ROLE OF CCI IN MERGER CONTROL IN INDIAN PHARMA INDUSTRY

Transcription

1 ROLE OF CCI IN MERGER CONTROL IN INDIAN PHARMA INDUSTRY Participant Detail : Name of the participant Institution Course & year of study - Jyoti Kumari - Symbiosis Law School - B.A. LL.B. Introduction : Perhaps for the fist time, the Competition Commission of India (CCI) has invoked national interest while asking hard questions of a merger-in-the making. The deal in question is the Sun pharma s acquisition of Ranbaxy - slightly uncommon purchase of a Indian pharma company by a local competitor. By the own announcement of the parties, this merger seeks to create the "5th largest global specialty generic pharma company in the world". 1 In the domestic space, Sun Pharma will be largest drug maker, with revenues estimated to be around INR crore ($ 4.2 bn), which will give it approx 9.2% share of Indian pharma market, (worth INR crores). The combined entity would have operations in 65 countries, 47 manufacturing facilities across 5 continents, and a significant platform of speciality and generic products marketed globally. This big ticket deal in the pharma space is also the first M&A transaction to have gone through public scrutiny amid concerns of adverse impact on fair competition in the market. 2 CCI, in its order, had said, "In terms of Section 1 Source: Ranbaxy, available at 2

2 29(2) of the Competition Act, 2002 (Act), the Commission formed a prima facie opinion that the combination is likely to have an appreciable adverse effect on competition and accordingly directed Sun Pharma and Ranbaxy (parties) to publish details of the combination within ten working days for bringing the combination to the knowledge or information of the public and persons affected or likely to be affected by such combination." The proposed deal has been argued extensively mainly on the grounds that it will create a monoploy in certain categories where the combined entities have a market share over 15%. The companies have a combined presence in 18 therapeutic areas, 127 therapeutic groups and 246 molecules.on Nov 15th Nov, CCI asked both the parties to rework the proposed merger. The antitrust body is concerned that the combined company would hold a dominant position in the pricing of generic drugs in India, since both these companies currently control a significant share of the Indian generic-drug market. To assess the implications of such a big-ticket merger on the Indian pharma sector and understand the importance of CCI s role in regulating merger controls, let s first have a look at the the nature of Indian pharma industry. Indian pharmaceutical industry has been witnessing significant growth over past few years (reveunes have increased from $6 Bn in 2005 to $18 Bn in 2012). Currently, it accounts for about 1.4% of the global pharma industry in value terms and 10% in volume terms. By 2020, the market is expected to reach $45 bn and become 6th largest pharmaceutical market in the world. 3 According to data released by the Department of Industrial Policy and Promotion (DIPP), the drugs and pharmaceutical sector attracted FDI worth Rs 60,100 crore (US$ 9.94 billion) between April 2000 and June Low cost of production and R&D boost efficiency of Indian pharma companies. India s cost of production is approximately 60% lower than that of the US and almost half of that of Europe. The industry currently meets India's demand for bulk drugs and nearly all its demand for formulations, with the remainder being supplied by foreign multinational corporations. India is an attractive market for the foreign multinationals for a variety of reasons: 3 Sectoral report on Indian Pharmaceutical Industry, India brand equity foundation, Oct 2014

3 India s economy continues to show signs of robust growth. The increased spending on healthcare needs is expected to drive revenue growth for pharma companies. 4 The emergence of chronic diseases like cancer, diabetes, Cardio Vascular System (CVS) and Central Nervous System (CNS) disorders is likely to drive demand for newer therapies. 5 With increasing pressures on curbing healthcare costs in the US, India s low-cost manufacturing capabilities coupled with attention to quality (India has the highest number of FDA-approved manufacturing plants outside the US.) will be sought by MNCs. India has a large pool of scientific manpower which can be used in drug discovery, development and clinical trials. Government Initiatives: As per extant policy, FDI up to 100%, under the automatic route, is permitted in the pharmaceutical sector for Greenfield investments. 100% FDI is also permitted for investments in existing companies under the government approval route. Further, the Government of India has also put in place mechanisms such as the Drug Price Control Order and the National Pharmaceutical Pricing Authority to address the issue of affordability and availability of medicines. If we look at the ground reality, we find that the market competition is extremely fierce with each branded generic/generic drug (constituting over 99% of the Indian Pharmaceutical Market, IPM) having not less than 50 to 80 competitors within the same chemical compound. Moreover, 100% of the market is price regulated by the government, 20% under cost based price control and the balance 80% is under stringent price monitoring mechanism. M&A activity in India: In India, the consolidation process within the Pharmaceutical Industry started gaining momentum way back in 2006 with the acquisition of Matrix Lab by Mylan witnessed one of the biggest mergers in the Pharmaceutical Industry of India, when the third largest 4 Source available at: 5 Global Pharma looks to India, Pwc Report, available at

4 drug maker of Japan, Daiichi Sankyo acquired 63.9% stake of Ranbaxy Laboratories of India at $4.6 billion. Pharma mergers again came into focus on the morning of April 7, 2014, when India woke up to the news of a $3.2 Billion domestic acquisition of Ranbaxy Laboratories Ltd. by Sun Pharmaceutical Industries Ltd. resulting in creation of fifth largest specialty generics company in the world. This news was soon followed by the successful cross-border acquisition of Agila Specialities from Strides Arcolab by Mylan Laboratories for $1.75 billion and domestic acquisition of Elder Pharma by Torrent Pharma for around $300 Million. This has reinforced belief of many in the potential of the Indian pharmaceutical industry. Following is the list of recent acquisitions of Indian pharma companies by foreign MNCs: 6 Year Company Bought by Price paid 2006 Matrix Laboratories Mylan Laboratories (US) US $ 736 million 2008 Ranbaxy Laboratories Daiichi Sankyo Co Ltd (Japan) US $4.6 billion 2008 Shantha Biotechnics Sanofi Aventis (France) US $ 783 million 2008 Dabur Pharma Fesenius Kabi (Germany) US $ 219 million 2009 Orchid Chemicals Hospira (US) US $400 million 2010 Piramal Healthcare Abbot Laboratories (US) US $3.72 billion 2012 Cosme Pharma Adcock Ingram (South Africa) US $ 86 million 6 Major combination cases are: Orchid Research Laboratories Ltd., Orchid Chemicals and Pharmaceuticals Ltd. Merger, Case No. C- 2012/02/31, decided on, 29th February, 2012, available at: Acquisition of shares in Arch by Mitsui Case No. C-2012/08/73,, decided on 19th September, 2012,available at: Acquisition of the Transferred Business by Hospira for Orchid, Case No. C-2012/09/79, decided on 21 st December, 2012, available at: 79.pdf Mylan s acquisition of Unichem Laboratories Limited, Case No. C-2013/04/119, decided on 6th June, 2013, available at: The acquisition of Agila Specialties Private Limited by Mylan, Case No. C-2013/04/116, decided on 20th July, 2013, available at:

5 Current Regulation w.r.t M&A: From June 1, 2011, the enforcement provisions of the Competition Act, 2002 relating to review of combinations (popularly also known as 'merger control' in different competition law jurisdictions) have come into force in India. The Act empowers the CCI, to review all proposed combinations crossing the thresholds provided under Section 5 of the Act. Review of mergers or combinations are undertaken by the CCI with the intent that if the competitive structure of the market is preserved or enhanced, there will be less need for an ex post intervention against any likely abusive conduct. 7 According to the procedure laid out in the Act, there can be three stages of enquiry into combinations: 1. First stage is when on due notification of the combination, the CCI is of the 'prima facie' opinion that the combination does not, or is not likely to cause an appreciable adverse effect on competition(aaec) within the relevant market in India, it can approve the combination. 2. However, if the CCI is of the 'prima facie' opinion that the proposed combination causes or is likely to cause AAEC, it can issue a show cause notice to the parties as to why an investigation in respect of such a combination should not be conducted. 3. Thereafter, after receipt of the response of the parties to the combination to such a show cause, the Commission may call for a report from the Director General (DG). The main focus,while assessing combinations, is usually on the analysis of existing or near future potential competitors, estimating the merging parties' combined market strengths and focussing more on the overlapping product segments of the parties to the combination. The CCI aims to look at the comparison between these parameters prior to and after the merger having taken place. Some legal experts are of the view that Foreign Investment Promotion Board (FIPB) is the right gateway for clearing mergers and acquisitions with respect to pharma companies instead of Competition Commission of India (CCI). FIPB is an inter-ministerial body of senior officials under the Finance Ministry which approves FDI proposals. It is argued that since the role and powers of CCI have been notified recently, the capacities of CCI would need to be strengthened if it has to act 7 Competition Act, 2002

6 as a gate-keeping mechanism. It is also said that while CCI is a statutory body mandated to scrutinise anti-competitive practices, FIPB is a policy mechanism and the concern being addressed is one of FDI policy. "The parameters within which the CCI can work would necessarily be circumscribed by the provisions of the Competition Act, which is structured around the determination of anticompetitive practices. The CCI may, therefore, not be able to take on board public interest concerns related to public health," 8 said a dissent note by the Industry Ministry given to the committee on FDI in Pharma headed by planning commission member, Mr. Arun Maira. Reasons not in favour of CCI scrutinising all M&A deals in pharma sector: 1) CCI approaches cases from a competition point of view, public interest factors are ignored The power of CCI to inquire into acquisition and merger is regulated under Section 20 of the Competition Act. 9 Sub-section (4) of Section 20 states that for the purposes of determining whether a combination would have the effect of or is likely to have an appreciable adverse effect on competition in the relevant market the Commission shall have due regard to all or any of the following factors and it lists down 14 factors. Hence, the focus of the Commission is to approach the issue from a competition point of view. To what extent public interest factors will be undertaken by the competition watchdog remains to be seen. Access to good healthcare has a key role in the growth and development of any country. Regulating and managing health care markets is, therefore, of utmost importance, for providing safe and affordable health care to people. The pharmaceutical sector is among the highly regulated sectors across the globe, regulated especially with respect to the prices, quality, availability and affordability of medicines, health insurance etc. In this context, it should be mentioned that CCI s primary 8 PTI, Ind Ministry gives dissent note to committee on FDI in pharma, Zeenews.India, Oct 22, Competition Act, 2002 (Section 20 of 2002)

7 mandate is to see that anti-competitive practices do not give rise to monopoly, not the regulation of prices. 2) Limitations of Competition law: CCI cannot intervene prior to the acquisition or merger. It can act only after the post-acquisition phase, after receiving the notification from parties. This limits the scope of remedies available before the commission compared to a prior approval route. 4) CCI cannot oversee all Brownfield investments without amending the Competition Act, because the current Competition Act prescribes a higher threshold level for CCI to exercise its powers to oversee mergers and acquisitions. Section 5 of the Competition Act sets a very high threshold level for CCI to act. As per Section 5 (a) 9i) (A), CCI can intervene only when the asset value in India is more Combined assets of the enterprises value more than Rs.1,500 crores or combined turnover is more than Rs.4,500 crores. In case either or both of the enterprises have assets/turnover outside India also, then the combined assets of the enterprises value more than US$ 750 millions, including at least Rs.750 crores in India, or turnover is more than US$ 2250 millions, including at least Rs. 2,250 crores in India. Reasons in favour of CCI: 1) CCI follows a transparent process: The procedure of the FIPB is opaque and there is an impression of arbitrariness of government decisions. There is no certainty as to the time period required for FIPB to clear an acquisition. It may hold it indefinitely without specifying the reasons for doing so. In the field of mergers and acquisitions, delaying the procedure of clearance of an acquisition is as good as denying it, as it will result in the concerned companies incurring huge

8 losses. The CCI is more transparent and operates within a well-defined structure, providing legal certainty to the parties with clearly defined appellate processes. In the words of Arun Maira: We must pay attention to the acquisitions and mergers taking place in the pharmaceutical sector. We do not want to be in a position where acquisitions are distorting the industry and oligopolistic or monopolistic conditions are created, We have created sophisticated mechanisms like the CCI where the necessary gate-keeping could be done before such takeovers or acquisitions take place. Therefore, we no longer need to follow the FIPB (Foreign Investment Promotion Board) route when there are other instruments to scrutinise a deal. 10 2) All aspects of the deal can be evaluated by CCI as per the Competition Act 11 The Competition Act 2002 empowers the Commission to evaluate all aspects of the proposed deal such as reduction of capacities for production or R&D and market distorting issues related to ownership of IPR. In its inquiry into cases of mergers and acquisitions, it takes into account the entire gamut of relevant issues, including those relating to the specific market, likely impact on prices and availability of relevant products/ substitutes, innovation, competitiveness, contribution to economic development etc., and the likely effect of the proposed M &A(Mergers and Acquisitions) on competition market. 3) Competition related scrutiny in case of M&A is nothing new in the developed markets of the world and is already being followed in the USA, the countries within the European Union (EU) and elsewhere. 10 Joe C Mathew & Nayanima Basu, 'CCI should clear pharma M&As', Business Standard, Sept. 27, FDI in the Pharma Sector: - Capitalizing India s Growth Potential or Disaster for a Booming E, available at conomy

9 The USA and EU competition authorities have reviewed several mergers of large multinational pharmaceutical companies that took place in the last decade. Their reviews examined whether the mergers would reduce competition in research and development, including clinical trials in particular therapeutic areas, as well as whether the mergers would lead to excessive concentration of the markets for particular therapeutic groups and products. For example, 12 the review of the 2004 merger between Sanofi-Synthélabo and Aventis was found to reduce competition in three segments. As a condition of the merger, the FTC required divestment of products that were still at the clinical trials stage of development. It required divestment of manufacturing facilities to a competitor (GlaxoSmithKline), and required the companies to help GlaxoSmithKline to complete clinical trials and gain regulatory approval. The FTC also required divestment of clinical studies, patents and other assets related to cytotoxic colorectal cancer medicines to Pfizer (FTC,2006). 13 China whose Anti-Monopoly Law came into being only in 2008 has approved 6 pharmaceutical mergers with conditionalities till date. 14 South Africa: While clearing pharmaceutical merger transactions, the South African Competition Tribunal has considered the question of the likely impact on public interest and cleared the merger after clearing its concerns. 4) If CCI believes any combination has an adverse effect on merger, it can propose certain modifications, commonly referred to as remedies to mergers. These remedies are usually of two types: structural and behavioral. 12 Source: available at 13 Competition impediments in Pharmaceutical Sector in India, available at 14 Same as source 7

10 Structural remedies: focus on eliminating the possible adverse effects on competition in the relevant market by modifying the structure of the combination, ordinarily through the divestiture of a subsidiary (or production facilities) and the creation of a new competitive entity. In case of pharmaceutical mergers, these remedies seem to have been the preferred mode of modification of mergers across jurisdictions in the form of divestiture of a subsidiary or brand of product. Let s look at some cases from comparative jurisdictions to understand how these remedies are applied by antitrust bodies. Israel: In the case of acquisition of 15 Taro Pharma of Israel by Sun Pharma of India in 2008, the Competition Commission in Israel intervened as it was concerned that there might be a possibility of price increases due to less competitive environment in three generic carbamazepine formulations. As a result, Sun Pharma was directed by the regulator to divest its rights to develop, manufacture and market of all these three formulations to Torrent Pharma or another Commission approved buyer. Europe: The European Commission's (EC) approach to pharmaceutical merger cases displays a marked tendency to seek product divestments if market shares exceeded 40-50%. In 2009, the EC cleared the acquisition by Sanofi-Aventis of Zentiva, a generic manufacturer active mainly in central and eastern Europe subject to the divestment of various finished pharmaceuticals in Bulgaria, Estonia, the Czech Republic, Hungary, Romania and Slovakia. In its competitive analysis of that merger, one of the main points taken into consideration by the EC was whether Zentiva produced the equivalent generic product (i.e. based on the same molecule) to any of Sanofi- Aventis' original pharmaceuticals. Ultimately, the EC found that the parties had high combined market shares in a number of markets, and thus required divestments. US: The Federal Trade Commission (FTC) usually takes the investigatory lead for pharmaceutical mergers, and appears to favour structural remedies as well. For example, in 2006, when Actavis announced its proposed $110 million acquisition of Abrika Pharmaceuticals Inc, the FTC after the process of review found that the proposed transaction would lead to anticompetitive effects in the 15

11 market for generic Isradipine capsules. To assuage the concerns of the FTC and facilitate the approval of the merger, Actavis agreed to divest all of Abrika's assets and rights necessary to manufacture and market generic Isradipine capsules to Cobalt Laboratories Inc. Behavioural remedies: These may be in the form of commitments by the parties to terminate exclusive agreements acceptance of price-caps on particular products for specified periods of time, or remedies to facilitate market entry through the grant to competitors of access to infrastructure, platforms, key technology, production or R&D facilities or through the licensing of intellectual property rights. While rare, the proposition of behavioural remedies for pharmaceutical mergers is not completely unheard of. In China, the MOFCOM accepted certain behavioural and quasi structural remedies in the Novartis/Alcon merger, wherein the parties gave commitments not to reenter a particular market for a period of five years and the termination of an existing exclusive distribution agreement n another market. 4) The provisions of the Competition Act, 2002 duly enable and empower CCI for seeking consultation with designated persons/cells in concerned ministries/ departments of the government. It has incorporated internal processes for specifically obtaining requisite data and expert advice from appropriate sources, including the ministries and the sectoral regulators. 5) Any quanitifiable adverse impact not seen till now After almost three years of acquisition of Ranbaxy by Daiichi, the product prices of Ranbaxy have remained stable, some in fact even declined. As per 16 IMS MAT June data, prices of Ranbaxy products grew only by 0.6% in 2009 and actually fell by 1% in Similarly, post acquisition of Piramal Healthcare by Abbott USA and Shantha Biotech by Sanofi of France, average product price increases of these two Indian subsidiaries were reported to be just around 2% and 0%, respectively. However, even if there is any remote possibility of M&A having adverse effect on competition, it will now be taken care of effectively by the CCI, as it happens in many countries of the world. 16 Source: avialable at :

12 Going Forward All said and done, the ultimate test of the efficacy of any policy lies in the implementation. Keeping all the aforementioned points in mind, it can be concluded that the Government of India has taken a very optimistic decision to allow CCI to be the watchdog of all the acquisitions and alliances in the pharma industry, but it must ensure that it brings about necessary amendments to the Competition Act 2002 to widen the scope of the commission strengthening it as an institution. A Standing Advisory Committee may be formed consisting of pharma experts to assist CCI. Also, the Government must look at the option of alternative public policies like public procurement of generic drugs and the domestic industry should be encouraged to produce cheap medicines. It is hoped that CCI will carefully scrutinize the possibilities of the market being less competitive due to mergers and acquisitions of pharma companies in the country. This concern becomes even greater, especially, in the horizontal mergers and acquisitions between the comparable competitors in the same products or geographic markets, as we have been witnessing in the pharmaceutical sector, over a period of time. One of the key concerns of the stakeholders in India is that M&A will allow the companies to come together to fix prices and resort to other anti competitive measures. However, in the pharmaceutical industry, this seems to be highly unlikely because of effective presence of the strong price regulator, National Pharmaceutical Pricing Authority (NPPA). NPPA controls nearly 30% of the medicines being sold in domestic market and has further powers to fix prices of any medicine if it finds the prices unreasonable. It is worth mentioning that invoking of public interest by NPPA is an exception rather than the rule. In contrast, CCI has to be a real time monitor of the price movement and the likely abuse of market power in different market segments including pharmaceutical market segment. Global players will keep on searching for their suitable targets in the emerging markets like India, just as Indian players are searching for the same in the global markets. This is a process of consolidation in any industry and will continue to take place across the world. Adverse impact of M&A on competition, if any, has to be effectively taken care of by the antitrust regulator. It goes

13 without saying that as we move on, the role of CCI in all M&A activities within the Pharmaceutical Industry of India will be keenly watched by all concerned, mainly to ensure that the vibrant competitive environment is kept alive. The antitrust regulator is currently very active and a better judge of whether the policy is creating monopolies. It should be given sufficient time to prove its utility, say, a period of five years. If CCI involvement fails to control the prices of drugs in India, the regulators might push for a national pharma policy. Such a policy would empower the Govt. to fix the prices of all essential drugs in India. In that case, it will be important to develop multilevel policy responses to curb the direct and indirect acquisition of domestic generic companies with the objective of creating an enabling environment for the industry to continue in business, and move up in the value chain, along with disincentives to MNCs to capture the Indian generic market under the garb of strategic acquisitions and alliances.