Brakes May Be Put On Direct MNC Deals In India As Government Fears Threat To The Indian Drug Industry

MUMBAI - Acquisition of growing Indian firms by global pharmaceutical companies may get tough in the coming days as the government is brainstorming about how to clamp restrictions on buying controlling equity stakes in Indian entities through the automatic foreign direct investment route (FDI).

A senior industry source in touch with the ministry of commerce told PharmAsia News that the new proposal is under consideration to limit FDI in the pharmaceutical sector including a few other industry segments, to 49 percent and any investments beyond that will need to be approved by the Foreign Investment Promotion Board. The proposals may reach a final stage in a month's time.

For now, Indian drug companies can be 100 percent acquired by multinationals without any restrictions and mostly through mandatory shareholder approval and acceptance of the board of directors of companies.

"As such, complete acquisition of Indian companies will go through closer scrutiny on what impact it might have on the availability of essential drugs in India," said D. G. Shah, secretary general at the Indian Pharmaceutical Alliance - an influential lobby group of select top Indian drug companies.

However, according to reports, the Department of Industrial Policy and Promotion under the Ministry of Commerce raised concerns about the future flow of foreign investments if "across-the-board" security vetting of FDI is introduced. The National Security Council categorized pharmaceuticals as a "sensitive sector" in addition to airports, seaports, petroleum and gas pipelines.

The past two years have seen a plethora of in-bound deals between Indian and drug multinationals, including Ranbaxy's buyout by Daiichi Sankyo, Dabur Pharma's acquisition by Germany's Fresenius Kabi and Sanofi Aventis' deal with BioMerieux for a bigger stake in Indian vaccines company Shantha Biotech.

Deals in the animal healthcare space saw Pfizer acquiring Vetnex from ICICI Venture (earlier a Ranbaxy group company) and Vetoquinol of France buying Wockhardt's veterinary care business.

Shah drew attention to a September letter that his association had written to the Department of Pharmaceuticals, which said that most sell-offs were "driven either by paucity of funds to run the ongoing business or by enormous challenges faced by the domestic industry."

The letter highlighted that most Indian companies had developed significant pipelines but were in need of significant funds for research. "Dabur, for instance, a very successful company with a rich pipeline of oncology products, had not only to fund ongoing research projects but it also needed funds to develop international marketing infrastructure," it notes (PharmAsia News, April 21, 2008).

Ranbaxy, the letter added, had built research, sales and marketing capabilities but was "bogged down by litigations challenging entry of generics, which needed additional funds to fight litigations and reap benefits of its research (Also see "As Ranbaxy Founders Exit, Daiichi Sankyo Assumes Complete Control; New Management Expects To Resolve U.S. FDA Issue" - Scrip, 25 May, 2009.)." About Wockhardt, the letter said the company "relied on funds from elsewhere and had to suffer as there is no funding mechanism in the country to meet the needs of the larger companies."

Wockhardt had to undergo a major financial bailout and sold a few divisions to tide over the crisis (Also see "With Huge Debts And Divestment Plans, Wockhardt Chairman Habil Khorakiwala Exhorts Employees To Rise To The Challenge" - Scrip, 6 Apr, 2009.).

The IPA also expressed its displeasure with the government's policies by noting that this phenomenon "highlighted the need for appropriate funding mechanism to meet the challenges faced by the big and successful Indian companies and have exposed limitations of the current policy framework."

Shah indicated that tax SOPs like weighted deduction for research and meager amounts disbursed under the Market Development Assistance program were insufficient to help grow the industry in becoming globally competitive.

D.G. Shah said that if the in-bound acquisitions continue unabated, this would ultimately hit not only exports of pharmaceuticals from India but also availability of quality medicines at affordable prices in the domestic market.

Global consultants McKinsey & Company predicts pharmaceutical manufacturing outsourcing industry to grow to $100 billion by 2015, driven in large measure by margin pressures and patent expirations. India can capture 8 to 10 percent of the segment, the consultants project in a report titled "Capturing the India Advantage."

Similarly, it said, domestic market is estimated to reach $20 billion by the same time due to the infrastructure build-up and the better market penetration by drug companies.

- Vikas Dandekar ([email protected])