The move to limit FDI in drug companies is a direct response to a series of recent developments in which Indian drug companies have been taken over by Multinational ones. The Indian promoter groups have been immensely benefitted and they sold off their stakes to foreign buyers at huge premiums running into billions of dollars. Civil Society groups and other Indian drug companies have raised a big caution about this development saying that such takeovers can dilute the government’s policy of maintaining affordable drug prices and also meeting the challenge of epidemics if one breaks out in future. Spokesman of foreign drug companies operating in India have rubbished these fears observing that the government has enough power in its reserve to intervene in case of medical emergencies or to hold drug prices in general.

But then why such takeovers are at all happening and what is happening behind the façade of the public debate? Foreign takeover of Indian drug companies has been a natural culmination of several factors and driven by inherent economics of the sector. The Indian drugs Industry has grown over the last two decades fairly rapidly and has reached a stage where the firms would become stagnant or have grown only incrementally. These companies have grown on the basis of reverse engineering and by the momentum of volume production of off-patents or generic drugs. A quantum leap in their operations would call for huge investments, particularly in research and development activities which were beyond the financial means of these companies.

Such investments are high risk because of chances of failure and would often have to be sustained for years. Besides, the research and development, infrastructure, technology and highly qualified manpower which are preconditions for drug discovery were not at their disposal. In a situation of this kind, Indian drug firms, already having large footprints in the generic drugs market, were very attractive for MNC majors. Hence the massive premium, the foreign majors paid for Indian drug firms were calculated bets for future profits.

The global generic drugs market is likely to expand phenomenally as a series of patents are going to lapse in near future and it should be possible to produce generic version of these drugs which are widely used. The Indian drug firms in the generic sector are already established in a big way because of their very strong competitiveness, large production capacities and internationally recognised quality standards. So this is a case of buyers fitting perfectly with the sellers. The MNC buyers of Indian generic firms would be able to capture the emerging global generic drugs market through their Indian acquisitions. They should be able to export these generics at good profits. Hence the premiums they paid were an investment in the future.

For the Indian promoters, who are basically entrepreneurs, the overseas bids were useful exit options. Given the prices they were getting for their firms, these entrepreneurs could enter into fresh and related fields. Thus Ranbaxy which sold its operations to Daiichi of Japan, the sale proceeds made them individual billionaires as well as go in a big way into hospital and even financial services. The Dabur group is actively pursuing its ambitions in fast moving consumer goods industry. The Indian entrepreneurs in every case have made huge gains and by no means sold their firms cheap.

By this logic, imposing a lower FDI sealing of 49 per cent would surely depress the market capitalisation of many such entrepreneurial Indian drug firms. Many of those waiting in the wings to sell off their firms have been disappointed. But then, Indian drug industry is split in the middle. In general, the Indian drug industry represented by Indian Pharmaceutical Alliance is now crying foul because large scale entry of foreign majors into generic drugs production can eventually unseat them from their niches. Their fear is that the foreign majors after their acquisition will not sit idle and as Indian companies, they will scale up their operations and provide in the domestic market. Their point of view is that once the foreign majors settle themselves in this country, they will be in a position to dictate price and availability. At that point, despite government orders and powers, it will be difficult to provide drugs at affordable prices within the country.

The foreign sector have termed this as unfounded fear and called the entire move to restrict FDI in pharmaceuticals as retrograde. The organisation of pharmaceutical producers of India (OPPI) are a club of multinational drug companies operating in India, is meeting policymakers and pointed out that such a move would go against the very grains of reform and liberalisation pursued since 1991. Foreign takeover of Indian drug firms could usher in major influx of investment into this country. It can also create a high technology knowledge economy in the country which can provide the base for India emerging as a hub for new drug development. This should result in creation of Intellectual property rights and allow the country to earn immense respectability as well as revenue.

The drug industry is thus evenly divided on the FDI issue. The big Indian majors are looking for killing while the permanent medium players see a threat from the foreign majors. The committee is thus faced with the tough task of protecting the interests of the Indian consumers while ensuring the growth of the drug industry in the country. (IPA Service)