Ukraine. Review of Mergers

[May 21st, 2013] To what extent are the sector-specific features of the pharmaceutical industry taken into account when mergers between two pharmaceutical companies are being reviewed?

Mergers between pharmaceutical companies are caught by the general rules set up by the Ukrainian competition legislation, which does not stipulate any sector-specific features for the pharmaceutical industry.

How are product markets and geographic markets typically defined in the pharmaceutical sector?

As already mentioned there is no sector-specific competition legislation for the pharmaceutical industry.

The commodity market (product market) is defined by the Law on Protection of Economic Competition as the sphere of circulation of goods (substitutional commodities), which during a certain period and within a given territory are in demand and supply.

In accordance with the Methodology of Determination of Business Entities' Monopoly (Dominant) Position on the Market approved by the Decree of the AMCU dated 5 March 2002 No. 49-r, the commodity market boundaries are determined by forming a group of interchangeable commodities (commodity groups), within which a consumer under normal conditions can easily switch from the consumption of one commodity to another. Territorial (geographical) boundaries of the market of a certain good (commodity group) is determined by establishing the minimum area outside which, from the consumers' point of view, purchase of goods (commodity group) related to a group of interchangeable commodities (commodity group) is impossible or purposeless.

In what circumstances will a product and geographical overlap between two merging parties be considered problematic?

As a general rule, the AMCU has a formalistic approach and during the decision-making considers whether a merger will lead to monopolisation or considerable limitation of competition on the whole market or on a significant part of it.

Under the Law on Protection of Economic Competition, prior merger clearance from the AMCU is required if the assets or the worldwide turnover volume of the participants, taking into account the relations of control, for the previous fiscal year exceed the amount equivalent to e12 million, provided that:

• aggregate worldwide assets or the turnover volume of at least two participants, taking into account the relations of control, exceed the amount equivalent to e1 million per participant involved;
• aggregate assets or the turnover volume in Ukraine of at least one participant, taking into account the relations of control, exceed the amount equivalent to e1 million; or (irrespective of above-mentioned thresholds);
• individual or aggregate market share of the participants, taking into account the relations of control, exceeds 35 per cent and the concentration takes place on this or a similar market of goods.

If, in accordance with the competition legislation, approval is required, the participants are not allowed to close their transaction without the AMCU's consent.

If certain business parts of merging parties overlap horizontally, the AMCU, rather than prohibiting the entire transaction, would look for remedies whereby its competition concerns are allayed and the rest of the deal is allowed to proceed.

Which remedies will typically be required to resolve any issues that have been identified?

Decisions of the AMCU granting permission for a concentration may be conditional on the concentration participants' fulfilment of certain requirements and obligations that eliminate or mitigate the negative impact on competition, such as the application of structural and behavioural antitrust measures. Structural measures may concern, in particular, restrictions in terms of the management, use or administration of property as well as obligation of the business entity to make divestments. Taking into account that there is no overall reimbursement procedure (except for single state pilot projects) and no compulsory health insurance in Ukraine, the pharmaceutical market is predominantly out-of-pocket, which makes it a highly socially and politically sensitive area and it is typical for AMCU to apply behavioural antitrust measures. Such measures could include maintaining the prices at the pre-deal level; reporting on prices and volumes of supplies in Ukraine over a certain period; maintaining the portfolio at the pre-deal level; refraining from obstructing access to (exit from) the market of certain products or purchasers, etc. In the event of non-fulfilment of such requirements and obligations by concentration participants, the AMCU may impose fines amounting to up to 5 per cent of the income of the business entity from the sale of products (goods and services) for the fiscal year preceding the year in which a penalty is imposed.

Would the acquisition of one or more patents or licences be subject to merger reporting requirements? If so, when would that be the case?

The acquisition of a patent or licence shall not of itself be subject to merger reporting requirements. Provided patents or licences as intellectual property assets are acquired within certain transactions involving acquisition of certain businesses, such deals may be subject to AMCU clearance. 

Meanwhile, if such acts cause or can cause prevention, exclusion or restriction of competition, they may be considered as concerted acts and thus require approval by the AMCU. Concerted actions as to intellectual property rights, which do not exceed the scope of IP rights granted by the IP laws, are exempt from getting approval of the antitrust authority, provided that these IP products are not exclusive on the market and these actions do not lead to significant distortion of competition. Agreements on assignment of intellectual property rights or assignment of rights on use of intellectual property, including patents, are not subject to approval by the antitrust authority, provided the restrictions do not exceed the scope of IP rights.

It is considered that restrictions do not exceed the scope of IP rights if the restrictions concern the scope of assigned rights, terms and territory of the licence, type of activities, area of use and minimal volume of production.

Source: Arzinger