November 24 2011
The government is contemplating the regulation of foreign direct investment in the pharmaceutical sector through Competition Commission scrutiny, by scrapping the acquisition limits for target enterprises.(1)
Recently discussed in a high-level meeting chaired by the prime minister on the possible regulation of foreign direct investment policy, the Planning Commission's Arun Maira Committee report has stirred a hornets' nest within the government, due to the growing popularity of medical tourism in India.
Foreign direct investment in brownfield acquisitions in the pharmaceutical sector is currently regulated through the Foreign Investment Promotion Board (FIPB), an internal regulatory authority for clearing foreign direct investment in India. The report instead suggests that the government should consider excluding such investments from the remit of a government notification under the Competition Act 2002. Under the act, acquisitions of target enterprises with a turnover of up to Rs7.5 billion or with assets of up to Rs2.5 billion need not be notified before the Competition Commission. The report argues that most brownfield investments in the pharmaceutical sector are below these thresholds and hence may escape the scrutiny of the commission. The report further argues that commission scrutiny is preferable to that of the FIPB, due to the clear and transparent legal procedures.
The Ministry of Health has recommended control through the FIPB route for brownfield investments instead of scrutiny by the Competition Commission. The Planning Commission instead seems to be in favour of the scrutiny by the commission. Both agree that there is a need to provide:
"[the] necessary enabling Regulations to make [the Competition Commission] effective for regulating the M&As in the brownfield category of foreign direct investments in the pharmaceutical sector."
Some have also suggested that the Competition Act 2002 should therefore be amended.(2)
Neither the Planning Commission nor the Ministry of Health appears to have appreciated the vast reach of the Competition Act. Under the act, the commission is empowered to scrutinise any foreign investment in the brownfield category, which is possible even now without lowering the current thresholds for target acquisitions (ie, below Rs7.5 billion in turnover or Rs2.5 billion in assets). In addition, even after FIPB approval, the Competition Commission can investigate such investments if they lead to any acquisition or control in an existing India enterprise that, in the opinion of the commission, is likely to cause an appreciable adverse effect on competition under the act - for example, relating to regulation of anti-competitive agreements(3) or abuse of a dominant position.(4) There is no requirement to amend the act for this limited purpose, as specific provisions already exist in the act for granting an exemption to any economic sector from any provision of the act.(5) However, this may not be the best option economically, as it is likely to pave the way for similar demands from other sectors.
There are numerous examples of anti-competitive behaviour by pharmaceutical giants worldwide. The global pharmaceutical industry has a long history of indulging in anti-competitive practices, including cartels, as illustrated by the Lysine Cartel and Vitamins Cartel cases. A sector inquiry has been underway in the European Union since January 2008 into the state of competition in the pharmaceutical sector. The inquiry was initiated after the AstraZeneca case, in which AstraZeneca was fined €60 million for deliberately misusing government procedures and the European patent systems with the aim of delaying the launch of the generic version of its blockbuster drug Losec (omiprazole) by generic pharmaceutical companies. As a part of this inquiry, three Indian generic companies - Lupin Ltd, Matrix Labs and Niche Generics Ltd - were raided in Europe. Furthermore, similar secret agreements were entered into with French originator company Servier, to delay the launch of the generic version of Servier's perindropil drug, a life-saving drug for hypertension.
There is no reason why this kind of secret, anti-competitive agreement could not have already been made or would be made by originator pharmaceutical companies (mostly from outside India) with Indian pharmaceutical companies, mostly generic, to delay the launch of popular medicines in India. Generic versions can be launched only following the expiry of the 20-year patent period, which either has already expired for most popular drugs or is likely to expire shortly.
Therefore, instead of tinkering with the thresholds for proposed mergers and acquisitions in this sector, thus unnecessarily creating fears in the minds of prospective investors in the greenfield category (and thereby depriving India of the technological advancements in this sector), it would be prudent for the Ministry of Health to utilise the existing capability of the Competition Commission to investigate anti-competitive agreements under Sections 3 and 4 of the act, without the need for changes to the existing structure.
(1) The issue was discussed extensively by CNBC TV18 in its popular weekly programme The Firm in the episode "FDI in pharma: one step back?" on October 14 2011. The video of the programme can be viewed at http://thefirm.moneycontrol.com/video_page.php?autono=599954&video_flag=1.
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