COMPETITION RELAXATIONS FOR THE PHARMACEUTICAL SECTOR: NEED FOR COLLECTIVE INTELLIGENCE
[Shalibhadra Daga and Ashish Mishra are fourth-year students at Maharashtra National Law University, Mumbai]
The current COVID-19 crisis has caused significant harm to the economy, with several sectors being pushed towards closure. Though the impact on most sectors has been negative, the pharmaceutical sector has emerged as a potential beneficiary. It is axiomatic that to contain the current crisis, the development of a COVID-19’s vaccine is utmost important. The responsibility to undertake such development, and to simultaneously cater to the unprecedented increase in demand for other necessary medicine, falls on this sector.
In order to improve the efficacy in the development of the vaccine and satisfy the rising demands, there is a patent need for Collective Intelligence. Collective Intelligence refers to a process where competing pharmaceutical companies would have the freedom to share research, data, and other crucial information in order to synergize the best elements of different vaccine technology platforms and approaches to create the best suited vaccine.
For the realization of such Collective Intelligence, relaxation of competition laws becomes imperative. But such relaxation poses the risk resulting into anti-competitive agreements enabling cartelization, abuse of dominant position, and price-fixing. This article attempts to strike a balance between keeping antitrust practices in check, while at the same time affording the pharma industry enough leeway to take all necessary measures to fast-track the development of the vaccine.
Need for Collective Intelligence
The development of the COVID-19 vaccine has emerged as the primary necessity to control the crisis, but undertaking such a venture requires divergence of huge amounts of capital, time and other resources. Hence, these ventures become risky for the pharma companies considering low success rates and immense opportunity costs due to diversion of resources. Furthermore, companies are apprehensive of getting equitable returns in case of success due to the imposition of social and public welfare measures by the government.
Thus, collaborations for vaccine development become imperative from two perspectives – firstly, reducing the burden of cost and resources and secondly, it expedites the process, bringing about efficiency. At present, collaborative efforts are underway with Pfizer and BioNTech agreeing to co-develop and distribute a vaccine. Such collaborative efforts have found legitimacy in the EU, UK and USA with governments opting to relax competition policies. These relaxations allow for collaborations, co-operation and data sharing between the competitors without apprehensions of breaching cartel rules. In USA, the antitrust authorities issued guidelines detailing an expedited antitrust procedure and provided guidelines for collaborations undertaken to protect the health and safety of American citizens. EU has taken a similar approach and has adopted a temporary framework for the critical medical goods industry through a so-called comfort letter to assure the market players in pharma sector against levy of heavy cartel fines.
European Competition Network in its statement stated that such relaxation in antitrust rules are “unlikely to be problematic, they would either not amount to a restriction of under Article 101 TFEU/53 EEA or generate efficiencies that would most likely outweigh any such restriction”.
Under the EU competition regime, agreements between companies that are likely to restrict, prevent or distort competition in EU are prohibited under Article 101 TFEU. However, this provision can be relaxed if the objective of such relaxation is improving the production or distribution of the product and any adverse impact from such relaxation is proportionate to the contribution made by it to said economic or technical progress. This stance was taken by the EU courts in Matra Hachette v Commission , provided that such an objective can be subsumed under the four conditions as mentioned under Article 101(3). Thus, the current relaxations that attempt to improve the efficacy of production and distribution of medical necessity, are in line with the requirements set out in this case.
It is further reinforced by the fact that in EU, similar exemptions to antitrust policy were made during other epidemics and pandemics such as H1N1 influenza in 2009 to increase and motivate the efforts for the development of vaccines. The same regulatory framework (as was already used in 2009) is being utilized to encourage the pharmaceutical companies to work together on a vaccine for Covid-19. These measures are temporary frameworks adopted by countries to expedite the development of the vaccine. Such a framework, allowing specific relaxations, encourages endeavors of vaccine developments. Hence, it is expedient that India also adopts such a model since currently there’s no such crystalized framework in India. However, it must be ensured that this crisis shall not become a veil for enterprises to escape competition law liability in case of serious violations.
Antitrust Risk of Collective Intelligence
Though the markets have come to a grinding halt, the fear of exploitative practices still resound with few goods gaining extreme importance. This rise in demand for essential goods, aggravated by panic buying by consumers, has created an opportunity for sellers and producers to take undue advantage of the situation. A simple example of this would be the N95 masks which were the WHO recommended masks at the start of the pandemic. These essential goods like hand sanitizers, masks and protective equipment were sold throughout the supply chain for hugely inflated prices. This exploitative practice of pricing (price gouging) requires active monitoring from authorities.
Furthermore, allowing collaboration between competitors for production and development of essential goods might pave the way for formation of cartels and anticompetitive agreements. This is because collaboration in areas outside their scope of research and development agreement risks unrestricted exchange of competitively sensitive information impacting competition during and after the crisis. Considering barter of sensitive information may allow the companies to set prices at undesirable limits and affect the market rates of many other medicinal goods and services which might result in price-fixing agreements. This will not only pave way for anticompetitive practices in the present circumstance but will also impact the market once the pandemic subsides.
There may also arise a situation where a certain kind of drug or vaccine is released into the market during the course of an exemption provided which the enterprise may bundle up with a certain other product that would otherwise be sold independently. This way, it would become imperative for consumers to buy an essential good along with a non-essential good. Another probable scenario could be the predetermination and enforcement of prices throughout the chain and therefore indulging into resale price maintenance in order to get the highest amount of revenues in this period for those particular enterprises.
These possible scenarios indicate risks of cartel formations, price-fixing agreements, bundling up, formation of monopolies, abuse of dominant position by overcharging and predetermination of prices with respect to essential commodities. These practices are regulated under the Competition Act, 2002 (Act). Section 3(3) of the Act deals with such horizontal agreements and invalidates such agreements which are likely to cause an appreciable adverse effect on competition. Though permitting collective intelligence requires certain relaxations to form agreements for exchange and sharing of information, data, and research, there is a possibility that these agreements may extend beyond the permitted scope and trigger a violation of Section 3 of the Act. Hence, it is expedient that necessary checks are installed to avoid such a result.
Since enterprises from pharmaceutical and essential good supplying companies are the frontrunners to receive any kind of exemptions from the government, there is a high chance that exploitative practices may go unnoticed owing to the period or gravity of the exemption. These conflicting concerns of the need for relaxation while ensuring antitrust checks, calls for a measured approach with regards to the conditions in the market and how to tackle them.
Suggestions for a measured approach
This requisite measures could be based on Section 54(a) of the Act which allows for relaxation of any provision of the Act on grounds of public interest. Reliance can be placed on this provision to create a temporary framework to include limited relaxation under Section 3. This will allow businesses freedom to expedite the process of developing the vaccine from the vantage of competition law. The nature of relaxation should be accommodative of interest of both pharma companies and consumers.
This can only be realized if the concerned authorities are satisfied that these joint ventures are actually enhancing efficiency and synergizing cumulative efforts. It would have to be closely examined by the Competition Commission of India (CCI) whether a collaboration between two or more enterprises is resulting into an outcome that would be beneficial for the society. These JVs in the same industry have to be notified under the Combination Regulations if it meets the required threshold given under the Act. CCI has accepted JVs under Combinations on various grounds which includes low market share of JV, no horizontal overlap between parents or JV, parents not being close competitors etc. Recently, efficiency was brought in as one such factor for accepting such applications through the APGDC/Shell JV.
Efficiency is assessed by the CCI as something that would create a solution which would ultimately benefit the consumers at large without distorting the current markets. An example would be the assessment of investments made and resources put into the JV, for the creation of the vaccine, being greater in value and amount than each would have individually done. If the output is seemingly more, then such a venture would not have to be brought under the scanner for liabilities. This would allow for horizontal relaxation for the companies to actively participate in collaborative efforts to bring a vaccine to the market soon.
Further, the framework could borrow from the implementation by the EU and thus may exempt collaborations for essential commodity ventures like vaccines. This will assure the collaborators from any antitrust inquiry or imposition of fines. Also, in order to keep a check on the process, a requirement for mandatory filing of details of these temporary collaborations (specifications of nature, area of research or developments, types of data or resources being exchanged) could be brought in.
In order to dismiss the negative effects of these collaborations after the crisis and preclude monopolist situations, end-oriented exemption on collaboration could be allowed. This means collaboration shall cease to exist upon achievement of ends like completion of vaccine development after which the existing antitrust framework would resume to apply. Guidance can be sought from the practice in Norway where all such collaborative agreements must be reported to the competition authorities despite the relaxations. In case any suspicion arises, it can be investigated and adjudicated upon at a later date when the markets and economies are stable once again.
It is suggested that these measures will act as an encouragement to fast-track collaborative ventures for development of essential commodities like vaccines. Such measures would brush aside the persisting ambiguity relating to antitrust policies in times of crisis, especially in the pharmaceutical sector. However, this encouragement needs to be provided along with operative protocols to deal with any market abnormality in the course of this exemption.