Govt plans riders for acquisition of Indian drug firms

Written by Rajat Guha | Rajat Guha | Soma Das | New Delhi | Updated: Feb 27 2012, 02:25am hrs
Foreign drug companiesForeign drug companies will be allowed to acquire their Indian counterparts only if they agree to a set of conditions.
Foreign drug companies will be allowed to acquire their Indian counterparts only if they agree to a set of conditions. According to a policy under consideration, this will ensure that domestic production of essential medicines undertaken by the target company is not disturbed by the buyer and that the acquisition doesnt hit supply of generic (non-exclusive) drugs in India.

According to official sources, the Foreign Investment Promotion Board (FIPB) has proposed to the industry ministry that the government take an undertaking from the foreign acquirer that without the health ministrys consent, they wont stop or reduce manufacturing essential drugs (both bulk drugs and formulations) in the acquired company. The acquirer must also pledge that it will utilise the acquired plants to supply medicines to the domestic market. The supplies from these plants to the local market will be in quantities comparable to those in the financial year preceding the year of the buyout. Buyers may also have to promise that under no circumstance will they reduce production of generic medicines in acquired plants. They must also give preference the domestic market when it comes to supplies.

Essential drugs in this context are those on the health ministrys National List of Essential Medicines.

The FIPB, which has been temporarily given charge of clearing pharmaceutical M&A deals has said that the department of industrial policy and promotion (DIPP) should examine the feasibility of these proposals.

Multinational pharma companies arent impressed: Making any pharma company sign an undertaking of this nature is tantamount to interfering with its internal operations. If these clauses are converted into law of land, it would make the domestic pharma space extremely unattractive and could mark the end of the era of great valuations that Indian drug companies have been commanding in recent past, the country head of a top pharma MNC told FE. The uncertain policy environment which is dragging on is making the pace of investment in the sector sluggish, he added.

Analysts feel MNCs are wary of signing such bonds and may find it objectionable. If such a clause is introduced, it must take into account whether the companies involved in an acquisition deal have the power to disrupt the drug supply chain or take into consideration the therapeutic profile of drugs produced by the company getting acquired, an industry expert said.

The health ministry is concerned that once control changes hands, the interest and orientation of homegrown firms may undergo a radical shift. As the business interests of the MNCs converge with the acquired local firms, the merged entity will be interested in holding prices. The MNCs are not only attracted to the Indian pharma market, they are here also because India is one of the biggest source of medicines and hence both affordability and availability of drugs in the domestic market may get affected if one lets the acquisition go unchecked, a health ministry official had told FE earlier.

There has been much hue and cry over FDI policy in the pharma sector where 100% FDI is allowed through the automatic route. Sections of the domestic industry have lobbied for restrictions, contending that if the FDI is freely allowed, it would lead to a spate of acquisitions and undermine Indias generic drug industry. Serial takeovers of Indian companies could adversely impact availability and affordability of medicines, they say. The opposite view is that FDI will promote large-scale investments, addition of manufacturing capacities and technology acquisition and development.

Since official deliberations led by the Planning Commission failed to resolve differences, the Prime Ministers Office (PMO) stepped in and decided India will continue to allow FDI without limit under the automatic route for greenfield investments in the pharma sector. In case of brownfield investments, the PMO had said last October that FDI will be allowed through the FIPB approval route for a period of up to six months, during which period, the Competition Commission of India will put in place the necessary regulations for effective oversight on M&As to ensure balance between public health concerns and attracting FDI in the pharma sector. Thereafter, the requisite oversight will be done by the CCI entirely in accordance with the competition laws of the country.

An inter-ministerial group headed by planning commission member Arun Maira had earlier witnessed a sharp divide among ministries. While half of the panel members from finance ministry, Planning Commission and the department of pharmaceuticals favoured the status quo, arguing against the need to impose any ceiling on FDI in the pharma sector, the other half inclduing officials from health ministry, DIPP, department of commerce and department of biotechnology strongly pitched for selective curbs on FDI in pharma.