It would soon be time for the government to review its 2011 policy decision on foreign direct investment in the pharma sector. The occasion is ripe to consider perceptions on the impact of FDI on the industry.The FDI policy for the pharma sector was revised on November 8, 2011, essentially shifting the FDI(in relation to the brownfield investments) from the automatic to approval route. FDI in the sector is permitted up to 100 per cent.
The decision was a sequel to the acquisition spree by multinational corporations — notably Matrix by Mylan (2006), Ranbaxy by Dai-ichi Sankyo (2008), Shanta Biotechnics by Sanofi Aventis (2009), Orchid Chemicals by Hospira (2009), and Piramal Healthcare by Abbott Laboratories (2010).
EXAGGERATED FEARS
While these acquisitions at seemingly high values have spelt a bonanza for the owners of the acquired companies, they did sound warning bells — in the Government — of alleged concentration in the hands of MNCs, with a possibly negative effect on the price and availability of medicines.
It is not that acquisitions did not occur prior to 2006. One must not ignore that these MNCs, like other corporates, were clamouring for growth.
With its vast market, cost-competitiveness and quality manufacturing facilities, it certainly makes economic sense for MNCs to pay a slightly higher price for a running business. To presume that every acquisition is done with an ulterior motive of controlling prices and markets, can perhaps be termed as an over-reaction.
In the same vein, what would one say about Indian acquisitions abroad — such as those made by the erstwhile Matrix Laboratories or Ranbaxy or Dr. Reddy's? We cannot attribute ulterior motives to these acquisitions. Since the government viewed these acquisitions as invasions by the MNCs, it wished to have a closer look. Therefore, it put them through the Foreign Investment Promotion Board scanner.
The Government has appointed a committee headed by Planning Commission Member, Mr Arun Maira, for examining the impact of these acquisition activities. This Cabinet-appointed committee did not find any evidence of distortion in competition, price or availability.
Therefore, was there lobbying by certain industry organisations, before a policy shift was effected?
PRICE CONTROL MECHANISM
Those advocating controls over investments into the sector (in existing companies) were talking of MNCs creating a market in which just a few companies would determine the prices of medicines. There is, of course, no doubt that acquisitions have become an easy entry point for MNCs into India's generic market. It is perceived that such acquisitions result in aggressive price increases, diversion of drugs to more remunerative global markets, and adverse effects on the availability of drugs in local markets.
Moreover, the absence of any shift in the FDI policy would be seen as an endorsement of takeovers by the Government. However, they never considered the fact that a shift in policy could convey a wrong signal to foreign investors. If the governments are serious about drug prices, they can control prices and availability. For example, South Korea has negotiated with Novartis for reducing the price of their Glivec before granting approval. India has the Drug Price Control Order in its armoury (already being revamped to make it workable); its latest exercise (2009) in the matter of controlling the price and availability of medicine for swine flu is another good example.
In addition, the Competition Commission of India (CCI) can oversee unfair trade practices. The Damocles' sword of compulsory licensing is, of course, always available. Therefore, relying on an FDI policy shift to achieve the same is unnecessary. It could only put off foreign investors.
COMPETITION PANEL's ROLE
The Competition Commission of India (CCI) is required to approve mergers above a threshold limit. It is also empowered to deal with cases of cartelisation, and cases impeding competition in the market.
The fears that acquisitions would result in price increases are ill-founded. In fact, competition has been so fierce that prices have actually been coming down. Even if one were to consider that the shift in FDI policy as a temporary phenomenon, subject to a review, the focus seems to be on using the CCI as a gateway for scrutinising acquisition proposals.
The Maira committee appointed by the Cabinet did recommend lowering of merger control threshold limits and the CCI to be better equipped. Some of the factors that would play a significant role in approving a brownfield investment — or a possible merger activity — would be creation of jobs, more research and development activity, increase in manufacturing facilities, assurances on continued supplies, guarantees on no upward price revisions and balanced product portfolios.
Ever since the shift in the policy, at least eight proposals have been approved by the FIPB. Though this has gone to nullify fears that the shift would drastically affect FDI inflows in to the Rs. 62,000 crore-plus sector, the real test would come when a major proposal comes up before the FIPB. The proposals so far cleared are small value transactions. Industry would live with FIPB perhaps, so long as the approvals are accorded within a reasonable time-frame, and are transparent.
The four proposals that were cleared relate to acquisition of stakes in Aptuit Laurus Private Limited, Edict Pharma Private Limited, Pharmaceuticals Ingredients, and Formulations India Private Limited.
The FIPB conveniently deferred decisions on stake buys by MNCs — one pertaining to Ambrose's proposal to buy a 40 per cent stake in Sutures India (estimated outlay Rs. 199 crore) and the other, Spain Chemo Group's offer to buy 100 per cent stake in Ordain Healthcare Global (estimated deal value Rs. 58 crore). The postponement of decisions clearly point to uncertainty over the new rules.
It is almost certain that when a review takes place, the ball would squarely be placed before the CCI, with perhaps detailed policy guidelines in place. A lowering of threshold limit is not ruled out and the CCI may be aided by a Standing Advisory Committee to vet FDI proposals.
(The author is Director and CFO, Natco Pharma. The views expressed are personal.)