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Analysis Of Anti-Competitive Practices In The Pharmaceutical And Healthcare Sectors

The COVID-19 pandemic has reiterated the importance of the pharmaceutical and healthcare industries. India is the largest producer of generic drugs in the world.

[1] However, 50-65% of the Indians still do not have access to essential medicines.[2] The pharmaceutical and healthcare industries are plagued with anti-competitive practices which lead to increase in the price of medicines, thereby making them unaffordable for many people. In India, the Competition Act, 2002 (Act)[3] prohibits anti-competitive practices.

The Competition Commission of India (CCI) since its inception has been enforcing the provisions of the Act. It has actively conducted investigations and taken up market studies specific to the anti-competitive practices in the pharmaceutical and healthcare sectors. On this account, this article aims to analyse the anti-competitive practices prevalent in the pharmaceutical and healthcare sectors. Further, it also analyses the interface between intellectual property rights (IPR) and the Act.

Application Of The Act In The Pharmaceutical And Healthcare Industries

The Act was enacted to prevent practices that adversely affected the competition and to promote and sustain competition in markets. Further, the Act aims to protect the interests of consumers and ensure freedom of trade carried on by other participants in the Indian markets.

Section 3 of the Act prohibits anti-competitive agreements. Under the said section, no person or enterprise or association is allowed to enter into any agreement that determines the purchase or sale prices, controls production, supply or the markets, or directly or indirectly indulges in bid-rigging or collusive bidding.[4] However, no such restrictions are placed on the patent holders. Therefore, IPR monopoly is allowed.

Section 4 of the Act prohibits abuse of dominant position. Under this section, no group or enterprise is allowed to abuse its dominant position and impose discriminatory conditions or prices in the purchase or sale of goods and services.[5]

Section 5 of the Act deals with combination regulations wherein only after the approval of the CCI, mergers and acquisitions are successful. This is done in order to check if the combinations are going to hamper competition in the market.[6]

It is important to apply the Act in the pharmaceutical and healthcare industries given the fact that healthcare is one of the basic needs of the people which must be accessible easily. The said industries are not transparent in nature and the blatant information asymmetry between the consumers and the companies operating in these sectors must be curbed.[7]

This often leads to the exploitation of consumers since the main motive of such companies is to reap high profits. Such evil practices of charging high prices can cost the lives of people who cannot afford it. Therefore, in order to maintain competitive markets and preclude consumers from falling prey to anti-competitive practices, enforcing the Act in the pharmaceutical and healthcare sectors is very crucial. Over the years, the CCI has been conducting various studies and investigations with respect to anti-competitive practices undertaken by companies in the pharmaceutical and healthcare sectors to suggest measures for curbing them.

CCI's Healthcare Policy Note

For the first time in the year 2010, CCI realized the need to investigate and study the causes for the increase in the anti-competitive practices prevalent in the pharmaceutical and healthcare industries. The Centre for Trade and Development's (Centad) report on anti-competitive practices in pharmaceutical and healthcare sectors had extensively covered the need for a better regulation of competition in the said sectors.[8]

In October 2018, the CCI released a healthcare policy note called Making Markets Work for Affordable Healthcare (policy note). [9] In the policy note, various stakeholders connected to the pharmaceutical and healthcare industries identified the following anti-competitive issues and recommended solutions to address them:
  1. High prices
    The policy note highlighted the role of the intermediaries in drug price build up. The unreasonable high trade margins have hiked up drug prices. High trade margins are indirect marketing tools used by drug companies. There is a colossal difference in market prices of the same drugs in different states. Further, the drug trade associations control the entire drug distribution system. They are self-regulated and contribute to high margins.

    To solve this issue, public procurement of drugs which will break the long distribution chain was recommended. This will make essential drugs available at affordable prices for the consumers. Further, using online pharmacies was also recommended. Unlike offline pharmacies, online pharmacies do not have a lot of intermediaries, thereby reducing the prices of the medicines. The online pharmacies directly deliver the pharmaceutical products from the manufacturers, thereby giving high discounts.

    Furthermore, in the case of offline pharmacies, consumers do not have much choice while choosing a brand of medicine as owing to information asymmetry, they end up purchasing the medicine brand given by the pharmacist. However, online pharmacies are transparent and show various brands of the same medicines along with their price differences. This enables consumers to make informed choices.

    Further, since 1997, the National Pharmaceutical Pricing Authority (NPPA), the pricing regulator which ensures that the essential drugs are available at affordable prices, has imposed a total penalty of Rs 6,423 crore on pharmaceutical companies selling essential drugs above the ceiling prices.[10] In addition to it, between the financial years of 2016 and 2019, the CCI has imposed a total penalty of Rs 11,939 lakh on pharmaceutical companies indulging in unfair trade practices including excessive pricing of drugs[11]. However, even after imposing such enormous penalties, the prices of drugs do not seem to reduce.
     
  2. Branded generics
    Another issue is with respect to quality perceptions behind proliferation of branded generics. There exists no or very little difference in efficacy and quality between branded and unbranded generics. However, the pharmaceutical market is dominated by the branded generics. The branded generics are expensive. Both the doctors and pharmacists indulge in unfair practices of prescribing branded generics when a cheaper alternative is available. The doctors and the pharmacists gain incentives and high margins by doing so. To solve this issue, it is recommended that the quality of all drugs must be thoroughly checked and inspected. It must also match the statutory standards. This must be done in a transparent manner for consumers to believe that the unbranded drugs are also of good quality.
     
  3. Vertical arrangements
    The next issue identified is with respect to vertical arrangements in healthcare services and lack of transparency. Various diagnostics and procedures done at the hospitals are not transparent. The consumers cannot make informed choices due to information asymmetry. Many hospitals have in-house pharmacies and diagnostic labs where multiple unnecessary services are prescribed for a package. Further, some hospitals force the patients to buy medicines from their pharmacies when the same can be bought outside at a cheaper price. The tests conducted at the diagnostic labs of the hospitals are also more expensive. The recommendation is that there must be a strong regulatory framework to ensure that the hospitals do not restrict its patients with respect to where they want to buy the medicines or do the tests.

Besides the above identified anti-competitive practices in the policy note, there are other practices proven to be anti-competitive which are discussed further.

Anti-Competitive Practices Indulged By Trade Associations

The CCI has been receiving several cases pertaining to the anti-competitive practices in the pharmaceutical and healthcare industries. Some cases were even taken by CCI on suo moto basis. In many instances, it was found that the trade associations were involved in muting the competition.

In the case of M/s Arora Medical Hall, Ferozepur v. Chemists & Druggists Association[12], Ferozepur (CDAF), CDAF made it mandatory for all the new chemists/druggists who wanted to take distributorship for medicines of a company in Ferozepur to get a no objection certificate ("NOC") and letter of credit (LOC) from CDAF by making a payment of Rs. 2100/- per company. The informant was removed from the primary membership of CDAF. Further, CDAF also asked its members to not purchase goods from the informant.

The wholesalers were directed to stop dealings with the retailers who continued to purchase goods from the informant. This violated provisions of section 3 and section 4 of the Act.

The Director General (DG) during the investigation found out that CDAF's mandate of compulsorily requiring the chemists/druggists to take NOC from CDAF and the practice of not granting NOC to certain people resulted in foreclosing of the market for such a person and this ultimately meant that CDAF limited and controlled the supply of drugs and medicines in Ferozepur. The act of CDAF drove out the existing competitors from the market.

The CCI held that the conduct of CDAF is violative of the provisions of section 3(3)(b) read with section 3(1) of the Act as it limits/ controls the supply/ provision of goods/ services in the markets.

The Bengal Chemist and Druggist Association (BCDA) case[13] is a suo moto case taken by the CCI for investigation. BCDA is an association of wholesalers and retail sellers of drugs. It was engaged in directly or indirectly determining the sale price of drugs and controlling the supply of drugs in a concerted manner and in issuing anti-competitive circulars directing the retailers not to give any discount to the consumers. The CCI held that the activities of the BCDA caused restraint of trade, stifled competition and harmed the consumers. It violated section 3(3) of the Act and therefore, a penalty was imposed.

In the case of M/s Sandhya Drug Agency,[14] a complaint was filed against many drug dealers association for anti-competitive practices and abuse of dominant position. The supply of drugs was stopped to the informant due to some political differences between the informant and the trade associations. The drug dealers association was directed to refrain from indulging in such anti-competitive practices which violated section 3 of the Act. It also directed that the practice of issuing NOC appointment of stockists, fixation of trade margins, collection of product information service ("PIS") charges and boycott of products of pharmaceutical companies must be discontinued. A penalty was imposed by the CCI for violating section 3 of the Act.

All the above cases show how the trade associations indulged in anti-competitive practices by not issuing NOC which led to the non-supply of drugs to the retailers.

Further, there have been cases such as the case of Varca Druggists and Chemists & Ors. v. Chemist & Druggist Association, Goa [15] where the trade association laid down the margins for wholesalers and retailers. CCI held that such practices are anti-competitive and are against the interests of consumers.

CCI also ensures that mergers and acquisitions in the pharmaceutical and healthcare sectors do not stifle the competition.

Mergers and Acquisitions

Mergers and acquisitions (M&A) also lead to anti-competitive practices as they have the ability to create monopolies in the market. The merger control is dealt with by CCI. CCI grants its approval to M&A deals only if it is satisfied that the deal will not lead to a monopoly. For instance, initially, CCI raised objections in the merger of Sun Pharmaceuticals and Ranbaxy[16] stating that the merger could be anti-competitive. However, the CCI allowed for the merger with a condition that the companies must divest eight drugs altogether. This had to be done to prevent concentration for the markets of those molecules. Therefore, preventing any combination that could hurt competition in the pharmaceutical and healthcare sectors.

Further, CCI has also dealt with many cases wherein the question of dominance has arisen. Dominant position thwarts competition and violates section 4 of the Act

Dominant Position

Several pharmaceutical and healthcare giants are evidently in dominant position as stated under section 4 of the Act. Although the dominance exerted by major corporations is evident, it becomes difficult to establish the same in cities where there are ample options available to the consumers. In the case of Shri Tarun Patel v. Haria Lakhamshi Govindji Rotary Hospital[17], CCI held that there were other substitutes available, thereby not establishing the said hospital to be in a dominant position.

Further, in the case of Shri Ramakant Kini v. Hiranandani Hospital[18], the complainants argued that the said hospital had contravened section 4 of the Act and denied market access. However, their argument failed before CCI as they could not place on record the evidence to establish the dominance of the said hospital.

However, CCI took a new approach in the case of Vivek Sharma v. Max Super Speciality Hospital[19] after realizing that it is difficult to establish dominant position of the hospital. In the said case, CCI noted that although there are several other super-speciality hospitals in Delhi, Max Super Speciality Hospital is larger than the others in terms of size, resource and research & development (R&D). Therefore, the said hospital was in dominant position. This approach is a deviation from CCI's earlier approaches and has made it easier to establish dominance in the healthcare industry.

Further, CCI, in October 2020, initiated a market study to study deep into the issues identified in the policy note as enumerated before.

CCI's Market Study

On August 27, 2021, a multi-stakeholder workshop called "Competition Issues in the Pharmaceutical Sector in India" was conducted wherein different issues were deliberated.[20] On 18th November, 2021, the report called market study on the pharmaceutical sector in India was released based on the workshop ("market study") [21].

It was observed at multiple instances that the same company had five to six brands for the same formulation of medicine. Further, there was an enormous price difference between brands of a particular generic formulation of different companies. There are variations in prices between brands of the same company. Also, the market leaders sell their drugs at a price higher than the companies with lower market share.

Furthermore, there is a huge difference in prices of branded generics in the private retail market and public procurement. 87% of drugs sold in India are branded generics. Even the doctors prescribe branded generics over generics which are low cost and functionally indifferent. Furthermore, there is a huge difference in the prices of pure generics in public procurement and branded generics in the retail market.

One set of stakeholders contended that the pharmaceutical companies foster higher quality of certain brands and price-quality correlation through their brand promotion measures, however, in reality there is no difference in quality between different branded generics or between unbranded generics of the same molecule. According to them, this perception hampered price competition and allowed them to set high prices and indulge in price discrimination.

However, the other set of stakeholders believed that quality varied across drugs of same molecules. They contended that since safety and efficacy were unobservable, known clinical experience of physicians through their prescription patterns reflect a preference for brands which could be of higher quality. Further, the stakeholders argued that the difference in quality across drugs is due to the non-uniform enforcement of quality standards across states.

It is recommended that the existing quality standards must be uniformly and effectively implemented throughout India. Further, in order to improve the quality expectations of drugs, all drugs across geographies must be tested in a periodic, systematic and scientific manner. It was also recommended that a national digital drugs databank containing formulation wise approved branded/unbranded drugs must be maintained to address the problem of information asymmetry in consumers.

Although it is recommended to have public procurement of drugs owing to low prices, the percentage of sub-standard quality drugs were found to be higher in government distribution outlets[22].

Further, unbranded generics are not available in the private retail market in India owing to the fact that doctors largely prescribe only branded generics which lead to low demand for unbranded generic drugs in the domestic retail market. Therefore, unbranded generics are available only in public health facilities.

Additionally, it was recommended that large scale public information campaigns must be launched to create awareness among the consumers about the efficiency and efficacy of generic drugs. Further, standard-compliant unbranded generic drugs must be available in private retail markets to make them available to the consumers.

A positive aspect brought about by the market study is that the majority of the stakeholders reported that the anti-competitive practices of mandatory NOC and collection of PIS charges no longer exist owing to the impact of several of CCI's orders with respect to the same.

Further, conflicts have always arisen while implementing IPR and the Act simultaneously. While IPR creates patent monopoly, the Act aims to prevent monopolies.

Interface Between IPR And Competition Act In The Pharmaceutical And Healthcare Sectors

On one hand, under the IPR, patents are granted to innovators for their innovations as per the reward policy. This is to encourage more and more innovations and inventions. On the other hand, competition law aims at preventing abuse of dominant powers, monopolistic power and anti-competitive practices. A patent owner can charge above the marginal cost as they hold the patents. This will limit competition to a large extent.

It is important to understand that both IPR and competition laws aim at the welfare of the people. The laws must be implemented in such a way that there is a perfect balance between the both. The United Nation Development Programme (UNDP) deliberated on the interface of IPR and competition law in relation to access to medicines in developing and underdeveloped countries. [23] It stated that it is difficult to have a perfect balance between the two.

According to UNDP, depending on the circumstances, the balance might shift to one side. In developed countries, the balance ideally should be more towards the IPR. However, in underdeveloped countries, the balance should go towards competition policies. This attitude might keep changing depending on the change in socio-economic conditions.

Further, the Trade-Related Aspects of Intellectual Property Rights (TRIPS ) Agreement also allows the members of the World Trade Organisation (WTO) for enacting suitable competition laws in their countries to address and thwart IPR-related anti-competitive practices.[24]

In absence of patent protection, 65% of pharma products would not have been introduced.[25] Therefore, it is safe to say that without patent protection, innovators would not have been incentivized to research and innovate more life-saving drugs. It is fair to grant the patent holders their patents for the time, efforts, money, and energy they are investing in their research.

Nevertheless, there are provisions under the Patents Act, 1940[26] which provide for accessing the patented products without the consent of the patent holder under certain circumstances. Section 84 and section 92 provide for compulsory licensing. Under section 84, an application for the grant of compulsory licensing can be made after the expiry of three years from the date of issuance of a patent.

Under the said section, an application for the grant of the compulsory license must be made only three years after the date of grant of the patent.

The application can be made only in the following situations:

  1. When reasonable public requirements in relation to the patented invention is not satisfied.
  2. When the public cannot access the patented invention at a reasonably affordable price.
  3. When the patented invention has not been used in the territory of India.[27]

Section 92 lays down specific situations where compulsory licenses can be granted. They are:

  1. Compulsory licensing can be issued for exports under exceptional circumstances.
  2. A country that does not have sufficient or no manufacturing power in the pharmaceutical sector in order to address public health can be issued with a compulsory license.
  3. In cases of extreme urgency, national emergency, or public non-commercial use, as long as a notification has been issued to the central government, the Controller General of the Patent can issue a compulsory license even without having received a formal application.[28]
Therefore, using the above two provisions, patent monopoly can be prevented during situations of extreme necessity.

Nonetheless, CCI is yet to face a case of patent monopoly in its hand. If at all CCI faces such a case, it would be interesting to see what stance would be taken.

Conclusion
Several recommendations have been made by various stakeholders in the policy note and the market study to prohibit anticompetitive practices. It is imperative to note that these are just recommendations and not laws which are enforceable. Furthermore, it is evident that CCI has been tirelessly working towards investigating and identifying several anti-competitive practices in the pharmaceutical and healthcare sectors.

However, the recommendations made in the policy note and market study cannot be incorporated in the Act as the recommendations are specific to the pharmaceutical and healthcare sectors.

Although CCI has successfully controlled certain anti-competitive practices indulged by the trade associations, there are several other anti-competitive practices that are intrinsic to the said sectors and can be only resolved with uniform and stringent sector-specific regulations. In addition to not being uniform, the existing laws are not enforced well.

For instance, according to rule 65 (11A) of the Drugs and Cosmetics Rules, 1945, the retailers/chemists dispensing a prescription containing substances specified in Schedule H and Schedule H1 or X are not allowed to supply any other preparation whether containing the same substance or not, instead of what is prescribed. However, it is noticed in the policy note and market study that brand substitution is extensively followed by the retailers/chemists in order to get incentives from such substituted brands.

CCI's efforts in highlighting the anti-competitive practices in pharmaceutical and healthcare sectors must be appreciated. Its policy note and market study have been eye openers. The nature of such anti-competitive practices in the pharmaceutical and healthcare sectors is such that it could cost several lives.

The issues are integral to the very core functioning of the said sectors. It has now become pertinent for the government to intervene and enforce a stringent legislation to prevent malpractices in the pharmaceutical and healthcare sectors. The government needs to ensure that every Indian has access to medicines whenever necessary since a majority of the population still do not have access to it.

End-Notes:
  1. Issa, J., 2021. GBR - The World's Pharmacy: India's Generic Drug Industry (Feb. 12, 2020), https://www.gbreports.com/article/the-worlds-pharmacy-indias-generic-drug-industry
  2. Patrick McMullan, Vamadevan S. Ajay, Ravi Srinivas, Sandeep Bhalla, Dorairaj Prabhakaran & Amitava Banerjee Improving access to medicines via the Health Impact Fund in India: a stakeholder analysis, Global Health Action (Mar. 2, 2018), https://www.tandfonline.com/doi/full/10.1080/16549716.2018.1434935
  3. The Competition Act, 2002
  4. The Competition Act, 2002,§ 3
  5. The Competition Act, 2002, § 4
  6. The Competition Act, 2002, § 5
  7. Souvik Chatterjee, Nupur Anchlia and Smita John, Dealing With Anti-Competitive Practices in the Indian Pharmaceuticals and the Health Delivery Sector (2008), http://www.cuts-international.org/pdf/CCIER-3-2008.pdf
  8. https://www.cci.gov.in/sites/default/files/PharmInd230611_0.pdf
  9. Making Markets work for Affordable Healthcare, Competition Commission of India, October 2018, https://www.cci.gov.in/sites/default/files/POLICY_NOTE.pdf
  10. Mani, S., 2022. India's Pharma Regulator Seeks Millions in Fines for Overpriced Drugs (Dec 22, 2020), https://www.zenger.news/2020/12/22/indias-pharma-regulator-seeks-millions-in-fines-for-overpriced-drugs/>
  11. CCI imposes Rs 11,939 lakh fine on pharma firms in last 3 years (July 1, 2019), https://www.financialexpress.com/industry/cci-imposes-rs-11939-lakh-fine-on-pharma-firms-in-last-3-years-mca/1624858/.
  12. https://www.cci.gov.in/sites/default/files/602012_0.pdf
  13. https://www.cci.gov.in/sites/default/files/022012_0.pdf
  14. https://www.cci.gov.in/sites/default/files/412011_0.pdf
  15. https://www.cci.gov.in/sites/default/files/4-28%20Main%20Order_0.pdf
  16. https://www.cci.gov.in/sites/default/files/C-2014-05-170_0.pdf
  17. http://www.cci.gov.in/sites/default/files/492015.pdf
  18. https://www.cci.gov.in/sites/default/files/392012GG_0.pdf
  19. https://www.cci.gov.in/sites/default/files/Case%20No.%2077%20of%202015.pdf
  20. Market Study On The Pharmaceutical Sector In India Key Findings And Observations 18-11-2021, https://www.cci.gov.in/sites/default/files/whats_newdocument/Market-Study-on-the--Pharmaceutical--Sector-in-India.pdf
  21. Id.
  22. http://www.indiaenvironmentportal.org.in/files/file/National%20Drug%20Survey%202014-16.pdf
  23. https://hivlawcommission.org/wp-content/uploads/2017/06/UNDP-Using-Competition-Law-to-Promote-Access-to-Medicine-05-14-2014-1.pdf
  24. Pharmaceutical Industry: The Interface Between Competition Law And Patent Law |(Aug. 9, 2016), https://www.legistify.com/blogs/view_detail/124-pharmaceutical-industry-the-interface-between-competition-law-and-patent-law/
  25. http://en.fas.gov.ru/upload/documents/Competition%20Issues%20in%20the%20Indian%20Pharmaceutical%20Sector%20(A.%20Gulati).pdf
  26. The Patents Act, 1940
  27. The Patents Act, 1940, § 84
  28. The Patents Act, 1940, § 92

Suggested Articles on Pharmaceutical And Healthcare Industries

:
  1. Patents and Public Health
  2. Challenges to India’s Patent Regime: Pharma Industry
  3. Protecting Intellectual Property for Covid-19 Innovations
  4. Mergers In Pharma Sector - Cynosure of The New-Age Takeovers
  5. Trademark infringement and passing off Indian Pharmaceutical Industry
  6. Patent Regime And Right To Health: National and International Perspective
  7. Understanding how FDI in Pharma Sector Takes Place and the Opportunities presented by Covid 19

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