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Making a smart choice: Thin line between compliance and collusion

The Ranbaxy import alert case highlights the need for enterprises to learn early and follow a regulatory compliant route if they want to maintain a trajectory of progress, especially in the changed environment across the world

Barely the news about the fine imposed by European Union (EU) on Ranbaxy on alleged cartelisation had settled down, there came the news of an import alert on the pharmaceutical company’s Mohali plant by the US Food and Drug Administration (US FDA). This news wiped out almost a third of market capitalisation of Ranbaxy. The action arises from the failure of Ranbaxy in rectifying the violations almost a year after they were revealed in an FDA inspection conducted in September and December 2012. This import alert is not the first for the company. This follows the earlier two alerts in 2008 over quality concerns and drugs manufactured at Paonta Sahib (HP) and Dewas (MP) plants.

 

As the societies become more developed and organised, the burden of responsibility on enterprises increases. If this burden is sportingly shouldered, not only does it help all the stakeholders but it also helps bring prosperity to the corporations in the long run. This becomes all the more important because of the fact that to enforce compliance, consequences designed by society are considerably heavy. A recent example of this is a series of brushes with regulation for Ranbaxy in the recent months.

 

Earlier, on 19 June 2013, the EU imposed a total fine of €146 million on nine drug manufacturers across the world including Ranbaxy, the Indian drug maker. This action of EU meant a fine of €93.8 million on Danish pharmaceutical company Lundbeck and fines totalling €52.2 million on several producers of generic medicines. The origin of this fine was an agreement, which the Dannish drug maker had entered in with several producers of generic medicines. In terms of this agreement, in 2002, Lundbeck agreed with each of these companies to delay the market entry of cheaper generic versions of Lundbeck's branded Citalopram, a blockbuster antidepressant. These agreements violated EU antitrust rules that prohibit anticompetitive agreements (Article 101 of the Treaty on the Functioning of the European Union - TFEU). These generic companies were notably Alpharma (now part of Zoetis), Merck KGaA/Generics UK (Generics UK is now part of Mylan), Arrow (now part of Actavis), and Ranbaxy. This agreement was to ensure that the drug manufacturers, which had a global presence in manufacturing generic drugs do not come with the drug produced by Lundbeck and whose process patent has expired, making it vulnerable to the efforts from other manufacturers, who, if they wanted to go ahead, could have produced the same at a fraction of the cost.

 

Speaking on the imposition of the penalty, Commission Vice-President Joaquín Almunia, in charge of competition policy, said, "It is unacceptable that a company pays off its competitors to stay out of its market and delay the entry of cheaper medicines. Agreements of this type directly harm patients and national health systems, which are already under tight budgetary constraints. The Commission will not tolerate such anticompetitive practices".

 

The press release, from the EU, further added “Experience shows that effective generic competition drives prices down significantly, reducing dramatically the profits of the producer of the branded product and bringing large benefits to patients. For example, prices of generic Citalopram dropped on average by 90% in the UK compared to Lundbeck's previous price level once wide spread generic market entry took place following the discontinuation of the agreements. But instead of competing, the generic producers agreed with Lundbeck in 2002 not to enter the market in return for substantial payments and other inducements from Lundbeck amounting to tens of millions of euros. Internal documents refer to a "club" being formed and "a pile of $$$" to be shared among the participants. Lundbeck paid significant lump sums, purchased generics' stock for the sole purpose of destroying it, and offered guaranteed profits in a distribution agreement. The agreements gave Lundbeck the certainty that the generics producers would stay out of the market for the duration of the agreements without giving the generic producers any guarantee of market entry thereafter. These agreements are very different from other settlements of patent disputes where generic companies are not simply paid off to stay out of the market.”

 

What has been placed on record in EU applies equally to India- rather more so. Our own Competition Commission of India (CCI), in its order dated 12 February 2012, had held that the actions of All India Organisation of Chemists and Druggists (AIOCD) had the impact of causing an appreciable adverse effect on competition in the relevant market. In its order, CCI held the AIOCD and its office bearers to be responsible for actions, which had the effect of adversely affecting the competition, and increase the price of drugs because of consequential impact.

 

It is interesting to note that the consumer who is the final user of the medicines does not have much of a say in which medicines he is getting and at what price. AIOCD is the apex body of different state level associations of all the chemists and druggists in the state. This covers all the dispensers across the country. Because of commanding such a vast network, AIOCD maintains a grip on how the medicines can reach the consumer: which ones and at what price. Because of these actions, the medicines, which are available in the market for the consumers are not the ones that are most beneficial and cost effective but are the ones which can fill pockets of the members of AIOCD to a better extent. The matter is now is before the Competition Appellate Tribunal (COMPAT) and we can wait for the final outcome after the appeal is disposed of by COMPAT.

 

For the sake of comparison, let us see what was in store for Ranbaxy if the allegation of cartelisation were to be levelled in India and established by CCI as proven. Section 27 of the Act, gives the penal provisions, both for anti-competitive conduct and abuse of dominant position. For cartelising allegation, the penalty upon each producer, seller, distributor, trader or service provider included in a cartel could have been up to three times of its profit for each year of the continuation of such agreement or 10% of its turnover for each year of the continuation of such agreement, whichever is higher.

 

If we look at the published results for Ranbaxy for the year ending on 31 March 2011, the turnover was Rs10,595.4 crore and the net profit was Rs1,048 crore. Three times of the profit is Rs3,144 crore. 10% of the turnover is Rs1,059.54 crore. Higher of these two figures will be Rs3,144 crore. Thus, the penalty during 2011 for the company, for similar violations in India, would have been up to Rs3,144 crore. On a similar pattern, the penalty would have to be computed for each year of continuation of the cartel and totalled up. In EU, the cartel continued for more than 10 years. But for the fact that the enforcement powers in India were given only in May 2009, the entire penalty could have been anywhere around Rs20,000 crore, even while believing that in earlier years, the profits and turn over might have been lesser. However, no penalty can be imposed prior to the date when enforcement powers were granted. Therefore, in India, the collusion having been four years, the penalty could have been close to about Rs10,000 crore.

 

What is certain is that it is high time that the corporations learn to respect and follow the regulations wherever needed. It not only will give them respectability of a more responsible enterprise but will also ensure that the companies remain on a growth trajectory without being tripped by the consequences of breach in regulation. This becomes all the more important for an emerging economy in transition like India, where earlier there were no regulations or these were not really cared for. Now, with the enactment of Competition Act, 2002, the enforcement powers being given to the Competition Commission of India, the ground realities have changed. In the changed environment, it is better for the enterprises to learn early and follow a regulatory compliant route if they want to maintain a trajectory of progress.

 

(After completing more than two decades as a Commissioner in IRS of India, KK Sharma was appointed as the first Director General of the functional Competition Commission of India (CCI). He has also been a very active member of International Competition Network (ICN), Merger Working Group. Mr Sharma was also nominated to one of the handful positions of an individual member of the Research Project Partnership (RPP) Platform of UNCTAD. A Ph.D. fellow in competition law from Bangor University, UK, Mr Sharma did masters in engineering from IIT, Roorkee, before doing graduation in law. Later, he completed PG Diplomas in Economics for Competition Law from King’s College, London, and IPR Laws from NLSU, Bangalore, respectively after doing Masters in Economics.)

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