towards enforcement of competition policy with respect to discount and pricing practices in Ukrainian pharmaceutical market.

Substance

The main focus of AMC’s scrutiny were the discounts provided by foreign pharmaceutical company to its distributors at the stage of drugs supply (import) to Ukraine and their effect on drug pricing for Ukrainian (i) pharmacy market and (ii) tender segment.

The AMC opines that retroactive discounts granted by pharmaceutical company to its distributors via credit notes lacked transparency and served as a tool to manipulate drug prices for Ukrainian consumers.

In particular, the AMC states that such discounts effectively decreased the price at which distributors purchased drugs from the pharmaceutical company. At the same time, distributors chose not to apply them for reduction of prices they offered for Ukrainian tenders. As a result, prices for drugs supplied to public sector customers ended up being higher than the same for pharmacies.

Importantly, the competition authority also concluded that the above discount structure permitted going around the pricing restrictions established by Ukrainian law for supplies of drugs for public procurements, while not formally violating them. In AMC’s view, when officially declaring its nominal (before discount) prices in official Ukrainian drug price register, the pharmaceutical company should have realized that distributors may be excessively charging Ukrainian public sector customers based on such nominal prices, rather than real prices after all discounts.

Furthermore, considering that distributors regularly reported to the pharmaceutical company on volumes of their sales, price levels, customers etc., the AMC held that the company was aware of, any contributed to, their price manipulations.

The AMC qualified such actions of pharmaceutical company and its distributors as anticompetitive concerted practices that led to excessive pricing of medicinal products for Ukrainian public tenders.

Conclusions for business

We believe that the above decision could be indicative of the approach that the AMC may apply to other similar investigations. Accordingly, pharmaceutical companies may consider re-visiting their pricing and discount strategies for Ukraine to ensure that pertaining competition risks are duly addressed.

The risk assessment should be done on individual basis, considering, among others, the following risk factors:

• Credit notes: retroactive discounts via credit notes may be viewed as lacking transparency and enabling price manipulations;
• Level of discounts: risks may get stronger proportionally to discount levels;
• Application of discounts: discounts granted at producer-distributor level are expected by the AMC to be adequately applied at distributor-customer level;
• Pricing regulation: medicinal products subject to pricing regulation in Ukraine, including those supplied for public procurements, require increased attention;
• Difference in pricing approaches for retail and tender business: if prices differ substantially, this may be an additional risk factor;
• Level of detail in distributor reports: excessive reporting by distributors to pharmaceutical companies may contribute to qualification of their conduct as anticompetitive concerted practices.

Viktoriya Podvorchanska, Counsel of EPAM
Oksana Franko, Senior Associate of EPAM