Laws

The Monopoly Control Authority (MCA) is a statutory, quasi-judicial body established in its
present form to administer the Monopolies and Restrictive Trade Practices (Control &
Prevention) Ordinance, 1970. The broad objective of the legislation is to provide for measures
against undue concentration of economic power, monopoly power and restrictive trade
practices. The law spells out circumstances, which shall be deemed to constitute the above, and
under Section 3 of the ordinance prohibits these clearly defined situations. Under Section 6 of
MRTPO, unreasonably restrictive trade practice has been defined as any practice, which
unreasonably prevents, restrains or lessens competition. These include agreements

(a) between actual or potential competitors of • fixing the purchase or selling prices or
imposing any other restrictive trading conditions with regard to the sale or distribution of any
goods or the provision of any services; • dividing or sharing of markets for any goods or
services; • limiting the quantity or means of production, distribution or sale with regard to any
goods or the manner or means of providing any service; • limiting technical development or
investment with regard to the production, distribution or sale of any goods or the provision of
services; • excluding by means of boycott any other or undertaking from the production,
distribution or sale of any goods or the provision of any services;

(b) between a supplier and a dealer of goods fixing minimum resale prices including • an
agreement with a condition for the sale of goods by a supplier to a dealer which purports to
establish or provide for the minimum prices to be charged on the resale of the goods in
Pakistan; or • an agreement which requires as a condition of supplying goods to a dealer the
making of any such agreement;

(c) In addition to these enumerated practices, the Authority may identify others which are
found to be unreasonably restrictive. For example, it might well find that restrictions, in
distribution agreements which limit the customers or territories of distributors are
unreasonably restrictive in certain circumstances. ‘Agreement’ here has been defined to include
any arrangement or understanding whether or not in writing and whether or not it is legally
enforceable. This would mean that unwritten collusive agreements would fall within the
definition of the word ‘agreement’. This is an important provision because restrictive
arrangements and agreements are quite often not in writing. MCA assesses the impact on
public interest in any of the above mentioned situations and through evidence collection
focuses on the issue for analysis. Under Section 11 of the MRTPO, in case of unreasonably
restrictive trade practices the order of the authority may:

(1) Require the person or undertaking concerned to discontinue or not to repeat any
restrictive trade practice and to terminate or modify any agreement relating thereto in such
manner as may be specified in the order;

(2) Require the person or undertaking concerned to take such actions specified in the
order as may be necessary to restore competition in the production, distribution or sale of any
goods or provision of any services.

Section 12 of the MRTPO deals with the orders of the Authority and lays down the parameters
within which the Authority will function. The orders of the Authority have been specifically
related to the situation being investigated, i.e. separate remedies have been provided for
situations of concentration of economic power, monopoly power and trade restrictive
practices. Under Section 14 of the MRTPO, the MCA is empowered to conduct enquiry in
circumstances constituting undue concentration of economic power and unreasonably
restrictive trade practices. It was under this provision of the ordinance that the MCA decided to
look into the matter.

Monopoly Control Authority (MCA) is a statutory, quasi-judicial body established in its present
form to administer the Monopolies and Restrictive Trade Practices (Control & Prevention)
Ordinance, 1970. The broad objective of the legislation is to provide for measures against
undue concentration of economic power, monopoly power and restrictive trade practices. The
law spells out circumstances, which shall be deemed to constitute the above, and under Section
3 of the ordinance prohibits these clearly defined situations. The law under Section 5 has
prohibited creation or maintenance of unreasonable monopoly power in any market.
Specifically under Section 5(b), the law prohibits anti-competitive mergers and acquisitions.
Such situations apparently are not very common at the present time, and the Ordinance
permits the Authority to determine which of them should be prohibited. According to the
Section 5 of the ordinance, (1) unreasonable monopoly power shall be deemed to have been
brought about, maintained and continued if- (a) there has been created or maintained any such
relationship between two or more undertakings as makes them associated undertakings where
they are competitors in the same market and together produce, supply, distribute or provide
not less than (one third) of the total goods or services in such market; (b) there has been any
acquisition by one person or undertaking of the stock or assets of any other person or
undertaking, or any merger of undertakings, where the effect of the acquisition or merger is
likely to create monopoly power or to substantially lessen competition in any market, including
any acquisition which creates any such relationship as is referred to in clause (a). (c) any loan is
granted by a bank or insurance company to any of the associated undertakings of amounts
greater or on terms more favorable than for loans made available to other undertakings in
comparable situations, or any loan is granted by a bank or insurance company to a person or
undertaking not associated with it on the condition or understanding that the borrower or any
of its associated undertakings will make any loan to a person or undertaking associated with
the lender.

(2) No such relationship, acquisition, merger or loan as is referred to in sub-section (1) shall be
deemed to have the effect of bringing about, maintaining or continuing unreasonable
monopoly power if it is shown- (a) that it contributes substantially to the efficiency of the
production or distribution of goods or of the provision of services or to the promotion of
technical progress or export of goods; (b) that such efficiency or promotion could not
reasonably have been achieved by means less restrictive of competition; and (c) that the
benefits of such efficiency or promotion clearly outweigh the adverse effect of the absence or
lessening of competition. Under Section 11 of the Ordinance, in case of contravention of
Section 3- (i) where the authority is satisfied that there has been or is likely to be a
contravention of the provisions of Section 3 and that action is necessary in the public interest, it
may take one or more of such orders specified in Section 12 as it may deem appropriate. (ii)
Before making an order under sub-section (1), the authority shall give notice of its intention to
make such order stating the reasons thereof to such persons or undertakings as may appear to
it to be concerned in the contravention to show cause on or before a date specified therein as
to why such order shall not be made; and (a) give the persons or undertakings an opportunity
of being heard and of placing before it facts and material in support of their contention. (iii) an
order made under the sub-section (1) shall have effect notwithstanding anything contained in
any other law for the time being in force or in any contract or memorandum or articles of
association. Under Section 12 an order of the authority in case of unreasonably monopoly
power— (a) require the person or undertaking to divest himself or itself of the ownership of
any stock or shares or other beneficial interest in any undertaking or of assets within such time
and under such conditions as may be specified in the order; (b) require the person concerned to
divest himself of any position held by him as an officer, director or partner in any undertaking
within such time and under such conditions as may be specified in the order; (c) require the
person or undertaking concerned to divest himself or itself of the management or control of
any undertaking within such time and under such conditions as may be specified in the order;
(d) prohibit the person or undertaking concerned from acquiring the stock or assets of, or the
undertaking from merging with, any other undertaking; (e) limit the total loans which may be
made by any bank or insurance company to any single individual or undertaking, or to any
undertaking associated with such bank or insurance company; (f) limit the investments of any
undertaking engaged in the banking, investment or insurance business; (g) require the person
or undertaking concerned to take such actions specified in the order as may be necessary to
restore competitive prices and eliminate restrictions on output or entry of competitors in the
market.

Drug Regulatory Authority of Pakistan (DRAP)

The pharmaceutical industry is highly regulated in Pakistan. It is regulated by both ministry of

national health services regulation & coordination (NHSR&C) and the drug regulatory authority
of Pakistan.
Pharmaceutical companies in Pakistan are governed under Drug rules 1976. The regulatory
authority is DRAP. DRAP oversee labeling and packaging, licensing, registration and advertising,
import, export and research of pharmaceutical of Pakistan.

The progress of Pakistan’s health sector has identified as a crucial impediment by the drug
regulation, in the wake of the ‘fake drug crises’ of 2012. In 2010, control of DRAP, shifted to
provincial government from federal government. After 2 years, the drug act of 2012 again
established direct federal jurisdiction over DRAP. Since it was formed media have criticized.
However till date there is no official or academic performance evaluation of DRAP.

Funding of DRAP
The two major issues concerning DRA’s funding are:
1. Lack of a sustainable funding source: The DRA is primarily financed by the Federal
Government. A clear indication of the DRA’s underfunded state is that it has operated with
a mere 225 drug inspectors in the past two years. Despite severe regulatory shortcomings,
only 52 new appointments have been made, none if which have been finalized.
2. Absence of accountability to the NHSRC (Federal Government): The DRA is only accountable
to its own board members for allocation of funds. This limited accountability has dis-
incentivized the DRA to take necessary steps to regulate the pharmaceutical industry at the
national level.

Issues Faced by DRAP:

The Pharmaceutical Industry Expo Center

Now DRAP has the responsibility of safety, quality and affordability of medicines due to the
major public health challenge facing by Pakistan. However, the DRA has thus far focused
primarily on promoting the export potential of the pharmaceutical industry. These activities
have been counterproductive to the DRA’s main responsibility of regulating the pharmaceutical
industry. Increasing export revenue should not be a function of the DRA, as evidenced in how
this role affects similar regulatory bodies worldwide.

Composition of the Governing Board

The DRA’s four constituent boards are lopsided in terms of representativeness and conflicts of
interest. In particular, the Policy Board is comprised of representatives from key ministries, the
provinces and experts from the public and private sectors. The autonomous function of the DRA
in the Drug Act of 2010 is significantly undermined by the presence of government-appointed
bureaucrats on the Board. A clear conflict of interest exists as other Policy Board members
have. Therefore, the DRA’s ability to fulfill its intended role in a highly politicized system
continues to be a challenge.

Uncertain Dynamics

In May 2013, the NHSRC issued a notification to remove the controversial Senior Joint Secretary

Arshad Farooq Fahim (Acting CEO of the DRA) in the wake of a drug pricing scam. The National
Accountability Bureau (NAB) charged the former CEO with raising the prices of drugs to benefit
a few select drugs manufacturers. This incident has led to a severe dip in national confidence in
the DRA. It is also one of the most significant reasons for the departure of numerous
multinational pharmaceutical companies from Pakistan in late 2013. Compounding the unstable
regulatory mechanism of the DRA is the fact that the organization has never had a permanent.

The International Market

International Experience of Regulating the Pharmaceuticals Market

Pakistan is not the only country where the pharmaceutical market is regulated. Barring a few
countries, which are usually beset with challenging conditions (like Afghanistan), governments
all over the world regulate pharmaceutical industry. However, this regulation comes in varying
degrees and with different strategies. The following is a brief look at selected global experience
of regulating pharmaceutical industry, and what research suggests about outcomes of
regulation. Hewitt, Maynard, lee and Bloor undertook an evaluation of studies conducted on
the various aspects of the health sector from 1980 to 2012, including pharmaceutical industry
regulations. When it came to pricing, they found that the evidence of the consumer saving from
government enacting price controls is either weak or non-existent. In instances where little cost
saving was recorded, it did not come courtesy of government led price controls but by
substitution in use. In fact, they found that price controls have an overall negative impact on
equity in access to medicines. A 2004 study by the US Department of Commerce58, which
looked at instances of international price controls in eight OECD countries, concluded that they
reduce R&D by 11 to 16 percent due to lost revenue. The Kaiser Institute of Health Policy, in its
study, compared US pharmaceutical regulations to three other countries (Britain, Australia and
Germany). It concluded that when it comes to regulating the pharmaceutical industry, there are
many questions to be answered which need research (for example, is the healthcare industry
structured such that regulations can be effectively enacted?). It did see government’s role in
regulation in instances where there are unethical in the pricing of drugs by companies, stated
that high drug prices have little to do government’s free hand given to firms. Rather, it was the
competing incentives and interests of various groups that resulted in higher prices of drugs63.
In their proposals, there is no room for government directly regulating drug prices. Judith
Wagner, in her commentary64 on a book written by a former editor of New England Journal of
Medicine, gave an insider account of what kind of regulations would work. She draws upon her
experience of the field to contend that any regulatory body’s emphasis should be upon
marketing costs and the direction of expenditure of R&D. In other words, Wagner points
towards ethical issues that require regulatory oversight rather than regulatory administering of
other aspects. Steve Forbes, noted businessman and the editor of the famous Forbes magazine,
came down heavily upon drug regulations, blaming them for problems like lower innovation
rates and decline in R&D65. In contrast to Forbes’ belligerence against all kinds of regulations, a
more balanced approach (backed up by history and research) is taken by Stewart Lyman.
Tracing the context of regulation and historical incidents related to drugs, Lyman advocates a
regulatory course which is similar to Judith Wagner (discussed above). In other words,
pharmaceutical regulations should be concentrated upon preventing ethical malpractices
(lobbying, marketing and emphasis of R&D upon ‘me-too’ drugs) rather than other aspects.
Hence, it would be fair to conclude that the matter of regulating the pharmaceutical sector
have undergone an evolution in views. Earlier, regulations were supposed to encompass
everything related to pharmaceutical industry. By now, majority of experts on this sector
advocate regulating the ethical issues like expenditure on marketing practices, financing of
medical practitioners by pharmaceutical firms and particular direction of R&D. Exports and
imports of pharmaceuticals has almost vanished as an area of pharmaceutical regulations, and
issues related to pricing of medicines have been handled without any attempt at coercing
manufacturers into selling at an official price. The example of the British pharmaceutical
regulations, stated above, is a reflection of this fact. Instead of administering drug prices, the
authorities there found an alternative, agreeable solution in the form of regulating profit
margins (which is related more to the ethical domain). Thus, it is safe to assume that the views
over time (at least that of the majority) have evolved from outright regulation of every aspect
of the pharmaceutical industry to targeting specific areas for regulations. Practices being
carried out (for example, if pharmaceutical companies are found overstating their R&D
expenditures). Management Sciences for Health (MSI), an international organization working in
the health sector, outlined the prerequisites for a good regulatory system in lieu of its global
experience. The best possible public good through regulation can come, MSI argues, through
ensuring safety, efficacy and quality of medicines. It also argues for doing away with
unnecessary and non-regulatory functions of a regulatory authority like service delivery,
manufacturing and medicine procurement, etc. Their report further contends that most
important factor in evaluating successful functioning of any regulatory authority is the extent of
its framework that is in tune with the existing situation of the pharmaceutical sector in the
country. Robert Galvin and Roger Longman, while opining upon criticism of the US government
policy to not interfere.

Global Market

The global pharmaceuticals market was worth $934.8 billion in 2017 and will reach $1170
billion in 2021, growing at 5.8%, according to a recent pharma market research report by The
Business Research Company.

This is an accelerated pace compared to 5.2% for the years before 2017, but is slower than the
other two large healthcare segments, medical equipment and healthcare services. Healthcare
as a whole is growing at over 7% year on year.
 PESTEL Analysis for the Pharmaceuticals Market

Current and ongoing changes in political, economic, social, technological, legal and environmental
factors are influencing growth in the healthcare market, where drugs play an important part. The
following factors are all boosting healthcare market growth:

 Reduced taxes and lowered drug prices in the USA

 GDP growth of over 6% in China and India
 Widespread population aging and sedentary lifestyles leading to increased chronic
disease prevalence
 Industrialized data services in R&D enabling the use of clinical trial data in trial
simulations
 Lowered regulatory barriers for new drugs in the USA
 High urban pollution levels increasing the incidence of conditions like asthma

As a result, healthcare expenditure per capita is set to rise from its 2017 level of $1137 to
$1427 by 2020
The Changing Geography of Pharma Markets

Growth over past decades means that North America and Western Europe still account for 56%
of the global market, but Asia Pacific has overtaken Western Europe as the second largest
region. Growth in Asia Pacific is fueled by increased affordability of drugs resulting from the
launch of low-priced generics. Other factors that are positive for growth in Asia Pacific are the
rise of GDP per capita in the region, government programs to support healthcare, and rapid
urbanization, which brings both doctors and pharmacies within easy reach of increasing
proportions of growing populations. Pharma sales in Asia Pacific will grow at 8.4% a year to
2021.

The story is a similar one at the level of country. The USA, by itself worth 25% of the global
total, is restraining global growth by rising at below 5% a year, while the much smaller pharma
markets of India and China are both achieving double that Key Segments in the Pharmaceutical
Market

The largest pharma market globally is for musculoskeletal drugs. These are treatments for
diseases such as rheumatoid- and osteo-arthritis, osteoporosis, carpal tunnel syndrome,
tendonitis, rotator cuff tear, muscular dystrophy, myasthenia gravis, lupus erythematosus and
others. Major drugs in this segment include Piroxicam Glaxo, Dolonex, Felden, and Piroxicam
Pfizer. The segment accounted for 14% of the global total in 2017. Cardiovascular, oncology and
ant-infective drugs are the second third and fourth largest markets.

Drugs for treating metabolic disorders such as diabetes and diseases of the thyroid and
pituitary glands will be the fastest-growing segment of the global pharma market to 2021. This
segment will grow at 9% a year going forward, following recent growth of 11.6%, but it will
remain in fifth place for market size.

Anti-diabetic drugs are the largest sub segment of the global pharmaceutical industry, worth
over $85 billion in 2017; second are the anti-viral and third come anti-hypertensives. Drugs for
some of the less prevalent cancers — thyroid, skin and ovarian cancer — are the fastest-
growing sub segments. This is in part because the US Federal Drug Administration has allowed a
less rigorous regulatory procedure and lower endpoint benchmark for cancer drugs, so
increasing the rate of innovation.

Competitive Landscape & Top Pharmaceutical Companies

Pharmaceutical drugs are subject to a large number of laws and regulations that deal with
patenting, testing, safety, efficacy and marketing and affect the size and growth rates of the
market. Together with the high R&D costs involved in creating new drug solutions, these can
act as barriers to entry for small companies. However, pharmaceutical companies produce both
generic and branded drugs. Generics, which are copies of patent-expired drugs, are
opportunities for smaller entrants. They are taking an increasing share of the market,
particularly in developing economies, where governments are encouraging their production in
order to make lower-price treatments more widely available.

In the overall market, top pharmaceutical companies include:

 Novartis

 Sanofi
  Pfizer

 Hoffman-La Roche

 Gilead

Together the top ten pharmaceutical companies account for 30% of global sales, making the
market moderately fragmented. Within individual segments, however, the share of these
pharmaceutical companies varies: Hoffman-La Roche is by some way the leading
pharmaceutical company in the large oncology drugs market, but Sanofi leads in the
cardiovascular and metabolic disorders segments.

In markets where biologics have penetrated, the leading players are not in the top ten pharma
manufacturers: Biogen, for instance, leads in the central nervous system segment, while Bristol-
Myers Squibb and Eli Lilley have significant shares in oncology.

Deal activity in the healthcare industry has surged in recent years. Most mergers and
acquisitions are aimed at boosting product portfolios and expanding the market reach of
products and services. For example, in August 2014 Merck acquired a clinical-stage
pharmaceutical company, Idenix Pharmaceuticals Inc., for nearly $4 billion. Through this
acquisition Merck strengthened its product portfolio by adding Idenix’s potential hepatitis
drugs.

Payments to Drug Regulatory Authority of Pakistan (DRAP)

There are certain special payments made to DRAP for various purposes including:

1. Central Research Fund: Annual levy of 1% of Profit before Tax

2. New Drug Registration Fees

3. Drug Registration Renewal Fees

4. Drug Manufacturing License Fees

Custom Duties:

Active Pharma Ingredients (API) and Excipients attract custom duties ranging from 5% to 25%.
Where custom duty is 25%, additional sales tax is also levied despite no sales tax on sale of
medicines. Advance income tax levied on import stage is currently at 5.5% on import value.
Import duty on medicines range from 0% to 10%. Cancer, transplant and heart related
medicines have 0% custom duty; however, they attract advance tax at 5.5% on import value.

Taxation:

Sale of locally manufactured medicines falls under the Normal Tax Regime (NTR) whereas,
Income Tax levied on import of finished medicines fall under Final Tax Regime (FTR). In case of
exports, the entire export proceeds, whether of locally manufactured medicine or imported
ones, also fall under FTR.

Promotional Spend:

Federal Board of Revenue (FBR) also reviews sales promotional spending by the Pharmaceutical
companies. As per the Drug Act, sales promotional expenditure is restricted to 5% of turnover.
The Finance Executive should ensure regular monitoring of promotional spend to ensure that it
remains within defined limits.

Transfer Pricing:

This issue is particularly relevant for Pharmaceutical MNCs; where local affiliate purchases API
from group companies worldwide. FBR has issued notices to many Pharmaceutical MNCs to
assess whether the transfer prices of API. FBR is generally interested in the pricing of APIs and
excipients that are used to manufacture products in Pakistan and whose income is
consequently taxed. Due to the importance of this matter, Finance Executives should ensure
that the company has adequate documentation in place to establish the purchase of products
from group companies.

Sales Tax:

Pharmaceutical industry has exempt status in GST; there is no output sales tax in respect of
sales of Pharmaceutical products. The GST returns are generally straightforward covering some
output tax with respect to disposal of fixed assets and scrap sales.