Changes to the legal frameworks: Key issues for life sciences companies
Vertical agreements are those between undertakings at different levels of the supply chain, such as a drug manufacturer and its wholesalers, distributors or pharmacies. These issues are also relevant to co-marketing agreements that life sciences companies may enter into, where such agreements contain a vertical element (i.e. the supply relationship between the originator of the contract product and the co-marketer).
The revised 'verticals' regimes in the EU and UK both came into force on 1 June 2022: the EU’s new Vertical Agreements Block Exemption Regulation ("VABER") and the UK’s Vertical Agreements Block Exemption Order ("VABEO"). In both cases these replace the prior EU block exemption (and which had been “retained” in UK law post-Brexit). Both the VABER and VABEO continue to provide a 'safe harbour' for vertical agreements which meet their criteria. The introduction of the new rules has two key implications for businesses to contend with: (1) changes to the rules from the previous regime; and (2) divergence between the UK and EU approaches. Both block exemptions are accompanied by detailed guidelines.
The VABER and VABEO overlap significantly both with each other and with the previous regime. However, there are important changes and divergences which are particularly relevant to life sciences companies.
- Resale Price Maintenance (RPM) – The approach to RPM (imposing minimum or fixed resale prices) is largely unchanged from the previous regime; it is still a hardcore restriction. However, both the EU and UK guidance have been updated in relation to fulfilment contracts. A supplier's imposition of resale prices on a distributor in a fulfilment contract will not constitute RPM provided the supplier, and not the customer, selects the fulfilment services provider. Separately, the VABEO confirms minimum advertised prices as a form of RPM; whilst these are not automatically deemed a hardcore restriction in the EU rules, they are noted as a potential form of RPM in particular circumstances.
- Active sales restrictions – It is now possible to appoint multiple “exclusive” distributors for a particular territory or customer group (i.e. shared exclusivity). In the EU a supplier can appoint up to five exclusive distributors whereas the UK guidelines refer to a "limited number" in proportion to the allocated geographical area or customer group. This gives suppliers greater choice in establishing an exclusive distribution system as it allows a greater number of possible distributors that can be protected from the active sales of other distributors. Additionally, suppliers can now require that their distributors pass on the active sales restrictions to their direct customers.
- Dual Distribution – Generally, agreements between competitors do not benefit from the “safe harbour” of the VABER and VABEO, with the exception of suppliers and distributors in a dual distribution scenario, where a company sells at the “upstream” level as well as the “downstream” level e.g. where a manufacturer sells to pharmacies directly as well as via wholesalers. Both the VABER and VABEO have now expanded the scope of this “safe harbour” to include agreements with wholesalers and importers. However, the VABER requires that where the parties in a dual distribution scenario exchange information, this must be directly related to the implementation of the arrangement or necessary to improve the production or distribution of the products in order to benefit from the safe harbour. For example, the following information exchanges would likely benefit from the safe harbour: wholesale prices, RRPs, technical information, production processes, inventory, stocks, sales volumes and returns, aggregated information on customer purchases, customer preferences and feedback and performance-related information. However, information exchanges on future prices or customer-specific sales data would be unlikely to benefit from the safe harbour.
- Dual Pricing – Both the VABER and VABEO now allow sellers to have different wholesale prices for products sold online than for products sold offline, provided the difference reasonably relates to the differences in costs or investments between the channels and that the intention is not to restrict cross-border sales or prevent the effective use of the internet by the buyer.
- Non-compete obligations – The VABER now permits non-compete obligations on a buyer that are tacitly renewable beyond a period of five years, provided that the buyer can effectively renegotiate or terminate the agreement at the five year mark. However, the VABEO still considers such tacitly renewable non-compete obligations as 'excluded' from the benefit of the safe harbour.
Other vertical considerations for life sciences companies
Beyond the changes to the rules outlined above, it is as important as ever for life sciences companies to consider competition law issues when managing their supply chain.
Parallel trade considerations after Brexit
Agreements which have as their object or effect a restriction of parallel trade between EU Member States are likely to be problematic under EU competition law (unless they are part of an exclusive or selective distribution system in which case some restrictions on “active” sales may be permissible). The EU rules apply based on where the anti-competitive effect is. Post-Brexit, agreements restricting parallel trade from the EU to the UK may not be caught by the EU rules but an agreement restricting parallel trade from the UK to the EU may be higher risk. The risk assessment will depend on the specifics of potential import/export (and reexport) patterns against the background of regulatory considerations.
Stock management programmes
Stock management programmes are one way which life sciences companies control the destination of their stock. These are often implemented against the background of marketing authorisation holders’ regulatory obligations to ensure appropriate and continued supply of products to cover the needs of patients at country level. Care must be taken in designing and implementing such programmes to ensure that it does not constitute an agreement with wholesalers or distributors which restricts parallel trade between EU Member States. For example, the supplier company should make unilateral decisions on whether to fulfil an order and the amount sold without involving customers in allocation decisions or seeking/accepting consent from customers on allocation amounts. Companies should also avoid strategies that penalise wholesalers which export and take care when considering monitoring where wholesalers or distributors resell.
An additional complication arises for pharmaceutical companies that may be considered dominant in the supply of one or more of their product portfolio. Dominant companies must ensure they meet “ordinary” orders from their customers, although they are not obliged to accept orders from new customers or out-of-the-ordinary orders from existing customers. What is “ordinary” will be assessed by reference to the size of the order relative to the national market and the previous business relationship with the customer but this assessment is not always straightforward. It is open to a dominant manufacturer to ration supplies, provided such a decision is made genuinely unilaterally and the ordinary orders of existing customers are still fulfilled.
Horizontal cooperation arrangements
The EU and UK are also updating their block exemptions and associated guidance on horizontal cooperation agreements – including R&D agreements, specialisation and joint production agreements. The changes to the guidance relate to joint purchasing, commercialisation, information exchange, standardisation and sustainability cooperation.
Hogan Lovells’ competition and regulatory lawyers combine a deep understanding of the regulatory landscape, knowledge of the competition rules and experience of advising businesses in the life sciences sector. Let us help you navigate the new verticals regimes and how the rules apply to your business.
Authored by Alice Wallace-Wright, Juliette Parkinson, Penny Powell, and Jane Summerfield.
