In perhaps the first ever landmark deal in the pharmaceutical sector this year, the US-based Mylan’s Rs 5,168-crore proposal to acquire Indian company Agila was approved by the Foreign Investment Promotion board after intervention from an inter-ministerial group led by the Prime Minister himself. One wonders if this was the precursor or the final nail in the coffin for FDI in the sector, since shortly thereafter the Department of Industrial Policy and Promotion(DIPP) sent out strong signals with a Cabinet note taking stock of FDI in pharma till date and proposing restrictions on any further acquisitions in the brownfield or existing pharma companies. The move has elicited a mixed reponse. While public health activists commend it, others are questioning the very logic behind the move.
As per data in the note, a whopping 66 out of of 67 FDI investments uptil 2011 were in brownfield pharma, which it says is a cause of concern. This was largely due to no distinction between greenfield and brownfield by the RBI. This lag prevented framing of suitable policies to countercheck such investments, to which the Foreign Investment Promotion Board (FIPB) approval in October 2011 came to the rescue ensuring that no pharma company had a dominance in the Indian marketplace. So while investments in new projects (greenfield) were allowed automatically, those in brown-field were routed through the FIPB.
However, according to RBI data, even after re-routing investment through FIPB, FDI worth $2.02 billion came into brown-field pharma between April 2012 and April 2013, while greenfield projects could attract only a mere $87.35 million. April to June 2013 saw perhaps the highest FDI in pharma sector as compared to the same quarter over the previous year, which further sent alarm bells ringing. In view of the statistics, fears over indiscriminate take overs of Indian pharma companies have risen which DIPP thinks could skew the balance in the favour of MNCs.
Is there a real threat or percieved?
 “Considering that exports form a large chunk of company sales, along with the government implementing price control over a growing basket of drugs, where is the threat to the domestic pharma industry? If there is one, I certainly do not see it as coming from FDI into the sector.”Mahadevan Narayanamoni Partner, Corporate Finance, Grant and Thornton |
Mahadevan Narayanamoni, Partner, Corporate Finance, Grant and Thornton believes that there is an urgent need to define ‘domestic pharma industry’ given that even for large pharma companies, majority of the sales come from exports. While Dr Reddy’s ranks highest with over 80 per cent of their sales coming from exports, Cipla is at the bottom rung. Leading API and intermediates companies such as Divi’s Labs, Shasun Drugs, Neuland Labs, Laurus Labs and several others, are no different in this respect, he adds. “Considering that exports form a large chunk of company sales, along with the government implementing price control over a growing basket of drugs, where is the threat to the domestic pharma industry? If there is one, I certainly do not see it as coming from FDI into the sector,” he stresses.
 “The share of MNCs in the top 20 companies has increased from 14.4 per cent in 2005 to 21.6 per cent in 2012. Whereas only one MNC was ranked among the top five companies (by sales) in 2005, three MNCs were among the top five companies by 2012.”Dr Sakthivel Selvaraj Sr Health Economist, Public Health Foundation of India |
However, Dr Sakthivel Selvaraj, Senior Health Economist, Public Health Foundation of India points out that increased acquisitions by MNCs over the past few years have lead to a considerable jump in their market share. For instance, Abbott went from being the 14th ranked company (with two per cent market share) in 2005 to the number one company in 2012 (seven per cent market share) after its takeover of Piramal Healthcare’s generics business unit in 2010, he cites. Taking it a step further he corroborates, “The share of MNCs in the top 20 companies has increased from 14.4 per cent in 2005 to 21.6 per cent in 2012. Whereas only one MNC was ranked among the top five companies (by sales) in 2005, three MNCs were among the top five companies by 2012.”
The increasing market share of MNCs aside, Narayanamoni is of the view that strengthening regulatory muscle could better help the domestic companies. This ranges from working upon the inability to implement regulations (product approvals, GMP compliance, pollution control norms etc), the failure to adequately incentivise R&D and the total lack of framework to encourage start-ups and early stage companies and investments in the pharma and biotech phase. “The pharma world is moving towards biotech drugs (seven of the top-ten drugs in 2012 were biotech drugs) and India is far away from being able to replicate its generics success story in the biotech / biosimilars space, without serious FDI and strategic investments,” he chips in.
Allaying apprehensions on drug affordability and accessibility, he further goes on to say that a robust framework for approving or rejecting M&As under the Competition Commission and an efficient process for carrying out clinical trials or launching new drugs in the market, would further ensure that these inbound acquisitions do not have an unfavourable impact on pricing in the long term. However, Sakthivel feels the effects might be opposite should the spate of acquisitions continue unchecked. These range from distortions in production patterns, increased export orientation of firms and neglect of the local market, increased dependence on imported medicines, greater consolidation within therapeutic categories and subsequent loss of competitive edge leading to higher drug prices.
A closer look, a more balanced approach
Even as the Health Ministry is mulling an overhaul of the policy, it has been suggested that FDI in critical pharma sector be restricted to 49 per cent to prevent takeovers. Foreign investors should also be mandated to create at least 25 per cent additional capacity and generate additional employment in the such projects. Critical sectors earlier identified by DIPP include vaccines, injectibles, and oncology (cancer-related) injectibles, however, it has left the identification of these sectors to the MoHFW.
But how do we define what is critical, is the current definition justified? Throwing some light on the same, Narayanmoni says, “The current definition of ‘critical areas’, is not really based on volume or value of consumption – rather these are the more technically complex areas of pharma manufacturing. By encouraging and incentivising investments and technology transfers in these areas, both of which would require FDI (financial and strategic), India would be able to ensure their continued manufacturing, notwithstanding the spate of inbound acquisitions.”
However, Selvaraj feels that these ‘critical areas’ (for example, vaccines market, antibiotics, oncology market) are also where the current market reflects a monopoly/ oligopoly scenario and have a high public health significance, hence, the impact of acquisitions cannot be discounted. “Several segments in vaccines, human insulin, oncology and cardiovascular care have a high concentration with four firms capturing 80-100 per cent of the total market share. Antiepileptics, antibiotics and antipsychotics also demonstrate moderate concentration.
Further, consolidation in any of these segments poses a serious threat to competitiveness, patient access and affordability,” he adds.
Both Narayanamoni and Selvaraj strongly insist that there is a need to evaluate proposed investments, with no mechanism for monitoring in place currently. “Future investment in pharma brownfield should remain outside the ‘automatic’ route. A case-by-case approach must be followed in vetting each proposal which takes into consideration all aspects that could impact health security with well defined . specific obligations for each case in granting the clearance,” elaborates Selvaraj. Narayanamoni pitches in, “I don’t believe the approval route should be used, to ‘rein in’ FDI. The objective should be to understand the drivers behind the transaction and review the potential impact of the transaction on long-term accessibility and pricing.” He suggests the Mylan – Agila deal as an example enumerating that the US competition authorities reviewed the transaction and its impact on pricing or availability because of Mylan’s exclusive control over certain generic injectable products and approved the deal subject to Mylan / Agila hiving off those products to a third party. Opposing points of view aside, the government should take into consideration the recommendations of the parliamentary committee at the same also asessing the impact of FDI on the Indian pharma industry in the past while also pontificating any repurcussions in the future. The opportunity should be utlised to take the right decisions to steer the industry in the right direction, while ensuring India retains a competitive edge.
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