ROLE OF CCI IN MERGER CONTROL IN INDIAN PHARMA INDUSTRY

Participant Detail :

Name of the participant - Jyoti Kumari

Institution - Symbiosis Law School

Course & year of study - 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". 1In the domestic space, Sun Pharma will be

largest drug maker, with revenues estimated to be around INR 27000 crore ($ 4.2 bn), which will

give it approx 9.2% share of Indian pharma market, (worth INR 76000 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. 2CCI, in its order, had said, "In terms of Section

1 Source: Ranbaxy, available at http://www.ranbaxy.com/sun-pharma-to-acquire-ranbaxy-in-a-us4-billion-landmark-

transaction/ 2 http://www.cci.gov.in/May2011/PressRelease/C-2014-05-170-Press-Release.pdf

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 2014..

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

• 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.

• 4The 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. 2008

witnessed one of the biggest mergers in the Pharmaceutical Industry of India, when the third largest

4 Source available at: http://pharmaceuticals.gov.in/aboutus.pdf

5 Global Pharma looks to India, Pwc Report, available at

https://www.pwc.in/assets/pdfs/pharma/Global_Pharma_looks_to_India.pdf

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:

6Year 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: http://cci.gov.in/May2011/OrderOfCommission/CombinationOrders/ORLfeb12.pdf • Acquisition of shares in Arch by Mitsui Case No. C-2012/08/73, , decided on 19th September, 2012,available at: http://cci.gov.in/May2011/OrderOfCommission/CombinationOrders/C-2012-08-73.pdf • Acquisition of the Transferred Business by Hospira for Orchid, Case No. C-2012/09/79, decided on 21

st

December, 2012, available at: http://cci.gov.in/May2011/OrderOfCommission/CombinationOrders/C-2012-09-79.pdf • Mylan’s acquisition of Unichem Laboratories Limited, Case No. C-2013/04/119, decided on 6th June, 2013, available at: http://cci.gov.in/May2011/OrderOfCommission/CombinationOrders/C-2013-04-119.pdf • The acquisition of Agila Specialties Private Limited by Mylan, Case No. C-2013/04/116, decided on 20th July, 2013, available at: http://cci.gov.in/May2011/OrderOfCommission/CombinationOrders/C-2013-04-116.pdf

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. 7According 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

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 anti-

competitive practices. The CCI may, therefore, not be able to take on board public interest concerns

related to public health," 8said 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. 9Sub-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, 2011

9 Competition Act, 2002 (Section 20 of 2002)

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

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

11The 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, 2011

11

FDI in the Pharma Sector: - Capitalizing India’s Growth Potential or Disaster for a Booming E, available at conomy

http://www.indialawjournal.com/volume5/issue_4/article5.html

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).

13China whose Anti-Monopoly Law came into being only in 2008 has approved 6 pharmaceutical

mergers with conditionalities till date.

14South 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 http://money.cnn.com/2004/04/26/news/international/aventis_sanofi/ 13

Competition impediments in Pharmaceutical Sector in India, available at http://www.circ.in/pdf/Pharmaceuticals_Sector.pdf 14

Same as source 7

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

http://online.wsj.com/articles/SB10001424052748704129204575507013304953260

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 re-

enter 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 2010. 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 : http://www.tapanray.in/credible-role-of-cci-and-nppa-should-allay-fear-of-possible-ill-effects-of-fdi-in-pharmaceuticals/

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

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.