Vj-63/1997/72
HUMAN AND HUMAN TRADE
The Competition Council of the Office of Economic Competition started a proceeding ex officio against HUMAN Serum Production and Medicine Manufacturing Plc. (HSPMM) and against HUMAN Trade Ltd. (HTL) concerning abuse of dominant position and adopted the following
The Competition Council declares that the companies subject to the proceeding abuse of their joint dominant position by - without organising the supply of retailers under normal conditions on the whole territory of the country - not selling the medicines produced by HSPMM to wholesalers on producer price.
This anti-competitive market behaviour shall be prohibited from January 1 of 1998.
The Competition Council imposed a fine of 3.000.000 HUF on the companies concerned.
I.
The main profile of HUMAN Serum Production and Medicine Manufacturing Plc is medicine production and medicine wholesale. The company itself sold its products to domestic wholesalers until December 31 of 1995.
HUMAN Trade Ltd was established in 1989 for the purpose of medicine wholesale. By the time of the proceeding it was 100% owned by HSPMM.
The two companies concerned concluded a "supply contract" according to which HTL will conduct the wholesale activity while HSPMM will conduct economic activities. In return to this and to the using of facilities, HTL will pay 2% of its income deriving from commercial activity to HSPMM. Some time later the facilities provided, as a result of the increase of primary capital, were also transferred to HTL`s ownership and by this the total section of HSPMM dealing with wholesale was transferred to HTL.
The Ministry of Public Welfare authorised, on October 4 of 1995 under No. 87.676/1995, HTL to take over and to carry on the medicine wholesale activity of HSPMM. From January 1 of 1996 HTL exclusively distributes the medicines produced by HSPMM and distributed only on domestic market, but also distributes other domestic medicine firms` products. However HSPMM will continue to sell its products not distributed on domestic market.
Considering the agreement the Competition Council came to a decision, Case No. Vj-20/1997/60. that it does not fall under the prohibition of agreements restricting competition.
After the transfer of wholesale activity, HTL has an adequate storage capacity and equipment park by which the company is able, in theory, to supply the retailers of the whole country from HSPMM`s products.
From 1996 HTL took over the supply of HSPMM`s contractual partners too and, by now, it supplies the same number of wholesalers while the number of retailers supplied increases. Distribution of wholesalers means 55% of total turnover of 1996.
II.
HSPMM, in terms of its share of turnover on the domestic medicine market, not considering products produced in wage-work and not distributed in commercial, is not placed among the first 10 medicine manufacturers and its turnover does not reach 1,5% of total turnover. Its income deriving from the selling of product through HTL means 60% of its total income reached by domestic distribution.
HTL purchases on producer price from HSPMM and its income deriving from the distribution of these products means 31% of its total income.
The medicine producers, with one exception, distribute on producer price to wholesalers. This producer price is set up each year at the price-negotiations held by the National Health Insurance Office. During the negotiations they compare to the European prices, but do not take into account the concrete production costs of the medicines and pricing of the producers. The producers, in practice, do not apply a producer price different from this and this will be the basis of the commercial profit margin and the subvention adjust to this amount.
The wholesalers usually give their needs to the producers until a certain day of each month and, depending on this, they are served one or two times a month.
There are about 80 wholesalers operating on the national market and 20 of them distribute 80% of the medicines. Six medicine firms conduct commercial activity themselves.
III.
HSPMM produces 427 kind of medicines out of which 399 are sold to HTL.
330 medicines out of total are diagnostics and reagents (not medicines), while 97 are packed medicines. 5 of them have substitute but 92 haven`t got registered substitute in Hungary.
Out of the latter factors and blood-preparations are distributed only to institutes and hospitals - partly through the direct supply of HSPMM. Infusions and vaccines are distributed also mainly to hospitals, while 80-85% of insulin (38-40 pieces) and eye- and ear-drops (13 pieces) are sold to wholesalers.
The order relating to infusion must be given to HSPMM 4 months ahead and its quantity must amount to at least 6.000 pieces, while the order of eye- and ear-drops must be made 2 months ahead and must amount to at least 10.000 pieces.
HTL undertakes, under its supply contracts concluded with hospitals and other medical institutions, that in Budapest on each working day it will complete the orders given until 2 p.m. of the previous day, while it will supply twice a week to the country-side. In reality, HTL completes the needs of hospitals and retailers within 24 hours in 100 kilometres area of Budapest and also in the same area of Nyíregyháza (where it has a new registered site), and it supplies usually within two days to other parts of the country independently of the contracts.
HTL establishes a new registered site in Szombathely which will enable it to supply the retailers in the whole country the same way as in the area of Budapest and Nyíregyháza.
According to the contract concluded with wholesalers HTL supplies on every second week or monthly and the order must be given 5 working days ahead of the supply.
However in practice, in the 100 kilometres area of Budapest HTL conducts daily supply beginning from September of 1996 and it is the same situation now in the area of Nyíregyháza as well.
The price, taken as a function of the quarterly turnover, is the amount of producer price plus 50% (until 25 M HUF) or 60% (under the limit) of wholesale margin. The transport is carried out by the customers according to the contract, but in reality, in case of demands, HTL transported itself 50% of goods to wholesalers during the last year. Earlier, HSPMM supplied wholesalers on producer price increased by 40-50% of wholesale margin plus it carried out transportation too.
IV.
The Competition Office started the investigation because the possibility arose that, when HTL exclusively distributes HSPMM`s products with the division of wholesale margin, the two companies concerned determine their prices by abuse of their dominant position and thus infringe Article 21 of the Competition Act.
The companies concerned stated that the direct supply would increase costs because the costs of wholesale activity would arise above producer price. Thus it was for practical purposes to create this new selling form, meaning that HTL took over from the wholesalers the costs of storing and cooling and it made possible the fast and more often supply. The companies sought the termination of the proceeding.
The investigation found both companies being in dominant position but the determination of price is not an abusive behaviour, because the division of margin has legal grounds.
V.
The Competition Council first of all stated that it considered the market behaviour of the two companies subject to the procedure unitedly, since HTL is 100% owned and controlled by HSPMM the two are not independent. That was also the reason for not considering the agreement of the companies as one falling under cartel prohibition.
According to Article 22(1) a) a dominant position shall be deemed to be held on the relevant market by those who market goods the reasonable substitutes of which cannot be purchased or can only be purchased under considerably less favourable conditions than usual in respect of the trade and goods concerned. Article 22(4) says that dominant position may be held individually or jointly by one or more undertakings.
The companies subject to the proceeding exist on the market as producers and also as marketing wholesalers and they jointly set up a situation in which HSPMM`s products can be purchased only from HTL.
The Competition Council examined substitutability only in relation to packed medicines since diagnostics and reagents cannot be deemed as medicines (strict meaning) because these supply institutes and doctors not directly retailers and patients. However the Competition Council found the 97 packed medicines not to be substitutable because it examined the abusive behaviour from the aspects of the traders not the users. The wholesalers, who resale the medicines to hospitals and retailers, are not able to carry out their tasks properly in the lack of special products of the medicine firm. They may operate effectively only if they can offer the whole range of products in Hungary. This way the patients and doctors would be able to choose the possible substitute of a medicine, but only if it is available at retailers too. It is not the wholesaler`s competence to choose the substitute which may be a foreign medicine.
According to the above the dominant position of the companies subject to the proceeding can be assessed in relation to the 97 medicines, because these products of HSPMM can be purchased only from HTL.
Afterwards the Competition Council examined if there was an abusive behaviour considering the price. The regulation on commercial margin of medicines makes it possible for the wholesalers to divide the wholesale margin, but this does not exclude abusement.
The Competition Council does not consider the price determined at the negotiations of the National Health Insurance Office as an obliged price such as an official price and therefore the divergence from it is not automatically injurious. But if the products of HSPMM are sold to wholesalers above this and there is no reasonable reason for it, just that the producer separated its wholesale activity, then this will make it possible to avoid this price by establishing an internal commercial unit - not considering that the price set up by the National Health Insurance Office is not right for the producer`s interest because in this case the main problem is the price policy agreement.
This price setting does not threaten the supply of final consumers if,
- the commercial unit is able to act as a local wholesaler on the whole territory of the country and is able to offer equal conditions to each retailers,
- is able to offer the usual wide range of products, meaning it is able to supply retailers without the intervene of other wholesaler and not harming the interest of final consumers.
According to the investigation the companies subject to the proceeding satisfy the above conditions.
The Competition Council examined the wholesale activity of HTL.
At the time of proceeding the usual supply of retailers did realised in the 100 km area of Budapest. The unit opened at Nyíregyháza during the procedure made this area being properly supplied too. However it cannot offer the proper supply, like a local wholesaler, in other parts of the country and this will only be possible after the opening of the unit in Szombathely. Until the supply of retailers is not at the same level in the whole country, it is not significant that what surplus service is offered to wholesalers by HTL. It is possible that the wholesaler wouldn`t like the performance of these services in reverse to the division of margin, but it would claim the total wholesale margin and would undertake the total performance of the wholesale activity. The partial deprival of wholesale margin would only be reasonable if it would claim the division of wholesale activity. Since HTL is not able to operate as a general wholesaler on the whole market, until it reaches this stage, it is unfair to market its products on a higher price increased by the division of margin contrary to the other medicine firms which offer their products on producer price.
According to the above the Competition Council assessed that the conduct is unlawful and prohibited the continuation of the conduct. It took into account, when determining the time-limit, that the contracts were concluded for one year by HTL.
The Competition Council imposed a fine under Article 78(2) taking into account the gravity of the violation. It considered that the disturbing of the market was not significant and a solution has occurred for the violation already during the procedure by the opening of the unit in Nyíregyháza. However it cannot be left out of consideration that this conduct could cause a precedents situation the general spreading of which would cause significant market distortion, since the producer could reach a price increase just by operating a wholesale unit but without taking over the total commercial function.
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dr. Sólyom Eszter sk. előadó
dr. Bodócsi András sk.
Vérné dr. Labát Éva sk.
Ágoston Marika