The pharmaceutical sector has been the centre of attraction to the policy makers as well as academia due to its strong link with the consumer healthcare and the life of patients, which cannot be substituted with any other product. In recent years, the sector has been undergoing a paradigm shift in regulations and operation, with the re-introduction of product patent system. The introduction of the new patent system raised several important questions like the affordability of drugs to the common man. During the post 1990s, there has been a rush among the firms in the sector to enter into consolidation, to overcome the challenges posed by globalisation.
Globally the pharmaceutical sector has been one of the major consolidation intensive sectors. During the 2004-10 merger wave, around 11 percent of the overall cross-border sales and 9 percent of the cross-border purchases has been undertaken by chemical sector firms, which include the pharmaceutical sector. In the year 2009, the corresponding figures were 13 and 12 percent (Beena, S, 2013). It makes around 43 percent of the total sales and 77 percent of the total purchases made by the manufacturing sector firms. There has been several attempts to quantify the extent of consolidation activity in the Indian pharmaceutical sector. According to Basanth (2000) pharmaceutical sector in India accounted for 5.2 percent of all mergers and 8.3 per cent of all acquisitions in the manufacturing sector during 1991-1999. Beena, PL (2008) observed that drugs and pharmaceutical industry accounted for a large number of mergers and acquisitions in India. A recent study by Beena, S (2013) also observed that up to the year 2008-09, around 9 percent of the pharmaceutical sector firms disappeared due to mergers alone. This number would have been even higher, if the acquisitions are also taking along with mergers. As per Competition Commission of India (2014), recently, there has been 27 mergers and acquisitions in the sector.
Obviously, the increased extent of consolidation activity in the sector has been distrusted by many. The basic reason for this has been the likelihood of monopoly creation and the consequent adverse effect on patients� welfare. The specific feature of the pharmaceutical sector unlike other sectors is that the consumption decisions are taken by the doctor and not directly by the actual consumer (patient). This makes the demand less sensitive to prices. It is well-known that the sector consists of various cheap generic drugs as well as branded drugs, with wide variation in the price level, along with the existence of high information asymmetry. It is also important to mention the unethical practices among doctors, chemists, hospitals with the pharmaceutical companies. All this makes the supply side factors more important in deciding the consumption decisions. Given this scenario, the occurrence of mergers and acquisitions especially among the big firms in the sector, further strengthen the supply side.
Coming to the competition side of the sector, the general perception is that the sector is not concentrated. The best evidence for this is the observation made by the competition regulator of India, i.e., the Competition Commission of India (CCI)[i] while dealing with the proposed consolidation of Ranbaxy and Sun Pharma, that the pharmaceutical sector in India is not concentrated. The reason given is that the top ten firms in the sector such as Abbot, Sun Pharma, Cipla are holding only 6.43, 5.35, 5 percent market share respectively. It is important to mention that, the pharmaceutical sector consists of a wide range of therapeutic categories and sub-groups such as molecules, which are not substitutable to each other. Any assessment of competition in the sector should consider the product market concentration. The final consumption of medicines are not occurring at the broad level, but at the product level. It has been observed that various therapeutic categories are experiencing acute concentration in the sector. For example, though there are around 100 firms operating in the Contact Laxative segment, the four firm concentration ratio is near 90 percent. Out of this, the first firm itself controls more than 60 percent of the market share. This is observed for many other categories of drugs. Further, the number of firms engaged in producing certain categories of drugs is less than five or ten in many cases.
Hence, the competition concerns in this sector owing to the consolidation activity should address these kinds of issues along with the fact that the policy decisions are going to affect the life of millions who are working hard to sustain their life.
Basanth, Rakesh (2000), �Corporate Response to Economic Reforms�, Economic and Political Weekly, Vol.XXXV, No. 10.
Beena, P. L (2008), �Trends and Perspectives on Corporate Mergers in Contemporary India�, Economic and Political Weekly, September 27, pp. 48-56.
Beena, S (2013), �Global Trends in Cross-border Mergers and Acquisitions� in Reddy, Krishna (ed), �The Economic and Social Issues of Financial Liberalisation: Evidence from Emerging Countries, Bookwell Publishing, New Delhi, pp. 26-40. ISBN 978-93-80574-41-7.
[i] Available in http://cci.gov.in/May2011/Home/C-2014-05-170-Form-IV.pdf; Accessed on 5th September, 2014