CONTEXT OF DRUG DISTRIBUTION IN INDIA
India’s pharmaceutical industry has grown at an incredible rate in recent decades. India was a net importer of drugs by the 1970s, but it is currently the third-largest exporter of drugs and vaccines in terms of volume and value, and it is ranked twelfth overall.[1] The pharmaceutical business in the Indian sector now generates INR 2.89 lakh crores in revenue, up from INR 1,750 crores in 1990, with exports making about 50% of the total revenue from pharma.[2] India’s total out-of-pocket health expenditures (OOPE) are accounted for by pharmaceuticals, at 43.2 percent[3]. As a result; it makes up the largest portion of OOPE, which is responsible for 62.7% of all national health expenditures. [4]. The availability of healthcare is significantly impacted as a result of pharmaceutical price increases.
In the international market for generic medications, India is one of the leading suppliers. The Indian pharmaceutical industry supplies more than half of the world’s demand for various immunizations. Additionally, the sector meets 25% of the pharmaceutical imports into the UK and about 40% of the demand for generic drugs in the United States. The Indian pharmaceutical industry currently supplies more than 80% of the antiretroviral medications needed to treat AIDS worldwide[5].
The distribution network is crucial to making pharmaceutical items available to consumers. Pharmaceutical manufacturers, wholesalers, and retailers all play a role in the drug supply chain. After the manufacturing stage, pharmaceutical products such as medicines, surgical items, serums, vaccines, and the like are sent to the appropriate clearing and forwarding agencies (CFA). CFAs act as primary distributors. Stock Keeping Units (SKUs) are to be distributed by CFAs in response to requests from stockists[6].
Market leaders set prices that are significantly higher than those of other market participants, especially those with lower market shares, although the pharmaceutical industry is filled with several businesses and brands. Competitive markets at every stage of the pharmaceutical supply chain can help achieve the public policy objective of making medications more accessible and inexpensive, including manufacturing, wholesale, and retail with the retail pharma market currently valued at about Rs 1.5 lakh crore, and is expected to reach about Rs 2.1 lakh crore by 2024.[7]
COMPETITION LAW IN THE PHARMACEUTICAL SECTOR
Pharma’s regulatory system consists of two parts: licensing and pricing. The Competition Act of 2002 recognizes the importance of protecting pharmaceutical businesses through their innovation, but this is limited by particular inclusions under Section 3(5)[8]. Through tie-in agreements, parties at different levels of the supply chain, such as pharmaceutical companies and pharmacies or hospitals, can attain vertical agreements; however, in the pharmaceutical industry, horizontal agreements are made between parties at the same level to control supply and set prices within the same level of the chain.
Most competition law cases involve problems that arise when a firm has considerable market power that could lead to lower output, increased prices, or fewer choices for consumers. These outcomes are manifestly harmful to consumers. Practices found to limit competition included requiring members of associations to issue no-objection certificates (NOCs) to manufacturers when appointing stockists, which limited a given region’s stockists/wholesalers, along with mandatory Product Information Service (PIS) fees levied by associations when introducing new drugs.
Antitrust concerns also arise from the setting of trade margins collectively by associations and their influence on discounts offered at wholesale and retail levels. The relevant market must be defined to determine the market power/share of the perpetrator in question. The behavior of enterprises within an oligopolistic market structure may also raise competition concerns even in the absence of any agreement. Their nature is that of ‘tacit collusion,’ ‘conscious price parallelism,’ and ‘tacit coordination’. While this hypothesis has been widely criticized, such activities certainly exist in reality.
COMPETITION LAW GOVERNANCE FOR DRUG DISTRIBUTION
The distribution network is crucial to ensuring that pharmaceutical items are accessible to clients. A drug supply chain is made up of manufacturers of medicines, as well as wholesale and retail intermediaries. Additionally, competition distortions can sabotage this goal at any point along the supply chain. Online pharmacies are the primary area of focus because they are anticipated to have a bigger impact on the landscape of pharmaceutical delivery in the future.
On November 18, 2021, the Competition Commission of India (CCI) released its report “Market Study on the Pharmaceutical Sector in India: Key Findings and Observations”[9] encompassing an extensive study on Branded Generic Drugs, Drug Distribution, and Competition Law. According to the Commission, trade association practices such as the need for a NOC to appoint stockists and to force pharmaceutical companies to pay PIS to introduce new products are anti-competitive. The Commission has mainly intervened on behalf of the AIOCD and its several state and district member associations. These cases demonstrate that trade associations “self-regulate” the entire medication supply chain, leading to market distortions.
In the context of drug prices and price regulation, intermediaries in the supply chain and their markups are highly debated topics. Markup is the term used to describe the difference between the retail price of drugs and the manufacturer’s cost (ex-factory price). In India, scheduled medications are subject to a statutory trade margin of 24 percent (under the Drugs Price Control Order, or DPCO), with 16 percent for retailers and 8 percent for wholesalers[10]. Pharmaceuticals on the market that are not scheduled are excluded from coverage by the DPCO. Since there is no competition between manufacturers on margins and no competition between retailers, there is no stimulus to compete on pricing paid by customers in this arrangement. These restrictions include the replacement of drugs subject to margin control with those not covered by the initiative and an increase in the selling of more expensive prescriptions due to dealers’ and hospitals’ pressure to distribute the medications that offer them the maximum cash flows.
The retail pharmaceutical business is changing significantly with the introduction of e-pharmacy. During the lockdown period of COVID-19, more than 8.8 million households out of 300 million accessed the online pharmacy market, compared to 3.5 million before the lockdown.[11] In India, there are two types of e-pharmacies: inventory-based and marketplace-based, with some online pharmacies being part of broader multi-product e-commerce platforms.
The discount percentages offered by online businesses appear to be higher than those offered by traditional businesses, presumably to boost consumer onboarding. The study’s findings led to the conclusion that for a pharmacy of in e-commerce nature to become a respectable competitive force and a significant and dependable distribution channel for drugs, clear and comprehensive laws covering all areas of e-pharmacy are required. To fill the law-making void and provide the necessary regulatory safeguards for the online distribution and sale of medications, the proposed law may include an element pertaining to e-pharmacy. Pharmaceutical distribution outcomes can be improved through better regulation and enforcement of competition law, and by gaining greater control over the incentives offered by manufacturers to doctors.[12]
CONCLUSION
Such systems are impervious to competition on the ultimate price paid by customers since there is no margin competition between producers who make goods and no competition at the retail level. The Commission strongly urges trade groups to put in place efficient competition compliance systems to make sure that they do not engage in price-fixing, output restriction including price range coordination, discounts, or any other feature of pricing, market partitioning, abuse of dominance individually and both collectively or bid-rigging. In India, online pharmacy dispensaries and e-pharmacy are relatively recent development. However, this industry is growing, and the epidemic has increased the online distribution of goods, including pharmaceuticals. Discounts offered by online pharmacies have been cited by consumers as a major concern, as well as the concentration of personal health data. The Antitrust regulator of India would probably raise the issues with pharma regulators prevalent both federally and at the state level so that they can consider pro-competitive regulatory actions as part of its advocacy role.
Author(s) Name: Aathira Pillai (Maharashtra National Law University, Mumbai)
References:
[1] ‘India Pharmaceutical Industry’ (IBEF) <https://www.ibef.org/industry/pharmaceutical-india> accessed 20 December 2022
[2] Ibid
[3]Prachi Singh, et al., ‘Medicines in India: Accessibility, Affordability and Quality’ <https://www.brookings.edu/wp-content/uploads/2020/03/Medicines-in-India_for-web-1-1.pdf> accessed 04 December 2022
[4] ‘Share of out-of-pocket health expenditure 2018’ (Statista) <https://www.statista.com/statistics/1080141/india-out-of-pocket-expenditure-share-in-total-healthcare-expenditure/> accessed 04 December 2022.
[5] Mishra R and Sathyaseelan B, ‘Generic Drug Distribution in India-Issues and Challenges. J Pharma Care Health System’ (2019) J Pharma Care Sys <https://www.longdom.org/open-access/generic-drug-distribution-in-indiaissues-and-challenges.pdf> accessed 04 December 2022.
[6] Ibid
[7] BV Mahalakshmi, Drug makers eye E-Pharmacy for real time Distribution Data (Financial Express, 20 August 2020) <https://www.financialexpress.com/industry/drug-makers-eye-e-pharmacy-for-real-time-distribution-data/2060295/> accessed 12 December 2022
[8] Competition Act 2002, s 3(5)
[9] ‘CCI pharmaceutical market study findings’ (Khaitan & CO, 23 November 2021) <https://www.khaitanco.com/thought-leaderships/CCI-releases-its-market-study-findings-on-the-pharmaceutical-sector-in-India> accessed 16 December 2022
[10] Sakthivel Selvaraj & Aashna Mehta, ‘Technology: Drugs and Diagnostics in Health’ (India Seminar) <https://www.india-seminar.com/2019/714/714_sakthivel_aashna.html> accessed 04 December 2022.
[11] Soni S, ‘Households Ordering Medicines from e-Pharmacy Startups Grew 2.5X amid Lockdown; to Grow 8X in 4 Years’ (Financial Express, 13 August 2020) <https://www.financialexpress.com/industry/sme/households-ordering-medicines-from-e-pharmacy-startups-grew-2-5x-amid-lockdown-to-grow-8x-in-4-years/2054408> accessed 20 December 2022
[12] ‘Competition issues in the Distribution of Pharmaceuticals’ (OECD) <https://www.oecd.org/competition/competition-distribution-pharmaceuticals.htm> accessed 04 December 2022.
