The removal of obstacles to parallel imports has traditionally been the primary enforcement activity conducted by the EU authorities in the pharmaceutical sector. It is worth considering whether the same approach should be taken by the Ukrainian authorities.
The main issues that arise in relation to parallel imports involve dual pricing (ie, different pricing for different countries) and supply limitations (ie, limitations on the supply of a product to one country in order to ensure that only local demand is met and that the products are not resold in other jurisdictions). Both of these matters have been closely monitored by the European Commission and regulators within EU member states. The Ukrainian Anti-monopoly Committee's recent investigation of the pharmaceutical market has also addressed parallel imports.
The EU regulators monitor these practices to safeguard competition within the EU single market – in particular, to ensure the free movement of goods without barriers to market entry in other member states. This update considers how the concept of parallel importation applies to the Ukrainian market, as well as the competence of the Ukrainian competition regulator in this regard. However, before undertaking such an assessment, the definition of parallel importation, its history and its impact on the market should be addressed.
According to the EU definition, 'parallel imports' are:
"products imported into one Member State from another and placed on the market in the destination Member State, outside the manufacturer's or its licensed distributor's formal channels. Parallel imports tend to occur when price levels for similar products between two Member States are significantly different, either as a result of national regulations or of manufacturers' policy. That creates an incentive for traders to buy products in the Member State where they are priced lower and sell them in the Member State where they are priced higher, at a price which allows the trader to make a profit."(1)
Parallel importation began in the European pharmaceutical market, when the first parallel-imported drug was imported from the United Kingdom to the Netherlands in 1975. The drug was approved for sale in both countries, but the importer was (according to him) refused the relevant marketing authorisations in the Netherlands. The matter went to court and the European Court of Justice ultimately ruled in the importer's favour, holding that the restriction of parallel imports within the single market is unacceptable. Following this, the European Commission issued special regulations governing the marketing of such trading. The importer started his small business of re-selling pharmaceutical products from low-price EU jurisdictions in high-price jurisdictions and quickly made a fortune.
Parallel importation in the pharmaceutical market is generally considered beneficial to consumers, as it provides them access to lower-cost drugs. This becomes particularly important in countries with lower average incomes and where patients pay for the drugs themselves, as in Ukraine. However, this policy is not beneficial for pharmaceutical companies, as it cuts into their returns on investment and adversely affects their ability to reinvest in the research and development (R&D) of new drugs. Whether this argument has merit and such efficiency claims are justified remains in question. In Ukraine, most pharmaceutical companies operate exclusively through sales. This means that there are no assets located within the Ukrainian territory and most production and R&D activities are undertaken outside the country. Therefore, any efficiency in this regard (according to pharmaceutical companies' claims) would be indirect in any case. However, Ukrainian consumers certainly wish to benefit from new and improved pharmaceutical products resulting from R&D, even if undertaken outside the local market.
Essentially, the EU regulator has ruled against the restriction of parallel imports because it may result in the partitioning of the market and the restriction of intra-brand competition. As this policy applies only to the EU single market, the question arises as to its effect on Ukraine, which is not a member of the single market, but strives for closer cooperation with it.
In order to answer this question, it is worth examining how the issue had been addressed between Switzerland and the European Union, as Switzerland – like Ukraine – is not part of the EU market, but borders it.(2) The most exemplary case in this regard is Gaba International AG. In 2009 the Swiss Competition Commission fined toothpaste manufacturer Gaba International AG almost Sfr5 million for imposing an export ban on its Austrian licensee. The commission held that the ban precluded Swiss market players from purchasing Gaba International AG products on the Austrian market.
The commission considered such a ban illegal because the Swiss market is generally more expensive than most neighbouring markets and the regulator wanted to increase the influx of cheaper products from abroad into the Swiss market. However, the regulator held that the prohibition on parallel imports is acceptable only:
- at the initial entry of the new product into the market; and
- where the product is patent protected (that said, pharmaceutical products are accorded special treatment and not subject to the general approach to parallel imports, as pricing in the pharmaceutical sector is government regulated).
Ukraine is not yet part of the EU single market. It also does not cooperate with the European Union as closely as Switzerland does, although such a high level of cooperation is hoped to be achieved in future. It is thus understandable that the Ukrainian competition authority may wish to address parallel imports and export bans in the Ukrainian market in general. The authority usually deals with this by reviewing local distribution agreements, which may impose export bans and other similar restrictions on distributors for resale outside the Ukrainian market without further analysis of their effect on the local market (in the absence of special regulation in this respect). Thus, in considering their effect on the local market, such restrictions may fall within the jurisdiction of the Ukrainian regulator only if the product in question may be re-exported back into the Ukrainian market. In most cases, this is economically and commercially unfeasible. This leads to more uncertainty as to how the Ukrainian regulator should address such restrictions.
Taking into account the decision in Gaba International AG, it is understandable that the Ukrainian authority may wish to deal with cases in which Ukrainian resellers are prohibited from purchasing products in neighbouring countries. However, such cases are rare in the Ukrainian market, as many products will be more expensive in foreign markets. Even if the issue is raised, the EU/Switzerland experience confirms that patent-protected products fall outside the scope of the general approach to parallel import restrictions (and many pharmaceutical products are patent protected; plus Ukrainian competition law has a special IP exemption allowing territorial limitations for IP-protected products). Finally, pharmaceutical product prices are in many cases government regulated and are thus accorded special treatment. Bearing this in mind, and considering the referenced case law, should such restrictions imposed by pharmaceutical producers on Ukrainian resellers be considered abusive?
The government has made pharmaceutical market policy a priority for the Anti-monopoly Committee to address in near future; only time will tell how it will do so. In particular, it remains to be seen whether the committee's new management, which have just assumed their positions, will share the position of their predecessors or take their own approach to this policy.
Ukraine's increasingly closer ties to the European Union may also reshape the approach to this matter for Ukrainian market operators, due to the gradual opening of the Ukrainian market in general and its integration into the single market.
(2) However, there is a difference in that, unlike Ukraine, Switzerland is part of the European Economic Area, meaning that there is wider cooperation between its domestic market and the EU market.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.