Making markets work for affordable medicines

Regulatory safeguards to ensure quality and efficacy of drugs are a necessary pre-condition for effective competition between generic and branded drugs

In September, the Competition Commission of India launched a market study of the pharmaceutical sector, which plays a pivotal role in the public health agenda of any nation. Quality, access and affordability of medicines are key determinants of the overall quality of public health. However, information asymmetry between consumers and suppliers of medicines and supplier-induced demand significantly circumscribe consumer choice. In such a construct, markets by themselves may not deliver optimal outcomes. Achieving these outcomes is paramount as pharmaceuticals contribute 43.16 per cent to the total out-of-pocket expenditure (OOPE) on health. It is reported that medicines worth Rs 1.42 trillion were marketed in June (Pharmatrack data), supplied by some 800,000 retail pharmacists. The fact that these retail sales were contributed by 534 firms marketing over 2,500 classes of drugs and over 65,000 brands, can give a false sense that the pharmaceutical market in India is highly competitive. But the ground reality is somewhat different that gets masked in these numbers.

First, over the ten years of the enforcement of the Competition Act, the Competition Commission of India (the Commission) had occasions to deal with several cases from the pharmaceutical sector where anti-competitive practices were alleged. Many of these cases before the Commission have shown that the entire supply chain of drugs is “self-regulated” by trade associations, which regulate entry by mandating a No Objection Certificate (NOC) prior to the appointment of stockists, control distribution by restricting the number of stockists and influence price by deciding the wholesale and retail margins of drugs. It is not uncommon for associations of small service providers to typically self-regulate in a manner that they believe best represents the interests of their members. However, some of their legacy practices may now fall foul of the law.

Second, various industry practices flourish in the pharma sector which do not allow markets to work efficiently. The intermediary, the prescriber and dispenser, play a critical role in the selection of medicines for patients. Practices of intermediaries that exploit information asymmetry is a major reason for sub-optimal quality and price outcomes. The public policy response to this issue typically takes the form of regulation of all aspects of the life-cycle from patent application to marketing approval, commercial exploitation, distribution and sales. All the important actors in the industry — manufacturers, wholesalers, retailers and prescribing physicians are also subject to regulatory controls. The need for a strong regulatory system cannot be over emphasised given the criticality of preventing spurious/sub-standard drugs from entering markets. Moreover, regulatory safeguards to ensure quality and efficacy of drugs are also a necessary pre-condition for effective competition between generic and branded drugs. However, since the regulatory framework that governs these aspects has concomitant influence on the entry of drugs as well the incentives of the market participants, regulatory overreach in this area or inconsistent application of regulations may also have an impact on competition.

Worldwide, inexpensive generic drugs are seen as key competitive force against patent-expired branded drugs marketed at exorbitant prices. This rests, in part, on the premise that generic drugs conform to the prescribed quality standards just like branded drugs. India is peculiar in some respects as due to lack of quality assurance, a new category of “branded generics” has proliferated the market leading to artificial product differentiation and muting generic induced competition.

To restore effective competition, the Commission has sought to identify through a market study the mechanisms which stifle competition. The study will provide pointers for interventions, which should possibly neutralise those mechanisms and unlock competition. The Commission had earlier also conducted an internal review of the regulatory architecture governing the pharmaceutical sector and a technical workshop on competition issues. The study is expected to provide empirical evidence to the issues raised in that workshop and documented in a note released by the Commission.

Given the developments that are unique and complex to the pharma landscape, this study intends to examine current practices in the pharmaceutical distribution market with a view to understand discounts/margin policies at wholesale and retail levels of the distribution system as well as assess recent regulatory rationalisation of trade margins and its impact on price and competition. It would also conduct impact analysis of the emergence of e-commerce on price and competition; besides carrying out an assessment of the current trade associations’ practice of requiring NOC for appointing stockists/distributors and investigating the magnitude of proliferation of branded generic drugs market. The findings of the study is expected to help in identifying the Commission’s advocacy and enforcement priorities.  

Identifying mechanisms that foreclose competition in the pharmaceutical markets and addressing them through proper instruments would be all the more important during a pandemic that has increased the healthcare burden on our large population that is uninsured and lacks a safety net.

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The author is Chairperson, Competition Commission of India