Stronger pharma merger control depends on CCI performance

Author: | Published: 1 Aug 2012
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The Government of India (GOI) has continuously taken initiatives to tighten merger activities in the pharmaceutical industry in order to maintain existing drug prices and prevent price manipulation by multinational corporations (MNCs). Since October 2011, such deals have been subject to clearance by the Foreign Investment Promotion Board (FIPB). Further regulations are expected as the industry anticipates greater scrutiny.

In October 2011, the GOI approved a proposal submitted by the Planning Commission to remove the automatic approval route for FDI into existing pharma companies. Some GOI officials previously suggested that the FDI cap should be lowered from 100% to 49%. This was ultimately rejected by the GOI, with the FDI cap remaining at 100% and certain extra restrictions imposed.

Such GOI initiatives have been launched to help control the price of drugs in India. The healthcare industry in general, and drug availability in particular, has raised many discussions in the country of late. In March 2012, the first compulsory license in the country was issued to Natco Pharma to produce a life saving drug. This followed the failure of Natco Pharma's foreign patent holder to offer the drug at a reasonable price.

Khaitan & Co partner Rabindra Jhunjhunwala says: "Where there is overseas investment, pharmaceutical acquisitions have recently come under regulatory scrutiny in India in order to ensure that the existing price control regime is maintained. The government has suggested the greater involvement of the Competition Commission of India in pharma industry deals."

Some domestic players have also requested GOI intervention over the entrance of foreign players in the Indian pharma industry. One legal practitioner, who wished to remain anonymous, says the GOI initiatives are also taken to protect domestic pharma companies as they worry that MNCs will later dominate and manipulate the Indian pharma industry.

The FIPB assesses applications with various considerations in mind. These include the impact of a merger on public affordability of a drug, whether a transaction will assist in developing the local pharma industry, and whether a transaction will bring about the infusion of new technology in the country.

In January 2012, four applications from international pharma companies wishing to invest in the Indian pharma industry were deferred. It has been suggested that this was either due to the potential implication of the mergers on the prices of some critical drugs, or because there was no proposal to enhance the quality of products manufactured by the Indian company.

In December 2011, the Corporate Affairs Ministry proposed that the Competition Act should be amended to empower the Competition Commission of India (CCI) to scrutinise all pharma M&As. A six-month window period was reserved for parliamentary review and approval of Competition Act amendments and, during this window, the FIPB continued to scrutinise merger activities in the pharma industry. This six-month window may now be extended until the proposed Competition Act amendments are reviewed and approved by parliament.

M&A activities that involve the transfer of shares below 15% are normally exempt from CCI clearance under provisions of the 2002 Competition Act that came into effect on June 1 2011. And the CCI has said that it will not intervene heavily in the pharma industry when it formally takes up responsibility for approving pharma M&A deals – saying that its responsibility is not to regulate prices in the drug market but to scrutinise M&A transactions that might give rise to monopolistic practices.

Some legal commentators suggest it is therefore highly unlikely that the CCI will intervene, as the Indian pharma industry is very fragmented without any single players. Regulating the market for anti-competitive behaviour thus might not be the most effective means of overcoming the problem of drug prices in India.

If CCI involvement fails to control the price of drugs in India, the regulators might push for the introduction of a national pharma pricing policy – something that has been proposed by the Department of Pharmaceuticals (DoP). Such a policy would empower the GOI to fix and regulate the prices of all 348 critical drugs, and such a decision would have a significant financial impact on domestic and foreign players.

The development of regulations in India's pharma industry, it seems, very much depends on the extent to which the CCI is able to influence drug prices after it assumes its role of scrutinising M&As in the pharma industry.

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