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Kazakhstan: Common Pharmaceutical Market Of The Eurasian Economic Union

Since the breakup of the Soviet Union, the former Soviet republics have been on a quest for independent development. At the same time, modern trends in international relations and inter-dependence of the post-Soviet economies, once part of a common and centralized economic complex, have prompted these nations to find ways to work together and integrate in order to expand economic cooperation.

Serious integration processes in terms of expanding economic cooperation began in 2009, when an agreement was signed to create a common customs space in the territory of Belarus, Kazakhstan and Russia. The agreements to establish a Customs Union became effective in July 2010, and in December of that year—at a summit of the Eurasian Economic Union—an agreement was reached to establish the Eurasian Economic Union (the EEU or Union) on the basis of the Common Economic space of Belarus, Kazakhstan and Russia. A couple of years later, the aforementioned agreement was implemented, and a tri-party treaty on the Eurasian Economic Union was signed on 29 May 2014 at a summit in Astana (the Treaty.) The Treaty came into force on 1 January 2015.

One of the first common markets within the Union will be a common market of pharmaceuticals which should begin functioning as early as 1 January 2016. Article 30 of the Treaty states that the member-states shall create, within the framework of the Union, a common market of pharmaceuticals which will comply with the standards of good pharmaceutical practices and be based on common principles. Taking into account that such a market should commence functioning in the near future, one of the first agreements signed within the Treaty's framework was, therefore, an Agreement on common principles and rules of turnover of pharmaceuticals within the Eurasian Economic Union, dated 23 December 2014 (the Agreement.) The Agreement was ratified in accordance with the law of the Republic of Kazakhstan dated 12 October 2015.

The Agreement sets common principles and rules for the turnover of pharmaceuticals within the common market. However, there remain a great number of questions about how this will be implemented in practice. Moreover, considering that many pharmaceutical companies are working in the territory of the member states through their distributors, there will be questions in this regard as well, in particular with respect to how the economic activity of the market participants will be coordinated. It should be noted that in view of Kazakhstan's recent acceptance to the WTO,1 Kazakhstan has assumed obligations whereby the import of certain goods (approximately one-third of the commodity items, including pharmaceuticals) into the territory of Kazakhstan for sale in the domestic market would be subject to lower customs tariffs as compared to the tariffs set for the EEU. It is anticipated that relevant administrative mechanisms will be introduced in order to regulate these matters which will allow applying the EEU customs tariffs when moving such goods across the border to the other EEU member states (i.e. out of the territory of Kazakhstan.)

This article examines the matters of access and sale of pharmaceuticals within the common pharmaceutical market of the Union as well as general rules of competition which will need to be followed by the pharmaceutical market participants.

Access to the common market of pharmaceutical products within the Union Regulation of the common market of pharmaceuticals As stated above, since the beginning of 2016 the common market of pharmaceuticals within the Union will be regulated in accordance with the Treaty and the Agreement. For the purposes of implementing the Agreement, which lays out the principal rules for the turnover of pharmaceuticals within the Union, it is also anticipated that a number of documents would be adopted by the Eurasian Economic Commission "which will result in a significant degree of harmonization of the systems of regulation of pharmaceuticals."2 In particular, it is anticipated that common rules for registration and expertise of pharmaceuticals, common requirements for labeling and package leaflets, as well as other documents, would be adopted. Through the adoption of such documents, the plan is to ensure the consistency of mandatory requirements for safety and quality of pharmaceuticals across the territory of the Union.

In terms of the practical implementation of the Agreement, it should be noted that the Agreement provides for a transitional period until 31 December 20253 during which the pharmaceuticals which have been registered before 1 January 2016 within the territories of the Union member states should be brought into compliance with the Union's requirements and rules. In addition, the Agreement envisages that those pharmaceuticals that were authorized for sale in the territory of the member states will be allowed for sale in those states until the expiry of their registration certificate.4 In this regard, it appears that once the common market of pharmaceuticals begins functioning within the Union, the national pharmaceutical markets in the member states will continue to operate throughout the transitional period. Therefore, despite the practical difficulties of implementing the goals set by the Agreement, it is anticipated that starting from the beginning of 2016, pharmaceuticals will be sold in the Union member states in the following manner:

1) Sale of pharmaceutical products on the common market within the Union Pharmaceuticals registered in accordance with the procedure established by the Eurasian Economic Commission (the EEC") and registered in the Unified Register of Pharmaceuticals (the Unified Register) may be sold freely in the territories of all the member states of the Union.5

2) Sale of pharmaceutical products in the national markets of the member states of the Union The Agreement does not provide for an automatic inclusion into the Unified Register of those pharmaceuticals that were registered in the territory of the member states before 1 January 2016. Therefore, such products may be sold only on the relevant national markets up until the expiry of the transitional period.

At the same time, the question about those pharmaceuticals which were never registered on the territory of any of the member states before (i.e. before 1 January 2016) remains open. The Agreement does not explicitly provide that such pharmaceuticals must be registered under the common rules of the Union. Nevertheless, the Agreement envisages the transitional period as stated above during which the national pharmaceutical markets will continue to operate along with the common one. There is an opinion that starting from 1 January 2016 such "new pharmaceuticals" will have to be registered under the common rules. How this matter will be dealt with in practice, however, remains to be seen.

Certain matters such as, among others, licensing of the pharmaceutical market participants, advertising of pharmaceuticals and activity of pharmacies are left outside the scope of the common regulation. Those matters as well as other issues that are not covered in the Agreement will be regulated by national legislation in accordance with the laws of each particular member state.

Registration of pharmaceutical products under the common rules The Agreement does not provide for the establishment of a supra-national body which would be responsible for the registration of pharmaceuticals intended for sale in the common market. It is anticipated that an applicant will have the ability to apply for registration of pharmaceuticals in the territory of one of the member states (i.e. reference state).

Registration of pharmaceuticals will be carried out in accordance with the rules of registration and expertise of pharmaceuticals as approved by a resolution of the EEC.6 As of today, a draft of the Rules of Registration and Expertise of Pharmaceuticals for Medical Use has been developed (the Draft Rules of Registration of Pharmaceuticals), and the discussion thereof concluded.

It follows from the Draft Rules of Registration of Pharmaceuticals (Section III) that pharmaceuticals will be registered according to a consecutive procedure (mutual recognition procedure) or a simultaneous procedure (decentralized registration procedure). Below is a brief summary of these procedures as provided in the Draft Rules of Registration of Pharmaceuticals available on the EEU's electronic law portal.7

Under the mutual recognition procedure it is anticipated that the registration of a pharmaceutical will be made in two stages:

1) National registration – the reference state carries out registration for the purposes of the pharmaceutical in question being sold in the market of such state

2) Mutual recognition – at an applicant's discretion, the pharmaceutical may be recognized in other member states (recognizing states). During the first stage, the authorized body of the reference state will carry out expertise of the pharmaceutical and, if positive, will issue a registration certificate to the applicant and will make an entry on the pharmaceutical in the Unified Register.

During the second stage, after the pharmaceutical is registered in the reference state (i.e. when the registration in one of the Union member states is made) the applicant may apply to the authorized bodies or expert organizations of other member states and for registration of the pharmaceutical under the mutual recognition procedure. The expertise of pharmaceuticals in the recognizing states is carried out in the form of a review of the applicant's request and supporting documents as well as an expert evaluation report of the reference state. If the recognizing state approves the reference state's expert evaluation report and issues a positive decision on the registration of the pharmaceutical, then the recognizing state will issue a registration certificate to the applicant, on the basis of which such pharmaceutical will be granted permission to be sold in the territory of the recognizing state.

If, however, the referring state's expert evaluation report is not approved by the recognizing state, the documents will be handed over to the Expert Committee on Pharmaceuticals under the EEC Collegium for the settlement of any disagreement. Based on the results of the settlement procedure, the recognizing state's authorized body will make a decision as to whether the registration will be granted or denied.

Therefore, based on the results of the mutual recognition procedure, a pharmaceutical may be permitted for sale in the territory of the referring state and those recognizing states which have decided on the registration favorably (i.e. in the reference state and in one or more recognizing states).

Under the decentralized registration procedure it is anticipated that the registration of a pharmaceutical will be carried out by several member states. The applicant independently selects the reference state when lodging the registration request (i.e. in those cases where there is no registration in place in any one of the member states).

Registration of a pharmaceutical under the decentralized registration procedure is also carried out in two stages which occur simultaneously:

1) Registration in the reference state;

2) Approval of the expert evaluation report in the recognizing states. For the purpose of registration under this procedure, the authorized bodies of both the reference state and recognizing state work together to carry out expert examination of a pharmaceutical. If both states' authorised bodies make favorable decisions on the registration, the applicant is issued the relevant registration certificates.

If a decision is made to deny registration, the reference state's authorized body notifies the applicant accordingly.

Therefore, based on the Draft Rules of Registration of Pharmaceuticals as a result of the decentralized registration procedure, a pharmaceutical may be registered in the reference state and the relevant recognizing states. At the same time, it is not entirely clear what decision will be made in practice, if disagreement between the member states which have considered the application (for example, when two/ three states give positive opinions, whereas one or two give negative opinions) remains.

In light of the foregoing, the manufacturers of pharmaceuticals will have the possibility to choose the reference state to lodge an application for registration and to select the procedure for registration of pharmaceuticals that are intended for sale in the common market of the Union. At the same time, despite the creation of the common market of pharmaceuticals, each member state will keep an individual approach to the registration of pharmaceuticals. In addition, it is worth noting that the Agreement provides for those categories of pharmaceuticals which are not subject to registration within the Union.8

Rules of competition in the common pharmaceutical market As noted above, from 2016 the manufacturers of pharmaceuticals will be able to complete registration under the common rules in one of the EEC member states and gain access to the common market without having to wait until their national registration certificates expire. Since that moment, the manufacturers will need to bear in mind that a cross border market may be triggered9 in the event the pharmaceuticals are sold in the territory of two or more member states, and consequently the Union's common principles and rules of competition will need to be applied.

General rules of competition According to the general rules of competition, as provided for in the Agreement:

1) Acts (omission to act) of a market participant holding the dominant position (i.e. not less than 35% of domination by an individual market participant, and not less than 50% or 70% of domination by several market participants)10 which result or may result in the prevention, limitation, elimination of competition and (or) impairment of the interests of third parties, are prohibited;11

2) unfair competition is not allowed;12

3) 3) Agreements between competing business entities (market participants) of the member states carrying out their activity within the same market which result or may result in certain consequences,13 are prohibited;

4) 4) "Vertical" agreements between business entities (market entities) are prohibited, except for "vertical" agreements which have been recognized as permissible in accordance with the criteria of permissibility;14

5) Other agreements between business entities (market participants) are prohibited, except for "vertical" agreements which have been recognized as permissible in accordance with the criteria of permissibility,15 if it has been established that such agreements result or may result in limitation of competition; and

6) individuals, commercial and noncommercial entities are prohibited from coordinating economic activity of business entities (market participants) of the member states, if such coordination results or may result in any of the consequences specified in items "(3)" and "(4)" above which may not be recognized as permissible in accordance with the criteria of permissibility. Entering into distributorship contracts in the new reality Practice shows that today many pharmaceutical companies work through distributors and enter into individual distributorship contracts generally dividing the EEC market by the territories of member states. It may well be that the manufacturers have their own commercial reasons for that. However, from a legal point of view, this is also explained by the fact that up until the present there have been different requirements and rules for sales of pharmaceuticals as well as national rules of competition in each member state.

From 2016, pharmaceutical companies and distributors will also need to adhere to common rules of competition when selling pharmaceuticals admitted to the common market of the Union. If a pharmaceutical is included into the Unified Register and thus permitted for sale in the common market of the Union, entering into a distributorship contract confining the sales of such pharmaceutical (for instance, to the territory of only one certain member state) may conflict with the common rules of competition as set out in the Agreement. Such provisions of distributorship contracts may particularly be qualified as "coordination by business entities of economic activity of business entities (market participants) of the member states" or as other "vertical" relations which are not recognised as permissible in accordance with the criteria of permissibility, and which result or may result in limitation of competition."

Moreover, other coordination of economic activity of business entities (market participants) of the member states (including by means of distributorship contracts) is prohibited, if such coordination results or may result in any of the following consequences which may not be deemed permissible in accordance with the criteria of permissibility:

Agreements between business entities (market participants) of the member states, which are competing and which carry out their activity on one and same market, that result or may result in: Setting or maintaining of prices (tariffs), discounts, increases (surcharges), mark-ups; Increase, decrease or maintenance of prices at auctions; Division of the commodity market by territory, volume of sales or purchase of goods, assortment of goods on sale, or composition of sellers or buyers (customers); Reduction or termination of production of goods; or Refusal to deal with certain sellers or buyers (customers).16 "vertical" agreements between business entities (market entities), except for "vertical" agreement that are deemed permissible, if: Such agreements result or may result in fixation of resale price for the goods, except for cases when a seller sets the maximum resale price for a buyer; Such agreements provide for a buyer's obligation not to sell the goods of the business entity (market participant) that is in competition to the seller. Such prohibition does not extend to agreements for the buyer's sale of goods under a trademark or other means of individualization of a seller or manufacturer.17 Pharmaceutical companies and/or their distributors may also violate other common rules of competition as listed above.

At the same time, if pharmaceutical companies wish to keep their national registration certificate, throughout the transitional period (i.e. up until the end of 2025) the pharmaceuticals may be sold freely in the territory of those states which issued the national registration. Under such an approach, during the transitional period the pharmaceutical companies will most likely be able to enter into distributorship contracts dividing the common EEU market (for example, by the territories of individual member states).

For the sake of fairness, it should be noted that the participants of the pharmaceutical market should in any case comply with the requirements of the national legislation in effect in the relevant member states. However, this article does not examine the requirements and specifics of national legislation.

Footnotes

1 As a reminder, the negotiations on Kazakhstan joining the WTO were finalized in mid-2015. In early October 2015, Senate of the Parliament of the Republic of Kazakhstan ratified the Protocol of Kazakhstan joining the Marrakesh agreement establishing the World Trade Organisation of 15 April 1994. After all necessary procedures have been completed, Kazakhstan will become the 162nd member state of the WTO.

2 V. Boitsov, Drugs for the Union, http://www.rg.ru/2015/02/10/lekarstva1.html.

3 Clause 1 Article 20 of the Agreement.

4 Clause 2 Article 8 of the Agreement

5 Clause 1 of Article 8 of the Agreement.

6 Clause 1 of Article 7 of the Agreement. In accordance with clause 7 of Article 7 of the Agreement, it is anticipated that when carrying out registration and expertise of pharmaceutical products, the member states of the EEU will be mutually recognizing the results of preclinical (non-clinical), clinical and other studies (tests) of pharmaceutical products, the results of inspections of production, preclinical (non-clinical), clinical studies (tests) of pharmaceutical products, and systems of pharmacological control, for their compliance with good pharmaceutical practices and requirements as established by the Eurasian Economic Commission.

7 See: https://docs.eaeunion.org/ru-ru/Pages/DisplayRIA.aspx?s=e1f13d1d-5914-465c-835f-2aa3762eddda&w=9260b414-defe-45cc-88a3-eb5c73238076&l=d70984cf-725d-4790-9b12-19604c34148c&EntityID=587.

8 Clause 6 of Article 7 of the Agreement.

9 In accordance with Clause 2 of the Resolution of the Supreme Eurasian Economic Council No. 29 dated 19 December 2012: "...a market shall be deemed transboundary if geographic boundaries of the commodity market extend over the territory of two or more member states."

10 See Resolution of the Supreme Eurasian Economic Council No. 29 of 19 December 2012.

11 Clause 1 of Article 76 of the Treaty, further, explains which acts (omissions to act) specifically are prohibited.

12 Clause 2 of Article 76 of the Treaty, further, lists the types of unfair competition.

13 Clause 3 of Article 76 of the Treaty, further, disclosed the consequences such agreements result or may result in.

14 Clause 4 of Article 76 of the Treaty, further, lists the types of vertical agreements.

15 In accordance with Annex 19 to the Treaty, agreements may be deemed permissible if they do not impose on business entities (market entities) limitations which are not necessary for obtaining the purpose of such agreements, and do not create possibilities for eliminating competition in the relevant commodity market, and if the business entities (market entities) prove that such agreements result or may result in: 1) improvement of production (sale) of goods or stimulation of technological (economic) progress or increase of competitiveness of the goods manufactured by the member states on the global commodity markets; 2) receipt by the consumers of the commensurable share of benefits (profits) which the involved persons obtained as a result of such actions. Conversely, "vertical" agreements are permissible if: 1) such agreements are the contracts of commercial concession; 2) the share of each business (market) entity participating in such an agreement on the commodity market that is subject of such "vertical" agreement does not exceed 20 percent.

16 Clause 3 of Article 76 of the Treaty.

17 Clause 4 of Article 76 of the Treaty.

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.