Government gears up for more drug sector buyouts

By Gautam Khaitan and Amlan Jyoti Borah, OP Khaitan & Co

Global pharmaceutical companies are facing the expiry of patents of some of their blockbuster drugs, increased competition from generic drugs manufacturers, and a decline in new money-spinning wonder drugs. In contrast, India is one of the world’s largest manufacturers and suppliers of generic drugs and is emerging as a vast and fast growing market for pharma products.

Gautam Khaitan
Gautam Khaitan

There is great potential for foreign pharma companies to invest in the pharma sector in India and have a slice of the huge domestic and international market for generic drugs. In the past decade or so, most of the foreign direct investment (FDI) in the sector has gone into buyouts of existing Indian companies or operations (brown-field units) rather than green-field projects. Some of the notable acquisitions of Indian companies by multinational companies (MNCs) were: Shantha Biotechnics by Sanofi-Aventis; Ranbaxy by Daiichi Sankyo; Piramal Health Care’s domestic business by Abbot Laboratories; Matrix Lab by Mylan; Dabur Pharma by Fresenius; and Orchid Chemicals by Hospira.

Growing concern

Such deals have led to pressing of panic buttons by Indian pharma companies, the Department of Industrial Policy and Promotion (DIPP) and other stakeholders, including the Ministry of Health, the Department of Pharmaceuticals, health workers and consumer groups, claiming that more takeovers by MNCs would result in predatory pricing, cartelization, etc., which would kill the competition and eventually lead to price increases and scarcity of essential drugs. This is a cause of great concern for a developing country like India with its huge population of poor people.

Thus, there is a growing desire within a section of stakeholders to block brown-field investments by foreign pharma companies.

Current scenario

Under DIPP’s current FDI policy, FDI up to 100% is allowed under the automatic route for green-field projects and under the approval route for brown-field projects. Further, the policy states that the central government may incorporate any additional conditions for approving investments in brown-field projects.

DIPP recently approved seven proposals for brown-field investments in the pharma sector which had been held up for a long period awaiting approval by DIPP. Among the proposals were investments into Ferring Therapeutics, Lotus Surgical, Curadev Pharma and Verdant Life Sciences. However, the proposal for the largest investment – the acquisition of Strides Arcolab’s injectables unit by Mylan – remained held up in spite of a green signal from the Competition Commission of India (CCI).

DIPP’s latest approvals indicate that the government has decided to follow a middle path by approving FDI proposals for brown-field acquisitions if the target Indian company’s domestic market share is below a certain threshold. This implies that approvals would come fast in relation to acquisitions where the target Indian company has insignificant market share or is not in a dominant position to control the market.

Amlan Jyoti Borah
Amlan Jyoti Borah

Fixing such a threshold for allowing FDI in brown-field acquisitions would open up most Indian pharma companies for acquisitions by MNCs except a few big companies dominating the market.

We must not lose sight of India’s dire need of huge FDI infusions into the economy to bridge the increasing current account deficit. It is high time that the government puts in place a transparent and investor-friendly policy which can achieve the dual purpose of protecting its core healthcare interests and attracting more investments into the pharma sector. It is also important to note that increased investments in the Indian pharma sector by MNCs would bring new drugs and technology into the pharma sector, which would help the people of India.

The Indian pharma sector is too price sensitive, competitive and fragmented for a few companies to dominate. If MNCs desire to grow big in India and make money on their initial investments, they have to eventually produce cost-effective drugs.

The role of the government in facilitating cost-effective access to drugs for India’s huge population and creating the right environment for investments in the pharma sector has to be in correct balance. The government must explore options such as public procurement of generic drugs for the poor and should give the domestic industry incentives to produce cheap drugs. Emphasis must also be laid on increasing research and development by both public and private institutions and transfer of technology to Indian-controlled companies.

Lots of the concern raised by various interest groups seems exaggerated as companies operating in India, whether controlled by Indians or MNCs, must follow the laws of India and the rules that provide safeguards in areas such as production of essential drugs and pricing of drugs. Further, India has the CCI to deal with issues of predatory pricing or cartelization.

OP Khaitan & Co is a 40-lawyer law firm, based in New Delhi. Gautam Khaitan is the firm’s managing partner and Amlan Jyoti Borah is a principal associate.


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