We quite often receive questions from our pharmaceutical sector clients related to the concept of “dominant position” in competition law. For example, how can one know whether or not a manufacturer of a medicinal product has a dominant position, what should be taken into account if such a position exists, etc.

In this newsletter, we outline the main factors related to the concept of dominant position as well as give some examples from local and EU competition law practice.

What it means for a manufacturer of medicines to be in a dominant position

European Union (EU) competition law states that a dominant position is related to “a position of economic strength enjoyed by an undertaking, which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers”.

The acquisition or strengthening of a dominant position is not prohibited in itself; however, the abuse of such a market power is. Anti-competitive behaviour of this kind may result in heavy fines if the competition authorities find an infringement has taken place.

Therefore, any company enjoying a dominant position should act responsibly in the market. Furthermore, company in such positions should constantly monitor its market position. If the intervention of a competition authority leads to the establishment that a dominant position exists, such a finding is likely to have unpleasant consequences for the company concerned.

How to assess if a manufacturer of medicines holds a dominant position

According to the European Commission (the Commission), a dominant position derives from a combination of several factors, which, taken separately, are not necessarily determinative:

  • position of economic strength on a market of the dominant undertaking and its competitors
  • the potential impact of expansion by actual competitors or entry by potential competitors, including the possibility of such expansion or entry
  • countervailing buyer power

Assessing economic strength

When assessing the economic strength of the companies concerned, market shares can provide an important first indication of the market structure. The higher the market share and the longer the period of time it has been held for, the more indication there is of a possible dominant position. Companies operating in a market with fewer market participants of similar size and influence have a higher probability of being in a dominant position. In many jurisdictions, competition law or the practice of the local competition authorities imply the rebuttable presumption of a dominant position if a company has a market share above 40% for a prolonged period of time.

Interpreting market share in the context of the relevant market conditions

Market shares are usually interpreted in the context of the relevant market conditions. In assessing the competition, it is not only the current market situation that is important, but also the ability of existing competitors to expand their business or the opportunities for potential competitors to enter the market. Such a prospect may reduce the allegedly dominant company’s incentive to, for example, raise prices.

For an expansion or entry to be considered realistic, it must be sufficiently profitable for the companies entering or expanding, taking into account factors such as barriers to expansion or entry, the possible reactions of the allegedly dominant company and other competitors, and the risks and costs related to failure.

If the barriers for new market entrants are low, the fact that one of the market participants has a high share of the market may not be a clear sign that it is in a dominant position. On the other hand, if the market has significant barriers to expansion or entry, this may play in favour of the dominant company as other market participants would have difficulties keeping up with any of its market actions.

In the pharmaceutical sector, the protection provided by patents is often seen as an important legal barrier. During the period of validity of the patent, other market participants are prevented from manufacturing the same products and eventually entering new markets.

Evaluating countervailing power

It is not only the position of other market participants that is of great importance when assessing possible dominance, but also the position of buyers. As explained by the Commission, countervailing buying power may result from the customers’ size or from their commercial significance for the dominant undertaking; or from their ability to switch quickly to competing suppliers, to promote new entries to the market or to vertically integrate, or to credibly threaten to do so.

If countervailing power is significant, it may deter an attempt by the allegedly dominant company to profitably increase prices. In the pharmaceutical sector, buyer power is a subject of great relevance. The buyers are often few and are often powerful entities, for example, national health authorities, hospitals or large and often vertically integrated wholesale – retail chains. These buyers often have the ability to exercise counterpower towards suppliers, forcing them to change their planned marketing approach.

Defining the relevant market

In assessing a possible dominant position, it is highly important to properly define the relevant market, which consists of a product and a geographical area. The more narrowly the relevant market is defined, the more likely it is that the company concerned is in a dominant position.

The relevant product market

The relevant product market comprises all those products or services which are regarded as interchangeable or substitutable by the consumer due to their characteristics, prices and intended use. Products or services, which could relatively easily, in particular considering costs and time needed, be put on the market by other manufacturers or by potential competitors also need to be considered.

The product substitutability analysis is carried out inter alia by studying consumer habits and the products concerned, taking into account any peculiarities. The competition authorities often apply the so-called “SSNIP” test to determine whether the consumers or other undertakings concerned would switch to substitutes if there was a price increase of 5–10% on the products concerned. However, applying the SSNIP in the pharmaceutical sector might be challenging or even unsuitable. The prices of medicines are typically subject to national regulation and to reimbursement, and sometimes consumers might actually not notice the price change due to the existence of various state support schemes and reimbursement mechanisms. Since the basic assumptions in relation to possible price changes in such situations cannot be applied, non-price factors affecting competition could play a more important role in the assessment.

Hence the definition of the product markets for pharmaceuticals would depend on whether the medical product is interchangeable with any other medical product. However, the question of whether a medical product is interchangeable with any other is a very complicated one, and depends on the characteristics of a specific product.

The competition authorities often define relevant product markets in the pharmaceutical sector by reference to the therapeutic indication and there have been cases where a single medicine has been regarded as constituting a separate market (e.g., an innovative medicine with no viable substitute). The product markets may be defined more broadly than within INN (International Nonproprietary Name), and also more narrowly than within INN (e.g. if the route of administration is different). Since the original medicines and generics have the same active substances, they should generally be seen as substitutable; however, a particular assessment would be made on a case-by-case basis.

The geographical market

The geographical market is usually defined as the area in which the undertakings concerned are involved in the supply and demand of products or services, and in which the conditions of competition are sufficiently homogeneous, and which can be distinguished from neighboring areas because the conditions of competition are appreciably different in those areas. The Commission has recognised in its practice that, although the European pharmaceutical market is large, the substitutability of medicinal products is usually assessed at a national level, or sometimes at a lower level, due to significant differences in national regulations related to the pricing and distribution of medicines. Therefore, in most cases medicines from one EU member state would not be regarded as interchangeable with those from another member state.

Abuse of a dominant position

Although there are no official guidelines specifically addressing the abuse of a dominant position in the area of pharmacy and medicines, some general rules are applicable to all markets. The types of abuse of a dominant position most frequently seen in national and EU competition law are defined as follows:

  • Refusing to enter into transactions with other market participants or to amend cooperation terms without objectively justifiable reasons, including unfair and unjustified refusal to supply products or deliver services. For example, in the Syfait II Case (Joined Cases C-468/06 – C-478/06, Sot. Lélos kai Sia) the European Court of Justice (the ECJ) concluded that a company having a dominant position on the relevant market for medicines abused its dominant position by refusing to meet ordinary orders in order to prevent parallel exports.
  • Limiting production, markets or technical development to the prejudice of consumers without an objectively justifiable reason.
  • Making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
  • Directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions. For example, in 2018 the Danish Competition Council found that the Swedish pharmaceutical distributor CD Pharma had abused its dominant position on the market by drastically increasing the price of the oxytocin product Syntocinon, used for contraction stimulation and treatment of haemorrhages after delivery. The price increased by 2000% per package in the period of 28 April to 26 October 2014. During this time period, the medicine in question was the only oxytocin product with a Danish marketing authorisation.
  • Applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage.
  • A relatively novel concept of abuse is “abusive denigration”, which is not referred to in EU competition law EU competition law or ECJ case law, and was introduced by the French Competition Authority, which applied a fine of over EUR 40 million to Sanofi-Aventis for pursuing a strategy of denigration. This strategy was aimed at healthcare professionals and against generic versions of Plavix, with the goal of limiting their entry into the market and favouring Sanofi-Aventis’s own products.

Local peculiarities, sanctions and practice of the competition authorities

Latvia

In Latvia, no manufacturers of medicines have been alleged to have abused a dominant position. However, from the Latvian Competition Council’s practice related to the abuse of market power in other sectors we see that markets are sometimes defined very narrowly in Latvia. For example, a single TV channel or distribution market of a Hollywood movie has been defined as forming a separate market. Thus, the overall conclusion is that very narrow market definitions cannot be excluded as a possibility in the area of medicines as well. Under the Latvian Competition Law, if abuse of the dominant position is discovered, the Competition Council may impose a fine of up to 5% of the net turnover for the previous financial year each.

Lithuania

Likewise, in Lithuania, there have not been any cases where manufacturers of medicines have been investigated for an alleged abuse of a dominant position. However, the Lithuanian Competition Council has stated the pharmaceutical sector is one of its priorities for the period of 2019–2021.

Thus far there have not been any cases of abuse of a dominant position that would define markets very narrowly (e. g. comparable to the Latvian cases of defining relevant market as a single TV channel or the distribution of a single Hollywood movie). However, this does not mean that the Lithuanian Competition Council could not define a product market very narrowly if an appropriate case were to arise. Under the Lithuanian Competition Law, an abuse of a dominant position can be punished with a fine of up to 10% of the global turnover of the undertaking (i.e. the entire company group) in the previous financial year. Moreover, the manager of the infringing company could be personally sanctioned with a fine of up to EUR 14,481 and a prohibition from taking a managerial role in any public or private legal entity for up to five years.

Estonia

In Estonia, no jurisdiction-specific approach exists to defining market boundaries for pharmaceuticals, since there exists no relevant practice with regard to this subject – i.e., the Estonian Competition Authority has not made any relevant/applicable decisions. According to the Estonian Competition Law, it is presumed that a company has a dominant position if it has a market share of above 40%. Therefore, the existence of a dominant position primarily depends on how narrowly the market is defined. However, from the Estonian Competition Authority’s practice related to mergers, we can see that markets can be defined very narrowly in the healthcare sector. For example, different medical care services are deemed to belong to different goods markets. A similar approach may be presumed for pharmaceuticals markets. As Estonian law follows the same principles as the EU competition law, the Estonian Competition Authority most probably would analyse the relevant markets, similarly to the European practice.

Under the Estonian Competition Law, an abuse of a dominant position can be punished with a fine of up to EUR 400,000.

Belarus

In Belarus, there are no specific rules defining what constitutes a dominant position for a manufacturer of pharmaceuticals. The general regulations addressing the establishment of a dominant position by an entity and abuses of market power are applied. According to the Antimonopoly Law, an entity has a dominant position if its market share is equal to or more than 35%.

In general terms, the market is identified as the circulation area of goods that do not have substitutes or interchangeable (similar) goods on the territory of the Republic of Belarus or a part thereof.

If the entity’s market share is between 15% and 35%, whether it has a dominant position can be determined by the Ministry of Antimonopoly Regulation and Trade of the Republic of Belarus (MART), after considering:

  • The ability to unilaterally determine prices and to have a decisive impact on the general condition of commodity circulation in the relevant product market
  • Existing restraint to access to and/or exit from the product market
  • How long the ability to have a decisive impact on commodity circulation in the relevant product market lasts

Any acts or omissions of dominant economic entities that result or may result in the prevention, restriction or elimination of competition and/or the infringement of the interests of other persons are prohibited. The list of actions that are considered as such is established by law and includes, inter alia, setting and maintaining monopolistically high or low prices, and the economically or technologically unjustified reduction or termination of the production of goods, if the goods are in demand or orders for their delivery have been placed and their production is feasible.

The fines to be imposed on legal entities for abuse of a dominant position are up to 10% of profits for the calendar year preceding the year in which the fact of violation is established, but not less than 500 basic units (around EUR 4,700).