Viewpoint

Managing competition, price and access
The changing paradigm for the pharmaceutical sector

High medicine prices impose a burden on national healthcare systems, where pharmaceuticals account for a significant
share of spending, especially for countries in the early stages of maturity in the pharma sector. Competition authorities
have expressed concerns that access to affordable, innovative drugs may be at risk due to high prices, market withdrawals
or other business strategies, along with national governments’ limited bargaining power against pharma companies. This
Viewpoint discusses competition in the pharma sector and presents an integrated framework for authorities to strengthen
pharma competition.

Access to affordable and innovative drugs

Competition overview in the pharma sector

Average government spend on pharmaceuticals is about 57
percent across OECD countries. Most private spending comes
directly from households’ pockets, which reflects both high costsharing requirements and the extent of OTC self-consumption.
Moreover, drug prices vary greatly across countries. Recent datafrom Medbelle shows that, for generic drugs, the UAE pays over
10 times more, while Egypt pays about 95 percent less than themedian. For branded drugs, the US pays five times more thanthe median, while Indonesia pays about 90 percent less. These
differences result from multiple factors, such as production andother operating costs and price regulation.

Market concentration and competition differ across the pharma
value chain activities (see figure below) and product categorygroups, and are dependent on regulation within countries:

Effective competition from generics/biosimilars represents a vital
source of price competition and significantly decreases price. Infact, when pharmaceuticals register patents to branded drugs,
the registration is only valid for a certain period, after which othercompanies can produce generic versions. This not only makes
older treatments more accessible, but also allows savings
to be redirected to newer medicines. However, to mitigate
the impact of generic entry, which greatly reduces revenues,
originator pharma manufacturers often use strategies to extend
the commercial life of patented drugs. Some even resort toanticompetitive behaviors to prevent entry of a generic that maythreaten revenues and market share. Consequently, competition
authorities have investigated and sanctioned practices that leadto higher prices and involve anticompetitive behaviors. Theseauthorities have expressed concerns that access to affordable,
innovative drugs may be at risk. There are limits to competition
law; thus, continuous efforts by stakeholders must meet thechallenge of sustainable access to affordable, innovative drugs,
especially in countries where the pharma sector is in earlystages of development.

Pharmaceutical value chain
R&D

Manufacturing

Pharma ManufacturersLicensing &distribution

Wholesale
distribution

Wholesalers

Retaildistribution
Retailers

Source: Arthur D. LittlenPharma manufacturers: For many stakeholders, theHerfindahl-Hirschman Index (HHI) for pharma manufacturing
indicates a low-concentration industry). However,concentration at the level of industry might not be the bestindicator, as patents protect certain categories. Thus, thebranded-drugs market is more concentrated than generics.
This high market power is also due to competitive R&D
and the merging of smaller firms with larger branded firms.
The result: no significant change in ranking of leading
branded-drugs manufacturers since 2011, indicating serious
competition concerns and continuing price increases.

nWholesalers: The wholesale market is characterized
by low- and high-concentration markets, depending on
regulations and distributing power. Most countries havemixtures of national and regional wholesalers, with national
wholesalers providing the full range of medicines andregional providing full and partial ranges. Some countries
have many wholesalers with less than half of market share(low concentration), while others have fewer than fourwholesalers with more than 85 percent market share (highconcentration).

Viewpoint

Retailers: Market concentration in retail is low to medium
due to legacy government monopoly pharmacies andregulation. This corresponds to low concentration in markets
with strict regulations and medium concentration in markets
recently liberalized, or where market positions of previously
government-owned pharmacies are still strong or big chainsprevail.

nHHI for pharmaceutical value chain
MANUFACTURERS

WHOLESALERSRETAILERSWorld (HHI, 2018 foraverage world average)(HHI, 2018)(HHI, 2018)

5 000
4 542

4 500
4 000
3 500

3 272
3 030
2 924

3 000

2 586

2 000
1 392

1 500

1 077 1 076

1 000500

530322229 227

0HHI considering private players only
HHI private & public players

2 300 2 247

2 500704

Source: Marketline, WTO, Ebsco, Researchgate, Duke University, PM Group, Arthur D. Little
Note: HHI is a measure of market concentration. An HHI of <1,500 is considered low concentration, an
HHI between 1,500 and 2,500 is moderately concentrated, and an HHI >2,500 is highly concentrated

Competition concerns in the pharma sectornAnticompetitive mergers, which can appear as priceincreases or lack of merger control.

nAbuse of dominance, which usually appears in five forms:
1. Excessive pricing: Prices set significantly above
competitive levels due to monopoly or market power.
2. Denigration: Competitors criticized in derogatory manner
to minimize competitive potential.
3. Kickbacks: Stakeholders offer negotiated bribery tactics
in exchange for anticompetitive disadvantage to briber.
4. Patent misuse: Stakeholders extend patents overproducts set to expire to limit generic competition(“evergreening”) or introduce modified versions to switch
patients from older versions without facing imminent riskof generic substitution (“product hopping”).

nRestrictive horizontal agreements often appear in threeforms:
1. Price fixing: Rival companies come to illicit agreement
not to sell goods or services below a certain price.
2. Generic-delay agreements: Brand manufacturers
negotiate with generic manufacturers to delay entry ofsubstitutes and avoid threat to sales of more expensive
branded products.

2Managing competition, price and access

3. Collusion: Rival companies cooperate for mutual benefit,
but decision to collude impacts market as a whole.
nVertical agreements mainly take the form of contracts,
which constrain competition.

In mergers, market definition of existing products typicallyconsiders overlaps and market shares of the merging firms’
products within a set of therapeutic substitutes; hence, large
firms may have hundreds of separate markets to be assessed.
Typically, mergers are approved subject only to divestment ofproducts for which there is significant overlap between merging
firms. There is less clarity about how to treat R&D in mergers.
Pharma firms often have clear pipelines of future products due
to clinical trial needs, making it predictable which products will
be available in a few years. There is, however, debate about
whether earlier “research capability” should be considered apotentially lost competition area in an “innovation market.”In both abuse-of-dominance and horizontal collusion cases,
competition authorities have recognized the importance ofregulation, and generally respond with competition law only
when regulation has failed. Arguably, litigation or regulation
within the patent system should be enough to prevent abuses
but evergreening and product hopping plus misrepresentationof rival products have all been considered abuse of dominance.
Competition authorities can only take action when the criteria for
a competition case have been met. In such a regulated sector,
if a competition authority finds itself repeatedly taking action
against infringements, it is likely a sign something is wrong
with the regulatory system and reform might provide a better
solution. The highly regulated nature of the sector makes otherforms of breach-of-competition law less prevalent.

Strengthening competition in the pharma sector

2Competition authorities aiming to strengthen competition shouldlook toward collaboration with country-wide stakeholders. We
have developed a framework with four key recommendations(see figure below):
Framework for strengthening competition in the pharma sector
1

STRENGTHEN
COMP. ENFORCEMENT

2

FOSTER POLICYADVOCACY

Ensure there are no lackof regulations essential
to the healthy
Ensure competition law isfunctioning of thecomprehensive in its
pharma sector, and thatcoverage, in line withregulations have direct orbest practices andindirect impact onstrongly enforced
safeguarding competition
to ensure a level playing
field for all stakeholders

34

Ensure systems andprocesses already inplace in the pharma
sector are optimized(e.g., promoting genericsubstitution and limiting
drug shortages)

Ensure bodies/regulators
are present in the
country for essential
responsibilities in thepharma sector

OPTIMIZE EXISTINGSYSTEMS AND PROCESSESOPTIMIZEGOVERNANCE

Source: Arthur D. Little

1. Strengthen competition enforcement: Problems often
stem from combinations of evolving regulations and lack ofenforcement. Competition law must remain comprehensive inits coverage, follow best practices and be strongly enforced.
Substantive provisions regarding abuse of dominance, collusion
and merger control should be held to high standards. The law

Viewpointshould embody an excessive reliance on formal, rigid rules.
Competition authorities must also be vigilant about stakeholders
that abuse their dominant position, especially in cases protectedby patents and non-regulated OTC drugs.
2. Foster policy advocacy: Competition authorities shouldensure there is no lack of regulations essential to the healthyfunctioning of the pharma sector, and that regulations havedirect/indirect impact on safeguarding competition. Policy
advocacy can relate to various policies, dependent on thedevelopment of a country’s pharma sector. For those markets inearly phases, policy advocacy can relate to the following:nStrengthening public procurement processes: Provide
an adequate degree of transparency in procurement
cycle to promote fair, equitable treatment of potentialpharma suppliers. To avoid any tendering decision-making
challenges between a country’s central public procurement
entity of drugs and bidders, define a clear procedure for
opening tenders and advocate for close cooperation.
Moreover, advocate for procurement entity to procure
multiple medicines for different therapeutic categories from
more than one manufacturer and/or increase frequencyof tendering. To improve competition, the entity should
consider allowing diversification of public formularies, aswell as procurement of two to three alternatives under eachtreatment category. This allows accommodation of multiple
therapeutic cases and treatment requirements for different
patients, as well as more competition in tendering process.
Another option: more frequent tenders instead of current
practice, which is once every two years. Alternatively, follow
a reimbursement negotiation model rather than a traditional
procurement approach.

Finally, secure mechanisms to prevent risks to integrity(protect procurement officials from undue influence, which
is more prevalent in early-stage sectors). Develop risk mapsthat identify the most vulnerable officials as well for riskactivities. Also look towards separation of duties within
the public procurement entity via multiple-level review andapproval. In this setup, different specialized resources would
handle various parts of the procurement cycle.
nImproving local innovation capabilities: Many countries
in the early stages of the framework depend on import orinternational manufacturers. This reliance stems mostly fromlimited innovation capabilities in local pharma manufacturing.
It presents a setback by discouraging dependence on local
talent and innovation capabilities. Best-practice countries,
on the other hand, have reached advanced stages ofmanufacturing potential by undertaking and incentivizing a
range of initiatives. Competition authorities should advocate
to various stakeholders within the country to improve local
innovation capabilities.

n

Ensuring deregulation of retail activities: Deregulation
retail various consumer welfare benefits and positivelyaffects competition.

3. Optimize existing systems and processes: Competition
authorities should identify systems/processes to be optimized
and then advocate for ensuring such optimization to safeguard
competition. Moreover, though many countries have initiatives
to promote generic drugs, there are many other initiatives toconsider (e.g., strengthen guidelines so physicians dispense
medicine based on molecule rather than brand). In addition,
the early-stage pharma sector may face drug shortage issues

Responsible bodies across regulatory dimensions
Competition
authority

Pharma regulatory
authority

Pricing regulation
authority

Mktg & sales
regulation authority

Association ofpharmacies

Industry association

Reimbursement
authority

Stateauthorities
CMED

Overseen by same entity

Competition authority and Ministry

Regulatory

Quality of service

Source: Arthur D. Little

Managing competition, price and access

3Viewpoint

despite having several initiatives. Competition authorities should
advocate for optimization of initiatives (e.g., enforcing regulation
to notify food and drug authorities of drug shortages, stimulate
and improve digitalization in supply chain and ensure tendering
process takes into consideration the availability of drugs).
4. Optimize governance: Sometimes, the sector is missing
specialized bodies that assume essential responsibilities
in regulating the pharma sector, or certain regulations are
not strongly enforced. To ensure a fair market, competition
authorities should advocate for ensuring the right bodies are inplace and regulations within the sector are strongly enforced.
The key is diversity of responsible authorities and bodies, eachspecializing in specific areas of monitoring and regulation (seefigure above).

Conclusion
The pharma sector will undergo increased pressure to ensurecompetition. To create a fair and competitive market wherepatients have access to affordable and innovative drugs, anintegrated framework is required. This allows competition
authorities to ensure a level playing field. This frameworkendorses proper actions for competition authorities to undertakein collaboration with various stakeholders.

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Authors
Craig Wylie, Vikas Kharbanda, Dhiraj Joshi, Dr. Regien Sumo,
Mario Elhoyek, Dobromira Boyadjieva

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