The Board recently published its reasoned decision1 on the application for negative clearance or exemption introduced by Roche Müstahzarları Sanayi A.Ş. ("Roche") regarding Roche's intended distribution system, through which Roche will limit to ten or less the number of pharmaceutical warehouses that will be designated to distribute Roche's human medicine to pharmacies and private hospitals ("Intended Distribution System").
- Roche's Intended Distribution System Candidate to Negative Clearance/Individual Exemption
The Intended Distribution System aims to limit the number of over thirty warehouses Roche is currently working with, to be no less than five but no more than ten. Furthermore, if the Intended Distribution System is implemented, Roche will not work with any other pharmaceutical warehouses other than the ones designated. The Intended Distribution System further includes the following elements:
(i) Limiting the number of pharmaceutical warehouses to be worked with and imposing obligations on the warehouses for maintaining service quality standards;
(ii) Refraining from assigning certain regions or customers to certain pharmaceutical warehouses and within this framework, ensuring that warehouses can enter into sales relationships with pharmacies across Turkey;
(iii) Refraining from imposing restrictions for the sales of rival products (i.e., no non-compete obligation);
(iv) Bringing a minimum order/purchase amount condition for the warehouses so that each order made by the warehouses does not fall under a certain amount;
(v) Ensuring that the warehouses are entirely free to sell products to other warehouses that have not entered into any agreement with Roche, without prejudice to certain legitimate contractual restrictions such as the export ban;
(vi) Requiring warehouses to act in accordance with the price regulations of the Ministry of Health;
(vii) Requiring warehouses to distribute Roche products only within the country (refraining from conducting export sales);
(viii) Ensuring that the duration of the contracts to be signed with the warehouses does not exceed three years.
Roche planned to consider various factors to choose which pharmaceutical warehouses it will work with in the Intended Distribution System such as sufficiency of facility, adequate distribution practices, prior contractual relationship with Roche, operational and technical competencies, having no overdue debts in their current commercial relations with Roche etc. Roche informed the Competition Authority that there will be six warehouses which (i) fulfill the relevant criteria, thus (ii) Roche intends to work initially with at these six warehouses.
As for the relevant market analysis, the Board took into consideration the relevant product markets for pharmaceutical warehousing and pharmaceutical services in its assessments while it ultimately left open the definition of the relevant product market.
The Board found that the Intended Distribution System that aims to limit the number of pharmaceutical warehouses to be no less than five and no more than ten warehouses might (i) hinder the activities of small and middle sized pharmaceutical warehouses in particular; (ii) increase market concentration as (a) small and mid-sized warehouses may exit the market or (b) there might be no new entries. In this regard, the Board concluded that a negative clearance cannot be granted to the Intended Distribution System as it falls under the scope of Article 4 of Law No. 4054.
Accordingly, the Board conducted an assessment on whether the Intended Distribution System fulfills the exemption criteria under Article 5 of Law No. 4054.2 The Board first assessed the Intended Distribution System in terms of the exemption criterion indicating that "[the agreement] should not eliminate competition in a significant part of the relevant market". Main findings of the Board as a result of its exemption analysis were as follows:
(i) Concentration in the pharmaceutical warehouse market is currently high. To that end, the results of practices that will lead small players to leave the market will have more severe effects on competition as compared to a market where concentration level is not high.
(ii) As maximum profit margins are determined by the public authority in this sector, the profit that pharmaceutical warehouses can obtain from sales is limited. Therefore, competition is achieved over factors such as term, discount, and product surplus. There are approximately 25,000 pharmacies in all over Turkey and it is therefore very important for warehouses to provide services to remote parts of the country. To that end, warehouses which distribute medicines to pharmacies carrying out activities in different parts of the country serve the very important function of medicine supply.
(iii) Pharmacies naturally want to fulfill their needs within the shortest time possible and take the proximity and the sales conditions of the warehouses into account in choosing the warehouse they will work with. Accordingly, pharmacies prefer to work with multiple warehouses in practice to fulfill their needs within the shortest time possible and receive the best sales conditions. This shows that small scale warehouses can be alternative to large (national) scale warehouses in places where there are multiple warehouses. Indeed, small scale warehouses may impose easier terms of payment on pharmacies and help pharmacies, with which the large scale warehouses refuse to work as they find it risky, survive in the market. In a market structure where small scale pharmaceutical warehouses are not alternative to national-large scale pharmaceutical warehouses, it will be difficult for some pharmacies to operate and therefore concentration will be higher. As a result, warehouses will be able to determine the sales conditions, thereby disruptions in both cost increase and service delivery for patients may occur.
(iv) Not being able to distribute important drugs would be disadvantageous for warehouses newly entering the market; it may even create barriers to market entry with a deterrent effect.
(v) Therefore, as a result of the Intended Distribution System, the market may remain under the control of certain undertakings for a long time. A small number of warehouses that can distribute all products will be able to apply tying/ loyalty discounts in order to make package purchases more appealing. As such, they will be able to shift the purchases of pharmacies to themselves.
(vi) Considering that warehouses other than those specified would not be able to carry out practices such as tying/loyalty discounts due to non-supplied products, the activities of small scale warehouses may become more difficult.
The Board further stated that, if concentration increases, the warehouses that cannot distribute all products will not be able to subsidize products with low price and frequent distribution, and may request higher distribution prices from producers. However, if the frequency of visits to pharmacies by warehouses decreases, service competition will also be negatively affected.
In conclusion, the Board decided that Roche's practice under the Intended Distribution System is within the scope of Article 4 of Law No. 4054, so negative clearance pursuant to Article 8 of Law No. 4054 cannot be granted. The Board further concluded that an individual exemption cannot be granted either as the conditions set forth under Article 5 of Law No. 4054 are not met.
The decision includes one dissenting opinion of a Board member which states that (i) the decisions made unilaterally by pharmaceutical companies in terms of limiting the number of warehouses they will work with would not give rise to competition law concerns, (ii) consumer welfare cannot be determined through assumptions, (iii) the purpose of Law No. 4054 is not to protect undertakings, but competition, (iv) interventions do not guarantee service quality in terms of pharmacies and consumers, and (v) the intended practice would not negatively affect the pharmaceutical distribution level of the market.
This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in June 2020. A link to the full Legal Insight Quarterly may be found here
Footnotes
1 The Board's decision dated December 12, 2019, and numbered 19-44/732-312
2 The list of the conditions for an individual exemption set out under Article 5 of Law No. 4054 is as follows:
- the agreement must contribute to improving the production or distribution of goods or to promoting technical or economic progress,
- it must allow consumers a fair share of the resulting benefit,
- it should not eliminate competition in a significant part of the relevant market,
it should not limit competition more than what is compulsory for achieving the goals set out in sub-paragraphs (a) and (b).
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