The pharmaceutical industry deserves special attention from competition watchdogs to ensure the availability of affordable medicines to all in the interest of public health. The Indian pharmaceutical market is characterized by a high number of branded generics, low R & D, increasing competition from MNCs and a high number of combinations to survive increasingly hostile market conditions. Branded generics indicate identification on the basis of a product name which differentiates a drug otherwise ideally identical in strength, safety, efficacy, dose, administration method and intended use. This market of branded generics only acts to the detriment of the consumers who have to pay higher prices to cover the promotion expenditure of firms trying to differentiate their products. Such consumer gains have been proved empirically[1]. Practices of Indian physicians of prescribing brand names rather than the molecular name of the drug are not standard across the world. Physicians in US prescribe the molecular name of the drug which is facilitated by insurance companies footing the cost of the prescribed molecular name of the drug which is the lowest priced in the market. The development of a wholly generics market in the US has been accelerated by the extent of health insurance coverage of its citizens, insurance companies would refrain from paying higher costs for the same generic drug to the insured, facilitating efficient price discovery. Insurance companies would also have knowledge of general prescription practices, and collusion between firms and physicians could be prevented. However, in India, medical insurance penetration across the country remains dismal in comparison to world average and expenditure on medicines rarely insured[2]. However, these are policy questions focusing on the need for greater development of the health and insurance sector in the country beyond the scope of this blog. This blog focuses on the promotion of the generic drug Industry in India, presently differentiated on the basis of their brand name. It seeks to highlight some methods adopted by pharmaceutical manufacturers to prevent the entry of these generics in market which have not been adequately addressed by the Competition Commission of India and require reform.
Anti-competitive conduct through agreements
The agreements entered into by pharmaceutical firms, both horizontal and vertical are often anti-competitive in nature.
Narrow definition of a market by CCI in the case of combinations
It has been a common trend that large pharmaceutical companies which enter into merger transactions do so at a time when their patents are about to expire in an attempt to maintain their market share. If we are to determine the consequences of a merger on a market, it is necessary for us to consider the scope of the definition of the market of the product in question. The Indian pharmaceutical market is characterized by both intra and inter-molecular competition. Change in price of a drug would not necessarily make a consumer buy another variant of the same substance in the absence of prescriptions stating the molecular name. In the case of unavailability/unaffordability of the prescribed medicine, retailers often suggest substitutes which may not consist of the same molecular structure but would almost result to the same desired result. In the Sun-Ranbaxy merger deal, the parties were directed to abstain/divest from the production of six molecules to reduce the combined market power of the firms in the production of the same component. In analyzing the effects of the merger, CCI measured the effects on competition in the same molecular producing industry rather than across all effectively substitutable products. It is suggested that the effects of mergers on intra-molecular competition also needs to be addressed and that markets cannot be conservatively defined.
Inadequate regulation of vertical agreements involving pharmaceutical firms
Further, the presence of both forms of competition (intra and inter-molecular) does not necessarily entail that the Indian marketplace is healthy and competitive. Physicians do not always prescribe the cheapest and the most effective drugs to avail financial rewards offered by pharmaceutical manufacturing firms issued in many forms. It is not correct to say that all forms of persuasion is illegitimate, manufacturing firms are entitled to advertise their products and demonstrate their efficacy. However, in the case of such a market where there is high information asymmetry, the possibility of abuse of such power which is not in the interests of the consumers cannot be eliminated. Some contend that there is no free market in the case of medicinal drugs as the pricing is determined on the capability of the pharmaceutical firms to market their products to physicians and not the end consumers. The CCI through its decisions has established that associations of wholesalers and retailers of drugs are not entitled to determine the sales price of drugs through prohibition of grants of discounts to final consumers by retailers who are members of these associations[3] or restrict supply/distribution through the imposition of additional requirements imposed in the form of issue of NOC etc to become distributors in an area[4].
Further, it has been notified that the following practices of associations of chemists, wholesellers and manufacturers would be termed anti-competitive[5]:
Issuance of No Objection Certificate or letter of consent by such associations for opening chemist shop/being appointed stockists/ distributor/whole-seller.
Compulsory payment of PIS charges by pharmaceutical firms/manufacturers to associations for release of new drug/new formulation.
Fixation of trade margins at different levels of sale of drugs/medicines.
Issuance of instructions to chemists/ druggists/shops/stockists/whole-sellers/ manufacturers restricting discounts on sale of drugs in retail or wholesale.
Issuance of boycott calls by the associations to their members against any enterprise for not following the instructions of associations.
In the above circular and the decisions of the CCI involving trade associations of retailers of pharmaceuticals, the possibility of agreements between trade associations of producers and these retail trade associations to keep trade margins high was not investigated. Horizontal agreements and combinations have been heavily regulated, even invalidated by CCI to the exclusion of these vertical agreements between the manufacturers and physicians/ distributors in the supply chain. As these pharmaceutical retail companies themselves hold immense bargaining power, there was no reason not to investigate their agreements with the retail trade associations.
What is the extent of the existence of these anti-competitive practices involving manufacturers? A CUTS study reveals that 32.2% of the firms surveyed in the study claimed knowledge of widespread collusive practices in the supply chain[6]. Low inelasticity of demand to irrational (expensive) drug prescriptions due to information asymmetry is to blame. Till the development of a generic drug industry characterized by the molecular name, a sizeable price difference among generics is bound to continue. As the prices would include the cost of ‘promotion’, firms would continue to be motivated to enter into such anti-competitive agreements which would protect their market share. It would be long before price differentiation across generics comes down in India, and thus, the role of the CCI in ensuring the absence of anti-competitive conduct by pharmaceutical firms becomes of vital importance.
[2] http://www.dnaindia.com/health/report-health-insurance-in-india-still-remains-an-untapped-market-1891509 and http://timesofindia.indiatimes.com/business/india-business/Insurance-penetration-in-India-at-3-9-percent-below-world-average/articleshow/46518607.cms
[3] Bengal Chemist and Druggist Association case, 2014CompLR221(CCI), it was held that retailers cannot be mandated to sell drugs only at MRP. Any concerted action to fix a uniform trade margin, regardless of its quantum, would be illegal.
[4] M/s Arora Medical Hall, Ferozepur v. Chemists & Druggists Association, Ferozepur (CDAF), 2014CompLR126(CCI), it was held that no distributor could be imposed with the obligation to get a NOC from a drug association through payment of money for its appointment as a stockist in the area.
[5] 3 February 2014, Press Information Bureau, Government of India, Ministry of Corporate Affairs vide press release accessible at http://pib.nic.in/newsite/PrintRelease.aspx?relid=102938
[6] Options for using competition law/policy tools in dealing with anti-competitive practices in the pharmaceutical industry and the health delivery system, CUTS centre for competition, investment & economic regulation, report prepared for WHO and Ministry of Health and Family Welfare, Government of India available at http://www.cuts-ccier.org/pdf/project-report08sep06.pdf.
ADDITIONAL REFERENCES:
Competition Impediments in the Pharmaceutical Sector in India, Natasha Nayak, research study supported by the Ministry of Corporate affairs available at http://circ.in/pdf/Pharmaceuticals_Sector.pdf
Competition Law and Indian Pharmaceutical Industry, Centre for Trade and Development (CENTAD), study commissioned by the CCI accessible at http://www.cci.gov.in/sites/default/files/PharmInd230611_0.pdf
This post has been written by Pavishka Mittal who is a third year student at the West Bengal National University of Juridical Sciences.
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