MARKET REVIEW ON PRIORITY SECTOR UNDER COMPETITION ACT 2010 PHARMACEUTICAL SECTOR Malaysia Competition Commission (MyCC) 27 December 2017 TABLE OF CONTENTS Executive Summary 2 List of Abbreviations 7 Glossary 9 Introduction 16 Methodology and Limitations 18 Policy Context for the Review 24 PART ONE: OVERVIEW OF MALAYSIA’s PhARMACEUTICAL SECtor Chapter 1: Overall Growth of the Healthcare and Pharmaceutical Sectors 28 Chapter 2: Market Structure and Supply Chain 41 Chapter 3: Market Share and Market Concentration 69 Chapter 4: Market Dominance and Impact on Availability, Affordability and Accessibility of Medicines 93 PART TWO: COMPETITION CONCERNS IN THE PHARMACEUTICAL SECtor Chapter 5: Key Existing Laws and Regulations and An Assessment of Impacts 118 Chapter 6: Competition Concerns Among Industry Players 148 Chapter 7: Selected Case Studies on Anti-Competitive Conduct 177 PART THREE: CONCLUSION AND RECOMMENDatIONS Chapter 8: Conclusion and Recommendations 208 APPENDICES Appendix 1: Guiding Questions for Interviews with Industry Players 224 Appendix 2: Malaysian Organization of Pharmaceutical Industries (MOPI) Members 229 Appendix 3: Brief Profiles of Top 6 Malaysian Local/Joint Venture Pharmaceutical Companies 230 Appendix 4: Pharmaceutical Association of Malaysia (PhAMA) Members 232 Appendix 5: Malaysian Association of Pharmaceutical Suppliers (MAPS) Members 233 Appendix 6: Drug Registration Process 234 References 236 EXECUTIVE SUMMARY The aims of Malaysia’s National Medicines Policy are to promote equitable access to, and rational use of, safe, effective and affordable medicines by its population. In order to maximize social welfare, this policy is strengthened by Malaysia’s Competition Act of 2010 and the establishment of the Malaysia Competition Commission (MyCC) to bring about allocation, production and innovation efficiencies. The Malaysian healthcare system has changed from a predominantly public healthcare system to a dual or two-tiered system where public and private healthcare expenditure are almost equal today. The big rise in the incidence of non-communicable diseases and out-of-pocket expenses in the healthcare system has wielded significant financial impact on both the private and public sectors. The pharmaceutical sector has grown by an average annual rate of 8% over the last decade, reaching RM8.6 billion or 16.5% of total healthcare expenditure (RM52 billion) in 2016. Imported medicines at RM5.4 billion still account for the largest part (63%) of the RM8.6 billion pharmaceutical market, while exports are only RM0.7 billion. Generic medicines now account for 55% of the controlled (prescription) medicines market by value. The market structure of Malaysia’s pharmaceutical sector is characterized by a three-level supply chain, starting with manufacturers of generic medicines and importers of originator and generic medicines at the first level, wholesalers and distributors at the second level, and providers at the third level who provide medicines to patients and end users. The scope of this pharmaceutical sector Market Review is limited to controlled medicines. These are pharmaceutical products containing scheduled poisons as listed in the First Schedule under the Poisons Act 1952. They are commonly known as prescription medicines. The Review focuses primarily on manufacturers/importers at level 1 of the pharmaceutical supply chain, and the wholesalers/distributors at level 2. Due to time constraints, it was not possible to do a more in-depth study of the providers in level 3. A dedicated study should be carried out on the level 3 players as they represent an important link in the supply chain. That study will also need to examine the interactions between level 3 and levels 1 and 2. Out of 28 companies manufacturing controlled medicines in Malaysia, 23 are locally owned and 5 are foreign-owned, with none from high-income countries. The total sales revenue of this market was RM1.7 billion in 2014/15. Though there are few players, the market is competitive, with a Concentration Ratio (CR) 5 of 54% and Herfindahl-Hirschman Index (HHI) of 824, with little evidence of price fixing. The companies produce generic drugs, facing price competition from imports from India and increasingly from other Southeast Asian and Eastern European countries. 2 Market Review on Priority Sector under Competition Act 2010 – Pharmaceutical Sector Out of 54 importers in this study, 35 are foreign-owned, accounting for RM3.9 billion or 87% of market share, with 19 locally owned companies taking 13% of market share. This market’s CR5 of 47% and HHI of 643 indicate a low degree of market concentration. However, market concentration measured in this traditional way does not capture market power. Importers are dominated by subsidiaries of multinational corporations (MNCs) from high-income countries that import patented (originator) medicines from their parent companies. The importers have market exclusivity over those products while pricing decisions lie with their parent companies. At the second level of the supply chain, out of 709 companies holding wholesale licences issued by the National Pharmaceutical Regulatory Agency (NPRA) to distribute controlled medicines, 72 companies were studied. Four categories of wholesalers and distributors were identified: large independent distributors, Bumiputera agents, wholesalers and distributors that are subsidiaries of manufacturers, and retail pharmacies that also do wholesaling. Despite the large number of players, this market is highly concentrated, with a CR5 of 83% and HHI of 2,370. Whilst high market concentration should imply a high degree of market power over pricing, this is not the case here as the wholesalers and distributors do not own the products they distribute and hence have no power over pricing. The third level of the supply chain is made up of the providers, which consist of general practitioners’ and specialists’ clinics (individual and group clinics), private hospitals (individual and group hospitals), retail pharmacies (single outlet and chain pharmacies) and public hospitals and clinics. In 2014, there were 6,978 private GP and specialist clinics, 184 private hospitals, 1,413 pharmacy companies with 2,098 outlets, 150 public hospitals and 2,871 public clinics. Owing to time limitations, no market concentration study was done at this level. In the pharmaceutical sector, standard measures of market concentration using CR and HHI are inadequate to measure and understand market power at the companies’ level. There is no strong correlation between market concentration (traditionally defined as sales revenue share), market power and anti-competitive behaviour. Other important factors such as entry barriers, supply conditions, and particularly patents may be more important factors in determining market power. Unlike with other consumer goods, patients have little consumer choice in the frequency and type of medicines to take. This problem is compounded by information and knowledge asymmetry between patients and doctors, where those who prescribe have more power to decide than the consumers. As medicines are not easily substitutable, the definition of relevant market becomes critical. Functional similarities are insufficient to establish substitutability as the efficacy and side effects of taking a product can differ from one patient to another. Prescription medicines cannot be purchased at will and the prescribing doctor may not know the price-sensitivity of a particular patient, or may place a lesser priority on the patient’s medical costs in a treatment. Market Review on Priority Sector under Competition Act 2010 – Pharmaceutical Sector 3 For these reasons, in this sector, defining the market for anti-competition purposes is sometimes examined at a very detailed level, frequently down to the chemical substance level of Anatomical Therapeutic Chemical (ATC 5) where the originator company, through patent and other exclusive rights, has legal exclusive market rights, enjoys dominant market position and often unbridled power to determine prices. With the lack of substitutability, competition is only enabled when generic medicines enter the market – prices often drop dramatically, by up to 90%, as seen in the case of HIV medicines. (Generic competition also often results in significant lowering of originator prices.) While patents are accepted as one form of incentive and reward for innovation, competition law is increasingly used to remedy misuse of the patent regime when such conduct adversely impacts on the fostering of competition in, and growth of, the domestic industry as well as consumer welfare and public health. In Malaysia, many medicines treating non-communicable diseases, such as cardiovascular illnesses and cancer, remain high even where patent rights in relation to these medicines have expired in other parts of the world. Experience shows that prolonged patent terms can be one reason for the continued high price of these medicines. Patent and product life-cycle management strategies are employed by originator companies to extend the monopoly over blockbuster medicines in the form of patent clusters or thickets where multiple patents are filed on, for example, methods, formulations and salts. These lead to many secondary patents and follow-on products which do not necessarily have added therapeutic benefits. For this reason, the European Commission, upon completing its inquiry into competition in the pharmaceutical sector in 2009, now monitors patent settlement agreements