Johnson & Johnson: Exemption Rejected

1. Introduction

On January 28, 2021, the Turkish Competition Authority ("Authority") published on its website the Turkish Competition Board's ("Board") reasoned decision on the individual exemption application of Johnson&Johnson Sıh. Mal. San. ve Tic. Ltd. Şti. ("J&J").1 The application concerns Johnson & Johnson's prospective 'Human Medicine Warehouse Sales Agreement' ("Agreement") to be concluded with only nine pharmaceutical warehouses.

According to the Agreement, J&J will solely work with these nine pharmaceutical warehouses regarding the distribution of four J&J medications out of 37 pharmaceutical products that J&J distributes in Turkey. All four of these products are used for serious illnesses, specially two of them are used for orphan diseases, and they were chosen because of their usage and because (i) they require high specialty, (ii) their sale prices are high, and (iii) they are often subject to parallel exports. Additionally, while J&J works with 40 warehouses for the distribution of its products, the Agreement aimed to establish a quantitative selection distribution system for those four products by decreasing the total number of warehouses to nine. J&J listed the criteria for the choice of these warehouses as: (i) financial power, (ii) number of districts and pharmacies they serve, (iii) efficient distribution and logistics network, and (iv) past experiences in warehousing sector. J&J stated that limiting the number of warehouses for the distribution of those products would allow close monitoring of exports. Also, the Agreement will not allow the supply of the products subject to the Agreement to the warehouses that are opted out from the distribution system.

2. The Board's Assessments

When defining the relevant product market, the Board followed the European Commission's decisional practice and its well-adopted approach and considered the European Pharmaceutical Marketing Association's Anatomical Therapeutic Classification ("ATC"). The Board did not find necessary to adopt a narrower market definition as the Agreement covers the sales to independent pharmacy channel and defined the market on the basis of ATC-3 classification related to the medicines' therapeutic characteristics or chemical structure. The Board identified that J&J's market share for these four products is below 40% in the relevant markets, i.e. the threshold to benefit from the Block Exemption Communiqué No. 2002/2 on Vertical Agreements ("Communiqué No. 2002/2").

The Board green-lighted the Agreement's aim to restrict parallel exports by referring to its precedents allowing restrictions on parallel exports2 and did not make an additional assessment on that front. However, the Board considered that this aim does not necessitate the implementation of a selective distribution system. Additionally, the Board underlined that the system will be implemented at the wholesale level and it is unclear whether such a system could attain the efficiencies in promoting expertise, which is required for pharmacies and not pharmaceutical warehouses

The Board found that the quantitative selective distribution system formulated by the Agreement is not required by the characteristic of the relevant products and that the criteria for the choice of the nine warehouses cannot be grounded on the characteristics of the products subject to the Agreement. As a result, the Board concluded that the relevant system does not qualify as a selective distribution system for the purpose of Communiqué No. 2002/2. As the Agreement restricts both active and passive sales to warehouses not included in the system and the exception for selective distribution systems was not accepted, the Board concluded that the Agreement would not benefit from the block exemption under Communiqué No. 2002/2 due to the restriction of passive sales, a hard-core restriction.

Subsequently, the Board conducted a detailed analysis regarding the four criteria of individual exemption below:

  • Ensuring new developments, improvements, or economic or technical improvements in the production or distribution of goods and in the provision of services:

Although the Board acknowledged the restriction on the number of suppliers would allow monitoring of distribution and decrease transaction costs, the Agreement would also restrain passive sales to other pharmaceutical warehouses wishing to purchase these products. The Board also considered that other warehouses could satisfy the criteria determined by J&J and this is why J&J rather limited the number of warehouses.

Under this criterion, the Board also discussed the public interest in banning parallel exports. The Board accepted that preventing the export of these products would contribute to the availability of the products in Turkey and eliminate the potential delays in treatment. Nevertheless, the Board reached that the Agreement already includes a provision for restriction on parallel exports serving for such purpose and the restriction on passive sales is not necessary for achieving this aim.

In this respect, the Board decided that the Agreement does not meet the first criterion of individual exemption.

  • Consumers must benefit from the improvements mentioned in the first criterion above

J&J argued that consumers would receive their fair share from the resulting efficiencies. This is particularly due to supply security and the emergency distribution system. The Board also accepted that the Agreement could contribute to providing access to these products in Turkey. The emergency distribution system would eliminate potential problems in the supply of these medications to independent pharmacies and patients. However, the Board decided that the Agreement would actually make it harder to access these medicines because pharmacies would be able to obtain them only from nine pharmaceutical warehouses. Overall, the Agreement does not meet the second criterion of individual exemption.

  • Not eliminating competition in a significant part of the relevant market

The Board accepted J&J's submission that the products subject to the Agreement account for only a small portion of all the products in J&J's product portfolio. To that end, the Board decided that the Agreement would not eliminate competition in a significant part of the relevant market just because some warehouses would not be able to have these products in their portfolios.

  • Not restricting competition more than necessary to achieve the goals set out in the first two conditions above

The Board decided that lacking an appropriate selective distribution system, the envisioned restrain on the sales of resellers is a restriction beyond what is necessary to attain efficiencies under the first criterion. The Agreement's potential contribution to product availability does not change this fact and therefore, the fourth criterion is also not met.

3. Conclusion

After examining the Agreement for more than one year, the Board rejected J&J's exemption application. It decided that the Agreement (i) falls within the ambit of Article 4 of the Law No. 4054; (ii) does not benefit from the block exemption; and (iii) cannot be granted an individual exemption. This is not the first time the Board rejected or fined3 the restriction of the number of distributors. To provide an example, the Board also rejected the individual exemption application of Roche Turkey in 2019 for its envisaged distribution system decreasing the number of pharmaceutical warehouses from 30 to maximum of 10 warehouses for the distribution of Roche's human medicines to pharmacies and private hospitals.4 Similarly, the Board did not grant the provision within the supply agreement between Pfizer Turkey and Dilek Pharmaceutical Warehouse limiting the number of the warehouses by setting a market share threshold.5

However, J&J decision goes even beyond these decisions, as the products at hand satisfied the market share threshold to benefit from the block exemption Communiqué No. 2002/2, and therefore a quantitative selective distribution system for these products would normally have been block exempted. Notwithstanding the above, the Board made an assessment as to whether the characteristics of the products required a selective distribution system and, answering this in the negative, reasoned that the system set out in the Agreement does not qualify as a selective distribution system for the purpose of Communiqué No. 2002/2. As a result of this, the restriction of passive sales to warehouses outside the system was interpreted as a hardcore restriction which takes the Agreement outside the scope of Communiqué No. 2002/2. Given the above, the Board's decision has important repercussions not only for the pharmaceutical sector, but for the assessment of selective distribution systems under Turkish competition law in general.

Competition Authority Initiates Investigation on Nadir Kitap

On January 28, 2021, the Authority announced it initiated an investigation against Nadirkitap Bilişim ve Reklamcılık A.Ş. which provides brokerage services in the market for online second-hand books sales via the website ("Nadir Kitap"). The Authority launched the investigation based on its decision No. 20-54/753-M, and will determine whether Nadir Kitap violated Article 6 of the Law No. 4054 by abusing its dominant position and not providing data to its seller members who want to market their products utilizing competing broker service providers.

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1. The Board's decision dated September 3, 2020 and No. 20-40/553-249.

2. For example, Daiichi decision dated May 22, 2018 and No. 18-15/280-139; Johnson & Johnson decision dated July 3, 2017 and No. 17-20/319-141; Servier decision dated June 23, 2016 and No. 16-21/363-169; Novo Nordisk decision dated February 5, 2015 and No. 15-06/71-29; Takeda decision dated April 3, 2014 and No. 14-13/242-107; Pfizer decision dated August 2, 2007 and No. 07-63/774-281.

3. The Board, in Sanofi decision dated April 20, 2009 and No. 09-16/374-88, concluded that Sanofi abused its dominant position by hindering competition in the wholesale level of the relevant markets through implementing the sales conditions in 2008 which stipulated a shorter maturity date for the sales below the determined monetary threshold.

4. The Board's decision dated December 12, 2019 and No. 19-44/732-312.

5. The Board's decision dated August 2, 2007 and No. 07-63/774-281.

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