The sector, which was opened to 100 per cent FDI in 2001, encountered a series of takeovers between 2006 and 2010
The policy problem on FDI in the pharma sector is caught in a maze of regulatory cross currents. It was not just the market potential and the top of the line local companies available for acquisition, but also that 2005 onwards India became TRIPs compliant and had its product patent regime in place, which attracted foreign investors in assuring long term growth prospects. The sector, which was opened to 100 per cent FDI in 2001, encountered a series of takeovers between 2006 and 2010, Ranbaxy by Dai-ichi, Shanta Biotenichs by Sanofi Aventis, and more recently Piramal Healthcare by Abbott Laboratories.
All the targets were robust profitable companies, but required investments for upgrading the technology – it was no secret that the Indian pharma sector’s growth was fuelled by reverse engineering. The transition of ownership was by and large non-contentious. Clearly the Indian pharma industry, inspite of being subjected to rigid price control for years, had established global creditability and success with a growth rate of between 8 to 9 per cent. What was required was enhancement in the Research & Development (R&D) investment - the Indian manufacturers’ average R&D spend being around 1.9 per cent of their annual turnover.
The health ministry was the first to raise concerns on rising prices and in alleging unfair practices being followed by the entities acquired by foreign investors, which was echoed by the Ministry of Commerce & Industry. It was to address these concerns that the Maira Committee was constituted. The Committee’s recommendation was that no changes were warranted in the FDI limits and the automatic route should continue.
However, a scrutiny process at the entry stage for investments in brownfield projects was proposed, requiring Foreign Investment Promotion Board (FIPB) approval, with the Competition Commission of India (CCI) clearing the investment from the potential anti-competitive angle. For this purpose, separate sector specific threshold limits were to be prescribed, and in the interim, brownfield projects would be cleared by the FIPB through the approval route. This recommendation was accepted by the Prime Minister but the rumblings did not abate, the Maira Committee recommendations were put on the back burner, and an inter-ministerial group involving the Department of Economic Affairs (DEA), Department of Industrial Policy & Promotion (DIPP), External Affairs and Health Ministries was set up. Sometime in 2011, based on the group’s recommendations, FDI in brownfield pharma was placed on the approval route.
In the meanwhile, the health ministry also released the draft National Pricing Policy, 2011, subjecting 348 essential medicines to price regulation. This has expectedly ignited a debate on classifications and prices and is yet to attain finality. The pharma sector is one such where the products are seldom purchased by choice, therefore market forces do not impact prices except for generic drugs. There is no doubt that an M R P on these 348 drugs will cause a dent in the anticipated profits. In the interim, several FDI proposals languishing in the pipeline but were cleared. Brownfield investments are not being evaluated by the CCI, nor have the merger control thresholds been realigned for this purpose. The ‘concerns’ appear to have disintegrated into a power struggle.
Queries have been raised about the CCI’s capabilities as a generic regulator, and FDI issues, specifically when it concerns the pharma sector and health issues. Specious arguments are being advanced as to why FIPB alone should be involved – CCI’s rulings are statutorily appealable and therefore potentially will protract the process. Media reports suggest that DIPP is expected to show its hand in the course of the week, in providing for all brownfield acquisitions to be on approval route and capping FDI in brownfield pharma at 49 per cent.
There could be yet another crisis in the sector, with the Novartis appeal being taken up for hearing in the Supreme Court next week. Novartis, the foreign parent and Novartis India had filed for patent registration of the cancer drug ‘Glivec’ which had been patented in 35 jurisdictions. The Patent Controller as well as the Appellate Board rejected the applications as being contrary to amended Section 3(d) of the Patent Act and the Explanation in not permitting patenting of derivatives. The Appellate Board’s ruling was challenged by both Novartis companies in a writ petition before the Madras High Court. The opposition’s submissions, which included Indian pharma companies was that this constituted a case of over-greening, and the patenting if permitted would lead to a massive price rise which was not warranted. Novartis challenged both findings and also alleged the amended Section 3(d) was contrary to TRIPS as well as Article 14 of the Constitution. The Court validated the Appellate Board’s ruling in declining to strike down Section 3(d) in interpreting the implications of “efficacy” in the explanation which would require a demonstrable increase in the therapeutic efficacy.
Whatever is the outcome of the appeal, there will still be aggrieved parties. But for the time, there is a peace offering with FIPB clearing eight pending FDI proposals in which the proposed new parameters were not considered. Its possible that the Maria Committee recommendations will be revived.
Kumkum Sen is a partner at Bharucha & Partners, New Delhi office, and can be reached at: kumkum.sen@bharucha.in
