This article has been written by Swaroopa V Royadu pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Prashant Baviskar (Associate, Lawsikho) and Ruchika Mohapatra (Associate, Lawsikho). 

Introduction

If the vaccine developed during this pandemic was under the control of only a few pharmaceutical industries and if  those pharmaceutical industries had made an agreement amongst themselves to sell the vaccine for a much higher price or would have made an agreement among themselves to sell those vaccines to only a few rich people then what would have happened? A very large number of the world’s population would have suffered for not getting a vaccine even during such crucial times! Thanks to the legal systems of every country that regulates such illegal and unethical business practices, we all had access to the vaccines. This article will help you to understand everything about Anti-Competitive agreements in the Pharmaceutical Industry in India. To understand the article in better way, it is essential to understand

• The Competition Act 2002 [in brief]
• Role of pharmaceutical Industries in India.

The Competition Act 2002

The Competition Act 2002 was enacted by the parliament of India; it replaced “The Monopolies and Restrictive Trade Practices Act 1969”.

The main purpose and objective of Competition Act 2002 is to carry fair and healthy competition in a market. The Act also emphasizes on preventing adverse effects on competition, the Act helps to promote and sustain competition in the market and also provides guidelines to promote and protect the interest of the consumers and avoid monopoly in business, the Act also controls illegal and unethical business practices in a market.

The prohibitions laid down by the Competition Act 2002 

1. Anti-competition agreement: 

Anti Competition agreements are the agreements that restrict the competition or remove the competitors from the market, such agreements are unlawful.

2. Prohibits abuse of Dominant position: 

When any person or company or organization, who is in a dominant position tries to control its competitors, consumers, and misuse its position, it is called the misuse of dominant position .

3. Regulates the combination:

If there are any mergers, acquisitions with the intention of acquiring assets, shares, taking of voting rights, taking control of management and then to control the market, then such combinations are prohibited.

Competition Commission of India was formed to deal with all the matters relating to Competition laws at state and Central level. 

Section 3 of the Competition Act deals with Anti competitive agreements. No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India. Such contracts are always void.

What kind of agreements are called an anti competitive agreement or how one determines if the agreement is anti-competitive?

• Agreement that directly or indirectly determines purchase or sale prices.
• Agreements that limits or controls production , supply, market, technical development or investment
• Agreements that share markets  or share/divide geographical areas of market or divides the goods or services, divides the customers.
• Agreements that directly or indirectly result in bid rigging or collusive bidding.

These are all Anti competitive agreements. 

Role of pharmaceutical industries in India

Pharmaceutical Industry is a part of the health care sector. The main functions of the Pharmaceutical Industry are producing, developing, discovering, supplying and marketing medical drugs with the aim to cure and protect consumers, vaccinate the needy and to protect all the patients with necessary drugs.

Pharmaceutical regulation means a combination of legal, administrative and technical measures that the government takes to ensure the safety, efficiency, and quality of medicines along with providing accuracy of product information. The pharmacy sector in India is regulated under The Pharmacy Act 1948.

How are the drugs supplied from manufacturer to final patients?

Anti-competitive agreement in the pharmaceutical sector when two or more pharmaceutical companies enter into an agreement which leads to adverse effects on competition in the market such agreements are anti-competitive agreements. For example: In order to make profit in one particular market, the competing pharmaceutical companies may fix the price of drugs through an agreement, through agreement they may limit the production of drugs, which in turn increases  the price of drugs and help such pharmaceutical companies to make profit. Anti competitive agreement can be either  a. Horizontal agreement: These are the agreements among the competitors at the same level. This includes price fixing, bid rigging, market allocation or market sharing, reducing supply of drugs.      Example : Agreement between retailer and retailer  b. Vertical agreements: These are the agreements  among the businesses at different levels of the market chain. This includes tie-in agreements, exclusive supply agreements, exclusive distribution agreements, resale price maintenance, refusal to deal. Example: Agreement between Manufacturer and retailer, agreement between stockist and hospitals etc. Effect of anti-competitive agreement 1.]Pay for delay: To understand this concept it is important to understand the 2 categories of drugs a. Generic drug and Branded drug: A Generic drug is a medication that is similar to branded name drugs in dosage form, quality, performance, safety, and strength. b. Branded drugs are the one which are been developed by pharmaceutical companies after making sufficient investment in Research and development and they are approved by FDA after checking the details of newly invented drug.Pay for delay is an agreement by which the branded name manufacturer pays an agreed amount of money to the generic manufacturer with a promise obtained from the generic manufacturer that it will not enter into the market with their cheaper medicine for a prescribed period. 2.] Collusive agreement: These agreements are made between chain systems, from apex pharmaceutical companies to over the counter. The manufacturer gives huge incentives to Doctors, pharmacies, wholesalers, retailers to sell their products. Most doctors being attracted to huge gifts and incentives prescribe irrational prescription of costly medicine though it would not be needed. Consumers in such situations have very few options to buy the medicine prescribed by doctors or chemists. Such collusive practices also take place between drug companies, retailers, medical representatives etc 3.] Bid rigging[ Antitrust agreement] : Bid rigging in general is a situation where different pharmaceutical companies who are competitors agree or make an agreement on who should win a bid. As a result of this the other pharmaceutical companies may withdraw from bidding, quote higher bidding prices, specify terms that are unacceptable, or they may even refrain themselves from bidding for their own personal benefits. The competitors may further agree upon themselves to have sub-contract between themselves, they may take turns to win a bid, they may agree to share production among themselves and share profits etc.As a result of such practice, the government which procure various types of drugs to hospitals for public interest have to pay higher price for the drugs 4.] Price Fixing: When different pharmaceutical companies who are competitors agree to fix, maintain, and control the price of drugs it is called price fixing of drugs.Most of the people in India are below the poverty line. They even struggle to get their basic human needs met. So the government of India tries to make certain medicines more affordable to such a class of people by listing essential medicines in the list of National List of Essential Medicines. As these are essential drugs these come under price control via the Drug Price Control Order. The consequence of this price control results in shutting down production of few medicines, fraudulent activities, price fixing which ultimately affects consumers. 5.] Market Sharing or Division of market: Pharmaceutical companies who are competitors make an agreement among themselves to divide sales territory into various geographical area or size or they divide the customers to make profits. Example. Company A makes an agreement with company B that it will sell its drugs in south Delhi and company B will sell its drugs in North Delhi. In this scenario both the companies don’t have any competitors in their respective area. 6.] Production Control : Here, it is important to understand the meaning of cartel. Cartel is an association of manufacturers with the purpose of maintaining the prices at higher level and thus restricting the competition.Under production control, pharmaceutical industries make agreements among themselves to reduce the production or manufacturing of drugs with the intention to increase its demand in the market and subsequently increase its price. 7.] Exclusive supply – When a pharmaceutical company restricts the purchaser from acquiring any goods or services from anyone other than the seller or any other person is called exclusive supply agreement. 8.] Exclusive Distribution – Exclusive distribution is a kind of distribution where a manufacturer or supplier authorizes only one distributors to distribute or supply drugs in specific region. Such distributors are sole authorized seller of those specific drugs. Exclusive distribution agreements that limit, restrict or withhold the supply of any drugs or medicine fall under category anti-competitive agreement. 9.] resale price maintenance – This refers to the imposition of a condition by a seller fixing the price at which his purchaser may resell the goods. Such conditions will create a clog on the free play of the market forces which alone will determine the prices at which goods are sold. 10.] Tie-in -agreement – This is a method under which the buyer is forced to buy the second product which is tied with the main product. Example : a person buying medicine for weight loss has to compulsory buy a weighing machine.  case laws on anti-competitive agreementBelgaum District Chemist and Druggist Association V/S Abbott India Limited , Karnataka In this case Belgaum District Chemist and Druggist Association [the informant] alleged that Abbott India limited [opposite party 1 or op1] and Geno Pharmaceutical [ opposite party3 or op3] stopped supplying essential medicines to some of its members on the ground that they have to obtain No objection certificate from All India organization of chemist and Druggist [opposite party 4 or op4] or from Karnataka Chemist and Druggist Association[ opposite party 2 or op2]. As a result of this the supply of medicine was restricted. The first investigation report of Director General made the following findingsOp4 and Op2 have indulged in action practice which are anti competitive in natureIt was observed that there was a violation of Section 3(3)(a) and section 3(3)(b) of Competition Act 2002Investigation further revealed that Op4 had an understanding with some pharmaceutical associations with the means of agreements and memorandum of understanding for the appointment of stockists. It was further revealed that trade margin of retailers and stockiest were fixed by these association in connection with Op4 and charges were collected by these associations for those who want to introduce new medicine in any territory, policy to supply medicines was such that there was no direct supply of medicine to any doctors , nursing homes or anybody who are not been approved by Op4.It was found memorandum of understanding was in contravention of section 3(3) and has put limits on supply of pharmacy products.It was also concluded that the norms and guidelines adopted by Op4 regarding appointment of new stockists and fixing trade margins amount was in  contravention of section 3(3)(a)and section 3(3)(b) of Competition Act 2002.The Commission asked the Director General to make some supplementary investigation on determination of price and limiting /controlling of supply of medicine.The Director General reiterated that memorandum of understanding between Op4 and few pharmaceutical  Associations form guidelines for fixing margins and appointment of new stockists.On issue of limiting and controlling of supply of medicine it was observed a. Firstly : New or additional stockists should get no objection certificate form state chemist or Druggist Association to enter the market. b.Secondly : New drugs are introduced in territory only after paying product information service[PIS] or prescribed product information index[PPII]With respect to determination of margin of wholesale price and retail price it was found that with respect to non- scheduled drugs it was fixed at the time of PIS or PPII approved by Op2. Effect of fixing margins also affects the sales price of non scheduled medicine.Report of investigation was sent to all the parties for submitting their written objections. After considering objections, reply to objections and oral hearing from all the parties the following issues were raised. Issues of the case: 1.] Whether the conduct of Op4 pursuant to its agreements/MOUs entered with other pharmaceutical Associations is in contravention of section 3(1) read with 3(3) of the Act or not?Op4 Was held not guilty after verifying evidence. 2.] whether op2 was a. Mandating NOC prior to the appointment of the stockist by pharmaceutical companies? Op2 was held liable b. Mandating pharmaceutical companies to pay PIS before launching of new drug With respect to PIS and PPII it was held in the absence of any material suggesting compulsion on the pharmaceutical companies to seek PIS/PPII publication, before introducing the drugs in any territory, mere offering of PIS/PPII services cannot be regarded as limiting or controlling supply of drugs. Accordingly, no contravention of section 3(3)of Act is established against op2 c. Prescribing PPII thereby determining the trade margin of the wholesalers and retailers? Op2 was held liable for determining the trade margin of wholesalers and retailers. Court ordered commission directs Op2 to cease and desist from indulging in the practice of mandating NOC requisite for appointment of stockist and fixing of trade margins for retailers and wholesalers which was held anti competitive. While considering the issue of imposition of penalty, the Commission takes into account the peculiarity of facts and totality of circumstances involved. The Commission notes that recently a penalty of Rs. 860321/- was imposed upon OP-2 in a matter involving similar allegations i.e. NOC practice for appointment of stockists (Case No. 71/2013 titled M/s Maruti & Company versus Karnataka Chemists & Druggists Association & Others). The period of contravention in the said case was subsequent to the period of investigation in the instant matter. In view of these, the Commission refrains from imposing any monetary penalty in the present case. Nevertheless, it is clarified that any future repetition by OP-2 of the conduct that are found herein as a contravention of the provisions of Act, will be taken seriously and proceeded with in accordance with the provisions of the Act. Conclusion As we all know, India is the largest provider of generic medicine in the globe and holds 20% share globally in supply by volume. India also ranks 3rd worldwide for production by volume and 14th by value. So it becomes absolutely necessary to regulate pharmaceutical industries in India. If the pharmaceutical companies are not regulated properly, then the unethical practices and illegal practices will surely reduce the economic growth and overall development of our country. 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