Product Market Definition in the Pharmaceutical Industry - Healthcare Series 5

1. Introduction

Competition analyses always begin with the definition of a relevant product market regardless of whether the analyses are based on the prohibition of abuse of dominance[1], prohibition of restrictive agreements[2] , or mergers and acquisitions control[3].

The definition of a relevant product market is not just a tool to conduct competition analyses, rather it also constitutes a substantial defense for undertakings during investigations based on abuse of dominance and restrictive agreements, and in mergers and acquisitions control. The narrower the definition of the product market, the greater the possibility of facing a violation decision or failing to obtain clearance for a particular merger or acquisition, and vice versa.

Generally speaking, a relevant product market involves all the products or services that are regarded as interchangeable or substitutable by the consumer (i.e., demand-side) based on the products' (i) prices, (ii) characteristics, and (iii) intended use. In some cases, supply-side substitutability is also considered. To calculate the substitutability between products, the Turkish Competition Board (“Competition Board”) generally refers to more material criteria that vary from sector to sector. In this article, we will explain the Competition Board’s approach to the definition of a relevant product market in terms of the pharmaceutical industry.

2. Relevant Product Markets in the Pharmaceutical Industry

When it comes to the pharmaceutical industry, the definition of a product market can be quite complex due to the vitally important, strictly regulated, and multifaceted nature of the market. To be more specific, when calculating the substitutability of drugs, on the one hand, their active ingredients and therapeutic properties and their interchangeability in the eyes of both medical authorities and patients must be considered; on the other hand, regulations regarding the coverage of the drugs by governmental health insurance must also be taken into account.

While emphasizing that the pharmaceutical industry is composed of several distinct small markets, the Competition Board assesses certain common criteria in order to define the product market such as (i) the active ingredient(s) of drugs, (ii) the therapeutic indication of drugs, (iii) whether the drug is originator or generic, (iv) dosage delivery of drugs, (v) whether the drugs are available on prescription or over-the-counter (i.e., medicines that can be obtained without prescription under regulations).[4]

Beyond these criteria, and taking the European Commission’s decisions as a reference, the Competition Board, in most cases, bases its assessments on the Anatomical Therapeutic Classification System (“ATC”) that has been developed by the European Pharmaceutical Marketing Association.[5] That said, in some decisions, the Competition Board refers to the Anatomical Therapeutic Chemical Classification System that has been developed by the World Health Organization.[6] Both classification systems have been developed in a similar manner but for different purposes;[7] both are hierarchical classification systems that categorize medicinal products according to chemical, pharmacological and therapeutic properties. In this article, only the ATC classification system will be explained.

i. The Starting Point: ATC 3

ATC classification is based on a coded four-level system. The first level (ATC 1) divides the drugs into 16 main anatomical groups (i.e., anatomical parts, organs, systems for which medicines are developed). The second level (ATC 2) classifies the drugs according to either their pharmacological or therapeutic properties. The third level (ATC 3) groups drugs by their specific therapeutic indications. Finally, while it does not exist beyond each ATC 3 subgroup, the narrowest level, ATC4, classifies medicines according to their active ingredients and mode of action.

In a similar manner to the European Commission,[8] the Competition Board takes ATC 3 as a starting point when assessing a product market definition.[9] The Competition Board emphasizes that ATC 3 groups drugs based on their therapeutic indication (i.e., their intended use). Drugs in the same ATC 3 subgroup have the same therapeutic properties and are regarded as substitutable products for the treatment of diseases or alleviating symptoms. The Competition Board also emphasizes that physicians regard the drugs in the same ATC subgroup as substitutable since they can prescribe those drugs interchangeably for the treatment of symptoms.[10]

With regard to the difference between drugs that are available on prescription and over the counter, the Competition Board concludes that such differentiation does not affect the definition of the product market in the case of Turkey since the sales conditions for both do not differ.[11]

In this regard, the Competition Board, in its many decisions, defines the relevant product market based on ATC 3 level;[12] however, there are many other decisions where the Competition Board has preferred a narrower market definition determined by ATC 4 or active ingredients, depending on the circumstances of the cases[13].

ii. Narrower Market Definitions: Active Ingredients Drugs that are not interchangeable in the treatment of a particular disease

Although drugs in the same ATC 3 subgroup have the same therapeutic properties, in some cases, those drugs cannot be regarded as substitutable products in terms of the treatment of a particular disease.[14] For instance, in its one decision regarding an exemption request[15] for a distributorship agreement, the Competition Board defined the product market according to the active ingredient of the drug concerned despite there being another drug belonging to the same ATC 3 subgroup capable of treating the same disease. The Competition Board found that due to the serious and irreversible side effects of the latter drug, the former drug was always the physicians’ first choice for treatment. Therefore, the Competition Board found that the two drugs were not sufficiently interchangeable and defined the market in a narrower manner.[16]

Public and Private Tenders

When it comes to the distribution of drugs through tenders, the Competition Board tends to define the relevant product market more narrowly.

More precisely, in cases of vertical agreements between drug manufacturers or distributors and drug warehouses for the distribution of drugs to hospitals through tenders, the Competition Board generally defines the product market according to the active ingredient of the drugs subject to the agreement.[17] The reason behind this precedent is the fact that most drug procurement tenders are based on the procurement of drugs that contain a specific active ingredient and dosage form. Drug warehouses cannot participate in tenders with drugs that contain active ingredients other than specified in the tender specifications. Therefore, in respect of drug procurement tenders where drugs containing different active ingredients do not compete, the product market must be defined in a narrower manner.[18]

Similarly, in a case where an act alleged to be an abuse of dominance regarding the attempts of a drug distributor to prevent a particular drug warehouse’s participation in a tender, the Competition Board defined the product market according to the active ingredient.[19]

Product Market Definition Following the Prescription of a Drug

Although, most of the time, drugs in the same ATC 3 subgroup are substitutable in the eyes of physicians in terms of treatment, once physicians prescribe a drug, this drug cannot be interchanged with drugs in the same ATC 3 subgroup.[20] More precisely, if the prescribed drug is not available in the pharmacy, the pharmacist can only sell a pharmaceutical equivalent of the prescribed drug (i.e., a drug that contains identical amounts of an identical active ingredient as the prescribed drug). While therapeutic equivalents are substitutable in terms of supply, there are not substitutable in terms of demand.

In this regard, in its one decision regarding the allegation of abuse of dominance due to a pharma manufacturer’s, discriminatory acts, and refusal to supply a particular pharma warehouse that distributes drugs to pharmacies, the Competition Board defined the product market according to the active ingredient of the drug concerned.[21] The Competition Board emphasized that prescriptions limited the pharmacies’ demand from pharmaceutical wholesalers.

3. Conclusion

In terms of the pharmaceutical industry, the relevant product market definition heavily relies on ATC 3 classification that groups drugs according to their therapeutic indication (i.e., their intended use). Since drugs belonging to the same ATC subgroup have the same end use (i.e., treating the same disease or eliminating the same symptoms), physicians regard such drugs as substitutable. However, some circumstances require a narrower product market definition in the eyes of the Competition Board. These circumstances include: (i) whether the drug concerned is indeed interchangeable with its therapeutical equivalents in respect of the treatment of a particular disease, (ii) whether the case involves the procurement of the drugs concerned through tenders, (iii) whether the case involves the distribution of the drugs concerned to pharmacies.

[1] Article 6 of the Law No: 4054 on the Protection of Competition Law.

[2] Article 4 of the Law No: 4054 on the Protection of Competition Law.

[3] Article 7 of the Law No: 4054 on the Protection of Competition Law.

[4] Competition Board’s decision numbered 16-36/625-278 and dated 03.11.2016; Competition Board’s decision numbered 14-46/845-385 and dated 26.11.2014.

[5] Competition Board’s decision numbered 14-46/845-385 and dated 26.11.2014; [5] Competition Board’s decision numbered 14-35/685-302 and 24.09.2014; Competition Board’s decision numbered 20-40/553-249 and dated 03.09.2020.

[6] Competition Board’s decision numbered 15-42/695-249 and dated 02.12.2015; Competition Board’s decision numbered 07-63/776-282 and dated 2.8.2007; Competition Board’s decision numbered 14-35/685-302 and dated 24.09.2014.

[7] The Anatomical Therapeutic Chemical Classification System with Defined Daily Doses (ATC/DDD) (who.int); Anatomical Therapeutic Chemical (ATC) Classification (who.int)

[8] European Commission, Case No COMP/M.5295 - TEVA / BARR; European Commission, Case M.8889 - TEVA / PGT OTC ASSETS.

[9] Competition Board’s decision numbered 18-34/577-283 and dated 26.09.2018; Competition Board’s decision numbered 14-35/685-302 and dated 24.09.2014.

[10] Competition Board’s decision numbered 18-34/577-283 and dated 26.09.2018.

[11] Competition Board’s decision numbered 14-46/845-385 and dated 26.11.2014.

[12] Competition Board’s decision numbered 20-40/553-249 and dated 03.09.2020; Competition Board’s decision numbered 20-36/488-214 and dated 28.07.2020.

[13] Competition Board’s decision numbered 14-46/845-385 and dated 26.11.2014; Competition Board’s decision numbered 14-35/685-302 and 24.09.2014; Competition Board’s decision numbered 20-40/553-249 and dated 03.09.2020.

[14] Competition Board’s decision numbered 18-30/518-257 and dated 06.09.2018; Competition Board’s decision numbered 16-14/215-93 and dated 20.04.2016.

[15] Request of exemption from the Article 4 of the Law No: 4054 on the Protection of Competition Law (i.e., prohibition of restrictive agreements) in accordance with Article 5 of the Law No: 4054 on the Protection of Competition Law.

[16] Competition Board’s decision numbered 18-30/518-257 and dated 06.09.2018.

[17] Competition Board’s decision numbered 14-35/686-303 and dated 24.09.2014; Competition Board’s decision numbered 20-36/488-214 and dated 28.07.2020; Competition Board’s decision numbered 20-08/81-48 and dated 06.02.2020; Competition Board’s decision numbered 19-40/637-269 and dated 19-40/637-269.

[18] Competition Board’s decision numbered 14-35/686-303 and dated 24.09.2014; Competition Board’s decision numbered 20-36/488-214 and dated 28.07.2020.

[19] Competition Board’s decision numbered 15-28/334-106 and dated 07.07.2015.

[20] Competition Board’s decision numbered 14-35/685-302 and dated 24.09.2014; Competition Board’s decision numbered 18-15/280-139 and dated 22.05.2018.

[21] Competition Board’s decision numbered 18-15/280-139 and dated 22.05.2018.