1 challenges in promoting competition in the drug industry: the brazilian experience mariana tavares...
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Challenges in Promoting Competition in the Drug Industry:The Brazilian Experience
Mariana Tavares de Araujo
Headlines
Sectoral Regulation
Background
Price Cap Regulation
Competition Enforcement
Merger Enforcement
Abusive Pricing Cases
Predatory Pricing Investigations in the Retail Sector
Generic Drug Cartel Case
Sectoral Inquiry2
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Sectoral Regulation
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Background (1/2)
Regulation introduced in 1998
New rules established that price increases should be informed to the government and justified
Currency Crisis of 1999
“Gentlemen’s agreement” through which firms agreed to limiting any price increases and spreading those along the first months of the year
New price increases were negociated after that, reaching a period of limited regulation after January 2000
In July 2000, government and industry signed a protocol that set prices to levels of the previous month and froze them until the end of that year
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Background (2/2)
Re-introduction of Price Controls
In December 2000, explicit price controls were introduced again through an index based on the sector’s cost estimate (Fórmula Paramétrica de Reajuste de Preços de Medicamentos - FPR)
A sectoral regulatory chamber (CAMED) composed of the Ministries of Justice, Finance, Health and of Brazil's National Health Surveillance Agency (ANVISA) was established
Current System in force since 2003
The FPR index was substituted for price cap regulation Entry prices have to be authorized by the sectoral regulatory
chamber Sectoral regulatory chamber renamed (CMED) and now also
integrated by the Ministry of Industry, Commerce and Development (MDIC) and by the Ministry Head of the Civil Cabinet
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Price Cap Regulation (1/2) Price Cap Formula: PPV = IPCA – X + Y + Z
PPV – Percentage of Price Variation
IPCA – Measures the inflation variation according to IPCA (National
Consumer Price Index)
X - measures the productivity variation
Y - measures the variation of relative price increases in other sectors
Z – measures the variation of relative price increases within the pharma
sector
Purpose: to incentive pharma companies to reduce
costs
Challenge: efforts are not verifiable through
accounting methods
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Price Cap Regulation (2/2) Additional challenges:
If all costs variations are passed on, there will be no incentives to reduce costs
Without a productivity factor, the pharma companies would not have any incentive to pass on to consumers any cost reductions
By including in the formula a discount over the price variation index, part of the cost savings are thus transferred to consumers
It should dully balance consumers and pharma companies interests and therefore
The productivity target should be attainable; and It should be forward looking and not just transfer passed
productivity gains
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Competition Enforcement
Overview of the system
Dual system: both administrative and criminal
Administrative level:
SEAE: issues non-binding opinions on merger reviews SDE: chief investigative antitrust authority and issues non-
binding opinions on merger reviews CADE: Brazil’s Antitrust Tribunal, subject to judicial review
Criminal level:
State and Federal prosecutors enforce the criminal statute
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Merger Enforcement
Novo Nordisk / Biobras (2002)
High market concentration in the insulin sector
CADE recommended that the MDIC suspended the antidumping
duties against Aventis Pharma, its potential competitor
Sanofi / Aventis (2004)
Merger cleared
Sanofi / Medley (2009)
Acquisition of the main generic producer. Divestiture of three
drugs as condition to approve the merger
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Abusive Pricing Investigations
In 2000 Congress determined that the SDE pressed
charges against 60 pharma companies for abusive
pricing
CADE followed the SDE’s recommendation in these
cases, acquitted the companies and concluded there
were no grounds to conclude for abusive pricing
based on antitrust criteria
These investigations motivated a broader discussion
regarding the need for sectoral regulation
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Predatory Pricing in the Retail Sector Around 20 investigations against drugstore chains
that were supposedly selling below cost to drive small competitors out of the market Consent agreement celebrated in court by State
Prosecutors preventing the firms from giving out discounts in the final price of the product
Investigations indicated that pricing difference was significant but not anticompetitive because Non-concentrated market and chains had no market
power Since 2002 price control mechanisms were in force Even if prices of some of the drugs sold by the pharmacies
were indeed below those drugs costs No significant barriers to entry in this market
CADE concluded that this was in fact a pro-competitive practice that should be encouraged, not forbidden
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Generic Drug Cartel Case February 1999: Enactment of Generic Drug Law
Despite its enactment, law did not result in immediate entry due to need for tests before approval by the Regulatory Agency
July 1999: meeting of executives of the main Pharma companies (together controlled at least 47% of the market) who agreed to block entry of generic drugs in the country Tactics included: refusal to deal with distributors that sold
generic drugs; a campaign towards doctors "respect my prescription and don't change it for other medicines"; and "quality program" against generic drugs
September 1999: SDE received meeting minutes, started the investigation and issued a preliminary order preventing the firms from implementing those decisions
October 2005: CADE concluded that the agreement could have blocked entry of generics and imposed fines of 1% of the firms' turnover (Janssen-Cilag was fined in 2% due to evidence that it had organized the meeting)
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Pharmaceutical Sector Inquiry
Inquiry sent in January 2010 to 37 originator
companies
Requests before the Judiciary regarding extensions of patent
rights (more than 37 cases pending before the Superior Court,
including blockbusters as Lipitor)
“Pay for delay” settlements between originators and generic
companies
Five on-going investigations at SDE (sham litigation
claims)
Close cooperation with INPI (Brazil’s Intellectual
Property Agency)
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Concluding Remarks
Even well designed price control mechanisms such as those in place in Brazil are not capable of introducing the same incentives firms are exposed to in competitive markets
Generic drug competition may be a superior option but takes time and require important institutional conditions (e.g. solid legal framework; strong regulatory agencies; etc)
Competition law enforcement continues to be important Effective merger review and conduct enforcement are
indispensable Fighting bid-rigging should be a priority
