26. 11. 2018
On 1 December 2017, it will be one year after a fundamental amendment to the Act on Pharmaceuticals1 (the “Act”) became effective. One of its main goals was to ensure the availability of medicinal products for the needs of patients in the Czech Republic. The amendment not only laid down restrictive rules for the distribution of medicinal products abroad, but also brought about new obligations for marketing authorization holders and distributors in relation to the distribution of medicinal products in Czech Republic. Under Section 77(1)(h) of the Act, distributors are obliged to ensure supplies of medicinal products to operators authorised to dispense medicinal products (essentially pharmacies, including hospital pharmacies) no later than within two business days of receipt of their request.
At the same time, said provision foresees that in order to ensure the availability of medicinal products on the Czech market, the distributor has the right to request a marketing authorization holder (the “marketing authorization holder”) to supply medicinal products to the extent of the distributor’s market share, and the marketing authorization holder has the obligation to do so.
The cited provision has raised considerable controversy during the legislative process. The first year of the validity of the new regulation shows that the critical voices were justified and that the amendment raises more questions than it answers.
2. Distributors’ obligation to ensure supplies of medicinal products within two days
First, we shall examine the practical difficulties distributors face when they are obliged “to ensure supplies of medicinal products within two business days of receipt of an order.”
In practice, distributors often face the situation where they cannot comply with orders within the statutory time limit. This is particularly the case when they do not have the required products in stock. Within two business days, they are thus forced to obtain them from a third party, for example, from the marketing authorization holder or another distributor. However, these persons do not have the stipulated time limit for delivery.
Distributors are obliged to comply with the order even if the product is not in their portfolio at all. In addition, they are obliged to ensure the supply without being entitled to examine the reasons behind the order. In other words, they are obliged to supply even when a pharmacy requires a medicinal product only for the purpose of its storage, or even for export abroad.
It is evident from the above examples that the Act places a heavy burden on distributors and in extreme cases may be even abused against them.
3. Obligation of marketing authorization holders to supply to distributors
The Act attempts to ease the distributors’ situation by conferring on them the right to request the marketing authorization holder to supply medicinal products “to the extent of the distributor’s market share”. However, this obligation leads to considerable problems in practice, too.
The main problem for marketing authorization holders is to determine the extent to which they are obliged to comply with distributors’ orders. Under the Act, a distributor’s market share is equal to “the market share achieved on the Czech market by the distribution of all human medicinal products in the calendar quarter preceding the last ended calendar quarter.”
Unfortunately, the marketing authorization holder does not have reliable data available, on the basis of which he could accurately determine the distributor’s market share. Such data are available only to the State Institute for Drug Control (the “SIDC”). However, the SIDC must not disclose the data in a way that would identify individual distributors’ market shares. In the end, the marketing authorization holder is thus unable to check whether the order is justified in terms of its extent.
It is also unclear whether the market share should reflect the distributor’s turnover in CZK or the volume of medicinal products supplied. Similarly, it is unclear to what distributors and in what amount the supply of a medicinal product that is consecutively distributed through more distributors should be attributed, as well as the date that will be decisive for including the supply in the respective quarter (contract conclusion date or physical delivery date, invoice due date or other time). The question is also how back discounts, turnover bonuses, etc. should be taken into account in market share calculation.
Another uncertainty arises from the fact that it is not clear what volume of medicinal products should be used as a basis to determine the permissible extent of the order. This basis may be, for example, the volume of medicinal products that the marketing authorization holder supplies statistically to the market in a given month or quarter. However, theoretically, the basis may also be the volume of medicinal products that the marketing authorization holder supplies historically to the market for the entire calendar year.
In extreme cases, it may happen that the marketing authorization holder receives orders for example from two largest distributors for the supply of a particular product to the extent equal to, say, 50% of the volume that the marketing authorization holder supplies for the entire year. The marketing authorization holder may thus lose all its stock and may be unable to satisfy other distributors who will contact him subsequently.
The obligation of marketing authorization holders to supply to distributors “to the extent of their market share” is also problematic from competition law perspective. As a consequence, such obligation will significantly weaken competition as it will lead to the fixing of market shares, in particular, of major distributors, the prevention of market expansion of existing distributors, and the prevention of new distributors from entering the market.
4. Possible reasons for rejecting an order
On its face, the Act provides marketing authorization holders and distributors with very limited options to reject orders.
One of the options explicitly foreseen by the Act is a case where a party has at least one monetary debt overdue more than 30 days to the marketing authorization holder or the distributor. The second option is a situation where the placing of a medicinal product on the market is interrupted or terminated in the Czech Republic.
Both the marketing authorization holder and the distributor may release themselves of their liability if they prove that they have made all reasonable efforts to fulfil their obligation.2 This reason may be taken into account with respect to the marketing authorization holder, for example, when its stocks are exhausted, typically as a result of an order from a major distributor “to the extent of its market share.”
On the distributor’s side, this reason may be considered, for example, in a situation where it is confronted with a pharmacy’s order to supply a medicinal product it does not have in its portfolio. If, without delay, the distributor reaches out to the relevant marketing authorization holders and distributors and, despite this, it does not receive the medicinal product from them, in our opinion, it should not be held liable.
Finally, in some opinions, one may release themselves of their liability for failing to comply with an order by referring to the purpose of the Act, which is to ensure the availability of medicinal products for patients in the Czech Republic. This principle is also enshrined in Article 81 of Directive 2001/83/EC, under which the “holder of a marketing authorisation for a medicinal product and the distributors of the said medicinal product … shall … ensure appropriate and continued supplies of that medicinal product to pharmacies and persons authorised to supply medicinal products so that the needs of patients in the Member State in question are covered.”
Based on this principle, it can be argued that neither the marketing authorization holder nor the distributor are automatically obliged to comply with each order. Rather, if the marketing authorization holder or the distributor is able to demonstrate that the needs of patients in the Czech Republic are saturated or that the applicant does not intend to use the required medicinal products to meet the needs of domestic patients but intends to export them, he should be entitled to reject such an order. The rationale behind this argument will, however, have to be upheld in the decision-making practice.
The first year after the adoption of the amendment was marked by extreme legal uncertainty. This is also admitted, among others, by the SIDC according to which these provisions of the Act are unenforceable in practice.
However, the lack of enforcement by the SIDC is criticized by the Czech Pharmacy Chamber which in September 2018 adopted a resolution to bring an administrative action against the SIDC because it allegedly does not sanction distributors who fail to supply medicinal products to pharmacies on time. At the same time, first lawsuits have already been brought by distributors against marketing authorization holders.
Before these questions are clarified by the courts, the scope of the obligations under Section 77 of the Act will still be unclear. This ambiguity is not only related to reasons for refusal to supply but also to other practical problems.
This applies in particular to marketing authorization holders who have to cope with the impact of the Act on their distribution models (e.g. DTP model or exclusive distribution), their capacity planning, optimal stock management, etc.
Solving these issues requires a considerable amount of creativity. At the same time, caution should be taken as a violation of the Act is subject to sanctions of up to CZK 20 million (approximately EUR 770,000).
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Authors: Václav Audes, Roman Barinka