Pharmaceuticals – Czech Competition Law Sector Inquiry – How Can Innovative Pharmaceutical Companies Best Prepare?
With the announcement last week by the Czech competition authority of a new, two-year sector inquiry, in-house counsel will be considering what steps should be taken to prepare. In this article, we discuss similar sector inquiries in other countries in recent years, the key issues arising for innovative pharmaceutical companies, and steps companies may wish to consider to proactively manage any potential issues.
Following complaints from stakeholders regarding the systems for distribution of human medicines in the Czech Republic, the national competition authority announced a new sector inquiry on 8 June 2021. The inquiry will examine competition in the markets for the distribution of reimbursed prescription medicines for human use, and will focus on the increased use of Direct-to-Pharmacy and Direct-to-Hospital (DTP/DTH) distribution systems. The inquiry will also examine related issues, such as pricing and trade, in order to map how the market operates.
The objective of the sector inquiry is to identify any problems in the operation of the market, and propose recommendations to strengthen competition. At the conclusion of the inquiry, the Czech competition authority will publish a report, and may decide to initiate follow-on investigations of specific companies if potential competition law infringements are identified.
Issues Often Addressed in Sector Inquiries
Over the past decade, national competition authorities in many European countries have launched sector inquiries into the supply and distribution of pharmaceuticals, for example: Nordic Countries (2020-2021), Austria (2017-2021), France (2017-2019), Latvia (2017-2018), Romania (2013-2017), Bulgaria (2015-2016), Spain (2014-2015) and Poland (2014-2015). In these sector inquiries, key issues for innovative pharmaceutical companies include:
- Medicine Supply Shortages. As the ultimate objective of any pharmaceutical supply chain is to deliver adequate medicines to patients, sector inquiries often investigate instances of supply shortages, and their causes. For example, the sector inquiry in Austria found a broad range of potential factors leading to shortages, including manufacturing capacity and bottlenecks, input constraints, increased levels of demand, and parallel trade.
- DTP/DTH and Reduced Wholesaler Models. Another frequent issue examined concerns competition at the wholesale level, particularly as many innovative pharmaceutical companies have revised their distribution systems to rely less on independent wholesalers, in favor of DTP or DTH models allowing greater supply chain control. For example, the 2017 report by the Romanian competition authority addressed the DTP systems implemented by Pfizer and GSK, concluding that DTP systems could potentially violate the competition laws, particularly if a company holds a dominant market position.
- Price Competition between Parties in the Supply Chain. National sector inquiries also often examine pricing competition within the supply chain, either at the wholesale or at pharmacy levels. For example, the recent Nordics sector inquiry report notes that there is currently no price competition between pharmacies (either physical or online) in Denmark, and includes a proposal that the existing fixed price regime be replaced with a maximum price regime. Similar recommendations to adjust the pricing systems for wholesalers and pharmacies arose in the sector inquiries in Austria and France. For innovative pharmaceutical companies, any proposed adjustments to the pricing systems may merit scrutiny, particularly if the changes may create international reference pricing issues.
- Wholesale/Pharmacy Chains with Significant Market Power. Sector inquiries may also investigate any situations where a wholesale or pharmacy chain holds significant market power. For example, the sector inquiry in Latvia identified that a strong, vertically integrated wholesale/pharmacy chain was able to gain increased profits due to its market position. In such situations, the competition authorities will also investigate any exclusivity arrangements with pharmaceutical suppliers or other measures that may limit competition from smaller competitors in the supply chain.
- Competition from Generics and Biosimilars. While not immediately obvious, supply systems and pricing structures can also facilitate or hinder competition from generics and biosimilars. Sector inquiries in Romania and other countries have recognized these issues, and have recommended steps to ensure there are no undue barriers to competition from generics and biosimilars. Most notably, following the sector inquiry in Romania, the authority launched an infringement investigation against Roche, ultimately imposing fines of approximately €12.8 million for unlawful steps to limit competition from biosimilars.
Preparations for the Czech Sector Inquiry
The following are some steps to consider when preparing and responding to the new sector inquiry.
- Ensure that Response Includes Local and Regional Input. While the Sector Inquiry may be focused on the Czech Republic, the issues addressed can have an effect outside of the Czech borders. For example, a decision by the authority to limit the use of DTP/DTH systems and require supply to wholesalers could lead to increased levels of trade outside of the Czech Republic. It is therefore important that the response to the sector inquiry is not left solely to the local affiliate, and instead also includes regional/global management and legal support best placed to address these broader issues with impact outside the Czech Republic.
- Make Sure Agreements Are Compliant. As an initial step in the inquiry, it is likely that the Czech competition authority will contact key innovative pharmaceutical suppliers and request copies of distribution and supply agreements. It is therefore a good time now (before receiving a request) to check that all distribution and supply agreements and T&Cs are in good order, and do not contain any illegal provisions that could cause a competition authority to launch an investigation (e.g. unlawful control of retail pricing, export bans, …).
- Check Supplies. As indicated above, sector inquiries often investigate any occurrences of supply shortages, and their causes. It is therefore worthwhile to ensure that supplies of all products are sufficient to meet the needs of the local market, and that any supply quotas or other measures are implemented in a manner that ensures adequate supplies for local patients.
- Identify Potential Challengers. The sector inquiry, and the accompanying questionnaires and consultations, provide an opportunity for any aggrieved wholesaler or other party in the supply chain to complain about any perceived infringements by pharmaceutical suppliers. In this context, proactive management of any ongoing disputes or risks is recommended in order to reduce the risk of a follow-on investigations into a potential infringement, which could lead to fines or other penalties.
- Ensure a Strategic Response on Key Issues. One risk from this type of national sector inquiry is that the local competition authority focuses solely on measures to increase local market competition (e.g. competition among wholesalers/pharmacies), and does not consider the potential impact of such measures on broader issues (such as trade and international reference pricing) and the resulting willingness/ability of innovative pharmaceutical companies to launch products and offer lower prices to payors in the local market. It is important that responses to the sector inquiry also address these broader issues and risks impacting innovative pharmaceutical companies.