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Resource centre on India's rural distress
 
 

Prescription For Trouble by Arindam Mukherjee

Mulling It Over

    100% FDI allowed in pharma sector through automatic route
    Seven top Indian firms have been acquired by MNCs in the past six years
    Fear of price rise in generic medicines if MNCs control market
    Health, commerce ministries want FDI to go through approvals
    PMO meeting key ministries next month to take a decision

***

Prime Minister Manmohan Singh has always been firm in reminding domestic industry that their fear of foreign competition is exaggerated. He’s been mostly right. It’s ironic then that in the 20th anniversary of reforms, Manmohan will have to, directly, sort out a messy battle in the dog-eat-dog pharmaceuticals sector. There is hectic lobbying now for checks on unrestricted foreign direct investment (FDI) and acquisitions in the sector. Significantly, some key ministries and government departments support this move—but other arms of government are opposed to it. It is going to be a tightrope walk.

Currently, 100 per cent FDI is allowed in the pharmaceutical sector through the automatic route. This has led to a spate of acquisitions of domestic pharma companies by global players. There is now a fear that, if allowed to continue unhindered, this will have an adverse impact on the “Indian” pharmaceutical sector. The critics say it will also lead to an increase in prices of key medicines, besides affecting supply. What they want are case-by-case restrictions to be imposed on the takeover of existing domestic companies by foreign firms.

Key ministries such as health and commerce (via the Department of Industrial Policy and Promotion, DIPP) as well as departments like the Council for Scientific and Industrial Research are pushing for this change in policy. The finance ministry is, however, opposed to any “rollback of economic liberalisation”. The PM has called a meeting of the key ministries early next month to take a decision on the matter. FDI through the automatic route was allowed in the pharmaceutical sector in 2001. In the past six years, seven leading Indian pharmaceutical firms—Ranbaxy, Piramal Healthcare, Shanta Biotech, Dabur Pharma, Orchid Chemicals, Paras Pharma and Matrix Labs—have been bought over by MNCs.

Both the health ministry and the DIPP feel that mergers and acquisitions in this sector should not be looked at as normal investments but “as a concerted attempt to blunt the challenge of generic drugs (legal copies of drugs that have gone off-patent) in India”. They fear that once the MNCs take over, they could bring a completely different product mix, which could hit the supply of low-priced generic drugs and render them unaffordable for a large part of the population. Says a DIPP official who requested anonymity: “We are worried that access to medicine is deeply dented for the common man. The MNCs are desperate as Indian generics are giving them a tough fight.”

Generic drugs make up more than 90 per cent of the $12.1 billion Indian pharmaceutical industry, the third largest in the world. Indian pharmaceutical companies have traditionally been able to challenge global MNCs by launching low-cost generic drugs that are also exported to other Third World countries.

In a representation made to the government, the Indian Pharmaceutical Alliance (IPA), which represents a large section of domestic firms, pointed out that post-acquisition, most Indian companies have reduced production of generic drugs and have also been steadily increasing prices. Says IPA secretary general D.G. Shah: “This could have a deep impact on public health in India as generic drugs could become unavailable. If you eliminate the large Indian companies engaged in this area, the MNCs will have a free hand in deciding the price and what to manufacture.”

As expected, the MNC lobby has rubbished all these claims, arguing that the takeovers have had a negligible impact on the Indian market. “The whole canard that drug prices will go up post acquisitions is not based on facts as global companies have been conservative about raising prices. Also, not a single drug has disappeared from the Indian market,” says Ranjit Shahani, vice-chairman and MD, Novartis India. He is also president of the Organisation of Pharmaceutical Producers of India (OPPI), which is dominated by MNCs.

Exactly how true is this? The OPPI says government bodies are there to check prices of medicines, which have “risen marginally post takeovers”. “Drugs of Ranbaxy and Abbott Piramal have increased by just two per cent (in price) in this period,” argues Tapan Ray, director general, OPPI. A look at generics from across companies, however, tells a different story (see table). Prices have been on the rise. There is also a huge difference between the prices of medicines from MNCs and Indian generic medicines. For instance, Xalatan eyedrops from Pfizer retails at Rs 1,187 (for 5 ml), while Sun Pharma’s Latoprost eyedrops sell for Rs 335 (for 2.5 ml). Clearly, a detailed study of price trends is required.

A few months ago, the government constituted a committee under Planning Commission member Arun Maira to look into the issue. The committee, which has had two meetings so far, is slated to meet again soon and submit its report by the end of September. Speaking to Outlook, Maira argues that the FDI factor does not really impinge on a solution. “We have to decide what industry structure is required here to ensure availability and accessibility of medicines for the people.” The Competition Commission will ensure that M&A activity does not distort the structure of the market. The government also has drug prices under “control”, Maira reasons. He says if FDI in the sector were to be channelled through an approval route, it would open doors for corruption and discourage investment. “In the absence of intellectual clarity, it becomes discretionary.”

drug price
 
Although Maira says he will behave like a “general physician and give a holistic medicine”, the committee will, in all probability, look to play it safe by putting forward options before the government. There are powerful players on both sides, and the PM will have to appease both. He will also have to be careful about the signal he is sending out: protecting the common man’s right to cheap medicines, or reversing a piece of reform. Can we then expect a middle-of-the-road solution that achieves both objectives?