Vol. XL No. 34 August 21, 2016

Modi Govt, FDI Policy & Pharmaceuticals

Dinesh Abrol

The central government’s decision to allow up to 74 percent foreign direct investment (FDI) as brownfield investment in the domestic pharmaceutical companies for their acquisition by the foreign firms through the automatic route has serious implications for the development of pharmaceutical industry and public health in India. With this change in FDI policy, the Modi government has opened up for powerful multinationals and investors the easy route of acquisition of well-established domestic pharmaceutical companies.

What is at stake ?
Multinationals and foreign investors have been campaigning for the brownfield FDI option to be put on automatic approval route. In the case of pharmaceutical industry this has been an important demand for implementation by the Indian government.  The target of the multinationals will be large and medium scale family owned or individual controlled pharmaceutical companies. It takes time and effort to set up a new manufacturing company in pharmaceuticals. The better option for a foreign company is to acquire an established business. Although the current government policy already allows 100 percent FDI in Greenfield projects through automatic approval route, but the country has failed to attract much FDI inflows under this more challenging route.
The brownfield FDI allows the multinationals and foreign investors to capture the market and dominate the sector at a lesser cost with good returns through this route. The Indian generics have already a place in the global market. Foreign firms can themselves serve the growing demand for Indian generics in their own home markets using these acquisitions. Foreign firms are also keen to take over the domestic companies to move into the domestic market and to utilise the production base which the nation nurtured to take care of the domestic public health needs.

What does past experience say ?
While acquisition of the generics business constitutes a favourable corporate choice for the foreign firms, but big pharmas are also known for the neglect of the needs of the poor of the developing world. Foreign firms did not take interest in serving the goals of affordable quality medicine when they dominated the sector in India during the fifties, sixties and seventies. Almost until the late seventies this was the case. India had to bring in public sector, introduce sectoral reservation to incentivise the non-big business in private sector and change the Indian patent act to prevent patent based monopolies from emerging in the market for pharmaceuticals.
Post-liberalisation experience also shows that domestic firms in the private sector were more responsive to the incentives and discipline of the Indian government when the policy makers delayed external liberalisation and continued with the protection of domestic firms. Foreign pharma companies wanted greater control during the decade of nineties. Thanks to the successful political opposition, foreign pharma companies were not able to get their demand met from the Indian government. Pfizer wanted to function via the establishment of fully controlled subsidiary. The FDI policy in place did not allow this choice. Consequently it was possible to align far better the economic considerations of domestic firms with the goals of public health and industrial development of the country.

Policy will kill domestic companies ?
Foreign firms are interested to kill the problem of potential competition from the Indian domestic firms from the roots. Their profitability has been falling due to the growing R&D productivity crisis emerging from their faulty business model and strong intellectual property driven R&D organisation. Their generic business takeovers are not resulting in the infusion of additional necessary capital into the acquired companies. The foreign owners are only leveraging the built up reserves of the Indian companies. The inflows on account of acquisition often go into the personal accounts of Indian promoters whose re-entry is prohibited by the takeover agreements.
When the acquired companies had foreign private equity (PE) investors already among the major shareholders, the desire to additional stable foreign inflows was not met as part of the takeover proceeds (on account of buyout of foreign PE investors) flew out. This was evident in the case of acquisition of Paras Pharma and Matrix Labs. In the normal course, it is logical to suggest that, had the companies not been taken over, the Indian companies would have deployed the resources for furthering the operations of the companies. The changes made in FDI policy do not provide a corrective for the acquired companies to convert these reserves into production and innovation related investments.  
After 2002, the National Pharmaceutical Policy, which the previous NDA government formulated, changed the conditions for investment of domestic pharmaceutical industry. Domestic pharmaceutical companies were encouraged to invest in the establishment of foreign facilities. The enabling policy framework of National Pharmaceutical Policy of 2002 lacked in policy instruments that would make them strategically competitive through the development of their potential for innovation making for domestic public health priorities. In fact there is evidence that the barriers to entry were allowed to grow. Consequently there has been rising concentration and control of the MNCs in many important therapeutic segments relating to non-communicable diseases. High and medium level of market concentration is already the case in close to fifty percent of the domestic market. Consequences of growing market concentration is showing up in either import dependence or availability and affordability of medicines, and change in the control of generic business (including exports).
Policymakers need to address such anti-competitive conduct, it can be done by adding conditions with regard to these practices on the investor through the Foreign Investment Promotion Board (FIPB) at the time of the approval. Attempt to impose the non-compete agreements by Mylan on Agila Specialities and Onco Therapies Ltd of Strides Acrolab Ltd will illustrate the danger. Although the Competition Commission of India managed to dilute in part the restrictions that aimed at killing the competition from Indian promoters, but one can imagine that when the foreign acquirer has the power what all it can imply for pricing and supply of critical medicines in India.

The real challenge for FDI policy
The FDI policy does not introduce a clear and transparent conditionality to get the brownfield investors to undertake “Greenfield foreign investment” of a matching amount for the purpose of expansion of activities of “production and innovation” to be undertaken from the basic stage in concerned company. The latest changes in FDI policy do not even take into account the possible adverse impact of changing market structure and strategic control on either the prospects of local production and innovation or the access to essential medicines for the Indian people. The policy of 74 percent share of FDI to the foreign investor and the remaining with locals does not attend to the issue of how to ensure effective participation of the local investors in the company operations.
The FDI policy does not even ensure the presence of a local promoter. It does not specify checking of the Articles of Association, Shareholder Agreement, Collaboration/technology licensing agreements for the qualifications of local partners to be provided for before granting approval to a foreign invested joint venture. Preferably the local partner should be an existing player in the industry holding relevant licenses, skilled personnel and having a minimum paid up capital to justify its effective stake in the company and the ability to carry on in case the foreign investor wishes to quit/not to cooperate at any point of time in the future.
The FDI policy should have allowed full control to foreign investors in only those cases where the domestic facilities are dedicated to one hundred percent export. The FDI policy does not provide for the imposition of additional specific obligations on the investor seeking remedies against anti-competitive behaviour. For example, the foreign investor can be made to divest the acquired business if it is observed that the investor is contributing to import dependence and is not willing to take steps to manufacture the drug locally.

Failure to provide for impact evaluation
The FDI policy needed to specify that the foreign investor can be made to part with the control of intellectual property if the market concentration and import dependence is found to be growing on account of the business acquired from the domestic market. The FDI policy does not even stipulate the obligation of the investees to report on the activities to be undertaken within the stipulated period. The FDI policy needs to introduce the review clause which will allow the government to throw out any conditions inimical to the autonomous development and the anomalies in the socially responsible functioning of the Indian entity. Violations can be dealt with thereon under FEMA appropriately.
There is an urgent need to revisit the changes announced. The changes must be based on the principles of national self-reliance and public interest. Changes should be non-arbitrary, transparent and measurable. Finally, where the current market reflects a monopoly/oligopoly scenario and where very few players exist, brownfield investment should not be allowed to take over existing businesses. This list would include for example vaccines, injectable(s), active pharmaceutical ingredient (APIs), rifampicin, erythromycin, ARVs, oncology market, biosimilars, etc.