The significance of the pharmaceutical sector for any country’s health and wellbeing is obvious. There exists an ever-increasing demand for safe, efficacious, innovative and, most importantly, affordable medicines – a balance that is not easy to achieve and often complicated on account of high research and development costs and intellectual property barriers. The significance of the sector also implies that it is highly regulated, with a multitude of regulators and laws controlling various aspects of the sector, including development, testing, manufacturing, marketing, procurement, patents, data protection and trademarks. The sector is also prone to competition distortions that require specific intervention of the competition authorities.
In India, this task falls to the Competition Commission of India (CCI). Cognisant of its regulatory burden and the distinct and significant nature of the sector, the CCI commissioned a report on the sector in 2010, merely a year after its enforcement powers came into effect,1 and again in 2015. The latter was commissioned to cover the Delhi and National Capital Region specifically, as the CCI had noted:
various issues in the pharmaceutical sector and healthcare delivery systems/services including non-availability of essential medicines, increasing price of drugs, nexus between pharmaceutical companies and pharmacists, nexus between pharmacists and doctors, nexus between doctors and pathological laboratories, nexus between doctors and pharmaceutical companies, and nexus between hospitals and insurance companies etc.2
The results of the study are not yet available and it remains to be seen how the CCI views any distortions that may be identified, and how it conditions enforcement in view of the results.
The article seeks to provide a brief overview of the actual enforcement by the CCI in the pharmaceutical sector as well as expected trends. Where necessary, due reference has been made to the approach adopted by the first appellate authority created under the Act – the Competition Appellate Tribunal.
Current enforcement trends
Unlike its counterparts in other jurisdictions where the primary focus of the competition regulators in the pharmaceutical sector has been centred around the conduct of patent holders with regard to the manufacturers of generic drugs,3 the CCI has been presented with complaints targeting the anticompetitive conduct in the distribution channel for pharmaceutical products. This is accompanied with assessment of mergers and acquisitions in the pharmaceutical sector.
The All India Chemists and Druggists Association
The primary issue before the CCI was the extent to which the association of the distributors of the drug, the All India Chemists and Druggists Association (AIOCD), directly and indirectly, through its state and district affiliates in every state across the country, controls the distribution channels. The AIOCD was found to be exercising absolute control over the distribution of drugs by entering into memoranda of understanding to implement the following conduct:
- making the appointment of a stockist or distributor by a pharmaceutical company subject to a no-objection certificate being obtained from the state associations;
- making the launch of new drugs by a pharmaceutical company subject to payment of prescribed charges for the purpose of publication of the product information in a Product Information Service bulletin;
- fixing of trade margins for distributors and retailers in the pharmaceutical sector by way of an agreement between pharmaceutical companies and trade associations; and
- boycotting pharmaceutical companies and distributors for non-compliance with any of the aforementioned.
Since 2012, the CCI has come down heavily on such memoranda of understanding, labelling them anticompetitive horizontal conduct.4 Since then, the CCI has imposed penalties on various state chemists and druggists associations5 for violation of section 3(3) of the Act by carrying on practices that fall within the ambit of section 3(3)(a) and section 3(3)(b) of the Act. The CCI’s enforcement has not remained limited to the associations, and on some occasions penalties have also been imposed on pharmaceutical companies6 for entering into anticompetitive agreements or understandings with AIOCD or its affiliates in contravention of section 3(1) of the Act.7 While recognising that the conduct of the pharmaceutical companies is on account of the diktats issued by AICOD and its affiliates, that by itself, according to the CCI ‘cannot absolve it (pharmaceutical companies) from liability under the Act for its anticompetitive arrangement/understanding/coordination’8 and the influence, if any, ought to have been reported by the pharmaceutical companies to the CCI.
Despite the fact that penalties have been imposed in over 12 cases since, and a public notice that was issued by the CCI in 2014 regarding anticompetitive practices,9 such practices still continue unabated in the market.
In 2015, the CCI imposed a penalty on GlaxoSmithKline and Sanofi for bid rigging in relation to a tender issued by the Ministry of Health and Family Welfare for the purchase of a meningitis vaccine that pilgrims wishing to go on the annual pilgrimage of Hajj are required to have.10 However, the Appellate Tribunal set aside the order holding that there was no cogent evidence to prove the bids had been rigged.11
Merger control in the pharmaceutical sector
While the enforcement on the behavioural side remains largely limited to addressing the distortions visible in the distribution channel, insofar as the pharmaceutical sector remains driven by mergers and acquisitions, the CCI has had a chance to deal with over 25 combinations while enforcing its merger control powers under sections 5 and 6 of the Act.
Much like its counterparts in other jurisdictions, the CCI has defined the relevant market according to the AIOCD system of classification,12 which is based on the Anatomical Therapeutic Chemical classification. The CCI has recognised that:
the molecule level would be most appropriate for defining relevant markets on the basis of substitutability. Alternatively, pharmaceutical drugs falling within a therapeutic group may also be considered as constituting a potential relevant market. However, in this regard it is noted that the pharmaceutical drugs within a group may not be substitutable because of differences in the intended use, mechanism of action of the underlying molecule, mode of administration, contra-indications, side effects etc…..Accordingly, it is appropriate to define the relevant product market at the molecule level, i.e., medicines/formulations based on the same API may be considered to constitute a separate relevant product market.13
The sector also had the distinction of the being the first in which the CCI approved a combination with modifications – directing the parties to divest certain products. The merger between Sun Pharmaceuticals and Ranbaxy Laboratories was the first merger in which a detailed investigation was conducted by the CCI. After defining the relevant market at the molecular level, the CCI conducted an assessment primarily based on the market shares of the parties, the presence and strength of competitors, and in certain cases, the role of the National Pharmaceutical Pricing Authority – which has the power to fix the ceiling price for certain drugs declared by notification to be essential. The CCI ultimately directed divestment of seven drugs14 and approved the merger subject to the divestment. The order, while providing sufficient details regarding the assessment in each market, was silent on how the divested assets were indentified.15
The remaining combinations sailed through, but a few presented the Commission with the opportunity to state its position on non-compete clauses. In Mylan-Strides, the CCI objected to the inclusion of a non-compete clause of six years and approved the combination after a reduction of the period to four years.16 Similarly, the Hospira-Orchid deal necessitated the reduction of the non-compete from eight to four years.17 The CCI also set out the yardstick for reasonableness in respect of scope of the clause in terms of the business, geographical areas and persons subject to such restraint.
The CCI was again faced with the assessment of non-compete covenants in the combination case of Torrent and Elder Pharmaceuticals. The non-compete obligations in this case prohibited the parties to the combination from engaging in specified business activities for periods of three years and five years, thereby attracting both duration and scope concerns. However, the combination was duly approved on suitable modifications, which included reduction of duration from five to four years.18 In contrast to the duration of non-compete clauses in pharmaceutical cases, the CCI restricted the permissible duration to three years in relation to MacRitchie and Advent’s investment in Crompton Greaves Consumer Electricals.19
These decisions appear to indicate the general acceptance of a duration of four years for non-compete clauses in the pharmaceutical sector; while in MacRitchie-Advent, the CCI required it to be limited to three years. While what amounts to a ‘reasonable’ ancillary restriction can be inferred to mean what is reasonably necessary to achieve the legitimate objective of implementing the transaction, this may differ depending on the sector and facts surrounding the transaction.
Expected enforcement trends
An overview of experiences in other jurisdictions would suggest that the most common concern that arises in the pharmaceutical sector is the degree and extent of competition between the generic manufacturers and the originator companies. The never-ending challenge in the sector arises from the necessity of ensuring that while generic entry continues, originator companies are adequately incentivised to invest in the development of new drugs.
The most common concerns that arise on account of the interplay between the originator and the generic manufacturer include:
- unilateral conduct of the originator company, which includes:
- attempts to evergreen patents and file multiple patent applications;
- resorting to legal processes, including but not limited to infringement actions, against the generic manufacturers;
- life-cycle strategies for second generation products;
- representations to authorities to influence the regulatory approval pathway for generic drugs; and
- raising concerns over the quality, safety and efficacy of the generic drugs; and
- reverse settlement (or ‘pay-for-delay’) agreements between originator and generic, resulting in the delay of generic entry.
The European Commission has, in its Pharmaceutical Sector Inquiry Report of 2009, noted these concerns and stressed addressing these not just through the enforcement mechanism of the Commission but also other regulators.20
The CCI’s likely approach
The challenge for the CCI would be to identify where the originator companies start employing seemingly legal conduct to strategically deny market access. Denigration of generics and influencing the regulatory pathway are specifically intricate in this regard and pose a challenge before the CCI, creating the need for a more nuanced understanding of the sector.
The other contentious issue is likely to be reverse payment settlements, which have created a storm in the recent past, and continue to test the legal standards that should be adopted, particularly in the United States.21 On the other hand, the General Court in the European Union found such agreements to have restricted competition by object in violation of article 101 of the EC Treaty.22 The divisive opinion of the two jurisdictions makes the approach the CCI may adopt more interesting. A plain reading of the Act would suggest that such agreements are likely to fall within the scope of section 3(3) of the Act and, hence, presumptively illegal, making the position in India identical to the European Union. There has been some speculation that the CCI has directed investigation into reverse payment settlements,23 however, the CCI has not given any confirmation of the same.
The jurisdiction question
Prior to exercising any powers, however, the CCI may be faced with the jurisdiction question. The existence of multiple regulators including but not limited to the authorities under the Patents Act, 1970, implies that for the CCI to take cognisance of matters in the pharmaceutical sector, it is likely to face jurisdictional challenges with the originator companies arguing that the exercise of their patent rights cannot be the subject matter of jurisdiction before the CCI. This was seen in respect of Standard Essential Patents as well, however the Delhi High Court has, for the time being, held in favour of the CCI.24 Notably, the CCI itself has not shied from exercising jurisdiction over allegedly anticompetitive conduct arising out of the exercise of intellectual property rights.25
We can assume that the CCI will continue to focus on the pharmaceutical sector and view with seriousness any distortions it perceives as being a result of anticompetitive conduct, particularly given its leanings towards consumer protection, thereby ensuring better access to safe and innovative medicines at affordable prices. We are, therefore, likely to see a number of enforcement actions in this area very soon.
- The Centre for Trade and Development prepared a report titled ‘Competition Law and Indian Pharmaceutical Industry’ in 2010.
- Invitation for Expression of Interest (EOI) for conducting Baseline Study/Survey in the Pharmaceutical Sector and Healthcare Delivery Systems/Services in Delhi and NCR Region, 17 September 2015. Available at: http://cci.gov.in/sites/default/files/whats_newdocument/Website%20Notice_Final_17.09.15.pdf?download=1.
- This includes assessment of, inter alia, competition assessment of pay-for-delay agreements and related patent strategies. See, generally, FTC v Actavis, 133 S. Ct. 2233 (2013), and Lundbeck v Commission, Case T-472/13 Judgment dated 8 September 2016.
- Varca Druggist & Chemist & Ors v Chemists and Druggists Association, Goa, MRTP C-127/2009/DGIR4/28, order dated 11 June 2012.
- See generally, Suo moto Case No. 02 of 2012 In Re: Bengal Chemist and Druggist Association order dated 11 March 2014; M/s Arora Medical Hall, Ferozepur v Chemists & Druggists Association, Ferozepur & Ors, Case No. 60/2012, order dated 5 February 2014; M/s Peeveear Medical Agencies, Kerala v All India Organization of Chemists and Druggists and Ors Case No. 30/2011, order dated 9 December 2013; M/s Sandhya Drug Agency v Assam Drug Dealers Association and Ors Case No. 41/2011, order dated 9 December 2013.
- See generally, Mr P K Krishnan Proprietor, Vinayaka Pharma v Mr Paul Madavana, Divisional Sales Manager, M/s Alkem Laboratories Limited & Others Case No. 28/2014 order dated 1 December 2015 (penalty was imposed on Alkem Laboratories for refusal to appoint the informant as a wholesaler on account of no NOC); M/s Maruti & Company v Karnataka Chemists & Druggists Association & Others, Case No. 71/2013 order dated 28 July 2016 (penalty was imposed on Lupin Ltd for denying supply of medicines to the informant for want of NOC).
- As per the CCI, section 3(1) of the Act is an umbrella clause that captures any agreement not horizontal or vertical in nature, ie, agreement not entered into with competitors or players in the vertical chain, See Vinayaka Pharma v Div Sales Manager, Alkem, Case No. 28/2014 order dated 1 December 2015, paragraphs 7.22-7.26.
- Ibid, at paragraph 7.26 and at paragraph 5.37, respectively.
- Public Notice regarding anticompetitive practices in the Pharma Sector dated 30 January 2014 (now removed from the Commission’s website).
- M/s Bio-Med Private Limited v Union of India & others, Case No. 26/2013 order dated 4 July 2016.
- GlaxoSmithKline Pharmaceutical Limited v CCI and Others, Appeal No. 85/2015 order dated 8 November 2016.
- Notice given by Torrent Pharmaceuticals Limited and Elder Pharmaceuticals Limited, C-2014/01/148 order dated 26 March 2014.
- Notice given by Sun Pharmaceutical Industries Limited and Ranbaxy Laboratories Limited, C-2014/05/170, order dated 5 December 2014.
- While Sun Pharma was required to divest one product, Ranbaxy was directed to divest six products.
- The CCI in its second order directing divestment identified the procedure adopted to identify the divested assets. See notice given by Holcim Limited; and Lafarge SA; C-2014/07/190, order dated 30 March 2015.
- Notice given by Mylan Inc, Combination Registration No. C-2013/04/116, order dated 20 June 2013.
- Combination Registration No. C-2012/09/79, order dated 21 December 2012.
- Notice given by Torrent Pharmaceuticals Limited and Elder Pharmaceuticals Limited, C-2014/01/148 order dated 26 March 2014.
- Notice given by Advent International Corporation and MacRitchie Investment Pte Limited, Combination Registration No. C-2015/05/270, order dated 12 June 2015.
- European Commission, Pharmaceutical Sector Inquiry Report, 8 July 2009.
- While the US Supreme Court held that cannot be regarded as per se illegal and the effect on the market would have to be proved in Federal Trade Commission v Actavis Inc, the lower courts are still struggling with applying the Actavis decision in practice.
- Lundbeck v Commission Case T-472/13 Judgment dated 8 September 2016.
- See generally: ‘CCI to Scan Drug Patent Settlements’, LiveMint, 3 August 2014, www.livemint.com/Companies/RVVDhRh7oTfpqlIphkb6jM/CCI-to-scan-drug-patent-settlements.html; India Enters ‘Pay-for-Delay’ Fray: CCI Investigating Pharmaceutical Patent Settlements, WSGR Alert, 12 August 2014. Available at: www.wsgr.com/WSGR/Display.aspx?SectionName=publications/PDFSearch/wsgralert-CCI.htm.
- Telefonaktiebolaget LM Ericsson (Publ) v Competition Commission Of India and Another, WP(C) 464/2014 order dated 30 March 2016. The matter is currently before the Division Bench of the High Court.
- See generally, Bull Machines Pvt Ltd v JCB India Ltd & Ors, Case No. 105/2013, order, under section 26(1), dated 11 March 2014; InPhase Power Technologies Limited v ABB India Limited, Case No. 12 of 2016, order dated 9 June 2016; Micromax Informatics Limited v Telefonaktiebolaget LM Ericsson (Publ), Case No. 50/2013 order dated 12 November 2013.
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