Drug Regulation Others Patent

Government relaxes FDI norms in Pharma


The government has recently allowed up to 74% Foreign Direct Investment (“FDI”) in existing pharmaceutical companies (brownfield investment) through the automatic route.  100% FDI is already permitted under the existing policy for brownfield investments after obtaining approval of the Foreign Investment Promotion Board (“FIPB”). The press release is available here.

money falling in the sky and green grass background

 From a plain reading these changes should lead to an increase in deals in the pharma sector.  The only difference between the recent change and the existing policy is a reduction in timelines for investment. A foreign company can now hold a majority stake in an Indian pharma company without waiting for government approval.

The move has been welcomed by foreign investors and since sentiment is running high we will hopefully see a flurry of infusion of capital in the market not just from private equity companies but also from western pharma. More infusion of capital should hopefully result in more funds being made available for research and development and consequently an increase in medicines in the market.

As far as price of medicines is concerned, I doubt the recent move will result in access to more affordable medicines since the infusion of capital will largely be profit driven.

 Ghosts of the past

 Earlier 100% FDI was allowed in pharma without a distinction between greenfield (investment by establishing a new company) and brownfield investments.  However a number of acquisitions of Indian pharma companies at the time resulted in fears that large-scale acquisition could possibly lead to an increase in drug prices and a downfall for the Indian generic industry. As a result in 2011 restrictions were place on brownfield investment, allowing investment only through prior approval of the FIPB and the Competition Commission.

Concerns had also been expressed that once foreign companies were allowed, they would grab market share and consequently would be able to exercise greater control which they would use to influence the government to amend the IP regime and in turn harm the thriving generic industry.

The experience of the last few years has proved that none of these concerns has come to fruition at the scale they were expected to. As a result we have the current reforms.

Impact on the IP regime

The government has an uphill task ahead to maintain a balance between a foreign investor friendly regime and protecting its generic friendly IP laws. Lowering of the Section 3(d) threshold, refraining from exercising compulsory licensing provisions and lowering drug price controls will be big ticket items on the foreign companies lobbying list.  Already earlier this year reports emerged of the Indian government’s alleged under table assurance to US industry groups that it will not invoke compulsory licenses any more (read our report here).

 It will also be interesting to see the impact on FDI of the government’s recently announced plans to amend the Drugs and Cosmetics Act, 1940, with the aim of improving ease of doing business for industries.

 Takeovers in the offing?

 Fears of large scale takeovers of Indian generic companies by foreign companies will probably come to naught. The perception  seems to be that since big pharma has consolidated its position they are not looking for fresh investment at the moment and are instead setting their sights overseas for investments.

While stocks of big pharma such as Sun Pharma, Dr. Reddy’s and Lupin remained largely indifferent to the government’s recent move, industry insiders expect greater infusion of capital in small and mid-size companies in the coming months.

Industry view

As reported by Hindu Business Line here, Indian Pharmaceutical Alliance’s DG Shah feels that the real impact of these changes will be seen over the next three years, In particular he says, It will show up whether investments come into small drug companies making generic medicines or into those making speciality products like injectibles, vaccines, or biotech products.

Hitesh Sharma, EY’s Partner and National Head (life sciences) in the same report mentions that the latest development is unlikely to be a “game changer” as, the FDI breather in isolation would not see foreign drug makers line-up to buy operations in India, until greater stability comes into the local environment in terms of clinical trial norms, intellectual property protection and medicine price control.

Image from here

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