Against abuse of pharma FDI

Written by Pradeep S Mehta | Updated: Oct 31 2011, 07:07am hrs
The debate on pharma takeovers has been hitting headlines, with the Prime Minister too getting involved in it. The worry is whether the takeovers will lead to an increase in prices and affect the affordability of medicines for the aam aadmi. The high level committee headed by Arun Maira has rightly prescribed that CCI is the body to keep a watch on brownfield investments in the pharma sector, in order to avoid any dominance and other anticompetitive behaviour, but that the FDI policy should maintain status quo.

Structural remedy post-merger being difficult, it is easier to deal with mergers ex ante. The CCI is empowered to do an ex ante review of all merger proposals subject to satisfying financial thresholds and direct modifications. The problem is the high financial thresholds, but it is not a good idea to suggest lower financial thresholds for a particular sector, which may end up in a quagmire. Secondly, to tweak the FDI policy just to deal with the pharma sector is not a smart move either as it will have a chilling effect on foreign investments in other sectors too. As it is, we are suffering from a policy paralysis for various reasons.

The hugely successful Indian pharma industry has witnessed much consolidation in recent years. Most of these acquisitions are tactical, largely to capture the growing Indian firms with large domestic and foreign markets. Many generics-producing firms have been acquired in the process. Such consolidation is also witnessed due to a change in the patent regime that allows for product patents since 2005, albeit a host of concerns have been raised due to the potential adverse effects on generic competition in the longer term.

Competition authorities the world over grant conditional approvals to mergers based on undertakings by the relevant firms where they commit to taking action to curb distortions in competition. Such a power also exists in our competition law. The applicants may commit, for example, to sell part of the combined business or to license technology to another market player or also undertake to not stop production of low-profit lines.

Competition authorities in the US and the EU normally make assessments of likely price rises and order appropriate remedies. In the US, the Federal Trade Commission (FTC) has substantial expertise in the pharma industry. Unlike the Indian system, the FTC brings civil actions in courts after its reviews of mergers. Large pharma transactions such as the Pfizer-Wyeth and the Merck-Schering Plough mega mergers have been carefully scrutinised. In such cases, the FTC often requires selective divestitures, after examining overlaps where the firms have directly competing drugs or products at an advanced stage of clinical development. FTCs focus is that mergers (a) do not raise current and future prices, and (b) do not reduce the likelihood of, or slow down the introduction of new drugs. Since 1990, the FTC has challenged at least 20 mergers involving pharma firms. Many of these were resolved through a consent decree and/or the abandonment of the transaction before the FTC filed a suit.

In the merger of Pfizer Inc and Pharmacia Corp (2003), it was alleged that the relevant market was R&D and the manufacture and sale of drugs for the treatment of erectile dysfunction, where Pfizer had Viagra among others and Pharmacia had two drugs in the early stages of clinical development. The remedies involved divestiture in nine separate product markets to different third parties. In the merger of Glaxo Wellcome and Smith Kline Beecham (2001), the FTC ordered divestiture in six significant product markets. In addition to the three markets where competitive overlaps existed due to existing agreements with other R&D firms, the consent order addressed competition concerns in several other markets.

In one of the cases of abuse of dominance through excessive pricing of patented medicines, the South African Competition Commission forced GSK, which was the worlds largest producer of AIDS treatments holding a 50% share of the market, to issue licences on two major antiretroviral (ARV) drugs to four generic producers. In another similar case, Boehringer-Ingelheim was forced to license nevarapinea major ARV to prevent mother-to-child transmission of HIV infectionto three producers. This led to licences being issued by drug companies to other producers at a low royalty rate of 5%. These and other similar cases could well turn out to be trendsetters for the Indian pharma sector, to follow a nuanced policy on addressing potentially unfair and exploitative practices adopted by pharma companies.

In a general way, there are several ways to deal with anticompetitive mergers. First, the authority may decide that there is no cure except to block the merger in its entirety. Second, the authority can approve the proposal with modifications, which could include divestment of some asset or business line, or require access to essential inputs/facilities. Third, the authority can require partial divestiture incorporating various aspects of a business, which could also facilitate the entry or expansion of replacement competition. Fourth, the authority can require contractual arrangements such as the licensing of IP or a supply arrangement and other behavioural relief such as a non-discrimination provision.

Pharma markets in the West are large but they are not growing as fast as the markets of emerging economies like China and India. It is expected that the current trend of acquisitions in India will stay for long. The CCI, in particular, needs to be on its toes all the time. Since the cry of regulating takeovers or shutting the stable doors after the horses have bolted makes for a tricky situation, the CCI can exercise its power under Section 28 of the Competition Act, 2002, and order a division of enterprise or demerger to ensure that the merged enterprise does not abuse its dominant position. One big advantage here is that no financial thresholds apply for this action. In theory, the CCI can also order a demerger of two grocery stores in a village, if the merged entity is indulging in anticompetitive practices following a merger. The CCI will need to pull up its socks to review the post-merger trends of some of the big fat acquisitions in the pharma sector to unravel the actual market trends and establish the presence of anticompetitive concerns in the market.

Besides the structural, remedial measures by the competition authority, other measures at a more macro level are required to achieve universal access to affordable medicines which is a critical concern. In this situation, affordability of medicines can be ensured through proper usage of compulsory licensing by the government. A proper pricing policy should be devised, considering the public interest. More drugs should be brought under price regulation. Bodies like the National Pharmaceutical Pricing Authority (NPPA) should be empowered to have jurisdiction over the pricing of new patented medicines. Government should also strengthen the pharma PSUs so that they are able to reach out to the people with affordable drugs, making use of the public health facilities.

The Arun Maira Committee inter alia recommends that the institutions involved in competition management Competition Act, CCI and COMPAT should be strengthened. This list is incomplete because the term institutions covers a whole gamut of stakeholders: government agencies, business, civil society, research organisations, media etc. Now that we are preparing a National Competition Policy, we will need a huge effort to carry all our institutions together to appreciate the need for competition reforms, so that we can add to our economic growth.

The author is Secretary General, CUTS International.

Madhav Dar & Vikas Batham of CUTS contributed to this article