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BW Businessworld

Genie In The Pill

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On 11 October, a high-level meeting chaired by Prime Minister Manmohan Singh decided all mergers and acquisitions (M&A) in the pharmaceutical sector should be vetted by the Competition Commission of India (CCI), not by the Foreign Investment Promotion Board (FIPB). But to some industry folk, the idea seems impractical. "What criteria can you apply to decide ‘market dominance' to veto a deal, when 80 per cent of the Indian pharma market is accounted for by at least 50 firms?" asks D.G. Shah, secretary general of the Indian Pharmaceutical Alliance.
The subtext of the recommendation appears to be the potential impact of MNCs being able to control market share through M&A, and raising drug prices unaffordably high or stopping the manufacture of no-profit medicines. To that end, Indian drug makers need to be protected from predatory MNCs. The question is if the CCI is the appropriate agency to do it.

The government's decision was based on the recommendation of an eight-member, high-level panel headed by Planning Commission member Arun Maira to examine FDI in Indian pharma firms. The committee recommended continuing 100 per cent FDI in greenfield projects through FIPB approval. The CCI has six months to formulate a framework for M&As. Industry insiders say key ministries such as finance, commerce and the department of pharmaceuticals were against bringing in the CCI. But Planning Commission deputy chairman Montek Singh Ahluwalia's support proved crucial. In developed economies, anti-trust bodies such as the Federal Trade Commission (FTC) in the US and European Competition Commission have vast powers and infrastructure to regulate such deals. The CCI is quasi-judicial, but it's decisions can be challenged in courts.

Others complain the Maira panel did not look into how MNCs have dominated India's drug market. Through acquisitions, they have increased presence from 10.5 per cent in 2004-05 to 25 per cent by 2009-10. "This will go up to the pre-1970 scenario of 35 per cent by 2015," says Ranjit Kapadia of Centrum Broking. The new framework may reduce MNC desire to fast track entry into generics through acquisitions, instead preferring greenfield investments in special economic zones to avail tax breaks.

Historically, though, MNCs have ignored India as a major destination for investments, even after India moved to product patent regime in 2005. CMIE data for 1995-2010 show domestic firms have invested more on R&D as a ratio of domestic sales than MNCs. Since 2005, MNC investments were higher than earlier, but at 4.1 per cent in 2010, it is still lower than the 4.5 per cent ratio of domestic firms. MNCs are also creating fewer productive assets. While domestic firms invested Rs 6,712 crore in 2010, MNCs only put in Rs 496 crore. Price hikes are another concern, but global company chiefs deny that. "Companies in various geographies can price products according to their market dynamics," says Christopher Viehbacher, CEO of Sanofi and president of Pharmaceutical Research and Manufacturers of America.

(This story was published in Businessworld Issue Dated 24-10-2011)