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Govt explores capping FDI in pharma by CH Unnikrishnan

The Indian government is exploring a proposal to reduce the limit on foreign direct investment (FDI) allowed in the pharmaceutical industry through the automatic route to 49% from 100% amid concerns over the takeover of local drug makers by overseas firms.

Officials from the ministry of commerce and industry and the ministry ofhealth have had multiple rounds of discussions on the proposal following a note written to them by the finance ministry in November.

The two ministries are toying with the idea of fixing an upper limit of 49% on FDI in the pharmaceutical industry, which would be deemed a sensitive sector, said two persons familiar with the development, including an official in the ministry of commerce and industry. The persons didn’t want to be identified.

Another set of discussions is likely to be held next week to consider the views of the department of pharmaceuticals on the proposed reductionin the FDI limit.

The move follows concerns expressed by lawmakers and the ministry of health that the trend of foreign drug makers taking over Indian pharmaceutical companies threatened government efforts to ensure the availability of affordable drugs manufactured within the country.

In November, Jyoti Mirdha, a member of Parliament’s standing committee on health and family welfare and a Congress member of Parliament from Rajasthan, cautioned the government about the potentially adverse consequences of foreign entities taking over management of Indian drug makers. In a letter addressed to finance minister Pranab Mukherjee, she sought “reasonable restrictions” on the sale of domestic drug makers to big global companies.

Mukherjee, in turn, wrote to the commerce and industry ministry to urgently look into the matter. A copy of the letter was seen by Mint.

The department of industrial policy and promotion (DIPP), which is responsible for framing policy related to foreign investments, is currently examining these concerns and will shortly make suggestions on how to address them.

A senior DIPP official confirmed this on Friday. “The finance ministry had a couple of months ago written to us in this regard,” he said.

Currently, foreign companies do not require prior approval from the Foreign Investment Promotion Board (FIPB), a government body that scrutinizes investment proposals, to purchase as much as 100% of equity in a local drug maker.

Foreign investment in some sectors including insurance, aviation and media, which are considered to be sensitive, is allowed only after FIPB scrutiny and up to a permitted limit.

“Foreign investment in pharmaceutical industry up to 100% was allowed inIndia through automatic route as the government expected new investments to flow into this sector for further growth,” said Dilip G. Shah, secretary general of the Indian Pharmaceutical Alliance, an industry lobby that represents top Indian drug makers.

“But the recent trend has shown that the foreign companies are taking over the existing businesses from the local players to instantly grab a significant market share instead of making new investments that help in expanding the industry,” he added.

The Rs.90,000 crore (including Rs.40,000 crore of exports) Indian drug industry has in the last five years seen half a dozen big takeovers by foreign companies.

They include the $3.6 billion acquisition of the promoters’ stake in India’s largest drug maker Ranbaxy Laboratories in 2008 by Japan’s Daiichi Sankyo Co. Ltd. US drug maker Mylan Inc. paid $734 million to acquire Hyderabad-based Matrix Laboratories in 2006.

German health care group Fresenius SE spent $219 million to take over Dabur Pharma in 2008. French drug multinational Sanofi-Aventis SA acquired a majority stake in Indian vaccines company Shanta Biotech in 2009 for €550 million. Last year, US drug and nutrition firm Abbott Laboratories paid $3.72 billion to acquire Piramal Healthcare Ltd’s domestic drug formulation business and spent $726 million to buy out Ahmedabad-based consumer health company Paras Pharmaceuticals.

All these deals have already resulted in a key shift of share in the Rs.50,000 crore domestic drug market. Foreign drug makers’ market share in India has risen to at least 15% from 10% in 2009.

“Considering the current local business ownership of foreign drug makers, their market share will exceed 20% by the end of this fiscal,” said Ranjit Kapadia, senior vice-president (institutional research, pharma) with brokerage HDFC Securities Ltd.

Mirdha wrote in her letter to the finance minister in November that 80% of the local population is dependent on private healthcare and most paidfor the medicines they required.

“Since medicines are sensitive items and expenditure on treatment of diseases is the second biggest cause of rural indebtedness, a heavy dependence on foreign sources can put the country in serious trouble,” she wrote.

DIPP had in September come out with a discussion paper on implementing compulsory licensing provisions in the country to ensure the availability of low-cost versions of patented drugs in the country.

Since India introduced a product patent regime for drugs and pharmaceuticals in 2005 in compliance with its obligation to the Trade Related Intellectual Property Rights agreement, there have been concernsamong public healthcare stakeholders that many life-saving drugs under patent protection may go out of reach of ordinary consumers.

Several foreign lobbies, including Pharmaceutical Research and Manufacturers of America, Japan Pharmaceutical Manufacturers Association, Japan Intellectual Property Association and USINDIA Business Council, have opposed compulsory licensing provisioning while responding to DIPP’s discussion paper. They said that it may hamper the flow of foreign investment in the pharmaceutical sector.

Ranjit Shahani and Tapan Ray, president and director general, respectively, of the Organisation of Pharmaceutical Producers of India (OPPI), an industry lobby that represents foreign drug makers in India, couldn’t be reached for comment by telephone on Saturday and Sunday.

In a different context, Shahani wrote in an email to Mint last week about the potential for “increasing collaborations and partnerships not only in the commercial arena but also in the research space in a bid to keep the escalating costs in control, leverage skills to get newer drugsto the market in shorter time spans and finally to share risks and rewards...”