The Office has completed a sector inquiry into the distribution of pharmaceuticals
2023-02-08
The Office for the Protection of Competition (hereinafter referred to as "the Office") completed a sector inquiry in the area of distribution of pharmaceuticals, which was carried out in the years 2021-2022. The purpose of the sector inquiry was to determine the state of competition in the markets of wholesale and retail distribution of human pharmaceuticals covered by public health insurance and issued on prescription in the Czech Republic, focusing on the impact of direct distribution systems on competition.
The Office based its investigation on data collected in the years 2018-2020.The investigation was notably affected by the lack of relevant data and its availability, which in some areas made it significantly more difficult to draw clear conclusions, for example, with regard to determining the exact share of direct-to-pharmacy (DTP) and direct-to-hospital (DTH) distribution schemes in the total volume of distributed, re-exported and shortage pharmaceutical products.
The core of the sector inquiry was therefore a comparison of distribution schemes and their impact on the wholesale and retail pharmaceutical market. In particular, the Office was interested in how the distribution scheme was reflected in the pricing and availability of pharmaceuticals covered by public health insurance, including the application of a trade or distribution mark-up.
For pharmaceutical products distributed in the traditional distribution scheme, the specific amount of the surcharge of distributors and pharmacies, depends on their mutual agreement (until the overall limit is reached). In direct distribution scheme, in practice, the pharmaceutical is distributed by only one of the wholesale distributors as a logistics partner selected by the pharmaceutical manufacturer or its domestic representative (hereinafter referred to as 'MAH' - marketing authorization holder). The trade surcharge is then shared between the MAH with the distribution license and the pharmacy. The logistics partner receives a remuneration for logistics services from the MAH.
Some smaller pharmacies point to the poorer availability of DTP/DTH medicines caused, for example, by daily, weekly and monthly limits on pharmaceutical purchases, when the MAH usually decides both which pharmacies will be supplied with a pharmaceutical and the maximum number of pharmaceuticals to be delivered to each pharmacy by its logistics partner. From a competition perspective in the wholesale distribution market, the unavailability of a few medicines from a distributor may not be perceived as a significant competition problem, as the range of medicines traded is relatively broad and these medicines are generally considered to be interchangeable. Thus, a particular pharmaceutical may generally not be considered as a necessary input for economic activity without the provision of which it is not possible to compete effectively or it may be necessary to cease/restrict commercial activity and exit the market for the wholesale distribution of pharmaceuticals.
As far as competition in the retail distribution market is concerned, a shortage of a pharmaceutical for immediate dispensing in a particular pharmacy may be addressed by a substitute if one exists and is available to the pharmacy, provided, however, that the substitute is not excluded by the doctor in the particular case. Competition is therefore affected by the prescription of the pharmaceutical, but is not completely eliminated with regard to substitution possibilities at the pharmacy level.
DTP/DTH systems are usually for special, more expensive drugs (e.g. cancer drugs); treatment of these diseases is carried out in specialized centers and large hospitals. Drugs are therefore purchased through tenders and, in the case of outpatient treatment, may be available to patients in hospital pharmacies at more favorable prices (no or lower co-payments). Direct distribution systems can therefore contribute to a more efficient allocation and use of pharmaceuticals in certain cases. Direct allocation of pharmaceuticals also potentially reduces the risk of expiry.
From a competition point of view, it is evident that in direct distribution schemes there is competition at the level of MAHs, i.e. between different pharmaceutical products serving similar therapies, i.e. pharmaceuticals representing substitutes for each other. Competition between wholesale distributors, as logistics partners, only takes place when their logistics services are offered to MAHs at the time of the introduction of the DTP/DTH system for a particular drug. In this respect, the Office considers it desirable for MAHs to enter into contractual relationships with multiple distributors (logistics partners) in the context of DTP/DTH distribution systems. Competition on the retail distribution market for pharmaceuticals may be affected in particular by the application of a distribution surcharge and the setting of limits on the consumption of pharmaceuticals by MAHs, which may have an impact on the immediate availability of pharmaceuticals in some pharmacies. It is therefore important that these limits are always set in an appropriate, non-discriminatory and transparent manner. On the other hand, direct distribution allows more effective control of the circulation of these pharmaceuticals by MAHs, contributes to ensuring their availability to domestic patients and lead to a reduction in the number of re-exported pharmaceuticals.
From the perspective of competition rules, free movement of goods - re-exports - cannot generally be prevented; this is only allowed in justified cases (e.g. a temporary shortage of a particular pharmaceutical). The issue of re-exports of pharmaceuticals is primarily within the competence of the State Institute for Drug Control (SÚKL) and the Ministry of Health of the Czech Republic (MZČR), precisely in connection with ensuring the availability of pharmaceuticals. The Ministry of Health may issue a measure of a general nature restricting or prohibiting the distribution of a pharmaceutical abroad on the basis of an initiative from SÚKL.
In practice, the DTP/DTH schemes only cover a specific group of pharmaceutical products and a relatively small number of them. Specifically, in the case of prescription drugs reimbursed by public health insurance, this is about 9% in terms of quantity and about 27-30% in terms of finance. Thus, the traditional distribution scheme continues to dominate, while at the same time a major trend towards its replacement by direct distribution cannot be observed.
In view of the above, the Office considers that the public interest in ensuring the supply of medicines to domestic patients outweighs any negative effects of direct distribution on the competitive environment in the market, which, moreover, have not been reliably demonstrated in the sector inquiry. Direct distribution schemes should primarily serve to ensure the availability of pharmaceuticals for patients. The inclusion of a particular medicine shall be objectively justified; the benefits of inclusion in the DTP/DTH system for persons covered by health insurance should outweigh any potential disadvantages in terms of restricting competition.
The sector inquiry concluded that direct distribution models do not have a priori negative effects on competition. The use of DTP/DTH schemes is justified as it allows a more efficient control of the circulation of medicines and leads to a lower rate of re-exports. At the same time, there has been no evidence of a negative impact of DTMs on the number of reported pharmaceutical shortages. In this context, it should be stressed that these findings refer to the period of the sector inquiry.
The Office is aware that at the time of the final report there are ongoing problems with the availability of certain pharmaceutical products or drug forms. The most frequently cited reasons for the availability problems are production and transport reasons, lack of raw materials and price capping at a level which is too low. Europe's high dependence on supplies of medicines from Asian countries, in particular India and China, is also frequently mentioned. No correlation with the choice of distribution scheme by MAH for these pharmaceuticals has been noticed.
If direct distribution schemes were prevented, this could lead to an undesirable effect in the form of lower interest on the part of MAHs to supply certain medicines to the domestic market, i.e. lower availability of certain pharmaceuticals for patients in the Czech Republic. In addition, the fact that only a smaller number of pharmaceuticals is supplied through the direct distribution system is unlikely to have an exclusionary effect in relation to distributors or pharmacies. A situation where a given medicine has no substitute and its sales would represent a significant income for the pharmacy would be considered potentially problematic. However, the existence of such a case has not been established by the Office.
The Office concludes that it has not found any specific indications that would lead to initiation of administrative proceedings for the infringement of the Competition Act, however, it will continue monitoring the pharmaceutical sector and the distribution of medicines even after the end of the sector inquiry and assess whether there are any specific or systemic issues that could unduly distort competition.
Recommendations of the Office
Based on its findings, the Office has developed three categories of recommendations, i.e. for regulators, MAHs and consumers. The recommendations are listed below in a headline format, with a broader explanation available in the full version of the report. Some recommendations would benefit from further investigation before being put into practice, particularly in light of recent developments with regard to unavailability of certain pharmaceutical products.
Recommendations for Regulators
- Monitoring of distribution schemes by SÚKL to increase market transparency, especially for regulatory and supervisory authorities.
- Increased cooperation between regulatory and supervisory authorities and the Office with regard to detecting anti-competitive practices.
- More thorough review of current regulation and cautious adoption of new regulation, reduction of the level of regulation of a given area, consultation with the Office when adopting new regulation.
- Prescribing/requesting a pharmaceutical/active substance instead of a specific pharmaceutical.
- Promoting online sales of reimbursed (by public health insurance) and prescription drugs.
- Increased consideration of real costs in pricing of pharmaceutical products and reimbursement from public health insurance (e.g. by modifying or supplementing the system of reference prices).
- Incentives to increase the motivation to produce additional pharmaceuticals in the Czech Republic in order to increase competition.
- A common strategy to tackle the unavailability of pharmaceuticals at EU level.
- Capping of the trade surcharges on reimbursed pharmaceuticals for each link in the distribution chain.
- Introduction of an emergent system and creation of conditions for its functioning.
Recommendations for MAH
- Ensuring that contracts and terms and conditions comply with Regulation 2022/720 and Guidelines 2022/C 248/01, which set out the principles for the assessment of vertical agreements and concerted practices under Article 101 TFEU and Regulation 2022/720.
- Appeals for more frequent tender procedures for DTP/DTH systems in the Czech Republic and setting other related conditions.
Recommendations for Consumers
- use a cheaper version of freely interchangeable pharmaceutical products (generics),
- check the supplement payment at several pharmacies and choose the most cost-effective option,
- monitor annual protection limits according to the age of the insured and claim overpayments,
- not to build up excess stocks of medicines.
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