Competition Assessment of the Indian Pharmaceuticals Sector

Competition Assessment of the Indian Pharmaceuticals Sector Aditya Bhattacharjea FiyanshuSindhwani Centre for Development Economics, Delhi School of Economics

Structure of the report • Introduction • Importance of drug availability and pricing in India • Special features of the market for medicines • Evolution of the policy regime • Empirical analysis of market structure • Competition law • Drug price control • Foreign direct investment—takeovers • TRIPS and patent protection • Public production, procurement and distribution • Competition assessment checklist

Evolution of policy regime • 1970: Patents Act and DPCO • 1973 FERA • Restrictive import policy • MRTP Act • Progressive relaxation of all the above from 1990s

Analysis of Market Structure:Aggregate level • There are over 10,000 pharma manufacturing firms in India • For pharma firms in Prowess, Price-cost margin, CR4 and HHI all show decline since around 2004. • Sharp decrease in ‘entry’ of new firms, significant increase in ‘exit’  large decrease in net entry. Possible reasons: • High interest rates • Inability to comply with GMP • Expiry of tax concessions given in HP • Aggregate import penetration has risen

Structure-conduct-performance analysis Carried out for 610 pharma firms in Prowess, 1990-2010. Results contrary to standard SCP models: • Coefficients for market share weakly significant, MS-squared insignificant  weak relationship between market share and profitability • Log (assets) is negative and significantlarger firms have lower PCM • Coefficients for contemporaneous R&D intensity and advertising intensity are negative and significant.But their lagged effect is positive  results of such expenditures are realised with a lag • Dummies for TRIPS periods are positive and significant

Analysis of market structure:Individual drugs • However, actual competition takes place at the level of therapeutic segments or individual drugs. • Calculations for 9 specific dosages of individual drugs show much higher concentration, increasing between 2005 and 2010 for some of them (CR4 > 90% for 500mg calcium tablets and 40mg insulin injections). • Wide variation in prices of different brands of the same drug (e.g. Diclofenac); coexistance of high prices with high market shares. • Need to look at firms’ practices. Branding of generics allows differentiation, marketing with high distributor margins and/or influencing doctors’ prescription behaviour. • But branding also serves as a signal of quality in the absence of effective quality control under the Drugs and Cosmetics Act

Competition law • Ineffectiveness of MRTP Act: limited resources, only ‘cease and desist’ orders • Review of all pharma-related cases decided till now under Competition Act • Five cases of regional chemists’ & druggists’ associations following AIOCD guidelines in forcing manufacturers to • limit number of stockists in each territory • obtain NOC from association for appointing new stockists • restrict bidders for government procurement • fix trade margins Products of manufacturers who fail to comply were boycotted in some cases. In some cases, associations also prevented chemists from giving discounts to consumers • These practices have been carried out nationwide for over 30 years • Fine based on association’s turnover grossly inadequate • Fixation of trade margins by NPPA: RPM by govt mandate?

Merger cases • 8 pharma cases decided since June 2011 when relevant sections of the Competition Act were brought into force; all were approved. • The ultimate control over the parties in the combination remains the same before and after the combination (intra-group reorganization). • Companies not engaged in similar businesses and no vertical integration (conglomerate merger). • Absence of one of the parties in India in the business of the other party • Companies mainly export oriented • Significant presence of other players (no AAEC) • CCI modified non-compete agreement in 2 deals • But we have identified several mergers that were not screened because the combined assets or turnovers of the firms were below the thresholds specified in the Act, or the assets/turnover of the target was below the threshold specified by the 2011 notification. Case for reviewing thresholds for this sector? 2012 Competition Act (Amendment) Bill.

Trade Policy • Coverage of import licensing brought down from 1980s, tariffs from 1990s – for most drugs, now 10% basic duty + 16% CVD + special CVD 4% + educational cess 3% • SPSS restrictions, incl registration and licensing of foreign manufacturing premises in some cases. • Antidumping: India now the world’s biggest (ab)user; non-market economy treatment of China (e.g. AD duty on metronidazole since 2000, paracetamol since 2002).

Drug Price Control • Review of debate over transition from cost-based pricing of 74 drugs under DPCO 1995 to market-based formula (average price of all brands with >1% market share) for all 348 NLEM drugs in NPPP-2012. • Weaknesses in arguments on both sides • Price controls are usually imposed for natural monopolies where the number of products and producers is few and competition infeasible. • Possibility that controlled prices can be used as focal prices for facilitating oligopolistic coordination – parallel with cement case? • Even the controlled prices can be much higher than the ‘competitive’ price discovered by tenders for bulk government procurement for schemes like TNMSC and Jan Aushudhi, even after allowing for additional trade margins. Example: Diclofenac • In 2013, the new DPCO was passed which seems to have reduced the prices of drugs covered in the NLEM. However, there are problems with this also as: • Many wholesalers and distributors found that their margins were eroded and stopped distributing some of these drugs • Some firms have started to introduce new variants (such as ‘controlled-release’) which they claim as new drugs which are not subject to the price cap.

Foreign Direct Investment and Takeovers • Review of Maira Committee Report • Screening by CCI (with extra expertise on health issues) preferable to FIPB. • Case for reducing merger review thresholds – Competition (Amendment) Bill 2012. • Review of debate on role of MNCs • Market share of foreign firms has not gone up post-TRIPS • But they are increasingly supplying the market through imports, esp of high priced patented drugs and also generics • Effects of takeover on R&D inconclusive, but MNCs overall have much lower R&D intensity • Too early to detect impact of 2008-10 foreign takeovers?

IPR Issues – Impact of TRIPS • Some evidence that growth rate of R&D expenditure and the number of process and product patents filed by leading Indian firms declined after 2005. • R&D for drugs to treat diseases of greatest public health importance (malaria, TB) neglected in favour of ‘lifestyle’ diseases by both Indian and foreign firms. • Encouraging signs of India using TRIPS flexibilities: • Grant of compulsory licenses for Bayer’s Nexavar. 3 more cancer drugs being considered. • Use of 3(d) to deny evergreening patent for minor improvements in Novartis’s Glivec • Pre-grant opposition  refusal of patent to Astra Zeneca’s Iressa • Post-grant revocation of patent for Roche’s Pegasys and Pfizer’s Sutent

Public production and procurement • In 2008, Health Ministry closed down 3 leading PSUs on grounds of not complying with GMPs. Reopened in 2010 but production still far below earlier levels govt has to procure vaccines from private producers at much higher prices. • Government procurement rules to ensure GMPs have been struck down by High Courts as excluding competition without adequate justification. • Need to provide assistance to smaller units to comply with GMP and to enforce quality standards under Drugs and Cosmetics Act. This would increase competition for bidding and also weaken industry’s argument against debranding on grounds of quality assurance.

Competition Assessment Checklist and Prescriptions • P1 (Fostering Competitive Neutrality) : Closure of 3 PSU’s on grounds of GMP  Reverse Discrimination. Prescription: Revival package with management overhaul, but subject to competitive neutrality principles. • P2 (Procedures should be rule bound, transparent, fair and non-discriminatory) : • GMP eligibility conditions rejected by High Courts in drug procurement Apply GMPs on nondiscriminatory basis, but provide concessional credit to MSMEs. • Antidumping duties on imports: support tightening of AD rules in WTO; take objections by user industries more seriously. • Tariff preferences extended to (some) SAFTA members: Probably not serious enough to justify changes • Acquisitions of Indian firms by the FIPB route: Reroute through CCI with lower notification thresholds and inputs of public health expertise. • P3 (Third party access to essential facilities on reasonable fair terms will ensure effective competition and therefore, should be provided in law): Use TRIPS flexibilities more aggressively and resist pressures to impose ‘TRIPS-plus’ conditionalities

Competition Assessment Checklist… • P4 (Ensure free and fair market process): Move towards debranding after ensuring alternative quality control mechanisms; expose pharma companies’ unethical attempts to influence prescribing behaviour • P5 (Effective Control of anticompetitive conduct through competition rules) : • Anticompetitive practices by chemists’ associations • Exclusive Dealing Arrangements • RPM More suomoto inquiries; impose penalties based on chemists’ turnover, not associations’; avoid fixation of trade margins in price control • P6 (Notification and public justification of deviations from principles of competition policy) • Antidumping and SPSS • Review of acquisition proposals through FIPB route • GMP enforcement and exemptions Give clear public justification for such deviations from competition principles

THANK YOU! • Comments welcome: aditya@econdse.org

Analysis of Market Structure

Drug Price Control

Competition Assessment of the Indian Pharmaceuticals Sector