Should FDI in brownfield pharma be curbed

Updated: Nov 13 2013, 08:40am hrs
The Planning Commission has opposed a proposal by the Department Of Industrial Policy & Promotion (DIPP) to limit foreign direct investment (FDI) in companies making critical drugs to 49% for brownfield investment and 100% for greenfield investments, saying that it will reverse the general direction in which the overall FDI policy should move. Currently, 100% FDI is allowed after securing the Foreign Investment Promotion Board (FIPB) approval. A brownfield investment involves acquiring existing plants and facilities and a greenfield investment is when an MNC establishes its own production by setting up its plant.

Given the challenges of managing labour and the high initial cost of setting up greenfield, it is very unlikely that MNCs would come only in greenfield investments. All the past M&As have happened in the brownfield investments. MNCs also prefer to have a majority of stake (100%) and, therefore, the policy suggested by DIPP is restricting FDI investments and excluding non-compete clause is a non-starter and we may see a declining trade in M&As in India.

Some of the myths/arguments put forth for restricting FDI investments in the pharmaceutical sector are mainly on emotional grounds and are not rational or logical.

There is a general belief that MNCs will reduce the generics in market as they would divert the production to other attractive markets and hence the availability of drugs in the local market will decline. The data, on the contrary, shows that six major Indian companies acquired by MNCsRanbaxy, Shantha, Paras, Orchid, Dabur and Piramalintroduced 341 new drugs/formulations since May 2009 in the domestic market.

The latest acquisition of Agila by Mylan would also not reduce the availability as more than 90% of the plant production in any case has been for exports. Assuming that in future the availability reduces, the Indian pharma industry will not have strong entry barriers and the Indian generic companies would only be too happy to occupy the space in a very short period.

The second myth is that the prices of medicine are likely to go up. Once again the data does not support this argument. DoP has conducted a price analysis of the drugs for the period 2009-11 and for the six major Indian companies acquired by MNCs for almost 70.8% of the packs, there has been no change in prices and only 6.8% packs had price increase up to 5%, and 2.9% had price increase more than 15%. As compared to that for domestic companies there has been no price increase for 67.3% of the packs and only 6.7% of the packs had price increase up to 5%, and 1.8% had price increase more than 15%.

Almost 30% of the industry is under price control through essential drug prices and is linked to inflation base increases. So, by no imagination, acquisition of domestic companies by MNCs would lead to price increases. The patented products introduced since 2005 are less than 0.5% of the total market and in any case are not significant and pricing regulation is likely to come in a short time.

The shine of India as an attractive market is waning. India as an investment destination does not figure in the top 10 countries of Merck Inc Investment Portfolio. We need to have positive policies which will help the most needed FDI and consolidate domestic firms. The technology and productivity gaps between the foreigners and locals may stimulate spillover effects. If the gap exists there is a scope for domestic companies to catch up by imitating the technology of foreign companies. The spillover of R&D generated outside the country is usually brought through FDI. Restricting FDI is a short-sighted policy that will hamper the growth of Indian pharmaceutical industry and deprive patients of new medicine and quality drugs.

Kewal Handa

The author is chairman, Medybiz Pharma Pvt Ltd, and former managing director, Pfizer India Ltd

Indian pharmaceutical industry is one of the worlds largest and most developed, ranking 4th in volume terms and 13th in value terms. The country accounted for 8% of global production and 2% of world markets. Most of the domestic pharma drug requirements are met by the domestic industry. India has the largest number of US FDA inspected plants (119) outside the US.

Indian domestic drug companies have achieved global success. Many of them supply medicines to around 200 developing countries at affordable prices. Hence, India was aptly called the pharmacy of the developing countries. Indian health ministers were prone to crow about this accomplishment with great degree of jubilation at both national and global meets.

But then came the FDI policy which allowed 100% foreign investment in the field of pharma. This policy is likely to upset all the successes that have been achieved since 1970 by the Indian domestic drug companies. Ever since the policy was implemented by the UPA government in 2006, many Indian companies have been taken over by MNCs. Between 2006 and 2010, six major Indian firms have been gobbled up, including Matrix Labs by Mylan of the US, Dabur Pharma by Fresenius Kabi of Germany, Ranbaxy Labs by Daiichi Sankyo of Japan, Shantha Biotechnics by Sanofi Aventis of France, Orchid Chemicals by Hospira of the US, and Piramal Healthcare by Abbott of the US. The latest is the acquisition of Bangalore-based Agila Specialties by Mylan for $1.85 billion. With more such takeovers, it may lead to a situation that existed before 1970 when India depended for much of its drug requirement on the MNCs.

According to RBI data, FDI worth $2.02 billion came into brownfield pharma projects between April 2012 and April 2013, while greenfield projects could attract only $87.35 million. Over 96% of FDI during this period has been in brownfield, thereby merely a substitution of domestic capital by foreign capital rather than being an addition, an internal DIPP note says. It is also apprehensive that once Indian companies are taken over by MNCs, there wont be any effort to develop low-cost medicines for the poor.

Taking this into stock the Parliamentary Standing Committee on Commerce recommended a blanket ban on the acquisition of Indian pharma companies by MNCs. This is contained in the committees 110th Report on FDI in Pharmaceutical Sector.

The committee stressed upon the importance of access to affordable medicine and stated that we should not lose sight of the fact that access and affordability of medicines is integral to the fundamental right to life enshrined in our Constitution. Any policy that contradicts the basic fundamental rights of our citizens must be discarded. According to the committee the real concern is about the technological and financial capability of Indian companies to bring new generic medicines including the generic version of patented medicines. All acquisitions, with an exception of Mylan, have been carried out by MNCs having business interest in originator drugs, and they have been using patents as a main strategy to curb competition. It is obvious that if the MNC drug companies have invested such amounts in acquisition then they would look for short-cuts to bring back profits. This they can achieve by pushing their costly patented/branded medicines and displacing popular generic brands of the acquired company from the market.

Chakravarthi Raghavan in his book titled Recolonisation aptly explains that the clock is not simply being put back. It is to be remade to move only backwards. With Indian companies having lost the capacity to manufacture drugs by process patent and having in addition lost major domestic manufacturing companies to MNCs, the prediction of Raghavan seems to be really coming true.

Gopal Dabade

The author is the Karnataka convenor of the All India Drug Action Network (AIDAN)