Should FDI in brownfield pharma be curbed?

Nov 13 2013, 03:10 IST
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SummaryThe Planning Commission has opposed a proposal by the Department Of Industrial Policy & Promotion (DIPP) to limit foreign direct investment

The Planning Commission has opposed a proposal by the Department Of Industrial Policy & Promotion (DIPP) to limit foreign direct investment (FDI) in companies making critical drugs to 49% for brownfield investment and 100% for greenfield investments, saying that it will reverse the general direction in which the overall FDI policy should move. Currently, 100% FDI is allowed after securing the Foreign Investment Promotion Board (FIPB) approval. A brownfield investment involves acquiring existing plants and facilities and a greenfield investment is when an MNC establishes its own production by setting up its plant.

Given the challenges of managing labour and the high initial cost of setting up greenfield, it is very unlikely that MNCs would come only in greenfield investments. All the past M&As have happened in the brownfield investments. MNCs also prefer to have a majority of stake (100%) and, therefore, the policy suggested by DIPP is restricting FDI investments and excluding non-compete clause is a non-starter and we may see a declining trade in M&As in India.

Some of the myths/arguments put forth for restricting FDI investments in the pharmaceutical sector are mainly on emotional grounds and are not rational or logical.

There is a general belief that MNCs will reduce the generics in market as they would divert the production to other attractive markets and hence the availability of drugs in the local market will decline. The data, on the contrary, shows that six major Indian companies acquired by MNCs—Ranbaxy, Shantha, Paras, Orchid, Dabur and Piramal—introduced 341 new drugs/formulations since May 2009 in the domestic market.

The latest acquisition of Agila by Mylan would also not reduce the availability as more than 90% of the plant production in any case has been for exports. Assuming that in future the availability reduces, the Indian pharma industry will not have strong entry barriers and the Indian generic companies would only be too happy to occupy the space in a very short period.

The second myth is that the prices of medicine are likely to go up. Once again the data does not support this argument. DoP has conducted a price analysis of the drugs for the period 2009-11 and for the six major Indian companies acquired by MNCs for almost 70.8% of the packs, there has been no change in prices and only 6.8% packs had price increase up to 5%, and 2.9% had price increase more than 15%. As compared to that for

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