This article has been written by Shaunak Chaudhary, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. The article has been edited by Amitabh Ranjan (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
Table of Contents
Introduction
The pharmaceutical industry in the digital market space is quite varied in structure and a point of competition between the companies in the market. Pharma companies are regulated by a larger number of regulations and compliances as compared to the digital marketplace that is still developing. The considerations that go behind pharma combinations (mergers or acquisitions) can be; acquiring patents to increase market presence and share and control of prices in the market. Whereas in the digital space, a large driver for combinations is data acquisition for processing consumer data and ultimately selling the same or using it for targeted marketing. The first part of this article shall look at the regulations behind the pharma industry that pertain to mergers and acquisitions, and the second part concerns itself with the digital space for the same topic of analysis.
Pharma
As mentioned above, the two main points of contention when discussing mergers and acquisitions in the pharma industry pertain to patents and pricing that ultimately lead to the goal of market share and profits. Patents in India are regulated through the Patents Act of 1970. They maintain the monopoly of a drug that the company has invented to protect their rights in the market and give rights to the company to manufacture the drug or to give out patents. The drugs don’t need to be invented by the companies themselves as other institutions may also do so, but the companies that have the patent for manufacturing, either owned or given, would reap the benefits in the pharma market. Section 3(d) of the Patents Act is the most relevant in this area because the Competition Commission when considering restrictions under Section 4 or 5 of the Competition Act, 2002, would be concerned with the kind of patents the companies have to ensure that there is enough competition in the market.
Section 3(d) speaks of the restriction on patents, which does not allow patents to be given to products that are a mere version of already existing products. If that new product does not have any new use it will not be given a patent. Derivatives of the same drug that have the same use shall thus not be granted new patents. As per the Competition Commission of India, this is in fact good for competition in the market since it does not make the pharma companies complacent and encourages more research towards medicines and techniques that are drastically different from the existing drugs. The Supreme Court in Bishwanath Prasad Radhey Shyam v. Hindustan Metal Industries [(1979) 2 SCC 511] has also laid down that the new product needs to be an inventive step and not a mere workshop improvement; it must lead to a new product and a new use or a substantially cheaper product.
National Pharmaceutical Pricing Authority (NPPA)
The price of drugs in India is controlled by the National Pharmaceutical Pricing Authority (NPPA) that was given life through a resolution in 1997 as per the plans in the Drug Policy of 1994. The NPPA controls the prices of the Schedule I drugs as mentioned in the Drug (Prices Control) Order, 2013. Unlike the United State, India has a very strict pricing policy on medicines that try to create a balance between the market demand and the supply costs. It does not just exist to lower the price for the public but also to ensure that the companies manufacturing the drugs find it profitable to continue supply.
Where the NPPA would be practising price control, there would be no scope for the companies to abuse their position post mergers or acquisitions to influence the market. On the other hand, when NPPA is not controlling the price, the companies may get some leeway but it can always initiate control over Schedule II drugs.
Role of patents in M&A transactions
Patents are the primary concern in the field of mergers and acquisitions. If the Competition Commission’s position is that patents for drugs should be given only to those that invent or discover a completely new product with a new use, it will have to be more vigilant when it comes to M&A. Where there are a group of companies all having patents of separate drugs and having similar market shares in the country, and two of them decide to merge, their market share would double and that two holding different patents. The issue over here will be that since medicines and drugs are necessary products, the rules of demand and supply are skewed towards the company’s manufacturing and selling. They shall immediately gain a lot of bargaining power even against the government. Although the situation would not become like it is in the US, if the patenting system is such that strictly new products shall get patents, this may become an outcome if the CCI does not pay attention to this facet of the transaction even if the net worth of the companies are not hitting the Competition Act benchmarks.
Digital Space
The regulations for mergers and acquisitions are essentially limited to the Competition Act when it comes to the digital space in India. The Competition Act does not explicitly mention data as a driver for combinations and does not give jurisdiction to the CCI pertaining to foreign company mergers that operate in India. The European Commission has the jurisdiction to regulate mergers through its Council Regulation (EC) No. 139/2004. Where the EU can judge the Facebook and WhatsApp acquisition, the CCI could not. Even though WhatsApp and Facebook are two of the most used messaging and social media apps in the country. The CCI looks into anti-competitive practices like in WhatsApp LLC v. CCI. The CCI was trying to investigate under Section 4 of the Competition Act, which is pertaining to abuse of dominant position. It was established in the case that WhatsApp has a dominant position in the market and that its potential to abuse non-price factors in the market could mean the creation of barriers to entry which would be a violation of Section 4(2)(c). Moreover, an agreement between Facebook and WhatsApp to share data with the parent company for tracking consumers not only through its platform but also WhatsApp can be a potential violation of Section 3, which pertains to Anti-competitive Agreements.
This exercise is of interpretation and not of regulation. There are no strict norms that regulate mergers and acquisitions specifically due to which a lot of it can be left to the imagination of the companies. Seeing that several of these big data companies that perform mergers and acquisitions, often to the detriment of the market, are foreign companies that may or may not have subsidiaries in India, the CCI’s jurisdiction is limited. This is why today we have a duopoly in the e-commerce market that the government is desperately trying to regulate ex post facto the acquisitions that got them there and a monopoly in the web search market since the CCI essentially has no say what Google LLC can do.
Comparative analysis
Pharma regulations and digital space regulations are drastically different when it comes to the considerations for why they are entering into a combination and the result of the combination. For one it is the control over patents and hence a greater bargaining power against the government, for the other it is the accumulation of data for selling or marketing. The CCI is obviously involved in both kinds of combinations but the complexity of a merger in the pharma industry would be far greater than what the digital companies would have to due to the existing limitations that have been there for decades. Moreover, what a company can do after the merger is also different. In the pharma industry, prices are regulated, hence, the end motive of profit is limited by regulation, but in the digital space, due to the novelty of the industry and the lackadaisical attitude of the governments towards their specific harms, the regulations are reactive than proactive and the jurisdiction of the CCI and their mandate relegates them to interpret the law instead of simply applying it.
Conclusion
The fact that in 2010, a detailed CCI recognized report on competition in the pharmaceutical markets was published with an exhaustive collection of the regulations that matter to the pharma industry gives an insight into the level at which the CCI has engaged in this matter. Weighing the importance of the two industries, it is clear that the pharma industry is more vital to the public as it pertains to a necessary commodity, and it is also much older than others. But the regulations have to catch up with the times when it comes to the digital space as well and net worth or turnover de minimis requirements that do not consider non-price factors for mergers and acquisitions are outdated forms of judging the market.
The NPPA post-acquisition/ merger between any pharma companies needs to be vigilant of the price effects of that combination in the market. Although they have the authority to control prices, that authority is not to be used indiscriminately and rather to be used parallel to market share changes and the introduction of new patents.
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