M&A in Indian pharma - cautious approach

The Reserve Bank of India (RBI) has notified new rules as regards to automatic approval for foreign direct investment (FDI) in existing pharmaceutical companies.

As per the circular number 56 dated December 9, 2011, RBI has notified the new policy for the foreign investment in Indian pharmaceutical companies. The reviewed policy is as under:

FDI, up to 100 per cent, under the automatic route, would continue to be permitted for green field investments in the pharmaceuticals sector.

FDI, up to 100 per cent, would be permitted for brown field investment (i.e. investments in existing companies), in the pharmaceutical sector, under the government approval route.

Under the new rules, for any merger or acquisition (M&A), the overseas investor will have to seek permission from the Foreign Investment Promotion Board (FIPB) and from June 2012 the monopoly watch dog Competition Commission of India (CCI) will examine such deals. This decision was taken after directions were received from the Prime Minister along with the Cabinet members who had shown concerns arising out of several acquisitions of domestic pharmaceutical companies by overseas firms. The above measures were suggested by a high-level committee, headed by Planning Commission Member Arun Maira.

Background of pharma industry in India
Indian pharmaceutical industry has grown leaps and bounds over last two decades from US$ 1 billion in 1990 to US$ 20 billion in 2010 of which the export turnover is US$ 8 billion. The pharmaceutical industry in India is now the third largest in the world in term of volumes and 14th largest in terms of value. This gap is attributed towards low cost manufacturing of generics drugs. Globally it ranks 4th in terms of generics production.

India is the only country with largest number of US FDA compliant plants (more than 100) outside USA and has 793 WHO-GMP approved pharma plants, 153 European Directorate of Quality Medicines (EDQM) approved plants with modern state-of-the-art technology. With this the industry has reached a significant level and its position is now well recognised at the global level. Foreign companies too have played significant role in the development of the pharmaceutical sector in the country.

Effect of the change in the policy
Of late many Indian pharmaceutical companies have been acquired by MNCs for e.g. US$ 4.6 billion acquisition of Ranbaxy by Daiichi Sankyo of Japan, Mylan taking over Matrix Labs, Sanofi buying Shantha for US$ 783 milion in 2008, Abbott of USA buying Piramal Healthcare in 2010, etc.

Though the move of applying for approval to Foreign Investment Promotion Board (FIPB) for investing in brown field pharma companies in India as against the earlier automatic rule may look negative but it’s a good decision in hindsight. As discussed earlier, many top Indian pharmaceuticals companies have been taken over by MNCs and most of the sizeable Indian companies are looking to cash on the existing interest of MNCs to acquire Indian assets. As many Indian companies have grown over the years to significant size by providing cost effective and generic products.

In the long run, this move may be detrimental to Indian consumers as most of the companies would be controlled by MNCs. Just to reiterate the fact that the price of similar drugs in USA is almost 5 times the price in India. The prices in India are low as compare to the western world because Indian companies are leaders in producing generic version of the costly drugs. Once the MNCs take over the Indian companies and their presence gets established they may increase the prices of drugs to recover the top dollars paid to Indian promoters and to increase their profitability. Though, at present the price rise by the MNCs in Indian market is not that significant as suggested by the analysis conducted by Department of Pharmaceutical but there is a good chance of that happening once the domestic manufacturers paves way for international players.

So the current move should not be seen as a setback for the growth of the pharmaceutical sector in India. It’s a careful step taken by the government to safeguard a critical sector. We can’t deny the advantages and requirement of FDI in the sector but in the interest of the society a balanced and cautious approach is commendable.

The change in the policy may act as a speed breaker for the potential foreign investors but in the long run it would also ensure that only serious global players come to India and that too with a long term horizon. It will also help in identifying as to whether their intention is to collude or undertake predatory pricing or get into anti competitive exercise.

It should not happen that India remains only as a low cost producer of generics and MNCs use it as hub for exports. The idea should be to develop new drugs by paying special attention to Research & Development (R&D) in the sector.  As a suggestion, the government could make it compulsory for the drug manufacturers in India to plough back certain fixed percentage of profits into R&D. The percentage could be more for Indian operations of the MNCs. This will ensure that the MNCs not only use India as a low cost base but also invest substantial sum in developing new drugs at affordable prices.

Government should ensure that going ahead, the foreign investors in the Indian market do not mis utilise their strong position to hold back supply of essential drugs or molecules and get into cartelisation.

Thus the whole objective of this change in the policy should be seen as an optimistically cautious approach towards the growth of the essential sector like pharma and not a change against the foreign investors. The idea should be to ascertain whether FDI will bring more focus to R&D, create more jobs, ramp up the production capabilities, and continuation of supplies and affordability of medicines in India. After all one should not forget the aim of the Department of Pharmaceuticals. “To make India the largest global provider of quality medicines at reasonable prices.”