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January 25, 2013

Should The Govt Bring In FDI In Pharma?


- Hiral Vimadalal, Executive-Legal [ Wockhardt Group ]

Hiral Vimadalal

Despite liberalisation and deregulation of the pharmaceutical industry, foreign capital in the industry is still quite low. The majority of the global pharmaceutical firms have invested in India, but due to the weak patent regime, price control and rigid labour laws, the firms tend to outsource a large part of their production and do not invest much in R&D.

India has many attractions for Foreign Direct Investment; skilled labour, a large population and a strong production base in the pharmaceutical industry. The pharmaceutical industry has been the eighth largest sector in India attracting FDI since 1991. Despite liberalisation and deregulation of the pharmaceutical industry, foreign capital in the industry is still quite low. The majority of the global pharmaceutical firms have invested in India, but due to the weak patent regime, price control and rigid labour laws, the firms tend to outsource a large part of their production and do not invest much in R&D. The government of India wants to increase the FDI inflow into the industry and they hope to attract more foreign capital with further liberalisation of policies regarding the pharmaceutical industry. The Indian government implemented performance requirements for foreign pharmaceutical firms in order to create linkages and spillover effects between the foreign firms and the host economy. However, today there are no performance requirements for foreign firms that invest in the pharmaceutical industry in India.

The Prime Minister’s office is closely scrutinising the guidelines framed by the Department of Industrial Policy and Promotion (DIPP). The issue of FDI in existing Indian pharma companies started attracting government’s attention after some foreign firms acquired big Indian companies.

Since 2006, as many as six big Indian pharma companies have been taken over by foreign firms. About $4.73 billion or 50 per cent of the recorded FDI in the sector since the year 2000 has been in the form of mergers and acquisitions. In the year 2006, Matrix Lab was sold to the US-based company Mylan. In 2008, Dabur Pharma was bought by Singapore-based Fresenius Kabi. Again in the same year, Ranbaxy was taken over by the Japanese company, Diachii Sankyo. The year 2009 witnessed two major deals in which Shantha Biotech was taken over by the French major Sanofi Aventis and the US-based company Hospira took over Orchid Chemicals. The latest example is of Piramal Healthcare, which was bought in the year 2010 by the US multinational, Abbott Laboratories. This has not resulted in price rise or limited supply of generic goods. India is a huge potential market for the MNCs with a competent and cheap workforce.

Apprehensions

Although the effect of these acquisitions may not be immediately visible, the apprehension of the government could be that the price of drugs manufactured by foreign owned/controlled Indian pharmaceutical companies may eventually be increased or the quantum of manufacture brought down, which would be to the detriment of the Indian end consumer. The apprehension of the quantum of manufacture is also reflected in the conditions imposed by the Foreign Investment Promotion Board (FIPB) while recently approving various investment proposals in the pharmaceutical sector. Among others, the conditions apparently include maintenance of the quantitative level of NLEM (National List of Essential Medicines), maintenance of research and development expenses and reporting to the FIPB on transfer of technology. The re-pricing of drugs by the acquired Indian pharmaceutical companies is perhaps a lesser concern, given that the Drug Price Control Order, 1995 (DPCO) regulates the pricing of essential drugs. It is, however, relevant to note that pricing of other non-essential drugs is not as closely regulated and therefore perhaps the apprehension.

Competition Commission of India & FDI

The government fears that 100 per cent FDI will lead to uncontrolled mergers and acquisitions (M&A) by foreign drug firms, which could lead to further increase in drug prices and also cartelisation.

However, the concerns relating to FDI in pharma sector remain. Though the statistics don‘t show them, they may surface over a period of time. For this purpose, some control of government over the FDI in pharma sector is needed. The Central Government has notified that in cases of brownfield investments in the pharmaceutical sector, FDI will be allowed through the FIPB approval path for a period of up to six months. In this period, the government will put in place the essential enabling mechanism for oversight by the competition commission of India. After six months, the oversight will be done by the Competition Commission of India (CCI) entirely in accordance with the competition laws of the country.

In 2011, the Prime Minister accepted the recommendations of the Maira Committee (headed by Mr. Arun Maira and other members were Finance Minister Mr. Pranab Mukherjee, Health Minister Mr. Ghulam Nabi Azad, Commerce and Industry Minister Mr. Anand Sharma, Deputy Chairman of the Planning Commission Mr. Montek Singh Ahluwalia) and decided that the Competition Commission of India (CCI) will continue to scrutinise all Mergers and Acquisitions (M&A) in this area to avoid any possible adverse impact on Public Health Interest arising out of such deals. The details of the ‘Maira Committee Report’ are not known, as yet, the key recommendation, as reported by the press was to be in relaxation of the threshold limits of CCI scrutiny for pharmaceutical M&As, which under the current law, involve target companies with a turnover of above `750 Crore (`7.5 billion) and assets worth more than `250 Crore (`2.5 billion).

The CCI will now be strengthened and directed to set up a standing advisory committee especially to look into M&A in the pharmaceutical sector of India to address the concerns of the stakeholders in this matter. It seems that the current (FIPB) and the proposed (CCI) approval requirements may act as a speed breaker for potential foreign investors as they may have to show that their intention is not to collude or undertake predatory pricing or any such anti-competitive practice. If the government makes necessary amendments and CCI‘s jurisdiction is enhanced to include all prominent pharma acquisitions by MNCs, it will ensure competition in the pharma industry in a transparent manner. With regards to the public interest concern, the government can come-up with alternative public policies like public procurement of generic goods and fixing the price of essential drugs.

CCI, however remains a recently established institution. Its expertise is limited to the competition aspect of the industry. It remains untested, as of now. Government of India has taken a very optimistic decision to allow CCI to be the watchdog over all the mergers and acquisitions in the pharma industry, but it must ensure that it brings about necessary amendments to the Competition Act 2002 and widens the scope of the commission. Without these amendments, the CCI will remain a toothless tiger and will not be able to address the concerns of the government.

The Road Ahead

To answer the apprehensions of FDI in pharma affecting the Common Man and Public Health, the government, it seems, has decided to slash the foreign direct investment (FDI) limit in the pharmaceutical sector in order to bring down the prices of drugs, chiefly essential drugs. It is mulling capping the FDI in the sector at 49 per cent and routing it through the government. Currently, the FDI limit in the sector stands at 100 per cent through the automatic route.

The government fears that 100 per cent FDI will lead to uncontrolled mergers and acquisitions (M&A) by foreign drug firms, which could lead to further increase in drug prices and also cartelisation. With India projecting a great growth and with pharma being one of the most stable and top grossing industries, FDI must be welcomed with open arms. FDI means more resources, more R&D and much-needed reforms to place the healthcare industry in India on the same pedestal as world giants. However, the concerns of the government are not misplaced.

Poverty is a widespread issue in India and the entry of MNCs must not spell more expensive essential drugs. The approach of the government seems to be in the right direction. It only needs to be crystallised and tested, to await the results and growth. FDI spells more revenue for Indian Companies, as has been demonstrated by the 6 companies which have entered into M&A in the last 6 years. Hence, FDI seems to be a win for all situation and must be ushered in soon.

Disclaimer–The views in the article are based on the author’s research from the internet and do not represent the views of her Company or Group.



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