New developments in legislation on special economic measures: what the participants on the pharmaceuticals market should anticipate

Pepeliaev Group advises that, starting from 25 July 2022, federal laws dated 14 July 2022 No. 272-FZ and No. 273-FZ came into force, which amend the public procurement rules, including in the sphere of pharmaceuticals and medical items if special state security measures are introduced.

1. What has changed

• Federal Law No. 61-FZ “On defence” dated 31 May 1996 a new rule has been added providing that companies, regardless of the form of ownership, cannot refuse to sign agreements /public procurement contracts pursuant to Federal Law No. 223-FZ “On purchases of goods, work and services by specific types of legal entities” ("Federal Law 223") and Federal Law No. 44-FZ "On the contractual system in the area of purchases of goods, work and services to provide for state and municipal needs” ("Federal Law 44") to supply goods, work and services for the needs of the army or other state bodies conducting anti-terrorist and other activities outside the Russian Federation if such special measures are introduced.

  It remains an open question whether one has the right to refuse to make a supply owing to it being impossible to produce a certain medicine / item for objective reasons or if the price of the contractual offer is disadvantageous for the company.

• Federal Law 223 includes a rule that allows government customers to purchase goods from a sole supplier if the purpose is to replenish supplies of the armed forces.

  Please note that the making of such purchases will be confidential, in other words, information on the products that have been supplied and the supplier will not be published openly. The purchases may be made according to the procedure of procurement from a sole supplier by sending an application to a specific manufacturer that is the owner of the registration certificate for the medicine / medical item or to the distributor.

• In Federal Law 44, the introduction of the mobilisation of the economy regime was included as an additional ground for making amendments to effective contracts under a state defence order concluded pursuant to Federal Law No. 275-FZ “On a state defence order” dated 29 December 2012. Government customers received the right to increase and reduce the quantity of products supplied under such contracts within the standards provided for in the state defence order. The value of the contract may also be adjusted in proportion to the adjustments being made.

• Federal Law No. 273-FZ dated 14 July 2022 introduced amendments to article 252 of the Russian Labour Code. The Russian Government has been vested with the power to introduce special regimes for the work of industrial enterprises if mobilisation or another special regime is announced. The Government’s resolutions may affect the procedure and terms for engaging employees to work outside of established business hours, during night hours, at weekends and on holidays, as well as for providing annual paid vacations.

2. Why this is significant for the pharmaceuticals market

Pharmaceuticals and medical items are treated as non-food products, and they can become the subject of a purchase under a state defence order[1]. This means that new requirements may also extend to pharmaceutical companies; at the same time, one may assume that the above rules may apply to purchases of medicines and medical products both manufactured in Russia and imported, depending on the actual needs for medicines and medical products.

The price of the purchased medicines / medical products will be determined on the basis of regulatory acts covering certain types of purchases as are in effect, including with account being taken of the requirements for forming the initial maximum price of a contract for medicines that are included in the list of vital and essential medicines (the Russian Healthcare Ministry’s Order No. 1064n dated 19 December 2019).

3. Issues of compensation to employees

Employees of pharmaceutical companies can be engaged to perform work outside of standard working hours. The Government will establish a special list of measures in the area of labour to apply to individual companies and their structural divisions, as well as individual production facilities.

Federal Law No. 31-FZ “On mobilisation training and mobilisation in the Russian Federation” dated 26 February 1997 ("Federal Law 31") stipulates that expenses on mobilisation works must be financed by the state and the companies’ losses must be covered under the procedure approved by the Russian Government, as companies cannot refuse to perform such work (article 9(2) and article 14(1) of FZ-31).

Yet, article 14(2) of this law contains another position: companies may have imposed on them a part of the expenses on carrying out mobilisation support work, which are not provided for in the state budget, such as expenses on maintaining capacities and facilities that are partially engaged in production for carrying out mobilisation tasks (orders). In any case, the terms of a partial co-financing of mobilisation expenses must be approved by federal or regional authorities.

What to think about and what to do

Given that the relevant legislation has been adopted, it would be prudent for pharmaceutical companies to keep tabs on the special economic measures being approved by the Russian Government, which may directly or indirectly affect the work of such companies. Such measures may result in it being necessary to adjust the plans of production / plans of shipment, which will affect the performance of obligations to third parties (buyers/customers in OEM manufacturing).

To mitigate civil law risks the suppliers / manufacturers of medicines and/or medical items are recommended to amend supply contracts / OEM manufacturing contracts to include a condition that the terms of production / supply may be changed unilaterally, including for the pre-approved requests, if the Russian Government takes the relevant special economic measures. This appears especially relevant for export contracts.

Help from your adviser

[1] Article 4(2)(4) of Federal Law No. 275-FZ “On a state defence order” dated 29 December 2012; article 2(3)(16) of Federal Law No. 31-FZ “On mobilisation training and mobilisation in the Russian Federation” dated 26 February 1997.