Devices Market in the First Six Months of 2015: Legal Highlights

Generally, 2014 was quite a challenging year for the Russian economy. Growing tension between Russia and Western countries and the “sanctions war” undermined Russia’s economic development and had a serious impact on the Russian Government’s domestic policy.

To increase its independence from foreign suppliers and improve its defense and security potential the Russian Government announced that it would be focusing on import substitution and domestic production.   This triggered legislative reforms, both in specific industry regulations and in general civil law. As an important industry in terms of state procurement, the pharmaceutical and medical devices industry was among those to be directly influenced by these developments. The most significant developments relevant for this industry are described below.

Promotion of Localization. 

The focus on import substitution announced in the Plan was not a total “greenfield” for Russian legislation. Certain preferences  for pharmaceuticals and medical devices originating in Russia, Belarus and Kazakhstan applicable to state and municipal tenders had previously been adopted on an annual basis by the Ministry for Economic Development. However, any other proposals for tighter restrictions on goods of foreign origin were dismissed. 2015 changed the situation, especially for the medical devices market. 

Firstly, the aforesaid price and selection preferences were expanded. Starting from May 10, 2015 they have been applicable to pharmaceuticals and medical goods originating from Armenia as well. 

Secondly, the preferences lost their temporary status: now they are applicable not for one year, but for an indefinite period of time. 

Thirdly, starting from February 14, 2015 access for certain medical devices of foreign origin (e.g., implants for osteosynthesis, CT scanners) to state and municipal tenders was further complicated. Now bids offering to supply such medical devices originating not from Russia, Belarus, Kazakhstan or Armenia will not be considered if there are two or more bids which (i) offer to supply similar medical devices originating from Russia, Belarus, Kazakhstan, or Armenia, and (ii) do not offer to supply the same medical devices of the same producer. The introduction of similar restrictions in respect of pharmaceuticals was also discussed at the beginning of this year; however, such regulations have not been passed yet and their prospects are unclear. 

The practical results of such measures are yet to be seen; however, new incentives for localization in this market are already being discussed. 

One of the most significant is the initiative of the Federal Antimonopoly Service (“FAS”) on legalization of the parallel import of goods. According to the current draft prepared by FAS, starting from January 1, 2020 a foreign manufacturer will not be able to prohibit or limit the importation of pharmaceuticals or medical goods legally sold abroad unless it has localized production of interchangeable goods in Russia. Prohibition of the importation of such goods will be treated as an antitrust violation. Although the relevant draft has not yet been adopted and is opposed by market participants, it was reported that a decision on the approval of this initiative in principle has already been taken.  

Furthermore, professionals within the industry have been discussing the more positive benefits for localization, including the conclusion of long term contracts for the supply of products to the state underwritten by state guarantees as proposed by the Ministry of Economic Development. These preferences will be granted if (i) the contract price exceeds 10 billion rubles, (ii) the term of the contract is between 3 and 7 years, and (iii) the supplier undertakes to make capital investments in the Russian economy, including transfer of technology and supply of equipment. The respective bill has not yet been introduced to the State Duma, and its adoption is pending. 

Attempts at Demarcation between Antitrust and Anticorruption Legislation

The issue of the relationship between antitrust and anticorruption legislation was one of the hottest topics for pharmaceutical companies in late 2014 – early 2015. In theNovo Nordisk, Baxter and Teva cases FAS found three leading international pharmaceutical companies (i) dominant on the market for their respective drugs; and (ii) guilty of abuse of dominance by imposing arbitrary conditions on their distributors and unreasonable refusal / termination of cooperation with them.  The theory behind these FAS proceedings, backed up by the courts, is that, by imposing FCPA screening on its distributors, these multinational firms are in violation of Russian competition law as they unlawfully and arbitrary refuse to contract with certain counterparties. 

The Russian courts, including the appellate and cassation instances, upheld the FAS decisions against these leading international pharmaceutical companies which had tried to subject their distributors to FCPA reviews. 

The main ground for such approach is the difference in legal interpretation of liability for third party misconduct. While the FCPA implies a broad definition, Russian law has taken a much narrower approach to this issue. The courts have held that, by its contractual nature, an agreement between a supplier and a distributor does not make the distributor’s actions attributable to the seller and does not allow the distributor to act in the name or on behalf of its counterparty. Thus, under Russian law, a mere declaration of the desire to comply with anticorruption laws in relations with distributors does not create a valid justification for an anticorruption audit, particularly if such review is aimed at testing compliance with foreign legislation which does not form a part of the Russian legal system.  

This position of the Russian law enforcement and judicial authorities did not comply with anticorruption policies based on FCPA and UKBA approaches, and subsidiaries of foreign companies subject to FCPA and UKBA were literally put “between a rock and a hard place”.  This particularly concerned pharmaceutical companies as the market where they operate can be defined very narrowly and they can be qualified as dominant and, thus, must comply with Russian competition law requirements. Furthermore, they are subject to both domestic anticorruption requirements and statutes with extraterritorial effect and must comply with them. 

In order to address these market concerns FAS issued Recommendations on the Development and Application of Commercial Policies by Companies Dominant on the Pharmaceutical or Medical Devices Market on June 30, 2015. This document concerns the above mentioned issues of contracting with distributors. FAS clarified, inter alia, that commercial policies should include exhaustive criteria of counterparty selection and a list of documents to be presented by a potential partner, description of the decision making process, terms and procedure for the consideration of proposals from potential partners, provisions regarding interaction with distributors on prices, discounts, and payment conditions. FAS emphasized that the provisions of the commercial policy of a foreign company based on FCPA and UKBA should be compliant with Russian antitrust legislation. This document stressed the requirement elaborated in earlier decisions that companies should set forth clear, consistent and well-defined criteria for the selection of distributors based on, inter alia, anticorruption provisions. 

In addition, FAS has suggested that the professional community should also take part in developing best practices of working with distributors. It has proposed the creation of a Code of Pharmaceutical Manufacturers (the “Code”) as a mechanism of industry self-regulation with minimal participation of governmental authorities. After lengthy deliberation the working group, consisting both of market participants and their associations and legal experts, presented the first draft of the Code in May 2015, subject to further revision.  FAS has promised to present the final version of the Code at the BRICS summit in November 2015.  

Changes in Regulatory Framework

Amendments to legislation on circulation of pharmaceuticals. Russian legislation on the circulation of pharmaceuticals has required substantial improvement for quite a long time as, above all, pharmaceutical registration procedures and pricing regulation did not correspond to international standards. In order to improve them amendments to Federal Law No. 61-FZ on Circulation of Pharmaceuticals dated April 12, 2010 were introduced to the State Duma in June 2014 by the Government. They included, inter alia, simplification of the pharmaceutical registration process, recognition of foreign pre-clinical and clinical trial results for the purposes of state registration of pharmaceuticals, the opportunity to challenge the results of expert reviews carried out during the registration process, reform of pricing regulation, etc. These amendments were adopted in December 2014  and generally came into effect on July 1, 2015. 

In parallel with the amendments the Ministry of Health has developed a series of by-laws required for their application which are currently under discussion. Such acts include, inter alia, rules for the determination of the interchangeability of drugs, rules of good laboratory and clinical practice, procedure for confirmation of conformity with good manufacturing practices, etc. These regulations contain some innovative rules, including, inter alia, that an application for state registration of pharmaceuticals cannot be rejected on the basis of an expert opinion on interchangeability and incompatibility, and publication of information regarding conformity by pharmaceutical manufacturers with GMP rules on the official website of the Ministry of Health. 

Changes in pricing regulation. On December 30, 2014 the Government of the Russian Federation approved a new List of Vital and Essential Drugs (the “VED List”) consisting of 608 pharmaceuticals. Maximum ex-works prices for pharmaceuticals on the VED List are still subject to state registration, but the Ministry of Health has proposed changing some of its aspects. In particular, the Ministry has suggested setting forth an exhaustive list of countries in respect of which manufacturers must provide minimum ex-works prices for products to be sold in these countries. It is also proposed that manufacturers should not be obliged to re-register maximum ex-works prices in the event of insignificant changes. Producers of medical devices will have to face pricing issues as well. On December 29, 2014 the Government approved a List of Medical Goods Implantable in the Human Body through Government Guarantees of the Free Medical Treatment Program. According to the amendments introduced to the Federal Law on the Basics of Healthcare in the Russian Federation, effective from May 9, 2015 maximum ex-works prices for the medical goods included in this list will be subject to state registration, similarly to VED. Elaboration of the respective procedure and methodology is pending, but it is more a question of time than of fact. 

Counteracting illegal drug turnover. In 2015 Russia attempted to improve the circulation of pharmaceuticals by tightening liability for the illegal turnover of drugs, medical goods and biologically active supplements. Firstly, the manufacture and sale of pharmaceuticals and medical goods without a license, as well as falsifying drugs and medical goods, the respective documents and their packaging became a criminal offense.  A person found guilty of this crime may be sentenced to imprisonment for up to five years with a possible fine in the amount of up to 2 mln. rubles or up to two years’ salary, with possible disqualification from holding jobs in similar positions. Involvement in the turnover of illegal drugs, medical goods and biologically active supplements is punishable for legal entities as well: they may be subject to administrative liability consisting in a fine in the amount of up to 5 mln. rubles or temporary suspension of activities for up to 90 days. Pharmaceutical manufacturers which are suspected of producing falsified drugs may be subject to dawn raids. 

The Ministry of Health has developed one more initiative aimed at preventing the turnover of illegal drugs. It has initiated public discussion  of a bill setting forth the framework for monitoring of the pharmaceutical trail from the manufacturer to the ultimate consumer. The data obtained by scanning drug labels at each stage of their circulation will be gathered in an automated resource maintained by the Federal Service for Oversight of Healthcare. Besides this, the regulator will have the right to suspend the circulation of drugs of inferior quality, effectiveness and safety, withdraw drugs with an expired shelf life from circulation, and control the destruction of drugs. The bill also provides for the Government to be able to set forth requirements for primary and consumer packaging of drugs. Improper labeling of both primary and consumer packaging may lead to the imposition of a fine of up to 600,000 rubles for responsible company officers, the same fine or temporary suspension of activities for up to 90 days for individual entrepreneurs, and a fine of up to 5 mln. rubles or temporary suspension of activities for up to 90 days for legal entities. Adoption of the bill is pending. If passed, it will be phased in gradually from January 1, 2017 until January 1, 2019. 

The second part of 2015 and 2016 will show the effectiveness of legislation that has already been adopted and whether the proposed initiatives will be brought to life. In addition, market participants may face more challenges and opportunities offered by the new public-partnership law, providing, inter alia, that the initiative for cooperation may come from a private party. But the attractiveness of the Russian market for investment could be tested by the suggested amendments to strategic investment regulation, which will allow the Russian President and Prime Minister discretion to decide which projects require s

Source