FDI tangle: And the vote goes to….?

The current Indian pharmaceutical market scenario has mixed availability of branded and generics. Each branded generic/ generic molecule (constituting over 99 per cent of the Indian pharma market (IPM)) has not less than 50 to 60 competitors within the same chemical compound. 100 per cent of the IPM is price regulated, around 20 per cent under cost based price control as per Drug Price Control Order (DPCO) 95 and the balance 80 per cent is under stringent price monitoring with a maximum annual price increase cap being effectively in place. Comprehensive data with regard to acquisition of pharma companies by multinational companies has not been maintained by the Ministry of Commerce and Industry. However, foreign direct investment (FDI) equity inflows of $341.49 million, have been recorded, under the acquisition route, in the drugs and pharma sector, between April, 2009 to February, 2012.

The FDI in pharma debate

The pharma industry is currently in the grip of a heated debate where one group pitched for relaxed FDI norms and 100 per cent FDI in pharma projects while the other group opposed these moves and recommended that only 49 per cent of FDI should be permitted in the brownfield projects of the pharma sector. The key anticipation for issue of 100 per cent FDI in the pharma sector was first raised in a discussion paper of the Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industries dated on August 24, 2010. The paper was primarily on Compulsory Licensing (CL), but the FDI issue was also duly noted and touched upon several times later. However, to understand the whole industry and its working mechanisms to review the issue properly.

On October 10, 2011, Prime Minister Manmohan Singh called a meeting of the Health and Commerce Ministries to decide on whether to bring FDI in the pharma sector under Foreign Direct Investment Promotion Board (FIPB) for “brownfield projects”. He accepted the recommendation of the ‘Maira Committee’ on FDI in the pharma sector and decided that the Competition Commission of India (CCI) will continue to scrutinise all Mergers and Acquisitions (M&A) to avoid any possible adverse impact on ‘public health interest’ arising out of such deals. It was reported at that time that the new system will be put in place within a period of six months. By the time CCI equips itself to handle the recommendations of the ‘Maira Committee’, as an interim measure, all brownfield pharma M&A proposals will be routed through FIPB for a period not exceeding six months.

The existing policy on FDI, in the pharma sector, was reviewed, vide press note 3 (2011), issued on November 8, 2011, wherein FDI, upto 100 per cent, under the automatic route, is permitted for greenfield investments and FDI, up to 100 per cent, under the Government approval route, is permitted for investments in existing companies.

A high-level expert panel of the Planning Commission on universal health has recommended lowering the present cap of 100 per cent FDI in pharma sector through the automatic route to below 49 per cent “to retain predominance of Indian pharma companies and preserve countries self-sufficiency in drug production.” The Planning Commission’s panel has recommended that the government should strengthen PSUs.

The most recent discussion on this front was on July 24, 2012 where an inter-ministerial group on FDI in pharma, headed by Shaktikanta Das, Additional Secretary in the Department of Economic Affairs (DEA), and attended by representatives of DIPP, Health, External Affairs, and Overseas Indian Affairs Ministries, deliberated on the FDI in pharma. The group has also suggested that investments resulting in an equity holding higher than 49 per cent in an Indian pharma company will have to apply for the approval of the FIPB, a part of the ministry of finance.

Industry speak

“In my view, limiting FDI in the pharma sector of India, at this stage, without any substantive reason and just based on unfounded apprehensions.” Tapan J Ray Director General, Organisation of Pharmaceutical Producers of India

Tapan J Ray, Director General, Organisation Of Pharmaceutical Producers Of India (OPPI) persents the argument against the FDI cap saying, “With a CL, the Indian government can authorise any pharma company to make any medicine needed by the country on an emergency basis. The country has already witnessed this during the H1N1 influenza pandemic. The very thought of creating a legal barrier by fixing a cap on the FDI to prevent the domestic pharma players from selling their respective companies’ products at a market driven price, just from the CL point of view, sounds unreasonable, prejudiced and highly protectionist in a globalised economy. In an environment like this, any apprehension or threat to ‘public health interest’ due to irresponsible pricing, will be highly imaginary in nature, especially when the medicine prices in India are cheapest in the world.”

Rahul Sehgal, President, Nestor Pharmaceuticals disagrees with this reasoning saying, “There is nothing wrong with 100 per cent FDI participation in the pharma industry. The entry of MNCs in the generic space is a strategic shift in the business model. Consequently, acquisition of generic companies is not only a tool for implementing the strategic shift, but also a smart move to fast track their entry in the generic space—‘the future of the strategic pharma sector.’ Acquisitions are a major tactical move and should be evaluated accordingly. It will be inappropriate to measure the impact of this profound shift by change in price levels or impact on competition in a short period.”

“Various government departments and ministries are sufficiently empowered under the current law to ensure that India’s sovereignty and public health are not compromised.” Dr Ajit Dangi President & CEO, Danssen Consulting

Dr Ajit Dangi, President and CEO, Danssen Consulting gives the historial perspective on the Government’s FDI policy stating, “Indian pharma sector is one of the few industrial sectors in India which is showing a healthy profitable growth not only in domestic market but also in exports consistently for the last several years. In spite of slowing global economy, rigid domestic price controls, weak enforcement of IPR, outdated drug regulatory policies and unpredictable tax environment, the sector has not only managed to survive but thrive in an intensely competitive market. But like in most democracies and more so in India, politics often drives economics resulting in a sound policy announced a decade ago of allowing 100 per cent FDI in pharma sector through automatic route being reversed by creating two categories for investment, brownfield and greenfield.”

“We have had a re-think on the issue and consider that 100 % FDI could be allowed as the Indian industry needs huge investments to meet R&D costs, brand building costs, production facility costs etc.” Daara Patel Secretary General, Indian Drug Manufacturers Association

Daara Patel, Secretary General, Indian Drug Manufacturers Association (IDMA) informs, “The Government has been scrutinising the existing FDI policy relating to the pharma sector that allows 100 per cent FDI through automatic route in greenfield projects and also 100 per cent through Government approval route in brownfield projects. To this end, the Department of Economic Affairs, Ministry of Finance had set up a Special Group in May 2012 to streamline the process for approval of FDI in brownfield pharma through FIPB. Forming an opinion on the same by an apex Association like IDMA is a tough job as IDMA consists of over 700 members comprising micro, small, medium, large and very large manufacturers situated throughout the length and breadth of our country with five State Boards, who have compelling reasons and divergent views on such a delicate issue. IDMA had earlier supported a cap on FDI in the automatic route. However, we have had a re-think on the issue and consider that 100 per cent FDI could be allowed as the Indian industry needs huge investments to meet R&D costs, brand building costs, state of the art production facility costs etc. “

“The move to allow FDI is a positive one as there is a need to provide impetus to R&D and creating an attractive proposition for global pharma players will allow companies to do just that.” S Ramesh President – Finance & Planning, Lupin

S Ramesh, President – Finance and Planning, Lupin says, “The role of FDI in Indian pharma has been significant; however it is riddled with both pros and cons. It is important to note that the risks that come with these cons can be mitigated by creating the right policy framework. The move to allow FDI is a positive one as there is a need to provide impetus to R&D and creating an attractive proposition for global pharma players will allow companies to do just that. Given the growing set of Indian consumers, the need for innovative R&D is pressing, moreover this will be important in the quest to provide affordable drugs. It is especially important that the new policy not only safeguards the interests of existing, domestic pharma players but also that it allows all the companies, in question, to make profits.”

Ray says, “It is quite intriguing, why the subject matter is being revisited after the Prime Minister’s clear decision on the issue. The pharma sector in India was opened up for 100 per cent FDI through the automatic route, only in 2002. This reformed FDI policy has been helping India as an attractive investment destination for pharmaceuticals. Any change in this policy now, will send wrong signals to the foreign investors about the unpredictability of the investment climate in India, the impact of which could be felt even beyond the pharma sector of the country.” “In my view, limiting FDI in the pharma sector of India, at this stage, without any substantive reason and just based on unfounded apprehensions, even when the Government is debating to open up the retail and the insurance sectors to foreign investors, will be a retrograde step in the reform process of the country,” he further states.

Dangi informs, “Brownfield investments are to be routed initially through FIPB and later through CCI. Some departments are even suggesting 49 per cent cap on investment in brownfield category. The reason given for this ‘U’ turn is an imaginary fear that MNCs will acquire Indian companies resulting in increase in drug prices and shortage of essential drugs as MNCs may discontinue manufacture of essential drugs due to low margins resulting in increased imports thus endangering public health and competitiveness of the Indian pharma industry. Similar arguments were put forward when India enacted the product patent law in 2005 with great reluctance. But seven years after this law was enacted we find that there is no dramatic price increase or drug shortage. On the contrary, many Indian companies have doubled their R&D budgets resulting in over a dozen new drug molecules in late phase clinical trials ready to be launched in next few years. Ranbaxy, for instance, has already paved the way by launching India`s first patented new drug for malaria. Many Indian companies have also earned millions of dollars in milestone payments from MNCs by out licensing their new drug candidates for global market.”

He continues, “Given the above background, putting various policy hurdles to `regulate ` FDI in pharma sector, not only smacks of an archaic mindset of policy makers but goes against the policy of economic reforms to liberalise the Indian economy. The first question we must ask is “does India require FDI?” Given the precarious state of India`s economy, rising fiscal deficit, depletion of forex reserves, rupee approaching senior citizenship (Rs 60 a dollar) and now specter of deficient monsoon, India can hardly afford not to attract more FDI.

Sehgal shows concerns that the regulation of FDI in pharma will impact the merger and acquisition (M&A) rules which in turn will affect the profitability as the will not be enough margins to promote. “The fear that these M&As between multinational companies and Indian pharma companies may lead to an oligopolistic market and jacking up of prices is unfounded and unsubstantial. It will be irrational for India to remove pharma sector from the automatic route and direct every brownfield FDI through FIPB route. There are other ways to provide quality medicines at affordable prices to the masses. Collaboration between the pharma companies and the government is the best way to make high quality medicines accessible to all. Any regulatory restrictions on FDI could adversely impact competition which is not in the public interest. “

Patel informs,”There is another school of thought which is concerned that the takeover of the Indian pharma companies by MNCs will mark the end of the pharma industry. Whilst we need to take care of these sentiments, let us not forget that there are over 10,000 manufacturing units churning out over 60,000 formulations. As against this there are not many multinational companies who have the resources to buy or the appetite to invest in so many Indian companies and at the same time very few Indian companies would qualify as super candidates for 100 per cent takeovers.” He continues, There is still another school of thought which says 100 per cent FDI in Indian companies would lead to increase in prices. This may not be true as the fact remains that: there is no direct connection between FDI and pricing. Pricing of a pharma product is dependent on the cost, competition, margin policy, business expenses, taxation, etc. All prices vary within a range – both of Indian and MNC products. For most pharma products, fortunately, we have widespread competition and prices in India are the lowest in the world. Additionally, we have government price control/monitoring and annual ceiling on all price increases. Any regulatory restrictions on FDI could adversely impact competition which is not in public interest. In fact, FDI investment could lead to increased competition, improved technologies, facilitate local R&D, support building of Indian brands and also promote employment.”

“Competition Commission could be directed to review all major M&A proposals to ensure and pacify our concerns that monopolies are not created by the takeovers thus influencing competition and price rises. This along with constant price monitoring by NPPA would adequately protect the consumer interest. “We also have a strong democracy and most Parliamentarians are sensitive enough not to allow monopolistic situations and consequent abnormal price increases especially in pharma products However, the Government should allow 100 per cent FDI only with certain safeguards and riders,” Patel adds.

Ramesh adds, “Overall, while the finer details will have to be carefully articulated so as to not prompt takeovers of Indian pharma companies, allowing FDI in the Indian pharma sector has the potential to create tremendous growth for the industry at-large, which is well poised to ride this wave.

Dangi suggests, “There are sufficient checks and balances to ensure that anti-competitive practices do not affect the growth of the domestic sector and public health is not affected. With over 10,000 manufacturers and every generic brand having over 20 me too brands available, the market is highly cluttered. Even the market leader has less than seven percent market share. A little consolidation, therefore, will not hurt the industry. Also, various government departments and ministries are sufficiently empowered under the current law to ensure that India’s sovereignty and public health are not compromised. There is also a principle of reciprocity in today’s interconnected economy. When Indian companies can go abroad and acquire 100 per cent stake in a company , there is no reason why India should not reciprocate. To sum up, by creating a positive investment climate, India will not only attract more FDI but it will help in getting modern technology, efficient logistics and supply chain, increased employment opportunities to our highly skilled knowledge workers and provide access to international markets.”

He summarises, “Let us see the total FDI attracted by BRICS countries in 2011 – China $124 billion, Brazil $67 billion, Russia $53 billion. and India $32 billion. The Indian policy makers from various departments like MOH, DOP, DIPP, FIPB, CCI should keep their differences aside and instead of appointing ‘n’ number of committees and Group of Ministers (GoM) ruminating on the issue endlessly, continue the sound policy of 100 per cent FDI through automatic route in the pharma sector.”

Thus, the general consensus among the industry players is that restricting FDI in pharma is a very over-protective stance and will be detrimental to the sector’s progress. Pranab Mukherjee, the President of India had once during his tenure as the Finance Minister stated, “Protectionism is harmful”. He had said this in context of the US move to hike visa fees and clamp down on outsourcing. The pharma players are of the opinion that we are also guilty of the same thing as far as FDIs in pharma are concerned. The government is still mulling over the proposal to restrict FDI in India. The verdict on the whole issue still pending, and the final decision rests with the PM. The industry exists in the hope that the final vote would be cast in their favour.

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