The Competition Council (hereinafter – CC) has carried out a number of activities in the pharmaceutical sector in recent years. In order to address competition barriers in sector regulation in a timely manner, the CC proactively engages in working groups, discussing planned draft sector regulation, carrying out assessments of the existing regulation and providing its assessment and recommendations to policymakers. In order to ensure that every market participant is able to conduct its economic activity in conditions of free and fair competition and promote the development of competition in all areas of the economy in the public interest, the CC has also supervised several markets, carried out merger control of market participants operating in the pharmaceutical sector, and developed explanatory materials for pharmaceutical market participants on topical issues concerning the application of competition law.
Currently, the issues related to the prices of medicinal products and the amendments to Cabinet Regulation No. 803 of 25.10.2005 “Regulations Regarding the Principles for the Determination of the Price of Medicinal Products”, which envisages changing the mark-up model for prescription medicinal products, are being actively discussed in the media. The CC has issued opinions on the draft amendments within the scope of its competence.
New pricing model for medicinal products
Currently, there is an active discussion in the public domain about the intention of the Ministry of Health (hereinafter – MoH) to revise the existing model of mark-ups for medicinal products in Latvia because the current model in Latvia is the most patient-unfriendly in the Baltics – medicinal product mark-ups and prices in Latvia are significantly higher than in Lithuania and Estonia. This has been repeatedly pointed out by the CC, for example, in its conducted market surveillance, the conclusions and proposals of which have been presented to both the public and the responsible authorities. At the same time, the problem of consumer-unfriendly prices of medicinal products has been highlighted by the State Audit Office and the World Health Organisation. Taking this into account, the MoH has drafted amendments to Cabinet Regulation No. 803 of 25.10.2005 “Regulations Regarding the Principles for the Determination of the Price of Medicinal Products” (hereinafter – Amendments).
The CC Report of 2019 “Pricing of Medicinal Products and Possible Restrictions of Competition Affecting the Affordability of Medicinal Products” concluded that the difference in prices of medicinal products between the Baltic states is influenced by different value-added tax (VAT) rates, while a more significant difference in the Baltic states is contained in the regulatory framework for the price of medicinal products with wholesalers and in pharmacies, i.e., in Lithuania and Estonia there are fixed maximum mark-ups or “caps” on wholesaler and pharmacy prices of medicinal products. In Latvia, however, the markup between the wholesaler and the pharmacy always increases in proportion to the purchase price.
The new MoH amendments stipulate that the manufacturer’s price of medicinal products will not be higher than in Lithuania and Estonia, and that the manufacturer’s price will not differ both within and outside the reimbursement system. The new model ensures transparent pricing and that the patient’s total out-of-pocket costs for prescription medicinal products will be significantly lower than at present. Consequently, it is planned to introduce a fixed mark-up for prescription medicinal products, potentially reducing their price for patients. The CC draws attention to the fact that the final price of medicinal products in pharmacies depends both on the applicable mark-up rules and on the price set by the drug manufacturer, where both wholesalers and pharmacies apply their own mark-ups to the price.
The CC has issued opinions on the planned amendments
Within the scope of its competence, the CC has issued opinions on the drafted Amendments, conceptually supporting their further progress (CC opinions available here and here), but at the same time drawing the attention of the MoH to the potential risks associated with the proposed Amendments.
The CC has not given an opinion on the possible impact of the pricing model chosen by the MoH for prescription medicinal products on the prices or availability of medicinal products and relies on the fact that the MoH has made correct calculations based on expert proposals and has chosen the most appropriate pricing model for the market situation of Latvia. Given the fact that the proposed Amendments apply to all market participants equally, the CC does not expect a significant impact on the competitive conditions in the market; however, it cannot be excluded that the chosen model may affect the activities of medium-sized and small operators on the markets for the distribution of medicinal products.
At the same time, the CC supports the MoH’s intention to carry out an analysis of the effectiveness of the new mark-up model of medicinal products and prepare and submit an informative report to the Cabinet of Ministers with the results of the analysis and proposals for the development of the introduced model.
A new approach is needed to assess competition in the pharmacy market
In 2022, the CC already launched a public consultation on “Clarification of the geographic market for the retail sale of pharmaceutical products in specialised stores (pharmacies)”. In this document, the CC examined how competition conditions should be assessed in the retail (pharmacies) market for pharmaceutical products, as the current definition of the relevant geographic market by a geographical unit – a locality – does not provide a complete and accurate picture of the competitive conditions on the market. Consequently, in the view of the CC, the relevant geographic market for the retail of pharmaceutical products in the specialised store (pharmacy) market can be defined narrower or broader than a locality, and the geographic boundaries of the market can be defined on the basis of consumer habits, isochrones and isolines, which from an economic point of view allow the market boundaries to be defined more precisely.
It should be noted that the explanation prepared by the CC on the need to introduce a new approach to assessing competition in the pharmacy market (using isochrones and isolines rather than geographical market boundaries) was strongly opposed by the big players in the sector, as is currently the case with the MoH’s intention to change the pricing model for medicinal products.
Concerns about a “monopoly” in the pharmaceutical sector
In addition, the decision of the CC of 14 June 2022, by which the CC allowed AS AB CITY to acquire AS Olainfarm (currently – AS Olpha), is being discussed in the public domain, where the opinion is expressed in some media that the CC has not delved into the retail sale markets of medicinal products and, by making a decision, has allowed a single “monopoly” company to gain strength.
In its assessment of the merger in question, the CC considered a number of markets affected by the merger and the likely impact of the merger on them. The markets covered by the decision of the CC include the market for the manufacture of medicinal products, the wholesale market for pharmaceutical products, the market for laboratory testing services, the market for healthcare (treatment) services, the market for the manufacture and wholesale/retail of food supplements, and the market for the manufacture and wholesale/retail of cosmetic products.
The CC found that in the mentioned markets in Latvia, a slight increase in the market share of AS AB CITY is expected from 1 to 5%, which is not considered significant enough in competition law to create a negative impact on competition. The CC concluded that the merger would not lead to a significant impediment of competition or to the creation of a dominant position of the merged player in any of the affected markets.
The CC found that at the time of the adoption of the decision, a high degree of market concentration had developed in the market for the manufacture of medicinal products in Latvia between the merging parties, Latvian manufacturers of medicinal products, and AS Grindeks and its subsidiary AS KALCEKS. At the same time, the largest Latvian producer of medicinal products by turnover is not the merging parties, but AS Grindeks and its subsidiary AS KALCEKS. In addition, medicinal products distributed by foreign manufacturers of medicinal products are widely available in Latvia and account for 95% of all medicinal products available in the market of Latvia, thus the CC concluded that the merger would not create significant risks to competition in this market. In addition, the CC also concluded that the manufacturing companies of medicinal products of the merger parties were not direct competitors, as they did not produce medicinal products falling under the third tier of the Anatomical Therapeutic Chemical (ATC) group of the medicinal product system.
The CC explains that the decision did not include and did not assess the concentration and the impact of the merger on the retail markets for medicinal products, given that AS Olainfarm undertook to divest all the shares in SIA LATVIJAS APTIEKA, clearly excluding any doubts about the negative impact of the merger on competition in the retail markets for medicinal products. The disposal of the capital shares of SIA LATVIJAS APTIEKA, together with all the assets of SIA LATVIJAS APTIEKA, was also enshrined as a binding provision in the CC decision. Accordingly, the retail markets for medicinal products are not affected by the merger.
The CC decision provides that until all shares in SIA LATVIJAS APTIEKA are disposed of/sold, the merging parties must ensure that AS AB CITY and its related parties do not influence the business activities of SIA LATVIJAS APTIEKA, and that no information on prices, business plans and other commercially sensitive information is exchanged between AS AB CITY and its related parties and SIA LATVIJAS APTIEKA, except as necessary to comply with the requirements of the laws and regulations. The CC also informs that since the end of 2023, control over the shares of SIA LATVIJAS APTIEKA is exercised by an independent manager Guntis Belēvičs, thus eliminating the possibility of control by AS AB CITY over SIA LATVIJAS APTIEKA. The CC actively monitors the implementation of the legal obligation set out in the decision, both by communicating with representatives of SIA LATVIJAS APTIEKA and the manager Guntis Belēvičis, as well as by following the steps of the divestment process.
By decision No. 8 of 30.04.2024 “On extension of the merger clearance”, the deadline for the disposal of the shares in SIA LATVIJAS APTIEKA was extended until 01 February 2025, taking into account both the market fluctuations related to the political and economic situation in recent years and the regulatory changes and planned changes in the pharmaceutical market, as well as the considerations that the fulfilment of the legal obligation is further complicated by the fact that the retail market for pharmaceutical products is strictly regulated and the Pharmaceutical Law sets additional conditions for capital companies in order for a pharmacy to be able to operate. It is also taken into account that some of the potential buyers of the shares of SIA LATVIJAS APTIEKA, which are already active in the relevant market, would require the authorisation of the CC to implement the transaction, which, given the market concentration, may be problematic in the first place, and therefore the number of potential buyers of the shares is limited, and finding a suitable buyer could be difficult.
SIA LATVIJAS APTIEKA must operate as an independent company in the market, and AS AB CITY must not influence/control its activities. If any person or persons have information that SIA LATVIJAS APTIEKA does not operate on the market independently of the influence of the companies in the AS AB CITY group, the CC invites such evidence and information to be submitted to the CC.
Vertically related companies in the pharmaceutical sector
The decision also looked in more depth at the fact that the same owners own a pharmaceutical manufacturing company, a drug wholesaler and a pharmacy chain, and medical institutions, or that so-called vertical integration is being exercised.
Despite the fact that vertical integration is not prohibited under competition law, and vertical relationships (as a result of complementarity) can, for example, increase production volumes of the companies and reduce their costs in getting the product to the consumer, which can potentially have a positive impact on the prices of the products offered to the final consumer, the CC in its decision also described the risks associated with vertical integration and found that there are control mechanisms in place in the pharmaceutical markets which should address these risks.
High administrative barriers to opening pharmacies
In its practice, the CC has concluded that there are high administrative barriers on the market in respect to the retail markets for medicinal products (pharmacies) – restrictions on the number and location of pharmacies in administrative territories – which are set by Cabinet Regulation No. 610 of 2 August 2011 “Criteria for the Location of Pharmacies and Pharmacy Branches”. In some administrative areas, such as the largest cities like Riga, Daugavpils, Ogre, Tukums, Liepaja and others, competition is in fact significantly limited or excluded. In such areas, the only way for a new competitor to enter the market is through the acquisition of an existing pharmacy or changes in the laws and regulations related to the criteria for the location of pharmacies. The CC has found that the rules have led to a historical situation where several pharmacies of the same company tend to be concentrated in certain localities where there are localities where a significant number or even 100% of pharmacies are owned by a single market player, and where the entry of new competitors is excluded.
In Latvia, there are currently five pharmacy chains operating under conditions of limited competition, excluding individual pharmacies and pharmacy associations: SIA LATVIJAS APTIEKA, SIA Apotheka, SIA BENU Aptieka Latvija, SIA EUROAPTIEKA FARMĀCIJA and AS SENTOR FARM APTIEKAS.
In the view of the CC, it is essential that the MoH, in cooperation with the social partners in the sector and other relevant public authorities, also considers further reforms in the sector aimed at expanding access to medicinal products, including a new model of pharmacy operations aimed at promoting competition among pharmacies already on the market, potentially creating opportunities and incentives for new entrants in the retail market of medicinal products.
The CC recalls that the pharmaceutical sector is strictly regulated, including the maximum price of medicinal products, and that the principles of free competition do not apply in these markets, despite which the CC monitors developments in these markets.