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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
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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
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• 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
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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
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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
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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)
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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
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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
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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
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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
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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/
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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
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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.