Sanctions to a Cartel in the Pharmaceutical Services Market

Introduction

The Pharmaceutical College of Tucumán ("CFT", after its Spanish acronym), the Pharmacy Association of Tucumán ("AFT", after its Spanish acronym) and the Circle of Pharmacies of the South ("CFS", after its Spanish acronym) were sanctioned with fines for a value of ARS  6,453,839 (approximately USD 322,691 at the current exchange rate), for entering into an agreement to limit and restrict competition among pharmacies in the Province of Tucuman in violation of Sections 1 and 2, sub-sections a), b) and g) of Law No. 25,156 (the “LDC”). The Sanction was imposed by the Secretary of Trade (the “Secretary”), following the recommendation of the Antitrust Commission (“CNDC”), on January 23, 2018.

The claim

On March 11, 2013, Bradel del Pueblo SRL ("Bradel" or the "Complainant") filed a claim with the CNDC against the CFT, a non-state public entity created by the Law No. 5,483 of the Province of Tucumán, for an alleged violation of Sections 1 and 2 of the LDC (the "Claim"). Likewise, the following organizations were incorporated ex officio as defendants, namely: the AFT and the CFS (together with the CFT, the "Defendants").

The Complainant stated that the CFT issued the Regulation of Pharmaceutical Services ("Regulation" after its Spanish acronym), which established a series of conditions to the prices of drugs to be charged to the affiliates of the health service providers. The CFT signed these agreements and handed the collections on behalf of the pharmacies, the latter being obliged to all terms and conditions included in said agreements. The Complainant understands that the Regulation implied the imposition of minimum resale prices which, based on a dominant position of the CFT, provoked an alignment between competitors i.e. pharmacies. For a better reference, Section 9 provided that "pharmacies that are affiliated to the system undertake (a) not to make discounts greater than (10%) on the retail price of medicinal products (…); (b) not to carry out additional discounts over the ones made by the health service providers that have agreements with the CFT (...) (c) not to carry out selective or massive advertising of discounts and not to do offers of medicinal specialties (...) and (d) not to remain open with attention to the public outside the commercial hours in detriment of the pharmacy offices that are on guard (...) ", whose purpose was to "ensure equality in the provision of the service". On the other hand, the Complainant said that the CFT would have had a persecutory attitude towards this entity, which was made through administrative summaries presented in the Ethics and Discipline Tribunal of the CFT on the grounds of alleged improper behaviors in violation of the rules and the Code of Ethics, such as excessive advertising and discounts.

The CFT denied a breach to the LDC arguing that it was a non-profit and non-state legal entity that does not act on the market. Likewise, it argued that the commercialization of medicinal products cannot be assimilated to the exchange of goods and services in general, given that it is a strictly regulated activity for implying the provision of a public service. In relation to the alleged imposition of minimum resale prices, it expressed that its role is to protect the equality of all members “avoiding that the economic and ethic bases that the law requires for providers are altered”, defend the interests of the affiliated pharmacies and promote the concept of medicine as a social good that, by its nature, should not be subject to the classic strategies of the market. In other words, the price of medicines is set by the industry in agreement with the State and not freely in virtue of the market dynamics. In this regard, the CFT concluded saying that it is the Complainant who, with the exploitation of a pharmacy chain, tends to form a monopoly, often generating that small and medium-sized pharmacies that cannot compete must to stop operating.

The CNDC was able to confirm that the CFT was not the only entity that grouped pharmaceutical professionals in the province of Tucuman; as the AFT and the CFS also co-existed, which like the CFT, were in charge of signing the agreements with the health service providers and handling collections on behalf of the pharmacies. In regard to these organizations, the CNDC verified that in the year 2001 the CFT, the AFT and the CFS subscribed a Letter of Understanding, which was later replaced by the Commitment Act of 2008, in which they established conditions to the affiliated pharmacies in relation to the discounts to be applied to the price of drugs, among other restrictions, in line with the RPF.

Given this scenario, the CNDC decided to further investigate the (i) CFT for an alleged abuse of dominant position in the market for the provision of pharmaceutical services and (ii) CFT, AFT and the CFS for an alleged participation in a price fixing agreement, which also limited the investment in advertisement and conditioned opening and closing hours of pharmacies.

The analysis carried out by the CNDC

The CNDC understood that only pharmacies which are authorized to commercialize drugs, on prescription or over-the-counter, are able to do so in conditions of exclusivity and therefore without competing with another type of retail dispensation channel. The CNDC defined the relevant market as “provision of pharmaceutical services“ and the geographical market as the entire province of Tucumán, since the alleged conduct involved all the pharmacies authorized to operate in said province.

CFT’s abuse of dominant position

The CNDC was able to verify the dominant position of the CFT on the basis that, out of a total of 675 pharmacies operating in the province of Tucumán, 579 were affiliated to said entity, which represented 85.77% of the pharmacies. Likewise, the CFT had a contract with 54 health service providers, among which there was the Institute of Social Security and Welfare of Tucumán, which brought together the largest number of members.

In relation to the CFT, said institution issued the Regulation for the purpose of regulating the intermediation in relation to the pharmaceutical services provided by pharmaceutical professionals to affiliates of health service providers, establishing a series of conditions, namely: (i) in case of adhering, pharmacies were subject to all the terms and conditions and were not able to (a) enter into agreements with institutions directly related to the CFT or (b) affiliate with other institutions for the purpose of signing agreements, and (ii) when the CFT have decided to terminate the contractual relationship with a health service provider, the affiliated pharmacies were inhibited from contracting with said entity for a specific period of time, leaving said health service provider without the possibility to contract with almost 85.77% of the authorized pharmacies of the Province. The CNDC understood that these exclusivity clauses served as a way of constituting and preserving the market power held by the CFT and of abusing its dominant position by imposing conditions that harm these entities.

With respect to pharmacies, Sections 9 and 13 of the Regulation on the one hand imposed restrictions to the discounts to be charged, limited the advertisement to be made and conditioned the business hours, and on the other hand entitled the CFT to “discipline” those pharmacies that have contravened said mandates. In witness whereof, the CNDC understood that the CFT had the intention of controlling competition of prices among the affiliated pharmacies, which was extended to other proportions such as the investment in advertising and opening and closing schedules, deteriorating the service that pharmacies could provide to the public.

According to the CNDC, the abuse of dominant position of the CFT in the pharmaceutical services market in the Province of Tucuman was duly evidenced. This was a key element to take into account when determining its sanction in comparison with the other Defendants, by considering it as the principal “author” of the concerted practice, as detailed below.

Agreement between the CFT, AFT and the CFS to limit discounts, advertising and opening / closing hours

The CNDC was able to prove that the AFT entered into agreements with 19 health service providers and had 45 affiliated pharmacies (representing 6.67% of the total), while the CFS had 51 affiliated pharmacies (representing 7,56% of the total) and that, together with the CFT, concentrated all of the pharmaceutical services offered in the province of Tucuman. As for the Commitment Act signed in 2008, the relevant entities undertook to follow, and to cause its members to follow certain rules that, like the Regulation, limited pharmacies from making discounts and prohibited mass advertising under the penalty of being suspended or definitively excluded from the lenders’ lists.

In this sense, it was not possible for pharmacies to affiliate to other systems in order to avoid such obligations, given that the two other existing systems in the Province of Tucuman had agreed with the CFT to apply the same restrictions and conditions.

The CNDC understood that both the Regulation and the Commitment Act entered between CFT, AFT and the CFS generated a cartel by (i) fixing prices net of discounts in the retail market of sale of medicines, (ii) regulating the investment in advertising and by conditioning the opening and closing hours of the pharmacies and (iii) imposing penalties and excluding from the system to those pharmacies that wanted to compete offering better prices or services. In summary, the actions of the Defendants over sixteen years (since the signing of the 2001 Letter of Understanding and the 2008 Commitment Act) directly restricted the right of pharmacies to compete throughout the Province of Tucuman, harming consumers by not allowing them to obtain lower prices and better services, and also affecting health service providers by not allowing them to offer better pharmaceutical benefits to its members.

Although the AFT and the CFS required the suspension of the proceedings in virtue of Section 36 of the LDC given that “the parties voluntarily decided to terminate the Commitment Act”, the CNDC understood that the case was solid and soon to be resolved and, as such, discarded the validity of the proposed commitmen; further, taking into account the duration of the conduct and its severe effect on the market. Based on the foregoing, the CNDC recommended the Secretary not to accept the commitment.

In addition to the economic penalty, the CNDC ordered all involved parties (i) not to prohibit, in any way, competition between their members and associates, as well as not to limit discounts, advertisement or not to set opening/closing hours, and (ii) to modify or eliminate, within 60 days, all those terms in their regulations that include difficulties or barriers to competition between pharmacies.   

Conclusion

The aforesaid is a new case involving a horizontal agreement between participants in a market, in virtue of which they fixed minimum resale prices and imposed other commercial conditions for the retail sale of medicines. The present case denotes a growing interest of the CNDC in this type of conducts, in particular, to discourage anticompetitive practices in the care of consumers and small and medium sized enterprises. Finally, the case under analysis evidences the type of revision that the CNDC will likely carry out in future anticompetitive conducts regarding cartels. In this sense, and taking into account that the draft amendment to the LDC incorporates a leniency program, it is reasonable to expect more activity related to investigation of cartels in Argentina.