Unhealthy abuse of dominance

Financial Express, July 09, 2012

By Pradeep S Mehta

In May 2012, Poland’s Court of Appeal upheld an earlier ruling by Poland’s Office of Competition and Consumer Protection to fine Narodowy Fundusz Zdrowia (NFZ), the country’s National Health Fund, a total fine of 1.1 million zloty (270,000 euros) for abuse of dominance. NFZ, which is Poland’s only public provider for health services, had abused its dominance by putting continuity clauses in its tenders that unfairly favoured companies that had cooperated with it in the past. It thus awarded long-standing clients additional points during weighting evaluations, meaning it discriminated against new market entrants.

The case becomes disturbing since it involves abuse of dominance by a firm, which is in the health sector—a sector that is critical with products of very low demand elasticity since they are necessities rather than luxuries. Despite the health sector being critical, firms usually find themselves in a dominant position, with huge opportunities for abuse due to the existence of several barriers to entry. Even hospitals are expensive to build and to operate such that there will be few investors in developing countries with deep pockets. It is a natural entry barrier and cannot be dealt with easily. This makes the need to protect the sector against any anti-competitive tendencies that can suppress its growth paramount. Abuse of dominance is largely intended to suppress the growth of the sector to ensure that the incumbents enjoy abnormal profits.

It is for this reason that competition authorities around that world, including those in the developed world, monitor the market closely to ensure that firms abusing their dominance are fined heavily. Several such examples exist, where competition authorities have punished health sector firms for abuse of dominance. In June 2011, for example, it was reported that the UK government had launched a lawsuit of £220 million for damages against Servier Laboratories, a French pharmaceuticals company for abusing its dominant position by causing a delay to rivals that wanted to launch their own generic versions of a blood pressure drug. In April 2011, the Office of Fair Trading (OFT) had found that Reckitt Benckiser had abused its dominant position in the market for the supply of alginate and antacid heartburn medicines. The OFT ruled that Reckitt Benckiser abused its dominant position by withdrawing and delisting Gaviscon Original Liquid from the NHS prescription channel in 2005.

In 2011, the European Commission fined AstraZeneca a euro 53 million for abusing its dominant position in the health sector. The pharmaceutical company had been found guilty of abusing its dominant position by withdrawing one form of its Losec products (capsules) in certain territories in the EU and replacing them with another (tablets) in order to block the entry of generic products and restrict parallel importing. In 2007, the French Competition Council issued its first ever order on predatory pricing after it levied a fine of euro 10 million on the pharmaceutical company GlaxoSmithKline. The company was found to have engaged in predatory conduct on drug sales in 1999 and 2000.

Companies in the health sector in South Africa and many other developing countries have also been found to be abusing their dominance and fined heavily by the competition authorities. A database of anti-competitive practices by Evenett, Jenny and Meier of 2006 revealed that about 41% of all cases of anti-competitive practices in Sub-Saharan Africa in the health and social sector could be attributed to abuse of dominance related competition violations. It is in the same context that abuse of dominance in the Indian health sector should also be looked at.

As outlined in a 2010 study commissioned by the Competition Commission of India (CCI) on competition issues in the healthcare sector, India is among the top five producers of bulk drugs in the world, with a share of 20% in the pharmaceutical market. Worth noting, the Indian health sector is highly technology as well as knowledge intensive, with costly research and development needs. With only some 35% of Indians being able to access essential medicines, this causes serious concern. The Competition Act, 2002 can be used as a tool to remedy the situation.

Most of the cases relating to abuse of dominance in the health sector are related to the abuse of intellectual property rights (IPRs). There are strong indications that IPRs are easily abused in India amid allegations that patentees are often misusing these rights. These also include price gouging in the selling of medicine, thereby jacking up costs. The Indian companies are also accused of restricting the entry of generics suppliers into the market, at the detriment of consumers who could only afford generic drugs. Restricting entry for generic drugs is done by creating artificial entry barriers by setting up their own range of generics, refusal to license and patent pooling, or not even working the patent.

An example of patenting abuse was dealt with by the Indian Controller of Patents recently, when it granted a compulsory license to Natco, an domestic pharma company, to produce the anti-cancer drug Naxevar, whose rights belonged to Bayer, a big pharma MNC.

The fear of possible anti-competitive practices also becomes more relevant against the recent entry of MNCs in the generic drug business in India. MNCs which recently entered the Indian market include Abbot Labs (by purchasing Piramal Healthcare), Sanofi-Aventis (which purchased Shantha Biotech), Fresenius Kabi (through Dabur Pharma) and Daiichi Sankyo (which bought Ranbaxy). They joined other MNCs such as GlaxoSmithKline (GSK) and Novartis, which were already in the market. With the market being so lucrative, there are always possibilities that the companies can engage in such practices if opportunities present themselves. (In our policy circles, we are still debating as to who will regulate such mergers, whether it would be FIPB or the CCI). Furthermore, most of these MNCs have been hauled up by competition authorities across the world.

Since it was established, CCI has already taken action against many firms for abusing their dominant positions such as the famous DLF case. However, the health sector is more critical, given the extent to which the poor are vulnerable to abusive behaviour by the firms. In addition to particular cases, it is also critical for CCI to inter alia invest heavily in getting acquainted with the whole rubric of the interface between competition and IPR, which would prove useful in dealing with abuse of dominance in the health and similar sectors.

The author is secretary general, CUTS International. Cornelius Dube of CUTS contributed to this article

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