Turkey: The Turkish Pharmaceutical Industry: Anti-trust Developments In 2009.

Last Updated: 8 April 2010
Article by Neşe Taşdemir Önder

Executive Summary

The pharmaceutical industry has been a constant source of antitrust focus in recent years. This report intends to give an outline of major Turkish competition law developments in 2009 with a particular focus on the pharmaceutical industry.

The Sector Inquiry

On January 20th, 2009, the Turkish Competition Authority ("TCA") initiated a sector inquiry in the pharmaceutical sector to identify any lack of or distortion to competition in the market. The TCA declared that their inquiry will have a broader scope than the sector inquiry in the EU and include an analysis of pricing, reimbursement, market entry conditions, distribution channels and public procurement processes in addition to the analysis of potential delays in generic entry, decline in the number of new medicines, and the use of intellectual property rights.

Investigations

The TCA on 20.04.2009 imposed (subject to appeal) a fine of TL 3.648.045,58.- to a pharmaceutical company found to be dominant in the relevant products markets defined on the basis of active ingredients, to have abused its dominant position by imposing different sales term conditions to warehouses on the basis of their monthly purchases. Dominant undertakings should be more careful in determining their conduct and distribution strategies.

The TCA on 16.09.2009 decided to initiate an ex-officio investigation against the Turkish Pharmacists' Association ("TPA") on the basis of allegations that the TPA urged its members to boycott a number of drug manufacturers and importers for decreasing the discounts and terms offered to pharmacies and that the purchase conditions of pharmacies were being determined outside the marketplace. The investigation is pending.

Regulatory Framework

Although of a general nature, the developments in the regulatory framework are evidently of significant relevance to the pharmaceutical industry.

On February 15, 2009 the TCA criticized for lacking standards and consistency in its method of setting fines for infringements, published "the Regulation on Fines" to apply in case of agreements, concerted practices and decisions limiting competition and abuse of dominant position" with the aim of determining objective criteria for setting fines for anti-trust infringements and the promotion of co-operatation by undertkings with the TCA in its investigations and/or detection of infringements.

The TCA parallel to the Regulation on Fines published the Leniency Regulation which lays down a new concept in Turkish competition law. The regulation aims to set out the conditions and procedure for qualification for immunity from fines or reduction of fines in cartel cases where active cooperation is entered into with the TCA by undertakings, their directors or employees in revealing a cartel to which they are or have been a member.

On May 13th, 2009, "The Guidelines on Technology Transfer Agreements" were introduced with the aim of providing detailed explanations as to application of conditions for exemption of certain types of Technologhy Transfer Agreements from the application of the Competition Act and for compatibility of these agreements with competition law to help undertakings in their self assessment of their agreements. For the purposes of competition law technology transfer agreements concern the licensing of technology where the licensor permits the licensee to exploit the licensed technology for the production of goods or services (such as patent license agreements).

The existing Guidelines on Vertical Agreements issued for the purpose of helping undertakings in their self assessment of compatibility of their vertical agreements with competition laws and assessment of conditions for exemption from the application of the Competition Act, were substantially revised on June 6th, 2009. One of the reasons of this revision is the introduction of the maximum 40% marketshare threshold as a requirememnt for qualification of vertical agreements for an automatic exemption, subject to compliance with further conditions.

The Report

The pharmaceutical industry has been a constant source of antitrust focus in recent years. This report intends to give an outline of major developments in Turkish competition law and practice in 2009 with a particular focus on the industry.

I. The Turkish Sector Inquiry

On January 20th, 2009, the TCA decided to initiate a sector inquiry in the pharmaceutical sector. The TCA declared that in the sector inquiry the structural problems will be considered and in light of the information gathered, policy proposals with regard to how to develop the competition conditions in the pharma sector will be presented. Although the TCA decision on the inquiry was to an important extent triggered by the sector inquiry of the EU Commission, the Turkish inquiry will include a broader analysis of pricing, reimbursement, market entry conditions, distribution channels and public procurement processes in addition to the analysis of potential delays in generic entry and development of new medicines.

The TCA unlike the EU Commission did not conduct any down-raids but started gathering information from actors of the sector.

Although it has been stated by the TCA that the outcome of the EU sector inquiry will be taken into account, the Turkish pharma sector welcomed the TCA's willingness to gain a better and in depth understanding of the market by extending the scope of its inquiry independent from the EU sector inquiry. Accordingly the TCA should consider the substantial differences between the pharmaceutical regulations in the EU and Turkey while presenting policy proposals to the sector.

II. Investigations

Fine imposed for Abuse of Dominant Position in the relevant market – Application of different payment terms to different warehouses by dominant undertaking.

A complaint was made by pharmaceutical warehouses against a pharmaceutical company on its alleged abuse of dominance at the wholesale level of its distribution system with the intention to exclude small pharmaceutical warehouses from the market. The TCA issued an investigation and found the company dominant in the relevant markets defined on the basis of active ingredients.

The conduct of the company subject to the decision of abuse was the application of two different types of payment terms to pharmaceutical warehouses as effective of March 2008. Pharmaceutical warehouses whose monthly purchase was below TL 250.000.- had been granted 15 days of payment term whereas warehouses whose monthly purchase exceeded TL 250.000.- had received 60 or 150 days of payment term depending on the type of drug. In its decision, the TCA recognized that a drug manufacturer and importer is free to determine its sale conditions. However, the TCA emphasized that a dominant undertaking in constructing its distribution system must take into account its special responsibility imposed on it by competition laws not to distort competition in the market. In this respect, the TCA analyzed the net impact of the sales conditions imposed by the pharmaceutical company and concluded that whereas the pharmaceutical company obtained negligible profit on the application of this system, small warehouses had to bear high costs and serious damages due to the conduct of the company. Therefore, the TCA considered this behavior as an exclusionary abuse of dominant position in the market and decided to impose a fine amounting to 0.5 % of the gross income (TL 3.648.045,58.- approximately € 1.737.164,-) of the company in 2008. The decision is subject to appeal.

Boycott by the Pharmacists' Association of Drug Manufacturers and Importers

The TCA on 16.09.2009 decided to initiate an ex-officio investigation against the Turkish Pharmacists' Association ("TPA") on the basis of allegations that the TPA urged its members to boycott a number of drug manufacturers and importers for decreasing the discounts and terms offered to pharmacies and that the purchase conditions of pharmacies were being determined outside the marketplace.

III. Developments in the Regulatory Framework

The new Regulation on Fines: Standards in Setting Anti-trust Fines

Pursuant to Article 16 of the Turkish Competition Act ( "Act") the TCA may, impose fines on undertakings or associations of undertakings and also on their directors and employees having a decisive influence on the infringement where, either intentionally or negligently, they are engaged in anti-competitive agreements and practices or abuse of dominant position in the relevant market.

The TCA was being criticized for lack of standard and consistency in its method of setting fines in such cases. The Regulation on Fines Applicable in Cases of restrictive Agreements, Decisions, Concerted Practices and Abuses of Dominant Position ("Regulation on Fines") published on 15 February 2009, aims to set objective criteria in the method of setting fines in order to ensure consistency, impartiality and transparency of the TCA's decisions. Another object of the regulation is the promotion of co-operation by undertakings with the TCA in its investigations and/or detection of infringements by rewarding co-operation in determing fines.

The regulation provides that in cartel cases the basis for setting the fine shall be determined by reference to 2%to 4% of the value of the net sales of the undertakings concerned preceding the final decision in the whole or part of the Turkish market depending on how the geographic market is defined. In the case of other types of antitrust infringements a basic fine between 50 and 3% of the net sales shall be imposed. The application of the relevant percentages depends on factors such as the market power of the undertakings concerned, the gravity of the damage as a result of the infringement in question.

The final step of setting the basic amount involves the consideration of the duration of the infringement. The basic amount is to be increased by half where the infringement lasted longer than one year but shorter than five years or by one fold in case of infringements lasted longer than five years.

Aggravating factors, such as continuation of the infringement despite the notification of the Board's decision for an investigation and repetition of the infringement shall then be taken into consideration to reach a final amount. Termination of the infringement and provision of assistance to the TCA with its examination or coercion by other undertakings for infringement will count among mitigating factors.

The fine to be imposed for each infringement of the undertaking cannot exceed 10% of its annual gross revenue generated at the end of the fiscal year preceding the final decision where a maximum of 5% of the fine is imposed on directors or employees of the relevant undertaking.

The final step also involves immunity from or reduction of fines in cartel cases, where the conditions are met under the new Leniency Regulation.

The Leniency Regulation: Whistle blowing on Cartels

The Leniency Regulation lays down a new concept in Turkish competition law and sets out the framework for rewarding cooperation with the TCA by undertakings which are or have been party to secret cartels in revealing them. The regulation sets out the conditions and procedure for qualification for immunity from or reduction of fines in cartel cases where an undertaking or a director or employee of an undertaking enters into active cooperation with the TCA in its detection of a cartel.

The regulation grants immunity only to the first coming member of the cartel to submit information and evidence to help to expose the relevant cartel on condition that certain additional requirements are fulfilled. Where an undertaking does not qualify for immunity but admits the cartel and cooperates by submission of evidence to uncover the cartel a reduction of fines is available to such undertaking.

It is not known yet whether there has been any application within the framework of the regulation since applications would be kept confidential unless decided otherwise by the TCA.

Guidelines on Technology Transfer Agreements: Qualification for Exemption

On May 13th, 2009, "The Guidelines on Technology Transfer Agreements" were introduced with the aim of providing detailed explanations as to the application of conditions for exemption of certain types of these agreements from the application of the Competition Act provided by article 5 of the Act (individual exemption) and by the Block Exemption Communiqué on Technology Transfer Agreements dated 23 January 2008 (automatic exemption).

Technology transfer agreements subject of the above legislation concern the licensing of technology where the licensor permits the licensee to exploit the licensed technology for the production of goods or services.

These agreemens may have anti - competitive effects due to restrictions contained such as exclusivities depending on the degree of market power of the undertakings concerned and, therefore, on the extent to which those undertakings face competition from undertakings owning substitute technologies or undertakings producing substitute products. The legislation defines the categories of agreements which are exempted up to a certain level of market power and on specifying the restrictions or clauses which are not to be contained in such agreements.

Therefore for technology transfer agreements between competitors it can be presumed that, where the combined share of the relevant markets accounted for by the parties does not exceed 30 % and the agreements do not contain certain severely anti-competitive restraints; they generally lead to an improvement in production or distribution and allow consumers a fair share of the resulting benefits. For technology transfer agreements between non-competitors the same can be presumed where the individual share of the relevant markets accounted for by each of the parties does not exceed 40%.

Undertakings are encouraged to make a self assessment of their agreements with competition laws and therefore follow the Communique and the Guidelines in determining such compatibility or conditions for exemption from the Act.

Extended Guidelines on Vertical Agreements: Qualification for Exemption

Vertical agreements defined as agreements or concerted practices entered into between two or more undertakings each of which operates for the purposes of the agreement at a different level of the production or distribution chain and in relation to conditions under which the parties may purchase sell or resell certain goods or services, such as distribution agreements are automatically exempted from the application of the Competiton Act by way of the Block Exemption Communiqué on Vertical Agreements (dated 14 July 2002) subject to certain requirements outlined in the Communiqué. Where conditions for such automatic exemption do not apply, an agreement may still qualify for individual exemption and undertakings are allowed to make a self assessment of compatibility of or the qualification for exemption without notification to the TCA for clearance or exemption.

With the new Guidelines on Vertical Agreements, the existing guidelines on vertical agreements issued for the purpose of helping undertakings in their self assessment were substantially extended on explanations on analysis to be made on the agreements.

The extension of the guidelines followed the introduction in 2007 of the maximum 40% market share threshold, as a requirement for qualification for automatic exemption under the Block Exemption Communiqué on Vertical Agreements and the restriction of the scope of automatic exemption possibility, as against the former Communiqué which did not entail any market share threshold to qualify for an automatic exemption.

The revised Guidelines accordingly provide detailed explanations on the calculation of the market shares for the purposes of the application of the exemption, definition of the relevant market and the effects of the restrictive covenants in vertical agreements, rules and principles in relation to hardcore restrictions, safe harbors and exceptional terms.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Neşe Taşdemir Önder
 
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