FDI in pharma : India’s quick fix

India seems set to reverse a ten year-old policy governing foreign direct investment (FDI) in pharmaceuticals.  If Prime Minister Manmohan Singh gives his nod to the recommendations of an inter-ministerial group then automatic approval for FDI in Indian drug companies will be capped at 49 per cent.  Beyond this limit, a foreign investor will have to seek permission from India’s Foreign Investment Promotion Board (FIPB) which may or may not grant it on a case-by-case basis.

Even when permission to hold beyond 49 per cent is granted to a foreign investor, the investee company will be required to maintain its level of investment in research and development and production of “essential” medicines for five years. See Mint’s report here.

The proposal is based on the belief that restrictions on FDI will help local industry and prevent shortage of essential medicines. That’s all wrong.

First, why are Indian pharma businessmen selling out? It’s simple really. They don’t want to run the business anymore.  Nobody held a gun to the heads of Ajay Piramal of Piramal Healthcare and Malvinder Mohan Singh of Ranbaxy Laboratories. Theirs were brilliant exits at top dollar.

The fact is that these men (and others like them) felt they could do better investing elsewhere. Perhaps they also lost their appetite for what is undoubtedly an extremely complex and challenging sector.  Both said they believed that their businesses would do better under their new owners. In the case of Ranbaxy, sold in 2008, there is some evidence that this is the case.  You can read an Economic Times article on how Ranbaxy is looking healthier post its acquisition by Japan’s Daiichi Sankyo here.

How does clamping down on Indian business houses’ exit prospects help the cause of their companies? Would the government prefer that they plod along with no real passion or interest in doing what they do? Is that sustainable?

Secondly, Indian companies produce generics. By definition, these are cheaper alternatives to patented innovator drugs.  They are also extremely good at it earning India the tag of “pharmacy of the world.” Indian generics have helped governments and individuals globally save money.

That does not mean that they are above the rules of business. They still have to grow and make profits.

Consider, for instance, the manner in which they have systematically pared their exposure to price-controlled drugs in India. It is also true that where the market is not large enough to merit investment, generics are often not present, however life-saving those meds might be.

Nor are they the sole purveyors of essential medicine. Didn’t Ranbaxy recently launch Synriam, a new anti-malarial also touted as India’s first new drug, under its new Japanese owners? See here. It’s launch event was presided over by India’s health minister Ghulam Nazi Azad whose ministry has been very vocal in its opposition to acquisitions by foreign drug makers. And by the way, foreign companies in India also hawk generics, with some exceptions.

Why then is the government singling out only those companies with a foreign ownership of over 49 per cent for special requirements governing the research and manufacture of essential drugs? This is discrimination, not affirmative action.

The real problem, if you can call it that, is that the drug business is beginning to look less attractive to some Indian business houses.  This could be a result of its rising regulatory complexity, greater competition, changed patent environment, and so on. Or it could be that many of their doyens are now ageing with no heirs or disinterested ones.

Now since the Indian state has failed miserably at running its own drug-producing enterprises it has no option but to rely on private companies, most of whom are homegrown, for supplies. Hence the panic.

In this context, the government might want to think about how to make the pharma business attractive again.  There are ways to make a business owner see prospects : create demand, invest in meaningful public-private partnerships, frame progressive rules, raise the bar on quality, scale up funding of innovation, and so on. This might not stem the tide but it just might encourage some to hang on, or new ones to emerge.

In parallel, keep the doors open to all while ensuring that there are adequate checks and balances to prevent scarcity and/or soaring prices. That will provide lucrative exits for those Indian businessmen who are disinterested, and send out the right signals to foreign investors.  That will also prevent the vesting of discretionary power in the hands of bureaucrats which this latest proposal might end up doing.

That’s the long, hard road.  What the Indian government is doing is a quick fix.  There’s this thing about quick fixes – they don’t always work.

Pic sourced from http://www.dreamstime.com

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