Discretionary ‘Non-Compete Clause’ in Pharma FDI: An Intriguing Decision

As I had commented before, the MNC investors, while acquiring controlling stake in the Indian pharmaceutical companies, henceforth, would not be generally allowed to include any ‘non-compete clause’ in their agreement with the Indian promoters. However, this clause may be allowed only in special circumstances with the discretionary power of the Foreign Investment Promotion Board (FIPB).

Looking back:

While looking back, the decision to have a relook at pharma Foreign Direct Investment (FDI) by the Department of Industrial Policy and Promotion (DIPP), was possibly spurred by the following key apprehensions of the ‘Third World Network (TWN)’, following a series of takeovers of important Indian Pharma and Vaccine companies by the MNCs:

1. Takeover of large integrated Indian pharma players would ultimately leave behind mostly the smaller domestic companies operating in the lower end of the pharmaceutical value chain. This may compel India to compromise on need-based R&D and become completely dependent on MNCs for meeting the country’s drug requirements to respond effectively to various urgent needs, over a period of time.

2. Acquisitions of well-integrated domestic companies with technological capabilities by the MNCs could either fully eliminate or restrict the use of TRIPS flexibilities in the country, such as, Compulsory Licensing (CL) and patent challenges. For instance, immediately after its takeover by Daiichi Sankyo, Ranbaxy withdrew all the patent challenges against Pfizer’s blockbuster cholesterol reducing drug Lipitor.

3. Takeovers are easy ways to make effective use of a well-oiled marketing and distribution network established by large domestic companies to substitute low-cost medicines with higher-priced ones, including the patented drugs.

4. MNCs allegedly want to restrict the large Indian companies from entering into the regulated markets with their low-priced generic products of high quality standards, resorting to patent challenges and taking prime initiatives in Para IV filing in the United States. All these are believed to be posing an increasing threat to them over a period of time.

5. These acquisitions could ultimately result in high medicine prices. As quoted by TWN, according to the ‘Indian Pharmaceutical Alliance (IPA)’, Abbott increased the prices of medicines produced by Piramal Healthcare immediately after its takeover. The examples given are as follows:

The price of Haemaccel was Rs 99.02 in May 2009; by May 2011 it had gone up to Rs 215 – 117 percent increase in just two years. In another instance, the epilepsy drug Gardenal registered a price hike of 121 percent during the same period.

The new ‘Press Note’ :

Thereafter, much water has flown under the bridge and finally the ‘Press Note’ of DIPP on Wednesday, January 8, 2014 formalized the deliberations of the inter-ministerial group held in November 2013 that existing policy of 100 percent FDI in the brownfield pharmaceutical sector through FIPB approval route will continue, along with the rider of jettisoning the ‘non-compete clause’. Only change in the above ‘Press Note’ is that, the said clause may be allowed only in special circumstances with the discretionary power of the FIPB. 

However, 100 per cent FDI will continue to be allowed through automatic route in the Greenfield pharma projects.

An intriguing decision:

The DIPP ‘Press Note’ appears to be intriguing without understandable explanations and quite inconsistent with the reform measures already announced by the government thus far in many other areas.

More so, as I wrote before, no tangible assessment of impact of all M&As, so far taken place in India, has yet been done in a systematic manner.

The ‘non-compete clause’ being a standard feature, especially in brownfield Mergers and Acquisitions (M&A), justifiably restricts the promoters of the acquired companies from getting into the same business for a predetermined period of time.

Absence of this clause is expected to impact the valuation of the target companies significantly. Hence, some large Indian promoters had openly expressed their displeasure against such arbitrary measures and that too in quite specific terms.

More importantly, the absence of the ‘non-compete clause’ does not, in any way, effectively address those apprehensions, as mentioned above.

Conclusion:

Without any tangible evidence, it is a matter of conjecture now, whether the above apprehensions have any merits or not, in any case.

Be that as it may, the clumsy way this issue has been handled by the DIPP, especially since last couple of years, adds today even greater confusion to overall pharma FDI brownfield policy in India.

The issues related competition during any M&A process, as per statute, fall within the purview of the competition watch-dog of the country – the Competition Commission of India (CCI), which is expected to ensure that desired competition does in no way get compromised during M&As, including brand acquisitions, for the sole interest of consumers.

Despite statutory requirement to pass through CCI scrutiny in all mergers and takeover processes in India, the provision for discretionary decision to review the ‘non-compete cause’ by the FIPB, on case-by-case basis, without putting in place a set of fair and transparent guidelines for the same, appears indeed intriguing.

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.

Leave a Reply

You must be logged in to post a comment.