View | Competition Commission's fault-line navigation in pharma sector market study

Generic drugs refer to unpatented products, produced by a variety of manufacturers. This helps in keeping prescription drug prices low, reducing healthcare costs and improving access. These are functionally undifferentiated products that make the generic drug market seem highly competitive.

However, only about 10 percent of the drugs in the domestic market are "unbranded generics", i.e., marketed with their chemical names, whereas 87 percent of drugs dispensed are so-called "branded generics", i.e., generic drugs sold with brand. While the former are largely procured and distributed by our public health infrastructure, the latter are sold through private retail stores. This leads to "brand competition" among the manufacturers instead of "price competition" because the price variation between branded and unbranded generics is over 100 percent. Therefore, where consumers should ideally benefit from having 17 brands on an average for every formulation, they pay a premium for branded drugs.

The high-cost branded generics have a greater market share than low-cost unbranded generics because of three reasons — (i) inadequate information with consumers regarding drugs; (ii) unobservable quality of drugs; and (iii) prescription of drugs by brand names rather than by generic names. Further, consumers' preference towards branded drugs is usually due to the perception that a higher price means better quality.

To dispel concerns regarding the price-quality correlation of drugs, CCI made a few recommendations which included setting up a National Digital Drugs Databank. Apart from the importance of the Central Drugs Standard Control Organization (CDSCO) in quality control, CCI stressed public awareness programs to be conducted to preach cost efficiency and efficacy of unbranded generic drugs. However, it will face aggressive advertising/promotion by brands.

CCI noted the success of 'Janaushadi Kendras' but pinpointed that availability of standard-compliant unbranded generic drugs must increase in the private retail market as well.

Online/e-pharmacies operate under two broad models — marketplace/platform and inventory-based. In the former, e-pharmacies simply play the role of an intermediary, connecting buyers and sellers. Whereas in the latter, they integrate their warehousing functions with carrying and forwarding agents (CF Agents), who work directly for the drug companies. In the supply chain of a traditional brick-and-mortar (BM), there are multiple layers increasing the cost to the end-customer like consignee agent, warehousing and cold chain management, transportation, C&F Agents, stockists, sub-stockists, and finally the private retailer.

However, the main difference between the two modes lies in proximity and immediate availability of medicines, overriding cost, or any other consideration for the consumer. CCI reiterated its stance on predatory/deep discounting strategies used by e-pharmacies that it needs to be looked in the light of efficiency-based competition on merits.

CCI also noted that the e-pharmacy space in India is witnessing an uptick in major mergers and acquisitions, signifying possibly increased scrutiny on the reportability of these transactions.

A theme present throughout the study was that the presence of multiple brands selling the same generic drug with intrinsically no real modification stifling innovation. Patented drugs are commercially beneficial for companies as they are insulated from competition for the life of their patent. Investment into R&D, clinical trials, and approvals significantly reduce the profits.

A pharmaceutical company could simply continue manufacturing generic drugs at its own price and earn hefty profits by relying on consumers’ price-quality correlation. For example, Diclofenac (100 mg), an analgesic sold by the market leader had a price variation of 172 percent when compared with a market laggard, making brands immune from price competition.

Further, the study stated that several prominent brands get their products manufactured through third parties, who also manufacture the same drug for other pharma companies. Thus, imitation is easier than innovation, with commercially similar end results.

In-depth analysis of data and extensive stakeholder consultations have led to a holistic analysis of the pharmaceutical sector in India. Certain revelations were quite well known to industry participants but not to the consumers. This study is expected to act as an effective toolkit for CCI in enforcement and merger control in the pharmaceutical sector.