Appellate tribunal upholds pact between drug traders, makers

Written by Gireesh Chandra Prasad | Gireesh Chandra Prasad | Neha Pal | New Delhi | Updated: Dec 19 2009, 05:15am hrs
The Competition Commissions appellate tribunal (CAT) has upheld the controversial agreement between drug makers and chemists that fixed traders margins on medicines and forced pharmaceutical companies to seek the apex trade bodys consent on hiring new wholesale traders. Sections of the drug industry and many independent observers have alleged that the agreement is patently anti-competitive and warrants regulatory intervention by the competition regulator.

The tribunal, chaired by former Supreme Court judge Arijit Pasayat, had ordered on November 24 to close the investigation proceedings against the All India Organisation of Chemists and Druggists (AIOCD), the apex trade body which is party to the agreement.

The deal in September 2003 between AIOCD and producers bodiesIndian Drug Manufacturers Association and the Organisation of Pharmaceutical Producers of Indiahelps the trade association to restrict the entry of new wholesalers and prevent members from undercutting each other on margins.

Amar Lulla, joint managing director, Cipla, told FE that any restrictive trade practice which creates entry barriers and stifles competition is definitely anti-competitive, and this agreement is of this nature. The tribunal, however, was not convinced that the trade bodys restrictions on companies hiring new wholesalers pre-empted possible competition among wholesalers and prevented a reduction in trade margins and retail drug prices. The case, based on a consumer organisations complaint, was probed by the investigation arm of the erstwhile Monopolies and Restrictive Trade Practices Commission, but was later transferred to CAT.

According to the agreement in 2003, for a company to hire a new stockist, the state association of the trade body has to assess whether there is a substantial jump in the companys sales which would warrant a new stockist in the same region.

The competition law holds such deals anti-competitive and prohibits any agreement relating to supply, production and distribution that causes a sizable adverse effect on competition. Any deal which determines the purchase or sale prices is considered to be anti-competitive. Under the now repealed MRTPC Act, these are classified as restrictive trade practices. However, the tribunals decision seems to be persuaded by the traders argument that the terms of the agreement are backed by sound economics and the governments drug-pricing norms.

According to the understanding between traders and producers, wholesalers receive 10% and retailers 20% of the retail price as commission on all medicines that are free from price controls and account for four-fifths of the retail market. This has no legal backing except for the governments acknowledgement of the privately-decided cap on the margin in some reports.

On the contrary, in the case of the remaining one-fifth of the retail market, where the government fixes the retail price, trade margins of 8% for wholesalers and 16% for retailers are fixed by law. SM Jharwal, chairman, National Pharmaceutical Pricing Authority, a drug pricing regulator, told FE , quoting market research agency ORG-IMS that scheduled drugs, the prices of which are fixed by the government, account for only 20% of the total retail pharmaceutical market.

The tribunal however, made no distinction between the price-controlled category of medicines and the decontrolled segment, apparently because the government has retained a safeguard provision that allows it to fix prices on the control-free segment as well.

The investigation wing argued that because of the restrictions on fresh stockists and the privately-decided trade margin caps on the de-controlled segment, there is a lack of competition among traders, which would have led to reduced commissions and lower retail prices for consumers. An IDMA representative welcomed the order, saying, The agreement was meant to ensure a smooth supply chain. Companies do retain the right to appoint stockists. The trade association only sets the guidelines in the interest of stakeholders.

Vinod Dhall, former member and acting chairman of the Competition Commission of India, told FE that on the face of it, such agreements are anti-competitive. Dhall declined to comment on the case but said, As a general principle under competition law, if enterprises collude to boycott, fix prices or impose conditions of sale, it is presumed to be anti-competitive behaviour.