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The department of industrial policy and promotion (DIPP) has circulated a Cabinet note proposing restrictions on foreign direct investment (FDI) in the pharmaceutical industry so that Indian firms manufacturing "critical" drugs cannot be taken over easily by foreign entities. This is because India has historically played a key role in developing life-saving drugs at affordable prices, making the industry a major exporter and enabling it to play an important role in delivering India's own health security.
One specific proposal is to restrict such investment in "critical" brownfield (existing) ventures to 49 per cent under the automatic route, while allowing 100 per cent FDI in greenfield (new) ventures without approval. Currently, 100 per cent FDI is allowed but after securing the Foreign Investment Promotion Board's approval. The policy review is on after Mylan proposed to take over Agila Specialities in the oncology area for $1.6 billion. The prime minister, Manmohan Singh, intervened to allow the sale but sought a policy review to address concerns.
It is important to take a second look at DIPP's argument for several reasons. Will such a move be good for entrepreneurship in the future in India and, if not, then can that be good for the need to keep supplying cheap medicines to the poor?
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The supposition underlying DIPP's proposal is that there is a unique Indian entrepreneurial tradition which has gone into making cheap medicines in the country. Remove these entrepreneurs and traditions and the urge to make affordable medicines will disappear, causing great harm to the poor all over the world and, particularly, in India.
This argument runs counter to the one that says Indian entrepreneurs are the same as their counterparts anywhere else. They like to make a good profit. Indira Gandhi enabled them to do so by introducing a particular patents regime and they could seize the opportunity because of the country's unique skills in mixing different compounds to produce the same drug. That phase has ended and India is trying to establish its own patent regime. If the new Indian regime retains a sufficient generics space for pharmaceutical companies, then foreign firms which buy up Indian ones to get a toehold in the generics business as the life of blockbuster patents runs out will not give up this profitable line of business in India.
One great way in which the country can ensure the future supply of cheap quality generics, on which the entire government machinery is conspicuously silent, is reviving the half-dead state-owned pharma companies, once the mainstay of India's generics landscape, like Indian Drugs and Pharmaceuticals and Hindustan Antibiotics. Anji Reddy, who made history by creating a firm like Dr Reddy's, first worked in Indian Drugs and Pharmaceuticals. It is tragic the way these firms have been allowed to decline.
The skills required to make the generics currently sold in the country are widely available and if it is considered expedient to do so, the public-private-partnership route can be adopted to revive the sick state-owned companies.
A viable business model can be developed around these sick companies: private entrepreneurs can do the day-to-day running and the state can procure the medicine for its public health service. The Parliamentary Standing Committee for commerce has drawn attention to the need to revive these units.
Then comes the issue of ensuring the supply of important patented drugs, which are considered necessary, at affordable prices. The Indian system has already set the ball rolling by laying the foundations of compulsory licensing through the Appellate Authority for Intellectual Property to allow the manufacture of a cancer drug whose patent is held by Bayer. The government must certainly resist the pressure from patient rights organisations to go in extensively for compulsory licensing. No country in the world has adopted that policy.
What the government can do is to go in for systematic and structured negotiations with the manufacturers of important drugs under patent so that they can become available in the country at reasonable prices. These negotiations are likely to be fruitful as now the patent holders know that the government will not hesitate from issuing compulsory licences if the need arises. The deterrent effect will be powerful.
Next comes the question of what makes entrepreneurs tick. Expectations of returns differ from industry to industry but all founders of start-ups like to know that they have the option to cash out at some stage at the best price the market can fetch. For entrepreneurship to thrive, there has to be a market for companies, not the least because angel financiers, venture capitalists and private-equity funds are a part of today's start-up landscape (the world was different when Ranbaxy and Dr Reddy's got going) and few will be willing to put their money in a sector where exit valuations are stunted by restrictions on the sale of brownfield ventures.
The US offers the most fertile ground for innovations and entrepreneurship for two reasons-protection given to intellectual property and the existence of an efficient market for companies. In fact, those behind start-ups in Silicon Valley tailor the products they seek to develop to the known path that the majors are following. This makes it easy for them to sell out to a Google or Microsoft. Novel drug developers, particularly now in the field of biotechnology, follow the same model and Indian regulations should not be such that at some future date the promoters of a firm like Glenmark with a globally accepted product in the bag is denied a good valuation because foreign interests cannot bid for a brownfield pharmaceutical company.
To ensure that India continues to make its own critical medicines cheaply, it is important to protect intellectual property rights, while disallowing "evergreening" (opportunistic extension of patents) and there is a good and efficient market for companies where buyers from all over the world can help discover the best prices. The last option that should be considered is bureaucratic controls.
This brings us to the issue of how bureaucracies work in India. If a 49 per cent foreign ownership ceiling under the automatic route is put on the sale of firms making "critical" medicines then the first task will be to make up that list and update it periodically. Such a list presumably will be prepared by the health ministry and the way in which it has worked in the fields of drug approval and clinical trials does not arouse much confidence. And once DIPP gets the powers to work a restrictive list, it will mean a layer of discretionary approval.
Pharma is among the few Indian sectors which are globally competitive. For it to remain so and grow, it will need huge investments. The country also needs hard currency to shore up its balance of payments and foreign direct investment is the preferred route for long-term investment. If both the US and Europe are trying to reduce their healthcare costs and encourage the prescribing of generics then their future is far from over. To get a good deal for India's public healthcare system, its government will have to conduct effective bulk procurement negotiations with generics players in India. But to do that the government machinery has to be both competent and honest.
