Czech Republic: Czech Competition Office concludes pharmaceutical sector investigation and publishes its full report and recommendations

Between 2021 and 2022, the Czech Office for the Protection of Competition (“Office”) carried out an industry sector investigation into pharmaceutical distribution models. The Office concluded that the current situation does not indicate a need to initiate administrative proceedings for breach of the law, but it intends to monitor and assess the market further. Aside from this, the Office’s report includes recommendations for pharmaceutical companies and consumers as well as the regulator. See the key takeaways below.

The scope of investigation

The investigation aimed to compare different types of distribution models and assess their effect on the wholesale and retail pharmaceutical markets. A particular focus were direct distribution models, either direct-to-pharmacy (DTP) or direct-to-hospital (DTH). These are based on the market authorisation holders (MAHs) directly distributing medicines to pharmacies or hospitals using only the services of a logistics provider, while the MAHs retain ownership of the medicines during the distribution process. Direct distribution therefore bypasses traditional distributors, who hold a medicine distribution authorisation and act as middlemen by purchasing medicines from MAHs and reselling them to pharmacies/hospitals.

Although the Office noted a lack of data availability to allow for precise conclusions, it estimates that among prescription medicines covered by public health insurance, DTP/DTH models account for approx. 9 % of quantity and 27-30 % in financial terms. They are also typically used in the case of special, more expensive medicines (e.g., oncological). The Office therefore concludes that traditional models based on non-direct distributors are still the norm and are unlikely to be replaced by direct models on a prevalent scale.

Assessing competition effects of direct distribution models

One of the reasons for initiating the investigation was indications from smaller pharmacies indicating that DTP/DTH distributed medicines are poorly available as a consequence of distribution limits where the MAHs selectively decide to which pharmacies medicines deliveries will be made, as well as at which maximum quantities. The Office also notes that while traditional models typically involve a plurality of distributors for each medicine, DTP/DTH models usually only involve a single large-scale logistics partner, which is detrimental to competition at the distribution level.

The Office nevertheless concluded that direct distribution models are not anticompetitive as such and are similarly common and accepted in other EU Member States. It finds that competition exists between the MAHs of substitutable medicines and that selective distribution is not necessarily a barrier to market entry given the availability of substitutes. In some cases, the direct distribution may also lead to a more effective allocation and greater availability of certain medicines, as well as preventing their re-export. The Office therefore finds that the use of DTP/DTH models has its justification, and that their restriction could lead to a lower availability of certain medicines.

In its evaluation, the Office emphasises that it is desirable that MAHs enter into contractual relationships with a plurality of logistics providers and that distribution limits are established in an appropriate, transparent and non-discriminatory manner. Overall, it concludes that the public interest in securing availability of medicines outweighs the possible negative effects of direct distribution models on competition on the market, which were moreover not conclusively found.

Recommendations for pharmaceutical companies to keep in mind

The final part of the Office’s report contains its recommendations, mostly aimed at the regulator and including several aimed at MAHs and the consumers themselves.

As for MAHs, the Office draws attention to the stricter rules brought about by the new Regulation 2022/720 on vertical block exemptions and the accompanying guidelines from the European Commission. Up until now, vertical agreements in distribution contracts between MAHs and their logistics partners were ordinarily regarded as genuine agency agreements, where MAHs retain all risks and which are not considered anticompetitive. However, the new stricter rules on interpreting these agreements may change this practice.

Secondly the Office recommends that MAHs conduct regular and transparent selection procedures for their logistics partners. This may help dispel risks of anticompetitive behaviour in cases where the distribution of certain medicines is restricted to a single partner.

The Office’s recommendations namely underline the need to revise existing distribution contracts in light of the new rules on their assessment. Failure to ensure their compliance may result in contracts being assessed as anticompetitive vertical agreements, for which significant fines may be handed out.

The Office’s full investigation report and recommendations can be found here (in Czech).

For more information, please contact Vojtěch Chloupek and Martin Taimr.

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