Preferences (Advantages) of Domestic Medicinal Products and Restrictions on Foreign Medicinal Products in Public Procurement

 

February 22, 2023

BRACE Law Firm ©

 

Since 2014, when the first wave of sanctions from Western countries hit Russia, the state has been actively pursuing an import substitution policy. Its goal was to reduce dependence on imported goods by establishing domestic production in most industries: from electronics to pharmaceuticals. One of the support measures for domestic production was the provision of preferences for Russian goods and the restriction of access to the market for foreign-made goods during public procurement.

Let us clarify that public procurement refers to:

• procurement carried out by state and municipal government bodies, as well as state-owned and budgetary institutions under their jurisdiction (hereinafter — "state procurement"), in accordance with Federal Law No. 44-FZ dated April 5, 2013, "On the Contract System in the Sphere of Procurement of Goods, Works, and Services for Meeting State and Municipal Needs" (hereinafter — the "Law on the Contract System");
• procurement carried out by state corporations and public-law companies, natural monopoly entities, and organizations engaged in regulated activities in the sphere of utility resource provision, autonomous institutions, and business entities with a state participation share of more than 50%, in accordance with Federal Law No. 223-FZ dated July 18, 2011, "On the Procurement of Goods, Works, and Services by Certain Types of Legal Entities" (hereinafter — the "Law on Procurement").

In this article, we will consider the procedure for providing such advantages and restrictions during the public procurement of medicinal products and the problems identified in the course of law enforcement practice.

Advantages and Restrictions on the Access of Medicinal Products in State Procurement

The application of national treatment, i.e., the provision of advantages to goods of Russian origin, is established by Article 14 of the Law on the Contract System. In accordance with this norm, the Government of Russia has been granted the right to establish a ban on the admission of goods, works, and services originating from foreign states, as well as restrictions on the admission of the specified goods, works, and services, and the Ministry of Finance of the Russian Federation — special conditions for admission to participate in state procurement.

As for medicinal products, preferences for domestic goods are provided by two normative acts:

• Decree of the Government of Russia No. 1289 dated November 30, 2015, "On Restrictions and Conditions for the Admission of Medicinal Products Originating from Foreign States Included in the List of Vital and Essential Drugs for the Purposes of Procurement for Meeting State and Municipal Needs" (hereinafter — "Decree No. 1289");
• Order of the Ministry of Finance of Russia No. 126n dated June 4, 2018, "On the Conditions for the Admission of Goods Originating from a Foreign State or a Group of Foreign States for the Purposes of Procurement of Goods for Meeting State and Municipal Needs" (hereinafter — "Order No. 126n").

Let us specify that under these normative acts, advantages are provided both to Russian goods and to goods originating from the countries of the Eurasian Economic Union (hereinafter — the "EAEU Countries").

Let us consider their mechanism of action and the approaches and problems identified by practice, with which customers and participants are faced, in more detail.

Restrictions on the Admission of Foreign Medicinal Products

Restrictions on the admission of foreign medicinal products in accordance with Decree No. 1289 must be established by the customer if the procurement satisfies the following conditions:

1. A medicinal product/products with one international non-proprietary name (INN) are being purchased, or in the absence of such a name, with a chemical or grouping name.
2. The procurement is the subject of one contract or lot. Let us clarify that the Law on the Contract System does not contain a direct ban on the formation of mixed lots with several INNs. However, the restrictions provided for by Decree of the Government of Russia No. 929 dated October 17, 2013, must be observed, namely, medicinal products with different INNs (or chemical/grouping names) cannot be the subject of one contract (one lot) if the price of the lot exceeds:

• RUB 1 million — if the volume of funds directed by the customer for the purchase of medicines in the preceding year did not exceed RUB 500 million.
• RUB 2.5 million — if such a volume in the preceding year was from RUB 500 million to RUB 5 billion;
• RUB 5 million — if such a volume in the preceding year was more than RUB 5 billion.

Also, it is prohibited to include narcotic, psychotropic, or radiopharmaceutical medicinal products, or a medicinal product for which there are no other analogs in dosage form and dosage by INN, in one lot along with "regular" medicinal products if the price of such a lot exceeds RUB 1,000. Thus, barriers have been indirectly set to prevent customers from bypassing Decree No. 1289.

3. The medicinal product being purchased must be included in the List of Vital and Essential Drugs (VED).

In addition, restrictions apply only when conducting competitive procurement where the formation of a notice and (or) procurement documentation and the submission of bids for participation are provided for.

When evaluating submitted bids, the so-called "three's a crowd" (third one is out) rule is applied, which consists of the following. If 2 or more bids are submitted for participation in the procurement with a proposal for medicinal products originating from Russia or other EAEU member states, or the Donetsk People's Republic or Lugansk People's Republic, bids with medicinal products originating from foreign states are subject to rejection.

At the same time, such bids must satisfy the conditions formulated in clause 1.1 of Decree No. 1289, namely:

• satisfy the requirements of the notice and documentation on the implementation of the procurement;
• not contain proposals for the supply of medicinal products from the same manufacturer or manufacturers belonging to the same group of persons as defined by Article 9 of the Federal Law "On Protection of Competition";
• the origin of the drugs proposed for supply must be documented.

Confirmation of the country of origin of a medicinal product is the certificate of origin of goods (hereinafter — "ST-1"), issued by the authorized body of an EAEU member state in the form established in the Agreement on the Rules for Determining the Country of Origin of Goods in the Commonwealth of Independent States dated November 20, 2009. The right to issue ST-1 certificates is granted to the authorized Chambers of Commerce and Industry. The procedure for issuing ST-1 form certificates on the territory of Russia for the purposes of state procurement of medicines is regulated by Order of the Chamber of Commerce and Industry of the Russian Federation No. 93 dated December 21, 2015 (hereinafter — the "Order of the CCI of the RF No. 93").

Even though Decree No. 1289 has been applied for more than seven years, questions still arise among both customers and suppliers during its application. Let us consider the most common disputed situations.

1. The bid contains both foreign and domestic drugs. If a bid contains several names of medicinal products and at least one of them originates from a foreign state, it is recognized as containing a proposal for the supply of a medicinal product of foreign origin. This position was formed by the regulatory authorities back in 2016 and is uniquely accepted in practice.
2. Two participants proposed a domestic drug from the same manufacturer. Regulatory authorities and courts do not have a single opinion on this situation. For example, the Moscow UFAS decided that if two bids are submitted for participation in the bidding proposing drugs of Russian origin from the same manufacturer (for example, as in the case of JSC "Sintez") with different registration certificates and different registration certificate holders (JSC "Sintez" and LLC "VELPHARM"), bids with foreign drugs are subject to rejection. A similar opinion was expressed by the Ministry of Industry and Trade of Russia in letter No. 91287/19 dated December 17, 2019.

The opposite point of view was expressed by the Commercial Court of the Volga District, which indicated that if the bids contain a proposal for the supply of medicinal products from the same manufacturer, despite the fact that the drugs are registered under different trade names, the restrictions established by Decree No. 1289 are not subject to application.

In our view, the position of the commercial court formally corresponds fully to the norms of Decree No. 1289. However, most antimonopoly authorities do not share it, believing that the business model used in the production of drugs allows for the production of a large number of various drugs on one production site; therefore, advantages should be provided with an orientation toward the registration certificate holders.

When making decisions on the application or non-application of restrictions, we recommend analyzing the practice of the antimonopoly authority in your region.

3. A domestic drug is proposed in the bid, but the ST-1 is missing. If the country of origin of the drug is an EAEU member state, but the ST-1 is not contained in the bid, such a bid is equated to a foreign one and may be rejected if the conditions for applying Decree No. 1289 are met.
4. The ST-1 certificate's validity period has expired. Many disputes in practice are caused by the validity periods of the ST-1 certificate. Clause 3.7 of the Order of the CCI of the RF No. 93 provides that an ST-1 is issued to a procurement participant for the duration of the procurement and ceases its action after its completion. Manufacturers of medicinal products are allowed to be issued certificates for a period of up to 1 year, but not more than the validity period of the annual expertise act.

There are cases when the validity of the ST-1 expires during the procurement procedure. Many customers are unaware of the note to clause 3.8 of the Order of the CCI of the RF No. 93, from which it follows that the validity of an ST-1 issued for a term of up to one year is extended in such a case until the completion of the procurement.

In addition, Decree of the Government of Russia No. 353 dated March 12, 2022, "On the Peculiarities of Permissive Activities in the Russian Federation in 2022 and 2023" (hereinafter — "Decree No. 353") provides for the extension of the validity of a number of urgent permits, including ST-1. Thus, if the validity of an ST-1 expired in the period from March 14, 2022, to December 31, 2022, its action is automatically extended by 12 months.

If the customer does not apply the specified norms and equates the bid to a foreign one, this may entail unfavorable consequences for them in the form of a review of the procurement results and the imposition of administrative liability.

Two-Level System of Preferences

Since 2019, the scope of application of Decree No. 1289 does not end there. In the event of rejection of bids containing a proposal for the supply of foreign medicinal products, the customer moves to the second stage of evaluating bids, namely, identifying whether there are proposals among the remaining bids for the supply of drugs whose production is fully localized on the territory of the EAEU.

To claim the advantages, such a bid must satisfy the following conditions:

• contain a proposal for the supply of medicinal products, all stages of production of which, including the synthesis of the molecule of the active substance in the production of pharmaceutical substances, are carried out on the territories of the EAEU member states;
• information about such pharmaceutical substances must be included in the registration dossier for these medicinal products.

To confirm the full production cycle on the territory of the EAEU countries, the participant must declare in the bid information about:

• a document confirming the compliance of the manufacturer of medicinal products for medical use with the requirements of the Rules of Good Manufacturing Practice of the Eurasian Economic Union or the Russian Federation (hereinafter — "GMP");
• a document containing information on the stages of the technological process of production of the medicinal product for medical use (hereinafter — "SP").

The procedure for issuing the specified documents is regulated by orders of the Ministry of Industry and Trade of the RF No. 261 dated February 4, 2016, and No. 4368 dated December 31, 2015, respectively. The customer has the opportunity to check the validity of the documents on the website of the Ministry of Industry and Trade of Russia. At the same time, it should be kept in mind that, as in the case of ST-1, by order of the Ministry of Industry and Trade of Russia No. 1987 dated May 18, 2022, the validity periods of GMPs expiring in the period from January 1 to December 31, 2022, are extended by 12 months from the day following the day of expiration of such conclusions.

If a bid satisfying the above requirements is identified, the customer applies the conditions of admission provided for by Order No. 126n. According to clause 1.4 of Order No. 126n, the participant who submitted such a bid is recognized as the winner if their proposal does not exceed by more than 25% the price proposed by the winner of the procurement whose bid contains a domestic drug but manufactured from a foreign pharmaceutical substance.

In the last few years, most disputes have been related to the provision of advantages precisely at the second stage. They are primarily related to determining from which stage the production of a pharmaceutical substance is localized on the territory of the EAEU countries. Let us consider the problematic points in more detail.

As mentioned earlier, the document in which the stages of production of a medicinal product are listed is the SP. Its form is given in Appendix No. 6 to the Minpromtorg Order No. 4368. At the same time, the mere fact of issuing the document does not yet confirm the localization of the production of the drug from the stage of the pharmaceutical substance on the territory of the EAEU. For this, its completion must begin with section 2A "Production of Pharmaceutical Substance", which, in turn, contains several stages of the technological process, such as:

• A.1. Stages of production until the molecule is obtained.
• A.2. Processing stages (without changing the molecule).
• A.3. Final stages of production.
• A.4. Packaging of the pharmaceutical substance.
• A.5. Packaging.

Let us note that the technological process of manufacturing a pharmaceutical substance differs depending on its method (chemical synthesis, biotechnological synthesis, isolation from mineral, biological, animal, or vegetable sources). At the same time, as is already seen from the name of the method of obtaining and as stated in clauses 56–59 of Appendix No. 2 to the Administrative Regulation of the Ministry of Industry and Trade of the Russian Federation for the provision of state services for the issuance of a document containing information on the stages of the technological process of production of a medicinal product for medical use, carried out on the territory of the Eurasian Economic Union, approved by Order of the Ministry of Industry and Trade of Russia No. 4368 dated December 31, 2015 (hereinafter — the "Administrative Regulation"), the synthesis of the molecule is possible only if the pharmaceutical substance is obtained by the method of chemical synthesis.

Both participants and customers have a question as to whether preferences are provided in cases where the pharmaceutical substance is obtained by isolation from biological, animal, or vegetable sources, where synthesis of the molecule is in principle impossible? Or the obtaining of the pharmaceutical substance is carried out by isolating it from chemical raw materials, in connection with which the production stage begins with the processing of the finished molecule?

Unfortunately, antimonopoly authorities do not yet have a single point of view on this matter. It can be said with certainty that the opinions of the territorial UFAS are divided. For example, in one of the cases, a procurement participant provided an SP document, in column 2.A.1 "Stages of production until the molecule is obtained" of which there was a dash. The auction commission refused to provide advantages to the participant. In the complaint, the procurement participant explained that the production of the medicinal product actually begins with the stage specified in clause 2.A.2 "Processing stage (without changing the molecule) — purification (recrystallization) of the pharmaceutical substance". The antimonopoly authority decided that the procurement participant had not confirmed the production of all stages of the medicinal product, including the synthesis of the molecule of the active substance on the territory of the EAEU. The UFAS refused to satisfy the participant's complaint.

In another case, an SP was provided in which a dash was also indicated in subsection 2.A.1 "Stages of production until the molecule is obtained" for a similar reason. The UFAS decided that completion starting from clause 2.A.2 is a proper confirmation of the country of origin. In addition, the UFAS Commission took into account the information of the State Register of Medicinal Products (SRMP), confirming the production of the pharmaceutical substance, including on the territory of the Russian Federation.

In our view, it is necessary to make changes to Decree No. 1289, obliging participants to provide an SP document as part of the bid, as well as to correct the norms that allow for dual interpretation.

Conditions for the Admission of Foreign Medicinal Products

The conditions for the admission of medicinal products are established by Order No. 126n. Its scope is quite wide: it is used in the procurement of various types of goods listed in the appendices to this order. At the same time, medicinal products are included in it in full (item 118 of Appendix No. 1 to Order No. 126n); therefore, the conditions for admission are applied when conducting competitive procurement in relation to the purchase of any medicinal products.

The mechanism of action of Order No. 126n consists in the following: participants whose bids or final proposals contain proposals for the supply of goods only from EAEU countries are provided with a price advantage of 15 percent, compared with foreign products. The procedure for providing preferences differs depending on the procurement method:

• when conducting an auction, the customer, when sending the contract, reduces the price proposed by the winner by 15% if their bid contains a proposal for the supply of at least one foreign-made product and a bid with a proposal for goods from EAEU countries was submitted;
• when conducting a tender, request for quotations, and request for proposals, a 15% reduction coefficient from the price proposed by them is applied to bids containing a proposal for the supply of goods from EAEU countries when evaluating bids. The winner is determined based on the price calculated taking into account the reduction coefficient. At the same time, the contract is concluded at the price actually proposed by such a participant.

As for the disputed situations when applying Order No. 126n, in recent years there have been more frequent complaints from procurement participants about the illegal application/non-application of preferences due to a lack of understanding of their mechanism of action or attempts to verify the customer's actions. For example, in one of the cases considered by the St. Petersburg UFAS, a procurement participant complained about the unlawful actions of the customer, expressed, in their opinion, in the incorrect application of the provisions of Order No. 126n. During the consideration of the case, the antimonopoly authority established that a participant who proposed a product originating from France was recognized as the winner of the auction. At the same time, one of the procurement participants proposed a product of Russian origin. When the customer sent the draft contract, the price was reduced by 15 percent of the price proposed by the winner. The UFAS decided that the provisions of Order No. 126n were applied lawfully.

Advantages Provided Under the Law on Procurement

When carrying out procurement within the framework of the Law on Procurement, their own national treatment rules also apply. However, the approach to their provision differs significantly from the state order.

The only regulatory document governing the provision of advantages for any types of goods is Decree of the Government of Russia No. 925 dated September 16, 2016, "On the Priority of Goods of Russian Origin, Works, and Services Performed and Rendered by Russian Persons, in Relation to Goods Originating from a Foreign State, Works, and Services Performed and Rendered by Foreign Persons" (hereinafter — "Decree No. 925"). As in the state order, it also applies only to competitive procurement.

The mechanism for providing advantages is similar to the procedure provided for by Order No. 126n. However, unlike the state order, priority is provided not only to goods of Russian origin and EAEU countries, but also to goods from member countries of the World Trade Organization (WTO), which currently includes 164 foreign states, including EU countries. Thus, the provision of advantages within the framework of the Law on Procurement is mostly formal in nature.

Let us consider an example. In one of the cases, a hospital was purchasing the medicinal product "Fulvestrant" by request for quotations. One of the procurement participants filed a complaint about the actions of the commission. According to the applicant, the customer unlawfully failed to provide priority to goods of Russian origin according to Decree No. 925. During the consideration of the complaint, the antimonopoly authority established that five bids had been submitted for participation in the procurement. The country of origin of the proposed medicinal products was the Republic of Croatia, the Russian Federation, and Romania. The antimonopoly authority indicated that in accordance with clause 8 of Decree No. 925, priority is provided taking into account the provisions of the General Agreement on Tariffs and Trade (GATT) and the Treaty on the Eurasian Economic Union. According to GATT, goods from countries that have joined GATT are provided with a priority similar to goods of Russian origin. Thus, Decree No. 925 directly provides for the provision of an equally favorable regime both to goods from Russia and to goods of WTO member states. Since the Republic of Croatia and Romania are WTO members, the procurement commission lawfully did not provide priority according to Decree No. 925 to any of the participants.

Let us note that the FAS Russia attempted to give a different interpretation to the norm of clause 8 of Decree No. 925, granting customers the right in their procurement regulations to establish priority for goods of Russian origin in relation to goods originating from a foreign state in a number of specific areas. However, this position has not been widely accepted in practice.

In conclusion, we note that the preferences for domestic medicinal products and restrictions on foreign medicinal products in public procurement undoubtedly have a positive effect as a measure of support for domestic pharmaceutical manufacturers. However, due to the complexity and, in some cases, inconsistency of the normative acts providing the advantages, the need has matured for their unification for the purpose of introducing "rules of the game" understandable to all participants. As for the priorities provided in accordance with the Law on Procurement, they cannot be recognized as effective. In our view, it is necessary to extend the preference system worked out in the state order to the procurement of state-owned companies.

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References

1. The members of the EAEU are Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia.
2. Decree of the Government of the RF No. 929 dated October 17, 2013, "On Establishing the Limit Value of the Initial (Maximum) Price of a Contract (Lot Price), Above Which Medicinal Products with Different International Non-proprietary Names or, in the Absence of Such Names, with Chemical or Grouping Names Cannot Be the Subject of One Contract (One Lot)."
3. Order of the Government of the RF No. 2406-r dated October 12, 2019, "On Approving the List of Vital and Essential Drugs, as well as Lists of Medicinal Products for Medical Use and the Minimum Range of Medicinal Products Necessary for Providing Medical Care."
4. Since the DPR and LPR have now become part of the Russian Federation, technical corrections are required.
5. Order of the CCI of the RF No. 93 dated December 21, 2015, "On the Regulation on the Procedure for Issuing Certificates of Origin of Goods in the Form ST-1 for the Purposes of Procurement for Meeting State and Municipal Needs (for Medicinal Products Included in the List of Vital and Essential Drugs)."
6. Letter of the Ministry of Economic Development of Russia No. 6723-EE/D28i, Ministry of Industry and Trade of Russia No. TsS-14384/19, Ministry of Health of Russia No. 25-0/10/2-1416, FAS Russia No. ATs/15615/16 dated March 14, 2016, "On the Position of the Ministry of Economic Development of Russia, the Ministry of Industry and Trade of Russia, the Ministry of Health of Russia, and the FAS Russia on the Application of the Provisions of Decree of the Government of the Russian Federation No. 1289 dated November 30, 2015..."
7. Decision of the Moscow UFAS Russia dated June 20, 2022, in case No. 077/06/106-9199/2022.
8. Resolution of the Commercial Court of the Volga District No. F06-18905/2022 dated June 2, 2022, in case No. A06-3203/2021.
9. Letter of the FAS Russia No. ATs/14053/16 dated March 9, 2016, "On Consideration of the Appeal."
10. Decision of the Moscow UFAS Russia dated October 13, 2020, in case No. 077/06/57-17197/2020.
11. Decree of the Government of Russia No. 572 dated May 12, 2018, "On Amending the Decree of the Government of the Russian Federation No. 1289 dated November 30, 2015."
12. Order of the Ministry of Industry and Trade of the RF No. 261 dated February 4, 2016, "On Approving the Forms of the Application for the Issuance of a Conclusion on the Compliance of the Manufacturer... with the Requirements of the Rules of Good Manufacturing Practice..."
13. Order of the Ministry of Industry and Trade of Russia No. 4368 dated December 31, 2015, "On Approving the Administrative Regulation... for the Issuance of a Document Containing Information on the Stages of the Technological Process of Production of a Medicinal Product..."
14. Order of the Ministry of Industry and Trade of Russia No. 1987 dated May 18, 2022, "On Extending the Validity Periods of Conclusions on the Compliance of the Manufacturer of Medicinal Products... with the Requirements of the Rules of Good Manufacturing Practice."
15. Decision of the Ivanovo UFAS dated December 13, 2021, No. 037/06/14-705/2021.
16. Decision of the UFAS for the Republic of Komi dated July 30, 2021, No. 011/06/14-544/2021.
17. Decision of the St. Petersburg UFAS Russia dated October 17, 2022, in case No. 44-3543/22.
18. Decision of the Sverdlovsk UFAS dated December 9, 2022, on complaint No. 066/01/18.1-3943/2022.