Pharmaceutical regulatory law
Regulatory framework and authorities
Which legislation sets out the regulatory framework for the marketing, authorisation and pricing of pharmaceutical products, including generic drugs? Which bodies are entrusted with enforcing these rules?
The legislative framework for the marketing, authorisation and pricing of pharmaceutical products in India (including generic drugs) consists of:
- the Drugs and Cosmetics Act, 1940, the Drugs and Cosmetics Rules, 1945 and the Drugs (Control) Act, 1950, which regulate the manufacture and distribution of pharmaceutical products;
- the Drugs (Price Control) Order, 2013, framed under the Essential Commodities Act, 1955, which regulates the pricing of certain essential medicines listed therein;
- the Pharmacy Act, 1948 and the Pharmacy Practice Regulations, 2015 (Pharmacy Regulations), which prescribe conditions and qualifications, upon satisfaction of which a person can be authorised to handle or dispense medicines;
- the Medicinal and Toilet Preparations Act, 1955, which levies an excise duty on medicinal preparations that contain alcohol, narcotic drugs or narcotics; and
- the Drugs and Magic Remedies (Objectionable Advertisements) Act, 1954, which controls the advertisement of drugs in India.
Are drug prices subject to regulatory control?
Drug prices in India are subject to regulatory control of the National Pharmaceutical Pricing Authority (NPPA), which is the governing authority under the Drug Price Control Order. Among other things, the NPPA is entrusted with the task of fixing and revising prices of controlled drugs and formulations; the enforcement of the Drug Price Control Order; and monitoring prices of both controlled and decontrolled drugs in the country.
Notably, price controls are applicable to ‘scheduled formulations’ (ie, drugs mentioned in Schedule I of the Drug Price Control Order, which can be found at www.nppaindia.nic.in/DPCO2013.pdf). These scheduled formulations also include drugs from the National List of Essential Medicines, 2015, which, as its name suggests, contains an exhaustive list of vital drugs that are subject to regulatory control. However, the government of India may also, in the case of extraordinary circumstances and in public interest, fix the ceiling price or retail price of any drug, whether scheduled or non-scheduled, or of a new drug for such period as it may deem fit.
Once a drug has been notified as a scheduled formulation, the NPPA may only revise (ie, increase or decrease) the ceiling retail prices. The Department of Pharmaceuticals, which falls under the Ministry of Chemicals and Fertilizers, is the designated authority under the Drug Price Control Order. It is empowered to hear any grievances against the listing of a drug as a scheduled formulation or on the issue of ceiling prices.
Is there specific legislation on the distribution of pharmaceutical products?
The legislative framework for the distribution of pharmaceutical products consists of:
- the Drugs and Cosmetics Act and the Drugs and Cosmetics Rules, which regulate the import, manufacture, distribution and sale of drugs in India;
- the Narcotic Drugs and Psychotropic Substances Act, 1985, which regulates the purposes for which, and quantity and price at which, certain drugs may be sold; and
- the Pharmacy Act and the Pharmacy Regulations, which prescribe conditions and qualifications upon the satisfaction of which a person can be authorised to handle or dispense medicines.
Intersection with competition law
Which aspects of this legislation are most directly relevant to the application of competition law to the pharmaceutical sector?
Competition rules and the pharmaceutical sector-specific laws on marketing, authorisation and pricing of pharmaceutical products must be read in conjunction with each other. More specifically, the following aspects of the regulatory framework listed in question 1 are most relevant to the application of competition law in the pharmaceutical sector:
- the Drug Price Control Order, which empowers the government of India to set ceiling prices for certain scheduled formulations on the basis of which manufacturers may set maximum retail prices, after accounting for local taxes. For new drugs, manufacturers may set maximum retail prices on the basis of retail prices determined by the government and local taxes;
- the Essential Commodities Act, which empowers the government to regulate the production, supply and distribution of essential commodities, including pharmaceutical products; and
- the Pharmacy Act, which prescribes the conditions and qualifications upon the satisfaction of which a person may be authorised to handle or dispense medicines.
Competition legislation and regulation
Which legislation sets out competition law?
The Competition Act, 2002 (CA02) and its allied regulations constitute the framework for competition law in India. The CA02 is primarily enforced by the Competition Commission of India (CCI).
Which authorities investigate and decide on pharmaceutical mergers and the anticompetitive nature of conduct or agreements in the pharmaceutical sector?
The CCI has the responsibility to investigate and decide on mergers as well as the anticompetitive effect of unilateral conducts and agreements in all sectors, including the pharmaceutical sector, together with the Director General (DG) (ie, the investigative arm of the CCI). An appeal from the decision of the CCI lies to the National Company Law Appellate Tribunal (NCLAT). A further appeal lies to the Supreme Court of India.
The government has permitted foreign investment of up to 100 per cent of the total share capital of both brownfield and greenfield ventures in India. However, investment in brownfield ventures is subject to the approval of the Department of Pharmaceuticals, for investments beyond 74 per cent.
The restructuring or amalgamation of pharmaceutical companies needs prior approval from the National Company Law Tribunal of the state in which the registered office of the company is located. Moreover, the acquisition of shares in a publicly listed pharmaceutical company will have to comply with the rules and regulations prescribed by the Securities and Exchange Board of India.
What remedies can competition authorities impose for anticompetitive conduct or agreements by pharmaceutical companies?
The monetary penalty for anticompetitive conduct can extend to up to 10 per cent of a company’s average (relevant) turnover for the preceding three financial years. In the case of cartels, the fine can be up to three times the profit made for each year for which the cartel was in existence. Additionally, the CCI may impose fines on individuals responsible for anticompetitive conduct. The Supreme Court of India in Excel Crop Care Limited v Competition Commission of India and Another (2017 (8) SCC 47), has now limited the scope of turnover to only ‘relevant turnover’ (ie, at the time of determining the quantum of penalty in the case of a multi-product company, the CCI may only consider the turnover of the ‘infringing’ product or service, as opposed to the total turnover of the enterprise found guilty of contravening the provisions of the CA02).
In relation to individual penalties, in M/s Arora Medical Hall, Ferozepur v Chemists & Druggists Association, Ferozepur (case No. 60 of 2012), the CCI imposed a penalty of an amount equal to 10 per cent of the average income of the preceding three years on individual office bearers of the Chemists and Druggists Association, Ferozepur, for entering into an agreement to limit supply of drugs and medicines. This set a trend, and the CCI has adopted equally stringent approaches in subsequent cases, such as Rohit Medical Stores v Macleods Pharmaceutical Limited and Ors (case No. 78 of 2012), where the CCI imposed a penalty of equal to 10 per cent of the average income of the preceding three years on an office bearer of the Himachal Pradesh Society of Chemists and Druggists Alliance (HPSCDA) for his active involvement in anticompetitive practices carried out by the HPSCDA. More recently, in Reliance Agency v Chemists and Druggists Association of Baroda & Others (case No. 97 of 2013), the CCI found the respective presidents of the Federation of Gujarat State Chemists and Druggists Association and Chemists and Druggists Association of Baroda responsible for the anticompetitive conduct of their respective associations, and accordingly imposed a penalty of 10 per cent of their average income for the preceding three years.
The CCI is also empowered to modify anticompetitive agreements (whether horizontal or vertical or agreements entered into by a dominant enterprise), order the division of a dominant enterprise or pass any other order it may deem fit. Where an enterprise found to be in contravention of the CA02 is a member of a group and the CCI finds other members of such group to also be responsible for or have contributed to such contravention, it may pass orders against such members of the group as well. Note that group is defined as ‘two or more enterprises, which directly or indirectly are in a position to exercise 26 per cent or more of the voting rights in the other enterprise; appoint 50 per cent of the members of the board of directors in the other enterprise; or control the management and affairs of the other enterprise’.
Private actions and remedies
Can private parties obtain competition-related remedies if they suffer harm from anticompetitive conduct or agreements by pharmaceutical companies? What form would such remedies typically take and how can they be obtained?
The NCLAT may pass an order for recovery of compensation from any enterprise, for any loss or damage that is shown to have been suffered, as a result of any contravention of the provisions of Chapter II of the CA02 (anticompetitive agreements, abuse of dominant position and merger control). Claims for compensation may be filed by the central government, state government, local authority or any enterprise or person.
The claim may arise from the final findings of the CCI or NCLAT (in an appeal against the findings of the CCI). Compensation may also be sought for contravention of orders of the CCI or NCLAT. There have been few cases in which compensation applications have been filed, with none relating to the pharmaceutical sector. In the decision of Adidas India Marketing v Nike India & Ors, the erstwhile Competition Appellate Tribunal (COMPAT), the predecessor to the NCLAT, held that the power of the COMPAT to award compensation is restricted to cases where loss or damage has been caused as a result of monopolistic or restrictive or unfair trade practice; the COMPAT has no jurisdiction where damage is claimed for a mere breach of contract. In this case, COMPAT also imposed a fine on the applicant for filing a frivolous compensation claim.
May the antitrust authority conduct sector-wide inquiries? If so, have such inquiries ever been conducted into the pharmaceutical sector and, if so, what was the main outcome?
The CCI is empowered to conduct sector-wide inquiries to determine whether industry practices contravene the CA02. The inquiry may be suo moto, on the basis of a complaint or on a reference by the government.
In July 2010, the CCI commissioned a study entitled ‘Competition Law and Indian Pharmaceutical Industry’. The study, conducted by the Centre for Trade and Development in New Delhi, concluded that although there was exponential growth in the industry, there was limited price competition among retailers. In 2013, the CCI initiated another study on the domestic pharmaceutical industry to look into issues relating to the patents regime, pricing, the process of manufacture and the terms and conditions for the sale of drugs through chemists and druggists in India. The outcome of the study is still awaited.
In February 2014, the CCI issued a press release in which it noted that it had passed several orders identifying the following practices as being anticompetitive and in contravention of the provisions of the CA02:
- the issuance of a no objection certificate by trade associations as a precondition for appointing stockists;
- compulsory payments of product information service charges to the trade associations for release of new drugs or formulations;
- the fixation of trade margins for sale of drugs or formulations by the trade associations; and
- calls for boycotts by trade associations.
As such, the press release drew the attention of associations of chemists, druggists, stockists, wholesalers and manufacturers to bring any violations of the CCI order to the CCI’s notice.
The CCI has also invited entities to carry out a study on the pharmaceutical and healthcare industry in India to look into public and private hospitals, insurance companies, pharmaceutical firms and their associations and doctors and their associations, in order to understand if there were any anticompetitive practices prevalent in these industries. The outcome of this study is still awaited.
To what extent do non-government groups play a role in the application of competition rules to the pharmaceutical sector?
Non-government groups can play a role in the application of competition laws in two ways: they may give information to the CCI regarding anticompetitive conduct, on the basis of which an investigation may be initiated and they may be asked for their views as third parties during an ongoing investigation. There have been instances of investigations being initiated by the CCI on the basis of information provided by trade or consumer associations.
Review of mergers
Are the sector-specific features of the pharmaceutical industry taken into account when mergers between two pharmaceutical companies are being reviewed?
When reviewing mergers, the CCI is required to consider the guiding factors listed in the CA02. These include the existence of barriers to entry, degree of countervailing power, actual and potential levels of competition, and the nature and extent of innovation - all with reference to the ‘relevant market.’
At the time of examining these factors, the CCI also recognises sector-specific qualities of the industry in question. This is also apparent in its assessment of ancillary restraints. For example, in Orchid/Hospira (2012), the parties argued that the non-compete clause restricting research, development and testing by the seller and its promoters was standard industry practice. The CCI held that non-compete covenants should be reasonable in terms of both their temporal and subject matter scope. It, accordingly, reduced the duration of the non-compete clause from eight to four years. Likewise, the CCI truncated the substantive coverage of the non-compete to ensure that the seller was not restricted from conducting research, development and testing on such new molecules that did not exist at the time the transaction was executed.
How are product and geographic markets typically defined in the pharmaceutical sector?
In several pharmaceutical mergers reviewed by the CCI, geographic markets are usually national in scope. However, the CCI’s decisions do not shed much light on the preferred methodology to define relevant product markets in this sector. It was only in Mylan Inc/Agila Specialities Private Limited (2013) that the CCI first made limited reference to therapeutic categories, intended use and characteristics of the product.
Thereafter, differing approaches have been adopted, possibly based on the complexity of each case. In New Moon BV (2014), the CCI considered the relevant molecular level of the drugs when analysing overlaps. This approach was replicated in Sun Pharmaceutical Industries Limited/Ranbaxy Laboratories Limited (the Sun/Ranbaxy decision), and the CCI went on to state that each generic brand of a given molecule is a chemical equivalent and therefore considered substitutable. However, GlaxoSmithKline plc/Novartis AG (2014) saw a return to market delineations on the basis of therapeutic category followed by a more granular, molecular-level approach in Pfizer Inc/Hospira Inc (2015). Finally, in Eli Lilly/Novartis (2015), the CCI acknowledged that in its previous decisions it had defined relevant product markets (in the pharmaceutical industry) at the molecular level (ie, medicines or formulations based on the same active pharmaceutical ingredient).
Addressing competition concerns
Is it possible to invoke before the authorities the strengthening of the local or regional research and development activities or efficiency-based arguments to address antitrust concerns?
The CA02 prescribes several factors that the CCI must consider when determining if any conduct or agreement results in an appreciable adverse effect on competition (AAEC) in the market. These factors include:
- potential anticompetitive harms such as:
- creation of barriers to new entrants in the market;
- driving existing competitors out of the market; and
- foreclosure of competition by hindering entry into the market; and
- pro-competitive benefits, such as:
- accrual of benefits to consumers;
- improvements in production or distribution of goods or provision of services; or
- promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.
As such, in determining whether any conduct or agreement results in AAEC, the CCI must consider efficiency-based arguments put forth by the parties. Even in the case of mergers, research and development is an important assessment parameter. Parties would therefore be able to invoke efficiency-based arguments to address antitrust concerns.
Under which circumstances will a horizontal merger of companies currently active in the same product and geographical market be considered problematic?
The CA02 and its allied regulations do not specify any thresholds for overlap that may automatically be considered problematic. The relevant test is whether the overlap is likely to cause an AAEC in India.
Merging parties ordinarily notify the CCI in the simpler Form I. However, when the combined share of the parties in horizontal overlap markets exceeds 15 per cent, or 25 per cent in vertically linked markets, the CCI (Procedure in Regard to the Transaction of Business relating to Combinations) Regulations 2011 (as amended up to 1 January 2016) (Combination Regulations) recommend that parties notify the CCI using the more detailed Form II.
In the Sun/Ranbaxy decision, overlapping products in which the combined market share of Sun Pharmaceutical Industries Limited and Ranbaxy Laboratories Limited was between 65 per cent and 95 per cent, were deemed problematic by the CCI. This prompted the CCI to pass its very first remedies order to divest a number of products.
When is an overlap with respect to products that are being developed likely to be problematic? How is potential competition assessed?
The CCI requires information on pipeline products and services to be disclosed in respect of transactions that involve high market shares to be able to examine whether there is likely to be a concern. Specifically, the Combination Regulations clarify that where the combined market share of the parties in horizontal overlap markets exceeds 15 per cent, or 25 per cent in vertically linked markets, it is preferable for parties to notify the proposed combination in the more detailed Form II. At the time of providing information in Form II, parties are required to disclose whether any of the parties have ‘pipeline products or services’ (ie, products or services likely to be introduced in the market in the near future). If so, parties are then required to provide an estimate of projected sales and market shares over the course of the following three to five years.
Thus, if on reviewing the information on pipeline products the CCI believes that the proposed combination is likely to result in an AAEC, it is possible for the CCI to make appropriate modifications to the proposed transaction involving such pipeline products as well.
Which remedies will typically be required to resolve any issues that have been identified?
The CCI may approve, disapprove or propose modifications to notified mergers. In the pharmaceutical sector, the CCI has, on at least three occasions, modified the term of long-term non-compete clauses from the duration agreed between the parties, down to four years.
Sun/Ranbaxy was the first case in which the CCI initiated and concluded a detailed phase II investigation. In certain product segments, the CCI concluded that the transaction would result in market shares that were deemed likely to result in AAEC. Accordingly, the CCI ordered Sun and Ranbaxy to divest seven brands and appointed PricewaterhouseCoopers to supervise the divestment process. The purchase of the divested assets by Emcure Pharmaceuticals was approved by the CCI in March 2015.
Patents and licences
Would the acquisition of one or more patents or licences be subject to merger reporting requirements? If so, when would that be the case?
The CA02 requires the mandatory notification of either shares or voting rights, or assets or control, when the relevant jurisdictional thresholds are satisfied and the transaction does not benefit from any exemption. Intellectual property rights (IPRs) including patents, comprise assets. Equally, the CCI has considered exclusive licences as assets. Accordingly, the acquisition of one or more patents or licences (only when exclusive) may be subject to merger reporting requirements.
What is the general framework for assessing whether an agreement or practice can be considered anticompetitive?
Under the CA02, 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 AAEC within India shall be void. Specifically, horizontal agreements that fix prices, limit or control production or supply of goods or services, share markets or sources of production, or result in bid rigging are presumed to be anticompetitive. The CA02 provides a limited carve-out for joint ventures that result in efficiencies in the production, supply, distribution, storage, acquisition or control of goods or the provision of services. Efficiency-enhancing joint ventures are not subject to the presumptive rule that is otherwise applicable to horizontal anticompetitive agreements. Vertical restraints, including tie-in arrangements, refusal to deal, resale price maintenance (RPM) arrangements, exclusive supply and exclusive distribution agreements, are prohibited only if they cause or are likely to cause an AAEC in India.
The aforementioned provisions relating to anticompetitive agreements do not apply to reasonable and necessary conditions or restrictions imposed for the protection of IPRs that have been registered under identified IPRs in India. Moreover, agreements exclusively relating to the export of goods or services are also exempt from the scope of anticompetitive agreements.
As indicated in question 13, the CA02 lists certain factors that the CCI must consider when establishing the anticompetitive effect of an agreement, including:
- creation of barriers to entry;
- market foreclosure;
- removal of competitors;
- benefit to consumers;
- improvement in production or distribution of goods or services; and
- promotion of technical, scientific and economic development.
Technology licensing agreements
To what extent are technology licensing agreements considered anticompetitive?
Technology licensing agreements may be considered anticompetitive if they cause or are likely to cause an AAEC in India.
Restrictive terms in technology licensing arrangements are likely to be examined as vertical restraints under the CA02. Absent market power, restrictions in technology licence agreements are less likely to raise concerns. When the licensor enjoys significant market power then the restrictions it imposes in licensing agreements, regardless of whether the underlying technology is protected by IPRs, the restrictions may be susceptible to scrutiny by the CCI. For instance, any attempt by a licensor to determine or influence the pricing decision (for the licensed IP) of the IP licensee may be scrutinised as a potentially anticompetitive RPM.
Licensors may also impose territorial or customer-specific restrictions as part of a licensing arrangement (for instance, by forbidding the sale of the licensed product to a set of customers or territory). Such territorial or customer-specific restrictions may be scrutinised as potentially anticompetitive ‘exclusive distribution’ or an anticompetitive ‘refusal to deal’. A licensor may also restrict licensees from dealing with any competing licensor, a restriction that may be examined as a potentially anticompetitive ‘exclusive supply’ arrangement. Any attempt by the licensor to make the grant of the IP licence conditional on the IP licensee purchasing the IP licensor’s other products, services or licences would be treated as a potentially anticompetitive ‘tie-in’ arrangement.
Unlike in the US and the EU, where refusal to deal is usually examined as unilateral conduct, in India, a refusal to grant a licence altogether or imposition of unreasonably restrictive licensing terms may be examined as a potentially anticompetitive vertical restraint. For instance, in Shamsher Kataria v Honda Siel (case No. 3 of 2011) (Autoparts case), the CCI viewed the car companies’ refusal to license their diagnostic (software) tools and repair manuals to independent repairers and workshops as an anticompetitive (vertical) refusal to deal.
Importantly, the CA02 provides a limited carve-out allowing owners of IP duly registered under an identified IP statute in India, including restrictions accompanying their licensing arrangements, which are both reasonable and necessary to prevent the infringement of their existing IP rights. In the Autoparts case, the car companies under investigation were unable to benefit from this limited exception as many were unable to adequately demonstrate either that their IP was registered under the relevant IP statute in India, or that the restrictions in question were both reasonable and necessary for protecting their IP rights (presuming they were validly registered).
Finally, restrictive conditions or the imposition of unfair royalty rates in technology agreements, where the licensor has sufficient market power to be held ‘dominant’, may be scrutinised as an abuse of dominance under section 4 of the CA02. The limited carve-out for IP holders under the CA02 is not available for abuse of dominance conduct.
Co-promotion and co-marketing agreements
To what extent are co-promotion and co-marketing agreements considered anticompetitive?
Co-promotion and co-marketing agreements may raise both vertical and horizontal anticompetitive concerns. A vertical relationship is created when the owner of the patented drug (owner) grants another entity (partner) the right to distribute, sell or market the product by way of the co-marketing agreement. If such an agreement incorporates vertical restraints contemplated in section 3(4) of the CA02 (such as tie-in arrangement or RPM), the same set of concerns as discussed in question 19 would arise.
Co-marketing or co-promotion arrangements also create a horizontal relationship since the owner typically retains the right to manufacture, distribute, sell and market its product while it grants similar rights to manufacture, distribute, sell and market to its partner. In such a case, the owner and the partner become competitors in the downstream market for manufacture, sale, distribution and marketing, as the case may be. Accordingly, any provision in the agreements that results in directly or indirectly fixing prices, limiting production or supply, market allocation or sources of production or any form of bid rigging, will be presumed to be anticompetitive. For instance, a non-compete clause in a co-marketing agreement that restricts the partner from selling any other pharmaceutical product that is similar to the subject of the co-marketing arrangement is likely to be viewed as an agreement (between entities engaged in the same level of trade) to limit the supply of the product in the market, and will be presumed to cause an AAEC under the CA02. Similarly, a non-compete clause that essentially precludes the partner from selling the subject products to a particular kind of customer (eg, hospital dispensaries) or certain markets (certain regions within India), is likely to be viewed as a horizontal arrangement to allocate markets, and will be presumed to result in an AAEC under the CA02. While the CCI is yet to reach a finding on horizontal anticompetitive concerns arising out of co-promotion or co-marketing agreements, the parties to such agreements will have the opportunity to present counter evidence to rebut the presumption of AAEC usually associated with anticompetitive horizontal agreements.
It has recently been reported that the CCI is investigating Novartis, Abbott, Emcure and USV for possible collusion in the sale of anti-diabetic drugs. It’s been alleged that Novartis, the patent holder and drug manufacturer, has engaged in price fixing by way of its co-marketing arrangements with Abbott, Emcure and USV. Since the matter is under investigation, no further details are available as to the treatment of co-marketing agreements by the CCI.
What other forms of agreement with a competitor are likely to be an issue? Can these issues be resolved by appropriate confidentiality provisions?
As indicated in question 20, agreements between actual or potential competitors, including buyer-seller agreements (between entities that otherwise compete), that directly or indirectly result in fixing prices, limiting supplies and allocating markets (by division of geographic areas or customer base) are prohibited on the basis of the presumption that they cause an AAEC. Implementing firewalls to prevent the exchange of confidential and sensitive business information (that would make it difficult to fix prices or coordinate supplies) may mitigate, but not eliminate, the risk of scrutiny by the CCI for potential anticompetitive conduct.
Apart from the type of co-marketing agreements identified in question 20, agreements in the nature of ‘pay-for-delay’ or reverse settlement agreements (where patent-holding pharmaceutical companies enter into private agreements with generic companies to delay the entry of generics for a consideration) are likely to raise concerns under the CA02. The CCI will likely examine the application of the limited IP carve-out under section 3(5) of the CA02 to such agreements. Even while the patent holder may have entered into a ‘pay-for-delay’ agreement with a generic company during the term of the patent (which, under the Indian Patents Act, 1970, gives exclusive rights to the patentee for, inter alia, making, using and selling the patented drug), the possibility that the CCI will consider the ‘pay-for-delay’ arrangement a reasonable and necessary condition for protecting IP rights under section 3 of the CA02, appears low.
Similarly, the CCI may also examine settlement agreements between patent-holding pharmaceutical companies and generic companies to settle patent infringement proceedings. Agreements to settle such patent infringement litigation may be viewed as anticompetitive agreements to limit or restrict the supply of products under section 3 of the CA02 if they have been entered into either with the objective of, or result in, the delay or thwarting of the entry of a potential competitor in the market. Such delay or restriction on the entry of a competitor would effectively extend the benefit of the patent protection beyond the statutory lifespan of the patent and hence not benefit from the limited carve-out provided under section 3(5) of the CA02.
In these cases, much like in the US and EU, the CCI is likely to focus on whether the purpose of these agreements or settlements is to delay the entry of a generic drug in the market, which would otherwise have competed with, and been available at, a fraction of the cost of the patented drug. In this respect, in August 2014, it was reported that the CCI is likely to review a patent deal between Hoffmann-La Roche and Cipla in respect of lung cancer drug, Erlotinib, as well as one between Merck Sharp and Dohme Corp (MSD) and India’s Glenmark Pharmaceuticals Ltd on the antidiabetic drug, Sitagliptin. The same report also mentioned that the CCI would investigate the market impact of ex parte injunctions secured by Novartis AG and MSD against a dozen local drug makers, blocking them from launching copies of diabetes drugs Vildagliptin and Sitagliptin. However, apart from investigation into an alleged cartel arrangement between Novartis and its co-marketing partners, Emcure, USV and Abbott, in respect of a diabetes drug, there has since been no further report or order from the CCI on these issues.
Issues with vertical agreements
Which aspects of vertical agreements are most likely to raise antitrust concerns?
Vertical restraints are not, per se, anticompetitive, unless they cause or are likely to cause an AAEC in India. The CA02 identifies an inclusive set of vertical agreements such as tie-in arrangements, refusal to deal, RPM arrangements, exclusive supply and exclusive distribution agreements, which would be anticompetitive if they cause or are likely to cause an AAEC in India.
Patent dispute settlements
To what extent can the settlement of a patent dispute expose the parties concerned to liability for an antitrust violation?
As indicated in question 21, antitrust issues arising out of the settlement of patent disputes have yet to be considered by the CCI. However, settlements of patent infringement litigation between parties may be reviewed by the CCI to examine whether the object or effect of the agreement is to delay or thwart the entry of a potential competitor in the market, to the detriment of consumers.
Joint communications and lobbying
To what extent can joint communications or lobbying actions be anticompetitive?
Joint communications or lobbying actions by way of a trade association or otherwise, to the extent that they relate to industry-wide issues such as government policies, taxes etc and not individual conduct, are unlikely to raise anticompetitive concerns. However, communications or actions that would facilitate any form of collusive practice (eg, on prices, territory of sales and introduction of new products) are likely to be examined under the provision on cartels.
Specifically, in the context of the pharmaceutical industry, in a large number of cases involving various chemists’ and druggists’ associations, the CCI found the obligation imposed by trade associations on pharmaceutical companies to pay mandatory product information service charges at the time of launching any new products to be anticompetitive to the extent they result in output restrictions and price fixing (Varca Druggists case (MRTP 127/2009/DGIR), Sandhya Drug Agency case (No. 41 of 2011)).
Similarly, the following have been identified as anticompetitive conduct to the extent that they were found to limit supplies and have the effect of determining prices:
- requiring new stockists to obtain a no objection certificate from the association before being eligible to be appointed to a pharmaceutical company (Belgaum Chemists & Druggists (case No. C-175/09/DGIR/27/28-MRTP), Santuka Associates (case No. 20 of 2011));
- fixing industry-wide minimum trade margins (Peeveear Medical Agencies (case No. 30 of 2011)); and
- giving instructions to boycott pharmaceutical companies or stockists for non-compliance with the associations’ norms (In re: Bengal Chemists & Druggists Association (suo moto case No. 2 of 2012), Arora Medical Hall (case No. 60 of 2012)).
On the other hand, in All India Tyre Dealers’ Federation v Tyre Manufacturers Association (MRTP case: RTPE No. 20 of 2008), the CCI held that trade associations may adopt measures that are necessary to protect the interests of its members, as long as they are not in contravention of the CA02. The CCI found that the discussion around low prices, increase in input costs, petition for levy of anti-dumping duties, blacklisting importers and export realisation, among the members of the tyre manufacturers association, fell within the realm of legitimate lobbying conduct, as they were not undertaken with the aim of determining the individual conduct of any of its members.
To what extent may public communications constitute an infringement?
Public communications that are aimed at or facilitate collusion, for example of prices or production quantity, are likely to be examined under the provision dealing with cartels. For instance, announcements by an enterprise indicating a possible increase in its price, followed by other players in the market, may indicate collusion and invite scrutiny. The CCI, though, will have to prove that the public announcement of prices indeed led to an agreement among all competitors to fix prices. On the other hand, public announcements, joint press statements or press releases setting out common and legitimate industry concerns (for instance, in respect of a government policy) are unlikely to be considered anticompetitive.
Exchange of information
Are anticompetitive exchanges of information more likely to occur in the pharmaceutical sector given the increased transparency imposed by measures such as disclosure of relationships with HCPs, clinical trials, etc?
The current Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 prohibit any form of relationship between pharmaceutical enterprises and HCPs. However, in practice, the interaction between pharmaceutical companies, device manufacturers, or their agents and HCPs has always been opaque. It would therefore be difficult to determine the likelihood of anticompetitive information exchanges between pharmaceutical companies and HCPs.
Recently, the government of India required all clinical trials to be compulsorily registered with the Clinical Trial Registry India. However, it is unclear whether disclosure in relation to clinical trials would facilitate any information exchange between pharmaceutical companies. In addition to these regulations and rules, there are several other regulations that require pharmaceutical companies to disclose confidential information to third parties.
Such information exchange would not in itself constitute a contravention under the CA02. However, the CA02 does not expressly exempt conduct undertaken in compliance with any other regulation (other than the relevant exemption for IPRs). Therefore, if the information exchange between pharmaceutical companies mandated by other regulations results in any collusive conduct, the enterprises may still be liable under the provisions of the CA02.
Anticompetitive unilateral conduct
Abuse of dominance
In what circumstances is conduct considered to be anticompetitive if carried out by a firm with monopoly or market power?
The CA02 lists certain conduct, which, if practised by a firm in a dominant position, shall be considered an abuse of dominant position. This includes:
- imposing unfair or discriminatory conditions or prices on sale of goods;
- limiting or restricting production of goods, or technical or scientific development;
- denying market access;
- making the conclusion of contracts subject to the acceptance of obligations that have no connection with the subject matter of the contract; or
- using its dominant position in one relevant market to enter into or protect another.
De minimis thresholds
Is there any de minimis threshold for a conduct to be found abusive?
Under the CA02, there is no de minimis threshold for abusive conduct. Given the CCI’s propensity to define the markets narrowly, the conduct in question may be found abusive even if the market size is very small or the number of customers being affected is insignificant.
For instance, in House of Diagnostics LLP v Esaote SpA (case No. 9 of 2016), the CCI defined the relevant market as the market for ‘dedicated tilting MRI machines in India’ distinguishing this market from regular MRI machines on account of its unique tilting system. Esaote, being the only manufacturer of dedicated tilting MRI machines, was found to have a 100 per cent market share, and thus dominant position. Esaote’s alleged conduct (refusal to perform contractual obligations and unilaterally changing the essential terms of the contract) was examined only in respect of the informant (and no other consumers) and one supply order. On this basis alone, the CCI reached a prima facie opinion that Esaote had abused its dominant position in the identified relevant market and directed an investigation.
Similarly, in the Autoparts case, the CCI defined the relevant market as the market for sale of spare parts in respect of each original equipment manufacturer’s (OEM) brand. The CCI then found each OEM to be dominant in respect of their own brand and found that each enterprise had abused its dominant position in that relevant market by, inter alia, charging excessive prices for spare parts and denying market access to multi-brand workshops and independent repairers.
When is a party likely to be considered dominant or jointly dominant?
An enterprise is considered dominant if it enjoys a position of strength that allows it to act independently of competitive forces in the market; or can affect the relevant market, competitors or consumers in its favour. The CA02 lists certain factors that the CCI must consider while assessing whether a firm is in a dominant position, including:
- market share of the enterprise;
- size and resources of the enterprise;
- size and importance of the competitors;
- economic power of the enterprise including commercial advantages over competitors;
- vertical integration of the enterprises or sale or service network of such enterprises;
- dependence of consumers on the enterprise;
- monopoly or dominant position whether acquired as a result of any statute or by virtue of being a government company or a public sector undertaking or otherwise;
- entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers;
- countervailing buying power;
- market structure and size of market;
- social obligations and social costs;
- relative advantage, by way of the contribution to the economic development, by the enterprise enjoying a dominant position having or likely to have an AAEC; and
- any other factor the CCI may consider relevant for the inquiry.
While the CA02 does not recognise the concept of joint dominance (the definition of a dominant position is limited to ‘an enterprise’), it does account for abuse of dominance by a group (‘there shall be an abuse of dominant position . . . , if an enterprise or a group . . . ’).
Can a patent holder be dominant simply on account of the patent that it holds?
The assessment for dominance of a patent holder will be conducted in the manner set out in question 29 (ie, first identify a relevant product and geographic market, and then examine whether the patent holder is dominant in that market). Where a patentee holds a patent for a particular technology or product for which there exists no substitute from a user’s perspective, then the chances of the patent holder being considered dominant increase. Thus, while owning a patent does not in and of itself result in a finding of dominance, it is a relevant factor for making the assessment.
As indicated in question 28, the CCI has, in the past, exhibited a propensity to define markets narrowly, particularly in cases involving unilateral conduct by patentees. In Best IT v Ericsson (case No. 4 of 2015), in its preliminary opinion, the CCI defined the relevant market narrowly as the market for ‘standard essential patents for 2G, 3G and 4G technologies in GSM-standard compliant mobile communication devices in India’. It then noted that Ericsson enjoyed ‘complete dominance’ over its present and prospective licensees in the relevant market because:
- Ericsson had 33,000 patents to its credit, with 400 of these granted in India;
- Ericsson was the largest holder of standard essential patents used in mobile communications, like 2G, 3G and 4G patents that were used in smart phones and tablets; and
- there was no other alternate technology available in the market in India.
Similarly, in Department of Agriculture v Mahyco Monsanto (case Nos. 2 and 107, both of 2015), in its preliminary opinion, the CCI defined the relevant upstream market as the ‘provision of Bt cotton technology in India’. While assessing Monsanto’s dominance in the upstream market, the CCI noted that Monsanto was the first company to develop and commercialise Bt cotton technology (single-gene, and, subsequently, two-gene Bt technology). While several companies offered single-gene Bt cotton technology, Monsanto was the only player in the two-gene technology market and other single-gene technology providers entered into licence arrangements with Monsanto. Thus, while Monsanto was not the only patent holder for Bt cotton technology, the CCI noted that it was nevertheless dominant because:
- a majority of the Bt cotton hybrids approved by the regulatory authority were incorporated using Monsanto’s Bt technology;
- more than 99 per cent of the area under Bt cotton cultivation in India was sowed using seeds with Bt technology licensed by Monsanto; and
- it posed significant entry barriers on account of large investments for research and development, lack of effective competitive constraints and significant consumer dependence.
The CCI is yet to issue the final orders in Ericsson and Monsanto, including on their respective dominance. However, the CCI’s preliminary opinions clarify that it is not likely to consider patent holders dominant solely on account of their patents, and it is likely to also consider other factors (eg, market share, usage and competitive constraints) to reach a finding on dominance.
Patent grant and enforcement
When would life-cycle management strategies expose a patent owner to antitrust liability?
The application of competition law to intellectual property is still at a relatively nascent stage in India. Complaints filed with the CCI involving the implementation (or non-implementation) of FRAND disputes or vexatious litigation following infringement claims are being challenged on jurisdictional issues (ie, whether the CCI, as an antitrust regulator, has requisite jurisdiction to determine these issues when sector-specific regulators exist). That said, the CCI is unlikely to intervene in cases where the restriction or strategy in question is within the scope of the legitimate exercise of the patent right (as under the relevant IP statute). Moreover, where the strategy in question is both reasonable and necessary to protect such right, it is likely to pass muster under the CA02.
For instance, a common strategy implemented by pharmaceutical companies to increase the life of their patents is ‘product hopping’. This involves discontinuing a patented drug towards the end of its patent term and introducing a reformulated ‘second generation’ drug, which may or may not offer distinct improvements over the first-generation drug. Under the CA02, while the introduction of a new product is not per se anticompetitive, while examining whether this strategy is a legitimate use of its patent rights from a competition perspective, the CCI is likely to examine the overall conduct of the patent holder in launching a new product (whether and how often this practice is adopted) and the effect on the ultimate consumer and the market.
Other life-cycle management strategies, such as creating a ‘patent cluster’, are likely to be scrutinised more closely by the CCI. Patent clusters involve the coming together of multiple companies to create new products by tying the product-creation process with existing patents. While the cluster arguably reduces research and development costs for each of the contributor patentees, it equally has the effect of precluding companies outside the cluster from using patents within the cluster, subject to the terms of exclusivity. To the extent that this collaboration is between competing pharmaceutical entities, the CCI may examine whether the ultimate object of the collaboration is to exclude other players or determine prices. The CCI may also examine if and to what extent these arrangements create ultimate consumer benefits (for instance, the launch of new products that may not have been possible absent such collaboration).
To what extent can an application for the grant or enforcement of a patent expose the patent owner to liability for an antitrust violation?
The CA02 does not prohibit or identify the mere application for the grant of a patent or the initiation of enforcement actions as anticompetitive. In practice, the CCI has opened the door for antitrust claims against IP holders’ enforcement actions, including by way of injunctions.
Notably, and as indicated in question 19, the CA02 provides a limited carve-out for patent holders from antitrust liability in respect of anticompetitive agreements to the extent that the patentees conduct is necessary for the protection of its patents under the Patents Act. However, the same conduct may expose the patent holder to antitrust liability if it is found to be in a dominant position.
For instance, in the context of enforcing copyright and designs, in Bull Machines Pvt Ltd v JCB India (case No. 105 of 2013), Bull Machines alleged that JCB had initiated bad faith litigation claiming infringement of its copyright and designs against it, and by doing so, had abused its dominant position in the market for backhoe loaders in India. The CCI, in its preliminary order, found merit in the argument and ordered an investigation, noting that ‘predation through judicial processes presents an increasingly [sic] threat to competition, particularly due to its low antitrust visibility’. By ordering an investigation into the actions of JCB, the CCI demonstrated that vexatious infringement suits might be capable of being construed as an abuse of dominant position.
More recently, however, the CCI appears to have adopted a more cautionary approach while considering the use of court proceedings to enforce legitimate IPRs as abusive. For instance, while directing an investigation in Biocon Limited & Mylan Pharmaceuticals Private Limited v F Hoffmann-La Roche AG & Ors (case No. 68 of 2016), the CCI, in its preliminary order, noted that recourse to legal proceedings is a right of every party and, as a general principle, cannot be viewed as being sham litigation except under exceptional circumstances. In sum, the CCI is likely to test whether the actions of an IP holder, including by way of an application for the grant or enforcement of a patent, are genuine or merely the means to foreclose competition.
Can communications or recommendations aimed at the public or HCPs trigger antitrust liability?
Communications or recommendations by pharmaceutical companies or trade associations may be considered anticompetitive if they result in the denial of market access or limit production or supply. For instance, in Biocon v Roche, the CCI initiated an investigation against Roche for abusing its dominant position by making representations to various state health authorities and drug controllers against Biocon’s products. In its prima facie order, the CCI equated such representations to ‘abusive denigration’ that could result in denial of market access for Biocon’s products.
May a patent holder market or license its drug as an authorised generic, or allow a third party to do so, before the expiry of the patent protection on the drug concerned, to gain a head start on the competition?
The CCI is yet to deal with cases involving ‘product-switching’ (ie, when patent holders either market a generic version of their drug or authorise a third party to do so, towards the end of their patent protection). However, as in other cases involving the interplay between IP and antitrust, the CCI will be required to balance the legitimate rights of patent holders to take steps to protect and use their IP, including possibly by engaging in product switching with the likely restriction on new market entry.
Examining cases of product switching from an antitrust lens is likely to be more complex. During the term of its registered patent, an IP holder has the legitimate right to exclude others from making use of its underlying patent used in the drug. During this exclusivity period, a patent holder is free to decide how best to use its patent. Licensing its drug as an authorised generic before the expiry of its patent term would fall squarely within the scope of its rights. However, where the CCI believes that such product switching is being employed with a view to deny market access to other generic manufacturing companies (the patent holder uses its legitimate first-mover advantage to market a generic drug as a cheaper alternative to its more expensive patent well in advance to gain a stronghold in the generic market for the same drug, by the time its patent expires), the CCI may consider whether this conduct may be viewed as an anticompetitive market-leveraging conduct, where the patentee uses its dominant position in the patented market to gain entry, and market share, in the alternate market for generic versions of that drug. Such anticompetitive leveraging may fall foul of section 4 of the CA02 that addresses abuse of dominance conduct.
While abuse of dominance provisions under the CA02 do not specifically require an ‘effects’ test, the CCI may equally consider whether the benefits of introducing a generic drug before the expiry of the patent (greater availability at cheaper price during the term of the patent) outweighs any potential market denial that such conduct may otherwise entail. Where such pre-term licensing is an outcome of collusive conduct (between the patentee and a generic manufacturer) to pre-empt the entry of an otherwise strong generic manufacturer, the risk of antitrust infringement would increase.
Restrictions on off-label use
Can actions taken by a patent holder to limit off-label use trigger antitrust liability?
Actions by a patent holder against off-label drug use are yet to be considered by the CCI. However, as discussed in question 34, the CCI will apply a similar filter (that of balancing the rights of the IP holder with the effect such conditions have on competition in the market) to determine whether such conduct would fall foul of the CA02.
Where there is sufficient evidence to demonstrate that steps taken by the patent holder to limit off-label drugs are legitimate (eg, to limit potential product liability law suits or potential hazardous or unknown effects of alternate uses that may damage the patent holder’s reputation), the CCI is unlikely to consider such action as being problematic under the CA02. In fact, such restrictive conditions may benefit from the safe-harbour provisions under the CA02 that allow IP holders to impose such restrictive conditions as are reasonable and necessary to protect its patent rights.
On the other hand, where such restrictictions on off-label use have been employed without any legitimate or reasonable basis, and only with a view to deny market access to possible competitors or downstream players (eg, to preserve such benefit for itself), it is possible for the CCI to scrutinise this conduct as being anticompetitive.
When does pricing conduct raise antitrust risks? Can high prices be abusive?
Pricing conduct under the CA02 may be examined as:
- anticompetitive horizontal agreements (ie, collusive price-fixing conduct under section 3(3) of the CA02);
- anticompetitive vertical restraints (ie, RPM under section 3(4) of the CA02); and
- abuse of dominant position (ie, unfair or predatory pricing under section 4 of the CA02).
If two or more competitors or potential competitors enter into an agreement to directly or indirectly fix prices or margins, it is presumed to result in an AAEC and is prohibited under the CA02. This would include any agreement to fix bid or tender prices or sales prices of drugs that are the subject of a co-marketing agreement. For instance, as mentioned in question 20, the CCI has initiated investigations against Novartis, Abbott, Emcure and USV for allegedly engaging in bid rigging and price fixing for the prices and supply of oral anti-diabetic drugs containing the active pharmaceutical ingredient, Vildagliptin. Similarly, the CCI found the practice of determining trade margin percentages for resale by the trade associations for chemists and druggists qualifies as an anticompetitive horizontal agreement under section 3(3) of the CA02.
The imposition of a condition by a seller to sell goods on the condition that the buyer will resell goods at a fixed price and not below this is construed as an anticompetitive RPM agreement. For RPM agreements to be treated as anticompetitive, the CCI will need to consider whether the condition results in an AAEC in the relevant market. The CCI has held in the past that, where a party has sufficient market power in the relevant market, the chances of an RPM causing an AAEC increases. More recently, in Fx Enterprise Solutions v Hyundai Motors (case No. 36 of 2014), the CCI found Hyundai to have entered into an anticompetitive RPM agreement. The CCI found that by fixing a maximum retail price and permissible discount to be given by dealers, Hyundai was effectively setting a minimum resale price. This, along with a monitoring mechanism by way of a penalty scheme for errant dealers, contravened section 3(4)(e) of the CA02, as it stifled intra-brand competition.
The imposition of unfair or discriminatory prices, including a predatory price, by a dominant enterprise is a type of abuse of dominant position under section 4 of the CA02. For instance, in a sub-judice matter before the CCI, the investigative wing of the CCI found a dominant super speciality hospital to have made excessive profits to the tune of more than 500 per cent on disposable syringes. On this basis, the report concluded that the hospital had abused its dominant position. Similarly, as indicated in question 28, in the Autoparts case, after finding that each OEM was dominant in the supply of spare parts for its own brand, the CCI held that each OEM had abused its dominant position by charging excessive prices for its spare parts. The CCI’s preliminary orders in Monsanto and Ericsson also found that charging trait value or royalty rates on the basis of the value of the end product rather than the licensed technology had no economic justification, was ‘unfair’ and was in prima facie contravention of section 4(2)(a)(ii) of the CA02.
To what extent can the specific features of the pharmaceutical sector provide an objective justification for conduct that would otherwise infringe antitrust rules?
The pharmaceutical industry is driven by innovation and significant investment in the form of research and development activities. IPR protection for proprietary products helps in fostering innovation and attracting investment in research and development. The CA02 recognises the need for balancing the rights of IPR holders and hence provides the limited safe harbour to IP holders for imposing restrictions that are reasonable and necessary to protect rights granted under the IP.
Has national enforcement activity in relation to life-cycle management and settlement agreements with generics increased following the EU Sector Inquiry?
Update and trends
Current trends and developments
Are there in your jurisdiction any emerging trends or hot topics regarding antitrust regulation and enforcement in the pharmaceutical sector?
The CCI has taken an active interest in the pharmaceutical sector from the very beginning. There have been several decisions from the CCI clarifying that the following practices adopted by trade associations of chemists and druggists were anticompetitive:
- the obligation to obtain a no objection certificate for appointing stockists;
- compulsory payments of product information service charges for releases of new drugs or formulations;
- fixing trade margins for the sale of drugs or formulations; and
- calls for boycotts of pharmaceutical companies or stockists.
Other forms of horizontal agreements in this sector, which the CCI has recently begun scrutinising, are co-marketing arrangements between pharmaceutical companies to examine whether such agreements facilitate collusion (eg, by way of fixing prices). Most recently, by directing an investigation against Roche for alleged abuse of dominant position, the CCI has reaffirmed its focus on the pharmaceutical sector.