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). – LEXOLOGY