“Protectionism is harmful” very aptly commented by Mr. Pranab Mukherjee, the Finance Minister of India, just the other day. This was in context of “recent US moves to hike visa fees and clamp down on outsourcing”.
While almost at the same time, both Indian and the foreign media reports indicate that being concerned by the recent acquisitions of the home grown relatively large pharmaceutical and biotech companies, the Department of Pharmaceuticals (DoP) and the Department of Industrial Policy and promotion (DIPP) of the Government of India are mulling a proposal to do away with the current practice of allowing 100% Foreign Direct Investments (FDI), as applicable to the pharmaceutical industry in India.
Even the Health Minister of India has been expressing this concern since ‘Abbott – Piramal deal’ was inked last year. He expressed the same apprehension, as he read out from his written speech, in an industry function in Mumbai held on January 7, 2011.
Thus the moot question is, will limiting FDI in pharmaceuticals be not considered by the world as a protective measure, just as ‘hiking visa fees and clamping down outsourcing’ from India by other countries?
Is it a mere speculation?
I would reckon so, as at this stage India cannot afford to take any retrograde anti-reformist measure in its endeavor to further accelerate the economic progress of the nation. The Finance Minister of India has also expressed so publicly, in the same context, quite recently.
Still the speculation is quite rife that a new cap of 49% FDI for pharmaceuticals would be able to keep the multinational companies (MNCs) away from having controlling stakes in the Indian companies, which will not jeopardize access to quality medicines at an affordable price to a vast majority of the population.
The key apprehensions:
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 key apprehensions towards foreign acquisitions of the Indian pharmaceutical companies by the MNCs:
1. Such takeovers could lead to an ‘oligopolistic market’ where a few companies will decide the prices of essential medicines, adversely impacting the ‘Public Health Interest (PHI)’.
2. If large Indian companies having the wherewithal to replicate any patented molecule are taken over by the MNCs, the ‘oligopolistic’ situation thus created and being strengthened by the exclusivity of products through product patent rights, will severely limit the power of the government to face the challenge of PHI by granting CLs.
3. In such a situation MNCs could well decide to sell only the high priced patented and branded generic drugs rather than the cheaper essential drugs, pushing up the drug prices and causing inconvenience to patients.
Addressing the key apprehensions:
Let me now try to address these apprehensions impartially and with as much data as possible.
1. Can Indian Pharmaceutical Market (IPM) be ever oligopolistic? 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’.
IPM has over 23,000 players and around 60,000 brands (source: IMS 2010). Even after, all the recent acquisition, the top ranked pharmaceutical company of India – Abbott, enjoys a market share of just 6.1% (source: AIOCD/AWACS , November 2010). Even the Top 10 groups of companies (each belonging to the same promoter group though different and not the individual companies) contribute just around 40% of the IPM.
Thus, IPM is highly fragmented. No company or group of companies enjoys any clear market domination. In a scenario like this, the apprehension of an ‘oligopolistic market’ being created through acquisitions by the MNCs is indeed unfounded.
2. The idea of creating a legal barrier in terms of limiting the FDIs to prevent the domestic pharma players from selling their respective companies at a price, which they would consider lucrative, just from the CL point of you, as mentioned in the ‘discussion paper’ of DIPP, sounds bizarre.
3. The market competition is also extremely fierce in India with each branded generic/generic drug (constituting over 99% of the IPM) having not less than 50 to 60 competitors within the same chemical compound. Moreover, 100% of the IPM is price regulated by the government, 20% under cost based price control and the balance 80% is under stringent price monitoring mechanism. In an environment like this, the very thought of any threat to ‘public health interest’ due irresponsible pricing, may be taken as an insult to the government’s own price regulators, who have contributed in making the medicine prices in India cheapest in the world, cheaper than even our next door neighbors like, Bangladesh, Pakistan and Sri Lanka.
Hard facts tell us a different story:
The apprehension that acquisition of Indian drug companies by MNCs will hurt the consumer interest is not based on hard facts. MNCs constitute 19% of the total share of the Indian pharmaceutical market in value terms. Of the 455 companies listed in IMS ORG, 38 are foreign owned (only 8.4%). The fragmented nature of the industry ensures high level of competition that has led to the lowest prices of essential medicines in India.
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 have remained 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.
Access to world class science and technology:
Even the acquisition of Shantha Biotechnique by Sanofi-aventis has enabled the domestic bio-tech company to get world class R&D support and international exposure in partnership with the one of the world’s largest vaccines development company – Sanofi-Pasteur. It is worth noting that none of the prices of locally produced vaccines by Shantha Biotechnique has gone up after this acquisition.
Data also shows that the number of products under price control is now much higher for MNCs in general than the domestic drug companies.
Other positive fall outs of acquisitions/collaborations:
All these acquisitions were absolutely voluntary in every way and brought in for the country large amount of foreign investments as can be seen in the Piramal Healthcare buyout amounting to US $3.72 billion and earlier the Ranbaxy buyout of US $4.2 billion. Such acquisitions also help in shifting investment and R&D focus of the MNCs into India, which offers good science and technology base with a significant cost arbitrage.
In my opinion, through partnering with MNCs, local drug companies have begun to gain access to international expertise, resources and good manufacturing practices. A number of local companies have already entered into alliances with MNCs to leverage these opportunities.
Thus limiting FDI in the pharmaceutical industry at this stage, when the government in fact is debating to open up the retail and the insurance sectors to foreign investments will indeed be a retrograde step for the country.
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.