On June 30, 2015 on its official site FAS Russia published recommendations for entities holding a dominant position on pharmaceuticals markets and medical devices markets (hereinafter together “pharmaceutical companies”) to develop and apply commercial policies.
In recent years FAS Russia has been paying close attention to the Russian pharmaceuticals market and the medical devices and equipment market. Based on the results of audit and after considering numerous (and quite high-profile) cases of violation of antimonopoly laws by pharmaceutical manufacturers, FAS Russia entered into a direct dialogue with the market players in order to formulate transparent and clear rules of conduct for pharmaceutical companies on the Russian market. One of the results of that dialogue are the official FAS Russia recommendations for entities holding a dominant position on pharmaceuticals markets and medical devices markets to develop and apply commercial policies (hereinafter the "Recommendations") approved by the Presidium of FAS Russia on June 17, 2015 and published on the FAS Russia site on June 30, 2015.
The Recommendations are based on the results of analysis of FAS Russia practice, and their text cites examples from the notorious cases of OOO Novo Nordisk, ZAO Kompaniya Bakster and TEVA PHARMACEUTICAL INDUSTRIES LIMITED.
Formally, the Recommendations apply only to those pharmaceutical companies that hold a dominant position on the market. However, considering that companies selling an INN drug that has no analogues in practically all cases will be considered monopolists on the market for that particular drug, it is obvious that many, if not most pharmaceutical companies should pay attention to the Recommendations. The text emphasizes that defining the size and boundaries of the product market is a multifaceted and complex process, and not only obvious criteria (such as sales and amount of revenue) should be taken into account, but also the criterion of interchangeability. In particular, FAS Russia pays particular attention to the fact that for a drug that cannot be replaced by other drugs the size of the market will be equivalent to the size of the market precisely for that irreplaceable drug and, accordingly, a company distributing such a unique drug in Russia will be considered a monopolist on the market for that drug. It is also important to note that the interchangeability or irreplaceability of any drug by other drugs should be established by a court.
The Recommendations strongly urge pharmaceutical companies holding a dominant position on the market for the relevant drugs to openly, objectively and reasonably select their counterparties and establish a transparent and clear system of discounts, bonuses and other economic benefits for them. In the context of this process, the Recommendations are particularly timely for companies that fall under American and English anticorruption legislation (FCPA and UK Bribery Act), which often leads to such pharmaceutical companies setting overstated and unreasonable (subjective) criteria for local distributors. Below is a brief overview of the key provisions of the Recommendations.
- The Recommendations propose that pharmaceutical companies adopt a detailed commercial policythat, inter alia, must contain criteria for selecting counterparties, a procedure for such counterparties’ due diligence based on the results of which the pharmaceutical company will decide whether to enter into a contract with the counterparty or refuse to do so, the list and authorities of the officers participating in the due diligence process and the list and authorities of the officers deciding whether to cooperate with the counterparty or to refuse such cooperation, the timeframe and procedure for reviewing counterparties' applications for cooperation/entry into a contract and the terms of cooperation with them defining the price of the product, sales volume, payment terms, etc. The commercial policy is required to include a draft standard contract with the counterparty containing all of its material terms, and the form of the new counterparty application. The Recommendations require the pharmaceutical company to post the template of such contract on its website and ensure free access of any third parties to it. It is recommended that all counterparties be promptly notified of any changes in the policy and/or templates of the contract and/or application.
- The document presents an inexhaustive list of objective criteria for selecting counterparties, for example: the counterparty having no arrears on taxes and duties or no indebtedness to a pharmaceutical company, the counterparty having been registered and holds the required licenses, the top managers of counterparty not having criminal records, etc. It is noted that the requirements to a counterparty may touch on the legal, financial and business aspects of the counterparty's activities; however, the list of such requirements and the list of documents requested by the pharmaceutical company to perform due diligence on the counterparty as those appear in the policy must be exhaustive and must contain clearly worded, clear and unambiguous criteria for selecting counterparties.
It is noted separately (citing the presumption of innocence) that information in the mass media, including on the Internet, as well as information obtained unofficially (for example, by telephone) concerning the counterparty's officers' involvement in corruption cannot be a basis for refusing to enter into a contract.
In order to avoid antimonopoly risks FAS Russia strongly recommends that pharmaceutical companies not suspend the supply of product and not to refuse to enter into a contract with a counterparty until a competent state authority of the Russian Federation declares the counterparty guilty of committing an offense that is inconsistent with the criteria for selecting counterparties established by the pharmaceutical company, and makes it impossible to continue cooperation with that counterparty.
- As a way of significantly mitigating antimonopoly risks, FAS Russia strongly recommends that pharmaceutical companies describe the process of selecting counterparties in their commercial policy in detail, disclosing all of the possible stages of review of applications for cooperation (execution of a contract), naming the officers involved in the pharmaceutical company's decision-making process in the matter, and also stating the maximum period for reviewing applications of counterparties, including at each stage of the due diligence, and the possibility of extending the due diligence period at each stage justifying the possible reasons. FAS Russia does not recommend, in particular, that pharmaceutical companies overlook the importance of setting and sticking to maximum time periods for reviewing applications, highlighting such actions as a factor increasing the probability of the pharmaceutical company being deemed as abusing its dominant position on the market for the product in question.
- FAS Russia allows a pharmaceutical company to use different commercial terms (financial benefits)(discounts, bonuses) for different counterparties, but only provided that this difference in the terms offered is economically justified. Among the permitted grounds for having different financial benefits, FAS Russia cites purchasing volume, prepayment, purchase of products from the warehouse or illiquidity of the product being sold. At the same time, it is not recommended to connect granting financial benefits with the purchase forecasts at tender indicating the regions of future supplies, as this could be considered as an unfair collusion at auction or coordination of economic activity, which is prohibited by the antimonopoly legislation. FAS Russia emphasizes in particular that pharmaceutical companies in the majority of cases are capable of independently planning the volume of their sales, based on information on past and projected volumes of the public client's needs for the relevant pharmaceuticals and about tenders held by the public client during the calendar year (including taking into account information on the number of patients who are taking the medications in question).
- FAS Russia allows pharmaceutical companies to carry out systematic audits of their counterparties to check compliance by the latter with the terms of the pharmaceutical company's commercial policy.
- The Recommendations call upon pharmaceutical companies to keep good records reflecting their interaction with counterparties: each stage of the process of interacting with the counterparty should be documented, all incoming and outgoing correspondence must be registered, each stage of the process of reviewing applications for cooperation and taking decisions on them should be recorded in a document, be signed and state the names of the pharmaceutical company officers who took part in the management decisions. It is also recommended to keep all applications and correspondence, as well as internal documents supporting the decision-making process for at least 5 years.
- FAS Russia recommends to include in the commercial policy a detailed description of the grounds and procedure for the pharmaceutical company ceasing operations with a counterparty. The list of grounds for terminating a relationship should be exhaustive and the grounds themselves should be clearly worded and be interpreted unambiguously. As an example FAS Russia cites such objective grounds for terminating a contract with a counterparty as the latter’s liquidation, failure to meet the selection criteria, the counterparty going out of business, payment arrears (exceeding a threshold), and agreement of the parties.
Formally, failure to comply with the Recommendations should not give rise to any liability or other adverse consequences. However, it is obvious that FAS Russia compiled them on the basis of practical conclusions that FAS has gathered based on the results of cases considered involving pharmaceutical companies, and that the Recommendations reflect the official position of FAS Russia as to the interpretation of the relevant actions of pharmaceutical companies on issues that arise most often in their business. Thus, compliance with the Recommendations may considerably reduce the risk of being held liable for violation of Russian antimonopoly law. That being said, undoubtedly, open and transparent interaction with counterparties will reflect positively on the company's reputation.
It should be noted that the mere adoption by a pharmaceutical company of a commercial policy compliant with the Recommendations does not mean that liability cannot be imposed if a violation has been proved. However, having the working mechanisms described in the Recommendations, specifically, having a policy and making sure its provisions are in compliance with the principles set out in the Recommendations (especially if the policy has been agreed with FAS Russia) may be a factor mitigating liability. It is precisely the quality of the policy from the perspective of its procedure for preventing violations that may provide a real opportunity to a pharmaceutical company to assert in the court that the company is not at fault because it used all of the capabilities available to it and spelled out in the policy to prevent a violation, or at least to mitigate its adverse effects.