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European Pharmaceutical Contractor

Ironing out the Creases


As Ukraine increasingly seeks to prove its worth in the global pharmaceutical market, development of anti-corruption laws and regulations renders the country more attractive to foreign investors.

The pharmaceutical market in Ukraine offers huge investment potential, with an annual turnover of around $2.87 billion in the year 2010, which is expected to grow by ten to 15 per cent in over the next three years, as well as a population of around 45.4 million.

The presence of powerful local manufacturers (four of the Ukrainian pharmaceutical producers are on the top 10 list of pharmaceutical companies with repsect to medicinal sales in Ukraine) and the increasing dependence of the Ukrainian pharmaceutical market on medicinal products and imported substances provide a unique combination of market characteristics and represent a good opportunity for foreign companies looking to launch their business in a new emerging market.

One of the key strengths of the Ukrainian pharmaceutical market is that GMP certification has been introduced as an obligatory part of licensing conditions. The joining by the State Service of Ukraine on Medicinal Products of PIC/S also adds credibility to the industry, as it allows mutual acknowledgement of GMP certificates, as well as acknowledgment of manufacturing site inspections conducted by the medicine quality authorities of other PIC/S memberstates. Working with the PIC/S will also facilitate import procedures and improve medicine quality control.

The pharmaceutical sector of Ukraine is of strategic importance to the country, considering its influence on national health and safety and the country’s demographic situation, as well as its powerful role in controlling the nation’s health. As a result it is one of the most highly-regulated spheres of the economy and legislation governing its scope is constantly subject to amendments.

This article will discuss the most pressing challenges for the Ukrainian pharmaceutical market in the near future, including the strengthening of state price regulation and possible VAT introduction for medicines; reorientation of marketing and promotion strategies due to the peculiarities of the new anticorruption legislation of Ukraine; and manufacturing localisation procedures or contract manufacturing on the territory of Ukraine caused by possible introduction of state import substitution strategy and so on.

State Price Regulation

Supply operations with medicinal products are exempt from VAT in Ukraine. However, as many pharmaceutical companies use the indirect supply scheme with the participation of one or more offshore resellers to evade legal restrictions on mark-ups for medicine prices, the State Customs Service of Ukraine has recently tightened import controls over medicinal products. Particular attention is paid by customs authorities to the customs value of imported medicines in order to prevent overstatement.

Ukrainian legislation regulates mark-ups for the wholesale price of medicines at the level of 10 (for medicines purchased within public procurement) and 12 per cent (for essential medicines which are on the list approved by the Cabinet of Ministers of Ukraine), while the base for calculating the mark-up of imported medicines is their customs value. Apart from the mark-ups regulation, starting from 1st March 2012 wholesale prices for medicinal products will medical devices purchased within public procurement will be subject to state regulation. Since medicines imported to Ukraine are exempt from VAT, overstating their customs value is an effective way for pharmaceutical companies to make a profit exceeding the statutory limit. One of the options proposed by state authorities to resolve this situation is the introduction of 10 per cent VAT on the importation of medicines to Ukraine.

Anti-Corruption Legislation

It is worth mentioning that the state has a dominant position in the healthcare services market of Ukraine, whereas the private sector amounts to just three to five per cent of the market. Despite the Constitution of Ukraine proclaiming that medical care in public (state and municipal) healthcare institutions is free, the sector is considerably underfunded. As a result, funding sources for public healthcare institutions includes donations from pharmaceutical companies, including product donations and the education of healthcare professionals by way of sponsoring their participation in different professional symposia, workshops, conferences and so on. Such activities are subjected to risks relating to the newly adopted anticorruption legislation of Ukraine. Donations and sponsorship, as well as other interactions with representatives from the pharma industry, constitute the basis of promotional activities by pharma companies.

It is in this context that the ‘On basics of counteraction and prevention of corruption’ law, of 7th April 2011 was created, introducing significant changes to pharmaceutical companies’ promotional strategies in the country.

Under the definition provided by this law, ‘corruption’ is deemed to be taking place by an official of entrusted official authority and of opportunities associated with such authority, if they are engaging in activities for the purpose of gaining illegal benefit, or there is acceptance of a promise/offer of such benefit for him/herself or for other persons, or respectively, a promise/ offer or provision of illegal benefit to an official, or upon his/her demand, to other physical persons or legal entities, with the purpose of inducing such person to unlawfully use entrusted to him/her official authority and the opportunities associated with such authority. In its turn, an illegal benefit is deemed to be any pecuniary funds or other assets, advantages, perks, services, or non-material assets, which without lawful grounds are promised, offered, provided, or received without pay, or at a price below the minimum market price.

The anti-corruption law has essentially extended the definition of state officials; officials of public and private legal entities (state and municipal entities), who receive a salary on account of the state or municipal budget, are conferred the status of ‘state official’ for the purposes of this law. An official is someone who permanently or temporarily holds positions involving the performance of organisationaldispositive or administrative-economic functions. Therefore, a chief executive, deputy chief executive, or other position who provides for executing of administrative functions (such as the head of the hospital division) of a state or municipal hospital shall be considered as state official and may be subjected to the liability for the corruption under the law. In some cases, officials of private clinics may be subject to liability for violation of anticorruption legislation as well.

The anti-corruption law sets forth the corruption liability exclusively for professionals who are officials, and according to the litigation (court) practice, any doctor performing organisational-dispositive functions, such as prescription of medicine to a patient, issue of sick-leave certificates or performing administrative functions, such as having in subordination at least one employee, might be considered to be a state official.

Thus, any illegal benefit received by or given to an official might be regarded as an offence in the eyes of the new anticorruption legislation, and as result both persons providing and receiving such benefits are subject to liability.

Based on the definition of an illegal benefit provided above, the following pharmaceutical company activities might be deemed corruption offences in terms of the anti-corruption law:

  • Provision of gifts, brand reminders and free samples of medicines to medical professionals
  • Hospitality: business dinner/coffee and so on in restaurants
  • Financing of participation fee, travel and accommodation costs for events (conferences and workshops for example) for doctors

Under the new law, obtaining gifts and brand reminders may be considered a corruption deed if it is obtained by a person with state official status or is a reward for decisions, action or lack of action in the interests of the donator, adopted or performed both directly by such persons and with their concurrence by other officials.

The anti-corruption law establishes the respective limitations for the value of gifts, which may be received by officials, and which shall not be considered as corruption deeds. Officials may accept gifts and donations that fall within the generally accepted notions of hospitality. The value of such gifts (donations) must not exceed 50 per cent of the minimum wage as fixed on the date of the acceptance of the gift (donation), and the aggregate value of such gifts received from one source within one year, must not exceed the minimum wage as fixed on 1st of January of the current year.

The Ministry of Justice of Ukraine further clarifies that gifts within the generally accepted notions of hospitality also include personal gifts received from friends and family presented on recognised holidays, provided that such gifts will not influence officials’ decisions or will not create an impression that it could influence their decisions. According to the above clarification, a modest business dinner with an official may fall under the definition of permitted gifts, provided that such hospitalities are not constant and do not influence decisions of the latter.

Negative consequences which a company may suffer as a result of deeming a certain promotional activity as a corruption offence may be the following: imposition of administrative and criminal sanctions (anything from a fine, to the deprivation of the right to hold certain positions or engage in certain activities or the imprisonment of officials); introduction into the Unified State Register of persons who have committed corruptive offence, to allow easy identification of repeat offences, invalidation of agreements, and reputational risks for the company.

Pharmaceutical companies of Ukraine are therefore reviewing their promotional and marketing codes, elaborating new anti-corruption compliance procedures and trying to find safe ways of promoting their products that are in line with the new anti-corruption legislation.

Import Substitution Concept

According to statistics, the sales volumes of locally produced medicines in packages constitutes 66 per cent, with imported medicines constituting 34 per cent, whereas in monetary terms the situation is reversed (29.7 per cent of local and 70.1 per cent imported medicines). This demonstrates that locally produced medicinal products are significantly cheaper than those that are imported, which is why they are usually prioritised for public procurement.

Currently, however, public procurement does not resolve the problem of medicine accessibility for the Ukrainian population. The absence of mandatory social health insurance significantly restricts the availability of free or privileged medicines for many people who are ill. At the same time, medicine is extremely expensive and not affordable if purchased out-of-pocket.

The Ministry of Health claims that the shortage of essential medicines, funded by state and local budgets, is mostly caused by overcharging of bids by foreign pharmaceutical companies within public procurement procedures.

As a result the government is looking to priotitise the interests of local manufacturers through the draft Concept of the State Program of Development of Import Substitution and the Substitution of Imported Medicinal Products, Including Biotech Drugs and Vaccines (for 2011 to 2021) has been recently developed and presented for public discussion (commonly known as the Import Substitution Concept).

However, although the Import Substitution Concept proposes many privileges and benefits (such as tax, customs and so on) for local medicine manufacturers, as well as prospects for the development of scientific and research pharmaceutical field, there are not sufficient funds for its implementation in the state budget of Ukraine. The Draft Concept has explicitly discriminatory provisions in terms of the On Protection of Economic Competition law regarding foreign pharmaceutical companies, providing for exclusive right to participate in public procurement procedures for local market players subject to availability of a certain medicinal product. Moreover, the above document (which also reflects the provisions of the Draft Law on Amendments to Article 9 of the Law on Medicinal Products of Ukraine that has been passed by the Parliament of Ukraine in the second reading) involves not only the actual shortening of the data exclusivity protection, but also eliminates the possibility to protect the data exclusivity of the medicines for which the registration application was submitted later than one year from the first registration of a medicinal product containing a new active substance, in any country in the world. Given the state of the medicinal products market in Ukraine, it is highly probable that foregoing the registration data will deprive practically all foreign innovative medicines of protection in terms of exclusivity.

Conclusion

To enjoy the benefits and privileges of a local manufacturer, many foreign pharmaceutical companies are now considering the possibility of establishing a manufacturing operation in Ukraine. As an alternative to localisation, contract manufacturing might be taken into account.

However, the question as to whether the early bird catches the worm, when applied to foreign companies willing to place their manufacturing facilities in Ukraine, is wide open. Such challenges as the land issue (there are certain restrictions as to the land ownership by foreign and foreign-owned legal entities stipulated by the Land Code of Ukraine), the VAT issue (supply transactions of medicines are exempted from VAT, whereas there is no VAT exemptions for manufacturing procedures, supply of equipment and so on); the obscure corporate structure of local manufacturers and non-availability of due protection of intellectual property rights make it difficult for foreign investors to take certain steps as to the anchoring their businesses in Ukraine.


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Timur Bondaryev is an Attorney, Managing Partner and Head of the Healthcare and Pharmaceutics at Arzinger. He also has extensive experience in working at state authorities and large corporations. Timur is a highly respected law practitioner enjoying an excellent reputation in the local and national market and was highly recommended by Who’s Who Legal, The Legal 500 – Europe, Middle East & Africa, and The Chambers Global. The Top 100 best managers of Ukraine Rating 2011 named Timur Bondaryev one of the leaders of the Ukrainian legal market. Email: timur.bondaryev@arzinger.ua

Svitlana Postrygan has been an Associate Attorney at Arzinger since 2008. Svitlana has wide experience in: incorporation of companies with foreign investment in Ukraine; drafting of companies’ charters, internal regulations, minutes of general meetings and other corporate documents; and provision of legal support on obtaining of various licenses and approvals, including in such spheres as healthcare, construction and so on. She is the author of many publications in professional Ukrainian and foreign periodicals, as well as manuals on pharmaceuticals, corporate law and real estate law. Email: svitlana.postrygan@arzinger.ua
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Timur Bondaryev
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Svitlana Postrygan
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