1. 1 Challenges in Promoting Competition in the Drug Industry: The Brazilian Experience Mariana Tavares de Araujo

2. 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 Inquiry 2

3. 3 Sectoral Regulation

4. 4 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

5. 5 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

6. 6 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

7. 7 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

8. 8 Competition Enforcement

9. 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 9

10. 10 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

11. 11 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

12. 12 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

13. 13 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)

14. 14 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)

15. 15 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

16. 16 Mariana Tavares de Araujo 55 21 3503 2003 mtavares@levysalomao.com.br