TO CONTROL OR NOT TO CONTROL PHARMACEUTICAL MERGERS? : A CONUNDRUM FOR COMPETITION COMMISSION OF INDIA

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1 TO CONTROL OR NOT TO CONTROL PHARMACEUTICAL MERGERS? : A CONUNDRUM FOR COMPETITION COMMISSION OF INDIA Participant Details Name : Kriti Soni Contact Number : Id : kriti.soni25@gmail.com Institution : National Law University, Delhi Course and Year of Study : BA.LLB. IV Year Introduction Healthcare is of vital public importance for any nation. Ensuring availability of quality medicines at affordable prices is a prime concern for any government. After 67 years of independence, India can proudly claim that she has been able to achieve this objective to a greater extent. According to the Ministry of External Affairs, Government of India, Investment & Technology Promotion Division, pharmaceutical industry of India ranks 4 th in volume, quality, technology and vast range of medicines that are manufactured. 1 Advent of British rule in India laid the foundation of pharmaceutical industry in India which was manufacture based and not innovation based. Before therapeutic revolution in 1950s, domestic sector dominated the pharmaceutical industry in India. After 1950s new medicines were marketed by MNCs. This in addition to strong patent regime that was prevailing due to application of British Patents and Designs Act, 1911 led to increase in the market share of 1 Overview of Pharmaceutical Industries, available at : (Last visited on 10 th November 2014).

2 MNCs. 2 The Government (Govt.) allowed MNCs even at the cost of domestic industry due to its strong R&D (Research and Development) which was lacking in the indigenous companies. By 1960s, there was a monopoly of foreign companies in the Indian healthcare sector. To break this monopoly, a conscious attempt was made by the Govt. to give preference to national industries. Ayyangar Committee concluded that it was because of foreign patent holders that pharmaceutical industry was dominated by the MNCs. 3 This paved the way for enactment of the Patents Act 1970 to promote national interest. The patent was limited to process in pharmaceutical and agricultural chemicals and term of patent was reduced to 7 years. Post 1970s growth of pharmaceutical industry was given essential impetus and domestic enterprises dominated the market. Indian generic industry flourished. It was producing drugs at a cheaper rate as a minuscule amount was invested on R&D and this in turn gave a boom to the exports. Soon India became an important player of the global generic industry. Domestic pharmaceutical companies experienced a golden era from 1970s to During this time, India became a member of World Trade Organization (WTO) after signing General Agreement on Trade and Tariffs (GATT) and signed Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) in India s patent law was against TRIPS requirement and due to growing global pressure she was forced to amend her patent laws which materialised in This amendment introduced the concept of national treatment, thereby extending the patent protection to all foreign patent holders for a period of 20 years. 5 The reversal of policies brought major challenges to the domestic industry. However, it cannot be 2 Organisation for Economic Co-operation and Development: Competition Issues in the Distribution of Pharmaceuticals (Global Forum on Competition 23 rd January, 2014). 3 Report on the Revision of the Patents Law by Justice Rajagola Ayyangar (September 1959). 4 Press Release 2003, (Last modied January 5 th, 2003). 5 Organisation for Economic Co-operation and Development: Competition Issues in the Distribution of Pharmaceuticals (Global Forum on Competition 23 rd January, 2014).

3 denied that these policies have brought within its fold new opportunities also which revolves around new survival strategies. Acquisitions, Greenfield direct investments, outsourcing, contract manufacturing and strategic alliance have presented new opportunities of growth and survival. While Indian pharmaceutical companies were dealing with changing policies, on the other side of the world, western innovative pharmaceutical companies were running out of market. To make profits or to the very least to realize the cost of innovation they had to increase prices which was forbidden by their government s policies. Their domestic market was already saturated. Under these circumstances, markets like India and China with a population of over one billion and unmet healthcare needs seemed lucrative and ready to be explored. India also realized this and to incentivize western druggist and to benefit the nation both in terms of increasing foreign investment and innovative, life-saving drugs, the Government of India announced 100% FDI in both Greenfield and Brownfield investments on October 10, While Greenfield investment was allowed under automatic route, Brownfield was allowed only through FIPB approval route. 6 Maira Committee recommended moving forward by amending the Act, 2002 instead of moving backward and falling on the FIPB approvals, which were administrative decisions and not an expert opinion on the effect of merger on the competition. This approach has always been criticized for being very arbitrary. FIPB route seemed sensible when there was no competition commission but to resort to administrative arbitrariness in the presence of competition watchdog it would be unacceptable and against the interest of consumers. Therefore, the committee recommended that the supervision should be done by the Competition 6 Press Release (Last Modified October 11, 2011).

4 Commission of India (CCI) constituted under the Competition Act, 2002 (the Act, 2002) 7 to oversee combinations taking place in India. The CCI notified merger control provision (ss.5 and 6) of the Act, 2002 on June The need for merger control arises due to possibility of abuse by the merged entity. The rationale of merger control is not very different from abuse of dominant position. But it is ex ante unlike abuse of dominant position which is ex post due to socio-economic cost involved in unbundling a merged entity. The Raghavan Committee Report 8 in para stated: A merger leads to a bad outcome only if it creates a dominant enterprise that subsequently abuses its dominance. To some extent the issue is analogous to that of agreements among enterprises and also overlaps with the issue of dominance and its abuse discussed in the previous sections. Viewed in this way, there is probably no need to have a separate law on mergers. The reason that such a provision exists in most laws is to pre-empt the potential abuse of dominance where it is probable, as subsequent unbundling can be both difficult and socially costly. CCI therefore controls all mergers and acquisitions by the procedure laid down in the Act, Pharmaceutical industry is no exception. But on a deeper analysis of the laws and recent government s actions, it can be argued that CCI has and will have limited control over the mergers taking place in the pharmaceutical industry. To prove the point, I will give three fold argument; 1) I will analyse application of s.5 of the Act 2002 read with the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (the Combination Regulations, 2011) and s.64 of the Act, in the light of pharmaceutical industry and recent trends of mergers in the industry; 2) I will draw a 7 Planning Commission of India: FDI Policy in Indian Pharma Sector: Arun Maira (Draft for Discussion at the High Level Committee Meeting on 27 th September 2011) 8 Government of India: High Level Committee Report on Competition Policy and Law: SVS Raghvan (2000)

5 comparative analysis with EU Merger Control Regulations 2011 and UK Enterprise Act 2002 to exhibit that Indian law was not enacted to deal with situations where the financial threshold was not met; 3) lastly, this section will argue that even the introduction of the Competition (Amendment) Act, 2012 will not be any relief and pharmaceutical mergers capable of having effects on markets will be left out of the grip on CCI merger regulations. s.6 makes it mandatory for parties to combination to give a notice to the CCI within the time period mentioned in the Act. 9 What constitutes a combination has been defined in s.5 in terms of financial threshold. An acquisition/amalgamation becomes a combination when parties jointly either have an asset of value exceeding 1000 crores or turnover exceeding 3000 crores in India or asset of value exceeding 500 million US dollars including 500 crores in India, or turnover more than 1500 million US dollars, including at least 1500 crores in India. 10 Thus, notice of only those acquisitions is to be given which meets the financial threshold prescribed in the Act. Studies have shown that hardly a few companies in pharmaceutical sector in India can meet this requirement. Maira Committee concluded that only companies in India and 18 foreign companies can meet the threshold requirements 11 which were made stricter vide notification dated March 4, and May 27, Had mergers like Mylan Inc.-Matriz Lab, Fresenius Kabi - Dabar, Daiichi-Ranbaxy happened after 2011, CCI would have assessed them. There has been an increase of 86.42% of FDI in pharmaceutical industry from s.6(2), The Competition Act, 2002 (12 of 2003). 10 s.5(a)(ii), The Competition Act, 2002 (12 of 2003). 11 Planning Commission of India: FDI Policy in Indian Pharma Sector: Arun Maira (Draft for Discussion at the High Level Committee Meeting on 27 th September 2011) 12 Notification S.O. 482(E) dated March 4, (Last visited on 12 th November, 2014). 13 Notification S.O. 1218(E) dated May 27, (Last visited on 12 th November, 2014).

6 to But hardly any cases were assessed by CCI. Studies have shown that foreign companies invest in India mostly through special purpose vehicles (SPVs) or subsidiaries and investments are made in small/medium sized enterprises due to which mergers fail to meet the financial thresholds. 15 This was also observed in Arun Maira Committee report after which Prime Minister s Office issued a press statement that adequate amendments will be made under the Competition Act, 2002 to bring the mergers under the supervision of the CCI. 16 However, no such notification was passed by the Central Government and amendment bill is still pending (to be discussed later). s.20(3) which empowers the Central Government to revise threshold, also lays down the mechanism with which the threshold can be revised. Threshold can only be revised on the basis of wholesale price index or fluctuations in exchange rate of rupee or foreign currency. There are two reasons as to why this provision is not helpful in dealing the problem of high threshold for pharmaceutical industry. First, it is a general provision and not industry specific. This would mean that threshold for all the industries would be revised and this would defeat the purpose of setting financial threshold for most of the industries, which is sieving out smaller transactions for merger control regime. Second, the mechanism laid down is very specific. It does not take into consideration the case where enterprises in an industry are of low turnover or asset value. s.64 of the Act gives power to the CCI to issue notification to carry out purposes of the Act. As has already been stated, controlling mergers will are likely to have an impact on the market is one of the purposes of the Act. So, to give effect to this purpose, notification could 14 Increase in FDI in Pharmaceutical Sector, Rajya Sabha (Last visited on 13th November,2014). 15 Organisation for Economic Co-operation and Development: Competition Issues in the Distribution of Pharmaceuticals (Global Forum on Competition 23 rd January, 2014). 16 Timsiy Jaipuria, Soma Das, GOI to Decide on CCI Filter for FDI in Pharma Sector, The Financial Express, May 17, 2012.

7 have been issued. But no such issuance has been made by the CCI. In the light of above discussion, it can be safely concluded that the present act has no provision under which the pharmaceutical mergers can be brought for assessment. Having said that, the question arises how do other jurisdictions deal with the merger in industries of vital nature when it is not able to meet the financial thresholds? Is it possible to adopt same interpretation in Indian scenario? The EU Merger Regulations 2011 defines concentration over which EU has jurisdiction on the basis of community dimension. Community dimension is simply jurisdictional threshold. 17 An exception is provided under Article 22 wherein even if a concentration does not meet community dimension, EU member can request the Commission to examine it if it is likely to affect competition. Though it is rarely used, it provides for any contingencies. Similarly, in UK Enterprise Act 2002, relevant mergers are determined on the basis of either financial threshold or share of supply test. According to OFT guidelines para 3.3.3, share of supply test under s.23 is satisfied, if supply is or after merger would constitute 25% in UK or substantial part of U.K. 18 There should be an increase in the share after merger. There is a distinction between share in markets and share of supply. Lastly, I cite the example of the Netherlands. Ministry of Economic Affairs has been vested with the power to decide lower threshold for certain industries as it thinks fit. Netherlands has set a lower threshold for pharmaceutical industry. 19 Thus, from the above discussion it is concluded that jurisdictions often allows for exemptions, it can be industry specific like in Netherlands or case specific like EU and UK. The Competition Act, 2002 has granted power neither to the Commission nor to Central Govt. to revise turnover on the basis of industry. The Act, 2002 will have to be amended to address the present crisis. This calls 17 Article 1 The Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings. 18 Competition Commission & Office of Fair Trading: Merger Assessment Guidelines (September 2010). 19 OECD Business: Summary of BIAC Discussion Points: Roundtable on Definition of Transaction for the Purpose of Merger Control (June 18,2003)

8 for studying the likelihood of the amendment bill rectifying the shortcomings of the Act 2002 with respect to financial threshold. Section 5A of the Competition (Amendment) Bill, 2012 seeks to introduce sector specific turnover for a class or classes of enterprise. It will empower Central Govt. to decide different threshold of assets and turnover for any class of enterprise. This power will be exercised in consultation with the CCI. 20 This power is different from the one guaranteed under s.54 of the Act which empowers Central Government to exempt industry in the interest of security of the state or if enterprise is performing sovereign function or practicing obligations assumed by state under any international treaty. 21 This provision is the outcome of recommendation of Arun Maira Committee Report and keenness of the Government of India to have 100% Brownfield investment without compromising with the healthcare by ensuring a healthy market and in turn affordable pricing of drugs. Section 5A is likely to be challenged under Article 14 of the Constitution of India, as there are no guidelines determining the the classes of enterprise and therefore gives a wide field to the Central Government to arbitrarily decide sensitive enterprise which deserves a lower threshold protection. As is seen in catena of judgments starting of E.P.Royappa 22, arbitrariness is antithesis of equality and section 5A is likely to be declared unconstitutional if passed in its present form. From this, another implication that follows is that it is likely that non economic factors would be considered in deciding exempted industries. The idea behind financial threshold was that small transactions are unlikely to have adverse effect on the competition. This assumption would no longer be applicable under s.5a of the Bill. Central Govt. would have to use different approach, which is not provided in the Bill. Even if it is declared to be 20 S.5A The Competition (Amendment) Bill, S.54 The Competition Act, 2002 (12 of 2003) 22 E.P.Royappa v. State of Tamil Nadu, 1974 AIR 555.

9 constitutional, to avoid any complexities later on it is advisable that approach or factors considered should be decided in advance. Thus, even if s.5a is passed it will bring more problems than solution, to the problem faced by the CCI at present in assessing consolidations of pharmaceutical companies. Pharmaceutical industry is vital to the country and it is essential that an expert body like CCI examines the impacts of mergers of two pharmaceutical enterprises. However, in the light of these three arguments I conclude that CCI has limited jurisdiction over merger control in cases of consolidation in pharmaceutical sector. CCI is still at nascent stage which is why it would be prudent to adopt measures adopted by much developed jurisdictions like EU, UK or the Netherlands. India has been successful in providing quality medicines at affordable prices and it is important that she continues to do so which is possible only when the competition watchdog prevents foreign MNCs from distorting the market. As Raghavan Committee pointed out unbundling a merger would be much more difficult and costly which is why it is essential that the merger is nipped in the bud. This Pandora s box should be settled once and for all otherwise its cascading effects would affect the entire healthcare system and would set back the clock before 1970s.