Pharma firms beware, CCI is inquiring

The Competition Commission of India’s (CCI) order dated February 10 imposing, for the first time, a penalty of R74.63 crore on a major pharmaceutical company (at a rate of only 3% of the average turnover, though it could have gone up to 10%) for refusing to appoint a stockiest in Kerala unless an NOC was obtained from the local Chemists and Druggist Association has come a shock for pharma manufacturers. This order has not only reversed the earlier trend of the CCI not penalising drug-makers, but has also left them wondering how they could be punished, as they themselves are victims of an organised, all-India body of syndicate of chemists and dealers. Going forward, the CCI may investigate pharma companies on similar grounds, and in case it again imposes penalties, an appeal will have to be filed in the Competition Appellate Tribunal.

Pharma companies seem to be the latest target of the CCI against the perceived anticompetitive conduct in the sector. The CCI proposes to undertake a baseline study/survey in the pharmaceutical sector and healthcare delivery systems/services in Delhi NCR. The inquiry covers issues such as non-availability of essential medicines, increasing price of drugs, nexus between pharmaceutical companies and pharmacists, between pharmacists and doctors, between doctors and pathological laboratories, between doctors and pharmaceutical companies, and between hospitals and insurance companies.

Background of sector inquiry: Three Indian generic companies—Lupin, Matrix Laboratories (subsidiary of Mylan) and Niche Generics (subsidiary of Unichem Laboratories)—along with Slovenian KRRA and Anglo-Israeli Teva UK/Teva Pharmaceutical Industries were raided by European Commission’s Directorate General for Competition for allegedly entering into secret agreements with French company Servier, apparently to delay the entry of the generic version of cardiovascular drug Perindopril (invented by Servier). This led to the initiation of a “sector inquiry” in the pharma sector by the European Commission on January 15, 2008, which concluded with the adoption of final report on July 8, 2009. The primary focus of the inquiry was to examine the competitive relationship between originator and generic companies, and amongst originator companies. Towards this end, the European Commission selected 43 originator companies and 27 generic companies for in depth analysis, which represent 80% of the relevant turnover in the EU.

Even earlier, on June 15, 2005, a fine of 60 million euros was imposed on AstraZeneca AB and AstraZeneca Plc (AZ) for misusing public procedures and regulations in a number of EEA states, with a view to excluding generic firms and parallel traders from competing against AZ’s anti-ulcer drug Losec. The abuse consisted of a pattern of misleading representations made by AZ before the patent offices of a number of EEA countries in connection with its patent application for Omeprazole (the active ingredient in Losec). Due to misleading information, AZ obtained extra protection in several countries and consequently the entry of cheaper generic versions of Losec was delayed, entailing costs on healthcare systems and consumers.

However, for the current sector inquiry, the CCI has so far dealt with three kinds of competition issues. One, the repeated allegation of district-level stockist associations prohibiting pharma companies to procure an NOC from them before appointing any new stockist in the district. Two, restriction on the introduction of medicines within a state unless an approval is sought by way of a “product information system (PIS)” charge to be paid. Three, trade associations either prohibiting discounts or, at the very least, restricting the level of discounts given by retailers to end-customers. To ensure compliance and non-deterrence, the associations issue diktats with threats of boycott for any deference by pharma companies or retailers.

The All India Organisation of Chemists and Druggists (AIOCD) exercises oversight over state- and district-level associations. At one level or the other, resolutions and instructions flow from AIOCD to state associations who, in turn, ask district/regional-level associations to implement them within their respective areas of coordination.

The first case filed by Cuttack’s Santuka Associates (a clearing and forwarding agent) against AIOCD initiated this inquiry. While declaring conduct of AIOCD in patronising and promoting the above practices anti-competitive, the CCI imposed monetary penalty on AIOCD. It was also directed to give an undertaking that the aforementioned practices would be discontinued. A series of such cases have been filed against various state- and district-level associations by individual chemists, resulting in fines and “cease and desist” orders by the CCI.

However, there has been an apparent defiance of CCI orders by local chemists’ associations. For instance, in one of the later cases dealt with by the CCI, despite clear knowledge of CCI’s order prohibiting such anti-competitive conduct, not only was the practice being continued, but a discussion to use “political clout” to handle CCI issues was found recorded in the minutes of the meeting of one state-level association.

The latest salvo from the CCI comes through its penalty on Alkem Laboratories. In a complaint filed primarily against the pharma association for coercing Alkem for not appointing stockists unless an NOC was granted by the chemist association for appointing stockists, the CCI held the pharma manufacturer guilty of having an anti-competitive agreement with the chemist association. Even though the CCI recognised that the instructions to follow such a practice were issued by the association (along with usual threats), the mere following of such instructions by the pharma company was considered as an “anti-competitive agreement”. It is based on an earlier CCI decision against Dr LH Hiranandani Hospital, Mumbai, for entering into an exclusive agreement with the stem cell collection services provider, Cryobank Inc, and should alone serve as a warning signal to the pharma sector apart from the results of the pending sector inquiry.

The author, based in Delhi, heads the competition law practice at Vaish Associates, Advocates. Views are personal

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