It has been widely reported by the media that Bollywood matinee idol Aamir Khan was invited by the Parliamentary Standing Committee (PSC) on commerce to express his views on Foreign Direct Investments (FDI) in the pharmaceutical sector of India on June 21, 2012.
The actor reportedly has suggested regulations on FDI in the pharma sector to protect the domestic pharmaceutical companies, as well as, any consequent adverse impact on the patients in terms of availability of cheaper generic medicines.
There is absolutely nothing wrong or surprising in the actor’s deposition to the PSC or for that matter in his expressing views on the subject from any platform of his choice. Every citizen of India has got the full right to express his/her views on any matter to the public in general, law or policy makers or any other august body as the person will deem necessary, for the best interest of the country. It is up to the astute individual members or the institutions to extract the essence of the key issues out of all such deliberations based on hard facts and help the nation to move in the right direction for its economic progress with inclusive growth.
That said, one also expects that just charismatic persona of a matinee idol with well-articulated and perfectly modulated pontification, in an expertly manner, on the “do’s and don’ts” of the FDI in Pharma, should not overwhelm anyone, without appropriate substantiation with intimately related hard facts and examples.
From my own perspective, let me now explore the facts on this highly contentious issue for you to judge.
Pharma industry is going through a consolidation process:
Like in many other countries, the consolidation process within the Pharmaceutical Industry in India has also started gaining momentum. Post amendment of the Indian Products Patent Act in January 1, 2005, first major M&A activity took place in 2006 with Mylan acquiring Matrix Lab.
2008 witnessed one of the biggest acquisition in the Pharmaceutical Industry of India, when the third largest drug maker of Japan, Daiichi Sankyo acquired 63.9% stake of Ranbaxy Laboratories for USD 4.6 billion.
This M&A activity was widely believed to be a win-win deal, with Daiichi Sankyo leveraging the cost arbitrage of Ranbaxy, while Ranbaxy benefiting from the innovative product range of Daiichi Sankyo.
In May 2010, Chicago (USA) based Abbott Laboratories acquired the branded generic business of Piramal Healthcare with USD 3.72 billion. This particular acquisition reportedly triggered the Government’s thinking in instituting newer restrictions on FDI in the pharmaceutical sector of the country.
However, I reckon, any such move will be a retrograde step in the financial reform process of India and could adversely affect foreign investments not only in the Pharmaceuticals sector, but possibly far beyond it.
Key Acquisitions of Indian companies:
Following are the details of M&As (Mergers & Acquisitions) in India from 2006 to 2011:
It is worth mentioning that all these acquisitions were voluntary in nature, which considerably helped shifting the investment focus of the MNCs into India. This is mainly because the country offers a good science and technology base with a significant cost arbitrage along with a thriving, yet inadequately penetrated, domestic pharmaceutical market.
Key apprehensions on FDI in pharma and the facts:
The Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industries in its ‘Discussion Paper’ dated August 24, 2010, which was primarily on Compulsory Licensing (CL), also expressed some of the following apprehensions towards foreign acquisitions of the Indian pharmaceutical companies:
I would like to address these key apprehensions as stated below:
Apprehension 1. Oligopolistic Market will be created with adverse impact on ‘Public Health Interest’
The dictionary defines ‘Oligopolistic Market’ as ‘a market condition in which sellers are so few that the actions of any one of them will materially affect price and have a measurable impact on competitors’.
Indian Pharmaceutical Market (IPM) has over 23,000 players and around 60,000 brands (Source: IMS 2011). Even after, all the recent acquisitions, the top ranked pharmaceutical company of India – Abbott enjoys a market share of just 6.2% (Source: AIOCD/AWACS, March 2011). The Top 10 groups of companies (each belonging to the same promoter groups and not the individual companies) contribute just over 40% of the IPM.
Thus, IPM is highly fragmented. No company or a group of companies enjoys any clear cut market domination. In a scenario like this, the apprehension of an ‘Oligopolistic Market’ being created through acquisitions by the MNCs is indeed unfounded.
Apprehension 2. ‘Oligopolistic’ situation will severely limit the power of the government to face the challenge of Public Health Interest (PHI) by granting CLs:
With a CL, the Indian Government can authorize any pharmaceutical company to make any medicine needed by the country on an emergency basis. With more than 20,000 registered pharmaceutical manufacturing companies operating in India, there will always be enough skilled and able manufacturers willing to make needed medicines during any type of emergency situations. The country has already witnessed this during the H1N1 influenza pandemic, when several domestic and global pharmaceutical companies stepped forward to supply medicines in adequate quantity to meet the urgent need of the ailing patients.
The very thought of creating a legal barrier by fixing a cap on the FDI to prevent the domestic pharma players from selling their respective companies at a market driven price, which they would consider lucrative, just from the CL point of view, as mentioned in the ‘Discussion Paper’ of DIPP, sounds unreasonable, prejudiced and highly protectionist in the globalized economy.
Apprehension 3. Lesser competition will push up drug prices:
Equity holding of a company has no bearing on the pricing or access to drugs, especially when medicine prices are controlled strictly by the NPPA guidelines and a highly competitive market condition.
That competition within the pharmaceutical market is extremely fierce in India is vindicated by the following facts:
- Each branded generic/ generic molecule (constituting over 99% of the IPM) has not less than 50 to 60 competitors within the same chemical compound.
- 100% of the IPM is price regulated by the government, around 20% under cost based price control as per DPCO 95 and the balance 80% is under stringent price monitoring mechanism with a maximum annual price increase cap being effectively in place.
In an environment like this, any apprehension or threat to ‘Public Health Interest’ due to irresponsible pricing, will be highly imaginary in nature, especially when the medicine prices in India are cheapest in the world, cheaper than even our next door neighbors like, Bangladesh, Pakistan and Sri Lanka.
As stated above, Ranbaxy was the first major Indian drug company to be acquired by the Japanese MNC Daiichi Sankyo in June 2008. Two years later, the prices of medicines of Ranbaxy did remain stable, some in fact even declined. As per IMS MAT, June data, prices of Ranbaxy products grew only by 0.6% in 2009 and actually fell by 1% in 2010.
Similar trend has been observed even for other acquisitions, as well.
Investments through ‘Collaborative deals’:
Following are some important collaborative deals in the pharmaceutical sector of India from 2009 to 2011:
|Dr. Reddy’s Lab
Such deals help the domestic pharmaceutical industry to reap a rich harvest in many other ways.
Positive fall outs of acquisitions/collaborations:
Mergers and Acquisitions (M&A) or ‘Brownfield’ investments and collaborative deals contribute significantly not only to create high-value jobs for Indians but also enable access to high-tech equipment and capital goods for the country.
Technology cooperation from the global pharmaceutical industry also stimulates growth in the manufacturing and R&D space of the domestic industry and positively impacts patients’ health with increased access to breakthrough medicines and vaccines.
In this process, with adequate stimulus to the pharmaceutical R&D, India too could fast evolve as a country with a strong research-based pharmaceutical industry capable of developing innovative medicines and inventing new drugs for the world at large.
Many countries, including India, have instituted programs and policy reforms to attract FDI in the pharmaceutical sector. These programs include substantial efforts to build up the R&D infrastructure and create a pool of qualified and talented work force.
Currently, there is a strong global competition for such investments. Countries recognize that pharmaceutical companies bring high-paying jobs, technology know-how and significant economic spill-over effects. As per reports, in the United States, each job in the research-based pharmaceutical industry supports an additional 3.7 additional jobs in the U.S.
By attracting high quality FDI in the pharmaceutical sector, India can further improve its sectoral capabilities and help honing skills of its talent pool. All these, in turn, will also give rise to increasing global penetration of pharmaceutical exports of the country.
India still draws lowest FDI within the BRIC countries:
A new study of the United Nations has recently reported that large global companies still consider India as their third most favored destination for FDI, after China and the United States.
However, with the attraction of FDI of just US$ 32 billion in 2011, against US$ 124 billion of China, US$ 67 billion of Brazil and US$ 53 billion of Russia during the same period, India still draws the lowest FDI among the BRIC countries.
At a time when the Global Companies are sitting on a huge cash pile and waiting for the euro zone crisis to melt away before investing overseas, any retrograde steps by India related to FDI in its pharmaceutical sector may not augur well for the nation.
Many countries are trying hard to attract FDI:
While our Government has been publicly debating policies to discourage foreign investment, other countries have stepped forward to attract FDI in their respective countries. Between October 2010 and January 2011, more than 27 countries and economies have adopted policy measures to attract foreign investment.
Access to generic medicines cannot be improved by restricting FDI:
The Pharmaceutical sector in India was opened up for 100% FDI through automatic route, only in the year 2002. This reformed FDI policy regime has been helping India as an attractive investment destination for pharmaceuticals.
Access to generic medicines cannot be improved by restricting FDI. Following measures and many more are required to address this critical issue in the country:
- The Government has already signaled increasing allocation of resources towards the health sector by doubling the funding available for the National Rural Health Mission (NRHM).
- It is also planning to extend the Rashtriya Swasthya Bima Yojana (RSBY) scheme to provide out-patient coverage to low income groups.
- Currently the government seems to be quite poised to distribute all essential drugs to the patients free of cost through public hospitals and dispensaries.
- Effective implementation of the ‘Universal Healthcare’ project in India will also help improving access to healthcare, including medicines, significantly.
- Increase in allocation of expenditure towards health from 1.1% of the GDP in the 11th Five Year Plan Period to proposed 2.5% in the 12th Five Year Plan Period is a step in the right direction.
- Healthcare financing will offer an enduring mechanism for reducing the Out-of-Pocket expenses of the poor, versus short term ‘knee jerk’ measures.
- Allocating resources from national welfare schemes towards health insurance coverage would be a step in the right direction. For example, a portion of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) funds could be spent on health insurance premium for workers engaged in such work.
“ Protectionism is harmful”:
It is worth mentioning that our Government has been publicly expressing its views against the concept of ‘Protectionism in Business’ over a period of time.
“Protectionism is harmful” was very aptly commented by Mr. Pranab Mukherjee, the then Finance Minister and now one of the Presidential nominees of India. This comment was in context of “US moves to hike visa fees and clamp down on outsourcing”.
India now needs to ‘Walk the Talk’.
Unfortunately, even recently, on July 3, 2012 Indian media reports indicate that the Government is still mulling proposals to restrict FDI in India. It stated, “The new rules will require the foreign investor to give an undertaking that if the company is investing in producing an essential drug, as mentioned in the government list of such drugs, then it will continue to produce that medicine”.
99% of the total pharmaceutical market in India constitutes of generic/branded generic medicines with over 23,000 manufacturers and 60,000 brands. In such a scenario, apprehensions that generic medicines, including those featuring in the National List of Essential of Medicines 2011 (NLEM 2011) will not be produced in India, is indeed intriguing.
In the light of ‘2010 Economic Survey of India’, the nation acknowledges the need to attract foreign investors in the country. Increasing foreign investments due to liberalization of FDI policies over the past two decades have benefited the Indian companies in terms of technology cooperation (technology transfer), greater resource mobilization and new market access opportunities.
Collaborative deals with the MNCs are enabling the local pharmaceutical companies to gain access to international expertise, increasing resources and world class manufacturing practices.
Any possible adverse impact of M&A on competition can now be effectively taken care of by the ‘Competition Commission of India (CCI)’. In addition, apprehension for any unreasonable price increases will appropriately be addressed by the ‘National Pharmaceutical Pricing Authority (NPPA)’, as is the current practice.
Thus, in my view, limiting FDI in the pharmaceutical sector of India, at this stage, without any substantive reason and just based on unfounded apprehensions, even when the Government is debating to open up the retail and the insurance sectors to foreign investors, will be a retrograde step in the reform process of the country, pontification with razzmatazz of a Bollywood Matinee Idol notwithstanding.
By: Tapan J Ray
Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.