The Competition Commission of India has undertaken capacity building exercises and have received specialised training in relation to business issues in the pharmaceutical sector. An insight by Abir Roy, Partner, Khare Legal Chambers
The Competition Commission of India (CCI), which is the regulatory authority set up under the Competition Act, 2002 (as amended) (Act), regulates both behavioural (i.e. anti-competitive conduct in the form of anti-competitive agreements (including cartels) and abuse of dominance) and structural activities (i.e. mergers and acquisitions) of the enterprises. The CCI has been established to ensure that enterprise carry out their business in a competitive manner and their activities do not cause or likely to cause an appreciable adverse effect on competition (AAEC) in India.
Based on the decisional practice of the CCI, the CCI has reviewed the practices in the pharmaceutical companies the most in the last three years. It is noteworthy that CCI has undertaken capacity building exercises and have received specialised training in relation to business issues in the sector. It must be noted that the activities which have already been investigated by CCI to date are more on cartel activities, whereas now the CCI is investigating highly complex issues in the pharma industry now, like ‘pay for delay’, and most importantly, phase II investigation of the merger between Sun Pharmaceuticals and Ranbaxy. The CCI has invited comments from the competitors on the said merger and based on the newspaper reports, it is highly likely that CCI will clear the transaction, subject to fulfilment of commitment by the parties which may be behavioural remedies (like access remedies, IP remedies) or structural remedies (divestures).
The first phase 2 investigation: Merger of Sun and Ranbaxy
The CCI had issued a show cause notice to Sun Pharmaceutical Industries and Ranbaxy Laboratories as to why the deal should not require an in depth investigation. Based on the procedure mentioned under the Act for reviewing combination, the CCI had to pass a prima facie order within 30 days of the notification. At the end of the 30 day period, excluding clock stops, the CCI can clear the transactions (with or without commitments) or can issue a show cause notice to the parties as to why a detailed investigation is not required. To date, the CCI has cleared all the transaction within the said period of 30 days. This was the first time where the CCI has issued a show cause notice under Section 29(1) of the Act to the parties (Sun and Ranbaxy in this case) as to why a detailed investigation is not required. The said show cause notice pointed out deal will result in significant market domination by one company and could affect the prices of essential life-saving drugs in the domestic market. Further, it was identified that the deal could be against ‘national interest’. It has been pointed out that if the deal goes through, the resultant entity will have significant market presence in the market and it will have market domination in the merged entity’s portfolio of 46 drug formulations. Post the show cause notice and reply by Sun Ranbaxy, CCI referred the matter to a phase II investigation and it sought comments from any person (including competitors) on the merger and their views on the competition law impact of the said deal.
Market analysis1
Sun-Ranbaxy would be the top player in 13 disciplines, including a few critical care areas. The combined entity would be a market leader in disciplines like psychiatry, neurology, cardiology, orthopaedics, ophthalmology, gastroenterology, nephrology, diabetology, dermatology and urology among others. If the merger goes through, it will create India’s biggest drug maker with an 9.2 per cent share of India’s pharma market, worth an annual Rs 76,000 crores by sales. The CCI, in merger analysis, views the market very narrowly and analyses the competitive impact of the said combination in such narrow market. Thus, based on the decisional practice of the CCI, they will review each category as a separate relevant market in itself. CCI can also analyse the market on a molecule basis. Based on the Form-IV2 published by the parties, the combined share of Sun Ranbaxy is as high as 90 per cent in certain molecules.
Further, the combined entity would create the top Indian pharma company in the US, the world’s largest drug market, with over $2 billion in sales and pipeline of 184 ANDAs (Abbreviated New Drug Applications) including high-value FTFs and will be the top player in generic dermatology business and the third-largest in branded segment.
Indian market
The combined entity will overtake Abbott India to become the top seller of medicines within India. The combined market share of 9.2 per cent and Abbott will have a 6.5 per cent share. As such, the CCI is unlikely to take the entire Indian pharma market as the relevant market, but will break it into categories, where the combined entity in 46 drug formulations has high market share. The CCI can, as a matter of process, ask the director general, the investigative authority created under the Act to undertake a detailed analysis of the deal.
Commitments
It has been widely reported that the CCI may clear the transaction, subject to fulfilment of the parties of certain commitments/ remedies. Merger analysis is a forward looking exercise and it is an enormous task for the regulators to appropriately analyse the competitive effects of a transaction in the future. To address any competition law concerns, the competition regulators have the power to issue commitments/ remedies to the parties to ensure that the behavioural conduct of the parties to the merger, post the consummation of the merger, does not create any competition law concerns. It must be noted that while issuing a commitment, the regulator has to consider the following: (a) the reasons which lead companies in the sector to seek a merger, in particular efficiencies and technical innovation; (b) any serious competition issues to which some mergers may give rise, for example the risk of foreclosure; and (c) the outcome for consumers as the main beneficiary of welfare enhancing competition policy interventions3. Further, the regulators have to keep in mind that since divestiture is typically permanent in nature and relatively invasive, the authorities have to be confident that their recommendation is proportionate to the competition threat created, that the divested assets remain viable, and that the buyer of the divested assets will not itself use the assets to threaten the competitive process. Given that the Act is patterned on the EU law, it is likely that the CCI will refer to the EU jurisprudence for guidance. The EC Notice on Remedies4 was published on October 22, 2008 in order to provide guidance regarding remedies acceptable to the EC, and to provide clarifications regarding: the general principles applicable to acceptable remedies and the types of commitments acceptable to the EC; the proposal compliances in both phases of the procedure; and the implementation of commitments.5
The remedies mentioned under the said EC notice included:-
(a) Structural remedies i.e. divestment of a part of business. The divestment must consist of a viable business, which in the hands of the purchaser, is capable of competing with the merged entity. In order to determine the scope of the business to be divested, all tangible and intangible elements- including intellectual property rights, know-how and goodwill, must be specified.6 The most important factor that needs to be kept in mind is that the said divesture must be pragmatic enough to be implemented i.e. plain vanilla divesture may not be enough to obviate any competition law concerns but must be coupled with trained personnel and manpower to ensure that the purchaser of the business, post the divesture, can compete with the merged entity and can impose a competitive constraint on the merger entity7.
(b) Behavioural remedies which included access remedies (i.e. commitments regarding the grant of access to key infrastructure, networks, key technology, including patents, know-how or other intellectual property rights, and essential inputs, usually on a non-discriminatory and transparent basis, have been accepted by the EC.8) or commitment with respect to re-branding.
It will be interesting to see how the exercise of commitments will be carried out by the CCI. It must be noted that issuing commitments is a very difficult task and the CCI must be sure that the commitment so issued will obviate competition law concerns. The commitments so issued can be mix of both behavioural and structural remedies.
Enforcement
CCI has become a very aggressive regulator and have already levies multiple headline fines. The CCI has also reviewed the conduct of Chemist and Druggist Associations in the pharma sector under Section 3 of the Act, which prohibits anti-competitive agreements (particularly cartels) and declares them void. The CCI has broadly held9 that the following practices of such Chemist and Druggist Associations are anti-competitive:
- Non-appointment of a stockist or a wholesaler from amongst the non-members of the respective trade association;
- Requirement of a NOC from the association for appointment of a stockist or wholesaler.
- Associations fixed trade margins below which the stockists were not allowed to sell;
- The distributors/ retailers were not allowed to give discounts to customers;
- Compulsory approval from the trade association for introduction of drugs in the market; and
- Requirement for routing bids for supply of drugs to the government and the hospitals through authorised stockist only.
The CCI has held that the above terms and conditions amounted to the restriction the ability of enterprises to supply and sell drugs in the market. In this regard, it should be noted that the CCI has not only imposed penalties on the trade associations themselves, but has also issues fines on the office bearers of such associations10. Based on the same, it must be noticed that CCI has invoked personal liability doctrine11 and has pierced the corporate veil and imposed fines on the officers involved. Further, now CCI is now reviewing complex competition law issues in pharma sector like pay for delay and it would be interesting as to how CCI views such practices.
References:
1. Market analysis is done based on industry reports and newspaper articles
2. Form IV is a form under Section 29(2) of the Act where the CCI requires the parties to publish details of the combination for bringing to the knowledge or information to the public and persons affected by such combination
3. Thomas Hoehn, Suzanne Rab and Grant Saggers, ‘Breaking up is hard to do”- National Merger Remedies in the Information and Communication Industries’, European Competition Law Review, Issue 5, 2009
4. EC notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under EC Regulation (EC) No 802/2004 (Text with EEA relevance) OJ C 267, 22.10.2008, p. 1–27Available at: http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52008XC1022(01)#ntr74-C_2008267EN.01000101-E0074
5. Paragraphs 2 and 3 of the Notice
6. Paragraphs 23 and 27 of the Notice
7. Please see Western Digital Ireland/Viviti Technologies (Case COMP/M.6203) OJ C 241/06 of 23 November 2011
8. Paragraph 62 of the Notice
9. Varca Chemists and Druggists v. Chemists and Druggists Association, Goa (MRTPC 127/2009/ DGIR4/28), decided on 11 June 2012; Vedant Bio Sciences v. Chemists &Druggists Association of Baroda (C-87/2009/DGIR), decided on 5 September 2012; M/s Santuka Associates Pvt. Ltd. v. All India Organisation of Chemist and Druggist (AIOCD), Organisation of Pharmaceutical Producers of India (OPPI) and Indian Drug Manufactures Association (IDMA) (Case No. 20/2011), decided on 19 February 2013; M/s Sandhya Drug Agency v. ADDA, BDDA, AIOCD, IDMA, OPPI, (Case No. 41/2011), decided on 9 December 2013; Peeveear Medical Agencies v. AIOCD and Janssen (Case No. 30/2011), decided on 9 December 2013; and Arora Medical Hall v. Chemists and Druggists Association, Ferozepur (Case No. 60/2012), decided on 5 February 2014.
10. In re Bengal Chemist and Druggist Association, 02/2012
11. Please see Section 48 of the Act
Abir is a competition law partner at Khare Legal Chambers. He has authored a book on “Competition law in India” published by Eastern Law House in 2014.