CCI efficacy to clear pharma deals doubtful: Experts

Business Standard, October 17, 2011

Even as the government plans to amend the competition laws to enable the Competition Commission of India (CCI) to scrutinise all mergers and acquisitions (M&As) happening in Indian pharmaceutical sector, experts doubt the effectiveness of such a move.

According to them, competition law is not the appropriate platform to deal with the issue of developing and maintaining indigenous drug research capabilities for production of low-cost generic medicines, as CCI mandate is to check abuse of dominance, cartels and unfair trade practices.

Experts also feel the move to take away financial threshold limit for allowing CCI scrutiny of all pharma M&As is not practical, as CCI is not meant to take over the role of sectoral regulators.

The legal robustness of allowing an external advisory body (proposed to be set up by the high-level committee in its report) to assist CCI in clearing M&A pharma applications has also been questioned.

CUTS International, a consumer group dealing with competition issues, considers the discussions about not having any financial thresholds for the pharma sector mergers/takeovers as “silly”. “This is impractical. We cannot and should not have a carve-out for any particular sector”, Pradeep S Mehta, secretary general, CUTS, said.

According to him, there are no financial thresholds even today that prevents CCI to take action against a post-merger/acquisition pharmaceutical entity if it is acting against consumer interests (by withdrawing low-cost medicines that were manufactured by the local firm before take over). “In theory, CCI can order a division (demerger) if it finds the merged company is indulging in abuse of dominance.”

Indian pharmaceutical Alliance (IPA), the select club of leading domestic drug companies, says, CCI action over abuse of dominance is a remote possibility in Indian context due to the fragmented nature of the industry. “Even after taking over one of the top ranking companies like Piramal, US drug firm Abbott still does not have a double-digit market share in India. How can then there be a case of abuse of dominance”, said D G Shah, secretary general IPA.

Shah is of the opinion that by taking away threshold limits and by not distinguishing between M&As between domestic firms and domestic-foreign multinational majors, the government has actually harmed the prospects of consolidation within the domestic industry.

“There should be more consolidation through M&As among Indian firms to take on the combined might of MNCs. By bringing all such deals under CCI scrutiny the government has slowed down this process,” he said.

Shah also points out that the valuation of domestic pharmaceutical companies have come down after the government announced CCI scrutiny of all pharma deals. “This has helped MNCs as they can look for cheaper assets in India”, he added.

The preamble to the Competition Act, 2002 defines the law as one way to establish a commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other markets participants in India.

Earlier this month, a Prime Minister-chaired meeting had cleared the report of a committee, headed by Planning Commission member Arun Maira, that 100 per cent foreign direct investment (FDI) be allowed in the pharma sector despite the opposition from the Department of Industrial Policy and Promotion under the commerce and industry ministry and the health ministry.

The meeting had also accepted the committee recommendations that all FDI be vetted by CCI. However, for six months the Foreign Investment Promotion Board under the finance ministry will continue to approve FDI in existing pharma companies.

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