India has decided to liberate foreign direct investment (FDI) in the medical devices sector from the conditions imposed on its pharmaceutical cousins. This begs the question : to what end? To recap, from January 21, FDI in medical devices will qualify for automatic approval of up to 100 per cent. Notably, this is irrespective of how the FDI flows into the country – via new investments in manufacturing/research (‘greenfield’) or the buyout of existing assets (‘brownfield’). This is unlike the pharma sector where brownfield investment is conditional, not automatic. Until now, medical devices were bound by the same FDI rules as pharma.
A Press Information Bureau (PIB) release evinces the fond hope that the move will encourage FDI inflows into medical devices thereby strengthening the hand of a “huge pool of scientists and engineers” who have the “potential to take the medical device industry to a very high level.” It says rather dismissively that the “domestic capital market is not able to provide much needed investment in the sector.”
Uninformed observers can be forgiven for inferring that a misguided FDI policy was a key obstacle that stood between India’s medical device sector and greatness.
The local medical devices industry is indeed small. It has been unable, with some exceptions, to grow beyond low-end manufacturing of consumables such as sutures and surgical gloves. Foreign companies dominate the market for high-end diagnostics and implants, most of which they import. It is estimated that they control three quarters of the market. This has been the case for so long that probably no one remembers a time, if it did exist, when it was not so.
But the FDI policy that differentiates between brownfield and greenfield investment in pharma and medical devices is only about three years old. Prior to that, since 2002 in fact, all approvals were automatic for both pharma and medical devices. So no, the “extant” FDI policy could not possibly have been responsible for the current state of the sector. True, some acquisitions did occur but you can count the significant deals on the fingers of one hand.
Two, if unchanged, could the FDI policy have impacted substantial capital inflows in the future? Highly unlikely, simply because the FDI policy change impacts brownfield investments i.e. the takeover of existing assets. And we are all agreed that there aren’t that many assets to take over, to begin with. Some, but not that many and nowhere near as many as pharma. So foreign companies will have to go greenfield, if they have any meaningful long-term plans for India and other emerging markets that have relatively lower pricing than developed countries. Which they could’ve done at anytime these 13 years. Some such as Becton Dickinson which set up a manufacturing facility for needles way back in 1997 or GE Healthcare which has identified India as a potential manufacturing hub for emerging markets have done so.
Now, let’s dwell for a moment on what really discourages investments in local manufacturing and research. How about the fact that there is virtually no regulation and that compliance with a local law that is hopelessly out of tune with current practices is not a plus point in the export market. Or that there is no government procurement of local goods when the private market is sold on foreign-made stuff nor financing to create greater affordability. Or a skewed customs duty structure that makes it cheaper to import finished goods than raw materials.
And coming to that “huge pool of talent,” the government-owned research institute NIPER identified a human resources “gap” in the sector way back in 2009. Observing that there were no academic courses providing multi-disciplinary skills needed by the industry, it wrote : “Though increased investment for technological and infrastructural development is of great importance, the need of the hour for the efficient growth of this sector is to generate skilled manpower with both technical as well as pharmacy-based understanding and training.” Six years, in India, is a short time. While some progress has been made on this front – such as the Indian government’s partnership with Stanford University to train the next generation of med tech innovators – is that enough?
Indeed, if you look at any of the reports that that make suggestions for the growth of the sector, liberating capital inflows is probably near the bottom of a really long list. If it is there at all.
So, no. The latest change in FDI policy, can at best, smoothen out the road for a few takeovers and for venture capitalists bold enough to invest. What it cannot do is to single-handedly build an industry.
P.S : Sellers of medical device companies are allowed by the new policy to sign non-compete agreements with buyers – where the seller agrees not to start a rival firm for some years. This is forbidden in pharma (for certain categories) for fear that it will lead to a shortage of medicines. As the PIB release explains, “The condition of (no) ‘non-compete’ was imposed so that the Indian manufacturers can continue manufacturing generic drugs and catering to the needs of the large number of people in the country and in other developing countries who cannot afford branded and patented drugs.” But if that be the logic, then it is even more important to ensure that no such clauses are signed in the medical devices sector which already has a shortage of local enterprise. However, the issue of ‘non-compete’ has been deemed “irrelevant” to medical devices. Strange are the ways of government.