FDI in pharma : India’s quick fix

25 Jul

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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12 Responses to “FDI in pharma : India’s quick fix”

  1. Ranga Iyer July 25, 2012 at 5:47 pm #

    Gauri , very well written . The Indian Pharma industry is very fragmented and is in need of consolidation . Consolidation can be thru Indian company acquiring an Indian company ( Zydus acquiring Biochem recently ) or MNC acquiring Indian company . If we want our Indian companies to acquire companies in other countries , there is no reason why we should not provide for quid pro quo . I like the comment made by G V Prasad of DRL calling it misplaced nationalism . Let’s stop seeing the East India Company ghost in these acquisitions .

    Like

    • Gauri Kamath July 25, 2012 at 6:46 pm #

      @Ranga Iyer. The East India Company ghost, I like that!

      Like

  2. Utkarsh Palnitkar July 25, 2012 at 6:46 pm #

    Dear Gauri,

    Insightful & Incisive…..as always. A few quick comments:

    1. The Government should be concerned with all three aspects of pharmaceutical products: adequacy, affordability and availability. Looking at one aspect in isolation of the others would serve no purpose.
    2. Does the Government have any mechanism in place to identify present shortages in pharmaceutical products and to forecast both availability and demand?
    3. At this point in time has the Government identified any concentration on the supply side. i.e. do few players control the supply of a product?
    4. The key issues for the Government to address are: dealing with shortages, if any; intervention required in the case of emergencies; mechanism to incentivise production to bridge shortages
    5. Does the Government have any evidence to suggest that sales of the industry as a whole and of dominant players are skewed in any manner?
    6. The market share of the top 10 firms over one decade is less than 50% of the total sales of the industry
    7. The domestic market is highly competitive with a large number of producers per product
    8. Would it not be wiser to determine which products are supply sensitive and focus on broadening their supply rather than look at tinkering of ownership norms?
    9. Ensure that if a manufacturer with a significant market share of any product (say 8% for argument’s sake) departs, there are enough incentives for other producers to step in.
    10. Price control applies to all companies, irrespective of ownership.
    11. Has the Government studied the profitability charts of the top 25% firms to determine whether it is very skewed as compared to the rest of the industry?
    12. It is now ten years since we have had 100% FDI in pharmaceuticals. Has the Government any data on concentration of economic power to the detriment of the consumers?
    13. The Herfindahl’s index which measures the intensity of competition would be around 1 for the pharma industry, which depicts a very competitive industry.
    14. Existence of foreign ownership is not a condition precedent to the creation of a monopoly or a cartel; dominance by domestic players is also possible. This point is proven by the recent findings of the competition commission in the case of cement cartels.
    15. Is the FIPB more competent than the CCI?
    16.FDI policy is a long term measure, with long term implications.
    17. Tinkering with FDI rates may not be the panacea that Government longs for.

    Like

    • Gauri Kamath July 25, 2012 at 6:49 pm #

      @Utkarsh. Sometimes I wonder if the government can’t see or doesn’t want to see

      Like

  3. Shankar Suryanarayanan July 25, 2012 at 11:02 pm #

    Government of India applies three levels of price control on prescription drugs sold in the domestic market. These controls apply to all companies regardless of ownership:
    – absolute prices are controlled for essential drugs
    – annual price increase is limited for all drugs, essential and non-essential
    – licensing to competitors is mandated for drugs deemed to be too expensive
    With these pricing safeguards in place, the government’s first priority, to ensure affordable drugs for the common man, is being well served. India is one of the cheapest markets in the world for pharmaceutical products. Even patent protected products like Januvia and Galvus are sold at a fraction of developed market prices.

    By creating an uncertain environment for multinationals, launch of innovative molecules will at a minimum be delayed, depriving citizens who can afford the newer drugs. The government should play up the strength of the pharma industry and welcome foreign investment. In pharma, Indian companies have a lot to offer investors not only in the domestic market but also for emerging markets and developed markets.

    For more comments, follow this link and go to bottom of page at http://epaper.financialexpress.com/40899/Indian-Express/05-June-2012#page/4/1

    Like

    • Gauri Kamath July 26, 2012 at 8:58 am #

      @Shankar Suryanarayanan That’s an interesting point – on the one hand, India awards patents on drugs and on the other seeks to prevent MNCs from investing in marketing and distribution through on-ground acquisitions. Amazing.

      Like

  4. Vikas Dandekar July 26, 2012 at 10:20 am #

    Hey Gauri, Beautifully summarized and balanced views on the FDI issue…And loved reading the inputs from Utkarsh…Much thinking needs to go into the healthcare delivery systems before just shackling foreign investments and policing the industry.

    Like

  5. Srinivas July 26, 2012 at 1:04 pm #

    Did you say Ghulam Nazi Azad? Seems apt somehow on this post!

    Like

  6. Gauri Pathak July 26, 2012 at 1:34 pm #

    Loved reading your thoughts, Gauri. I agree with you completely. Most Indian companies who view pharmaceticals purely as a “business” will eventually sell themselves out. Those (owners) who are passionate about it will sustain. The point is – how does the Government view pharmaceuticals? On the one hand they view it as a “philanthroipc” industry that should be making medicines available at cheap / affordable prices to patients, a.k.a NGOs. On the other, they are very concerned about the business interests of pharma companies and MNCs in particular.

    Like

  7. Dr. Pipasha Biswas July 26, 2012 at 3:43 pm #

    Dear Gauri,

    Enjoyed reading this article as always from you! Agree with most of the comments from the readers, but the fact is that its is as always in India a “Chalta hai” attitude which will not take them far.
    Dr Pipasha Biswas

    Like

  8. Ajit Kamath July 30, 2012 at 8:50 am #

    Dear Gauri,

    Great article !There is no one more affected than Arch Pharmalabs in the current imbroglio. Misplaced nationalism coupled with ignorance about the pharma industry have put us in a rather sensitive situation. Inspite of challenges faced by India in attracting FDI, we did our best to get a strategic investor and all our efforts have come to a nought. No one is bothered to decipher the way our industry works and how some enlightened souls feel that we are responsible for high cost of medicines. Being a API manufacturer and supplier and that too with next to nothing manufactured at our end in the NLEM, we are flummoxed with this dithering on FDI investment in our sector and particularly in our segment, which in any case is a highly fragmented segment with no influence whatsoever on the pricing of dosage forms . Added to this current situation are the pronouncements from various quarters permitting automatic approval upto 49% which have not been officially substantiated or even acknowledged by the powers that be. I really hope that we come out of this policy paralysis soonest as we are getting disenchanted ,by the day, in the current situation. Keeping fingers crossed for a clear cut policy direction, this way or that to stop further embarassment for us and the country with prospective foreign investors.
    Ajit Kamath

    Like

    • Gauri Kamath July 30, 2012 at 10:22 am #

      Thanks a lot for sharing Ajit. Your comment is revelatory. From what you’re saying, in spite of the 49 per cent “automatic” approval clause, things are rather unpredictable when you actually have a proposal that you want approved. Also, it is unclear whether any distinction is being made between NLEM cos and non-NLEM cos as also bulk drug manufacturers and finished dosage form companies. Indeed, the situation appears far worse than imagined. Which reminds me of a rhetorical question that a senior drug industry executive from a leading homegrown Indian company asked me recently – “Does the government want the Indian drug industry to face a fate similar to that of the Indian telecom sector?” There’s a lot of anger out there.

      Like

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