The Competition Authority has reached the final stretch with its pharmacy reform analysis. Could we say the competition situation has changed for the better in the past three years?

Both our data and economic analyses from the past 24 months suggest the [pharmaceuticals market] situation is virtually unchanged. We did not really look at whether things have gotten better or worse. Rather, we just wanted to see whether Estonia's pharmacy reform from three years ago had brought about change. We find that it has not.

When the reform was launched, it was said that the aim was to have more pharmacist-run drugstores in Estonia. Does this mean none have appeared?

Indeed, according to the State Agency of Medicines' database, not a single new pharmacist-run drugstore has been opened in the last three years. Curiously enough, our analysis rather suggests the reform has worked as a kind of market barrier. One of the recommendations we will be making is to revise the whole market and especially the wholesale side of things. Pharmacists are usually tied to a pharmacy chain today. How could pharmacist-run drugstores come about in this situation, seeing as they also need suppliers?

Our recommendation is to foster competition also on the wholesale market. Only then will we see new pharmacies, including independent ones.

Why haven't we seen new pharmaceuticals wholesalers in Estonia?

I dare not provide a single answer. The topic has long been on the agenda, also at the Competition Authority. Looking at the analyses, it seems we have longstanding wholesalers with a lot of market power and who have long held vertical relationships with pharmacists and pharmacies. Change takes times, while not all conditions for it have been created either.

Let us compare the medicines market to that of retail, with Lidl's arrival in Estonia serving as a good example. A new supermarket chain entered the market and pulled some customers away from existing players using lower prices and a different selection. Why cannot a major drugs wholesaler enter the Estonian market in the same way and offer local pharmacies lower prices?

Most pharmacies are tied to wholesalers of which there are only a few in Estonia. It is purely a matter of loyalty. Even if the pharmacists say they are free to buy from somewhere else, order systems are made in way to facilitate the status quo.

The pharmaceuticals retail business does not usually have high profit margins. I would even go as far as referring to it as a lifestyle business in hopes I'm not hurting anyone's feelings. We do need to take a look at why there is no competition on the wholesale market. /.../ Creating competition in wholesale will see it follow in retail.

In other words, the reform has completely failed at separating the wholesale and retail markets?

I dare not say that either. Legally speaking, the two markets are not vertically linked through ownership relationships.

But our analysis points to other factual circumstances. How wholesalers still maintain ties to a lot of franchise pharmacies. For instance, most chain pharmacies rent their premises, whereas they do so from franchisers or other companies with ties to wholesalers, rather than real estate developers.

Let me get this straight. Pharmacies that have a franchise contract are renting premises from franchise owners who also own wholesale warehouses? Furthermore, they are technically forced to order medicines from wholesalers who own the franchises? Are we being taken for a ride?

Allow me to clarify that there are 470 pharmacies in Estonia run by 170 operators and all have somewhat different agreements for their premises and how they source medicines. We cannot generalize like that.

As concerns whether we're being given the run-around, I believe it is time to address the matter of drug markups and solve the problem once and for all. It goes beyond vertical relationships between pharmacies and wholesalers.

Our analysis also found problems with markup. Random interviews revealed that most pharmacists do not change wholesalers because the prices are all largely the same. This begs the question of why do we not have competition? Something is off here.

The Competition Authority will continue to monitor the market and we want to take a closer look at franchise contracts. Franchise contracts are not illegal provided the franchiser's market share is below 30 percent, while we have developed some doubt as to the latter being the case.

I would call it a conviction rather than a suspicion.

The Competition Authority is looking into the matter, while we have no cause to point fingers at this time.

The price of medicines is basically government regulated in Estonia, an agreement between the Health Insurance Fund and pharmaceutical manufacturers. We also know that the latter give wholesalers discounts. Who ends up pocketing the difference?

The way it is supposed to work is that the wholesaler transfers a part of the discount to pharmacies with the latter then transferring it to customers. But because there is very limited competition, wholesalers do not pay the advantage forward. Our analysis also suggests it is not reaching pharmacists. They in turn cannot extend to the customer something they haven't received in the first place as it would leave them with unfairly thin margins.

What are the wholesalers' margins here?

If memory serves, it was as much as 45 percent in 2020, in terms of what manufacturers give wholesalers.

Is the State Agency of Medicines capable of effectively monitoring compliance with competition rules? Or perhaps the Competition Authority should have more say?

This has been discussed before, while I would say the State Agency of Medicines is doing good work. The question is whether they have the necessary capacity to determine whether a market participant has a dominant position. Matters of competition law aren't really in their portfolio.

When the State Agency of Medicines is processing an activity license, it can but is not obligated to ask the Competition Authority whether the pharmacy is under the control of another business. /.../ The medicines agency does not have that capacity and works with us.

But there are nuances involved. For example, the Competition Authority does not have the powers to ask companies for information directly. It all seems quite ineffective.

It is probable that amendments are in order. We need to boost the powers of the State Agency of Medicines. Why not also consider placing pharmaceutical sales under the supervision of both the agency and the Competition Authority.

In summary then, the situation is hardly rosy, looking at what drugs cost, how those prices come about and the level of actual competition between wholesalers and on the market in general.

I would not go that far. Medicines are available in pharmacies, traders have access to drugs, while we do need to determine why there is no competition. If there are artificial barriers in place, it is the task of the Competition Authority to draw attention to them and try to help create competition on the market.

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