India Mulls Pharmaceutical Sector Investment Cap

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Editor’s Note: As of November 26, 2013 the Union Cabinet has decided to defer the proposed FDI cap on the pharmaceutical sector. Other proposed restrictions surrounding mandatory investment in R&D were also deferred.

Nov. 19 – After a controversial acquisition earlier this year, India is considering strict new limits on foreign investment in the pharmaceutical industry.

According to a senior government official who spoke with the Wall Street Journal under condition of anonymity, the proposal currently under review would prohibit foreign companies from owning more than a 49 percent stake in Indian manufacturers of “rare and critical” medicines.

Under the existing law, foreign investors are permitted to buy 100 percent of local drug companies.

This February, U.S.-based Mylan Inc.’s acquisition of Agila Specialties Pvt. Ltd. – a local manufacturer of antibiotics and chemotherapy drugs – provoked outrage among Indian politicians who viewed the acquisition as a threat to domestic drug supply. Because India controls some drug prices domestically, many argued the acquisition could result in critical Indian-made pharmaceuticals being exported to more profitable markets – thereby endangering local access to inexpensive, lifesaving medicines.

In response to criticism surrounding his approval of the acquisition, Indian Prime Minister Singh ordered his cabinet to review India’s policy towards pharmaceutical sector FDI and prepare a proposal to restrict foreign control of domestic drug production.

Under the proposed restrictions, the Indian Health Ministry would have the power to decide which medicines qualify as ‘rare and critical.’ Companies would also be required to devote 25 percent of their total investment within the first three years to building new research centers or manufacturing plants, and would be prohibited from divesting from acquired factories or R&D capabilities.

Rajesh Laddha, CFO of Indian drug maker Piramal Group, voiced deep concern over the proposal, noting that it would restrict foreign investment as most Indian drug makers have products that could be classified as ‘rare and critical.’ According to other critics, the proposal also has the potential to complicate the deal-making environment for pharmaceutical companies and their investment bankers.

A government study used to justify the proposed restrictions found that between April 2012 and June 2013 nearly US$2 billion was invested by foreign companies in India’s pharmaceutical sector, but only US$90 million was used to construct new manufacturing facilities. The study also claimed that if India’s top three drug makers were to be acquired by foreign companies, foreign control of India’s drug market would increase from 25 to 41 percent.

The cabinet is expected to make a decision on the proposal by mid-November.

GlaxoSmithKline Praise

Details about the proposed restrictions come amidst praise of India’s pharma policy by GlaxoSmithKline (GSK) CEO Andrew Witty. During his recent visit to India, Witty told The Economic Times that he believed the government’s stance on issues such as pricing and patents were justified.

“I think it is wholly reasonable for a country that is having tremendous growth with challenges to think about pricing. I am not one of those CEOS who is gonna stand here and say that you have to have the same approach as you have in another country. India is a very unusual country. It starts from a different place than a Britain or a France or a USA, therefore we have to think about what is the right way for India to balance its needs,” he stated.

Witty’s comments come as somewhat surprising after GSK was badly affected by recent government-mandated price restrictions.

Calls to Review Defense Investment Cap

News of the proposed investment cap on pharmaceuticals also comes alongside calls for the country to review its current 26 percent FDI cap in defense production.

As the world’s single largest importer of arms, senior air force officials believe India’s 26 percent FDI cap has created an unnecessary dependence on overseas suppliers and threatened its ability to keep up with Chinese and Pakistani efforts to modernize their militaries. Most recently, a US$15 billion deal to buy 126 Rafale fighter jets from France’s Dassault Rafale Aviation has been stalled by protest from a local manufacturer – Hindustan Aeronautics Ltd (HAL) – who has been developing a light combat aircraft since the early 1980s with no success.

Allegedly, a cabinet panel is currently considering a proposal for FDI in defense above 26 percent – but only if state-of-the-art technology is involved.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

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