Data show that purchase of medicines is the largest contributor to out-of-pocket-expenditure on healthcare by Indians. The government has taken initiatives such as the PM Janaushadhi scheme which provides generic medicines at affordable prices. But such intervention may not be required if cartels in the pharmaceutical industry stop sustaining artificially inflated prices for medicines.

The pharma supply chain comprises manufacturers and distribution intermediaries. These stakeholders generally participate in the market through their respective trade associations.

In terms of price, approximately 82.3 per cent of drugs are “unscheduled drugs” i.e. there is no statutory cap on their trade margin. One would expect a thriving market with dynamic price competition in the 82.3 per cent unregulated market.

CCI moves

However, market studies by the Competition Commission of India (CCI) reveal that trade associations have suo motu usurped power to fix and enforce trade margins for unscheduled drugs. “Industry practice” is a margin of 20 per cent for retailers and 10 per cent for wholesalers.

Trade associations collectively enforce inflated trade margins for retailers and wholesalers by simply ensuring higher MRPs. CCI has held this practice to be anti-competitive under the Competition Act as it limits price competition and goes against the interest of consumers.

A recent paper — Chronic Cartels — Diagnosing Disease Plaguing the Indian Pharma Distribution Chain — found that a whopping 19 out of 20 contravention orders passed by the CCI in the pharma industry, have been for cartelisation by retail pharma associations. It notes that some associations including the All India Organization of Chemists and Druggists (AIOCD), Chemists and Druggists Association of Baroda (CDAB), All Kerala Chemists and Druggists Association (AKCDA) have engaged in anti-competitive activities, despite CCI orders.

The modus operandi adopted by pharma associations to ensure that manufacturers and retailers comply with their diktats is surprisingly effective and well monitored — without an NoC from the trade association, no distributor/retailer can source drugs from manufacturers.

There are multiple reasons for the persistence of anti-competitive activities in the pharma industry, inspite of CCI being active. First, monetary penalty is imposed generally only on the errant trade association using the income of the association as a base.

Paltry penalty

Consequently, the penalty amount is abysmal when compared to the monetary profit made by individual participants in the chain including pharma manufacturers, retailers and wholesalers.

Secondly, in the past when the CCI tried to penalise pharma manufacturers, its wings were clipped by the appellate body, erstwhile COMPAT (now NCLAT), which overturned its orders.

Over time, the CCI stopped penalising pharma manufacturers. The COMPAT has so far only (partly) upheld two CCI orders against pharma associations and even in these two cases, appeals are pending before the Supreme Court.

Interestingly 14 out of 19 cases, where contravention orders were passed by CCI against pharma associations, were initiated on information submitted by aggrieved intermediaries like wholesalers and retailers. Pharma manufacturers have not been informants in any case involving pharma associations.

Manufacturers are seemingly hesitant to ruffle feathers of powerful associations and are happy to maintain status-quo as long as distributors/retailers push their products. Anti-competitive practices in the pharma sector have a direct bearing on prices and supply of medicines in India.

While e-pharmacies may present a solution, currently their contribution is miniscule, 0.5 per cent of the Indian market. The only way forward is to ensure that competition is restored in the existing pharmaceutical distribution chain.

The writer is a co-author of the paper “Chronic Cartels – Diagnosing Disease Plaguing the Indian Pharma Distribution Chain” available at Views are personal