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TWN Info Service on Intellectual Property Issues (Aug13/03)
22 August 2013
Third World Network

Ban recommended on MNC acquisition of Indian pharmaceutical companies

New Delhi, 22 August (K M GopaKumar) – India’s Parliamentary Standing Committee on Commerce has recommended a blanket ban on the acquisition of Indian pharmaceutical companies by pharmaceutical multinational corporations (MNCs). 

This recommendation is contained in the Committee’s 110th Report on FDI (foreign direct investment) in Pharmaceutical Sector (http://164.100.47.5/newcommittee/reports/EnglishCommittees/Committee%20on%20Commerce/110.pdf).  The report was tabled in both houses of the parliament on 13 August 2013.

The investigation of the Committee was prompted by a series of MNC acquisition of Indian pharmaceutical companies since 2006. During the last seven years many large and medium sized Indian pharmaceutical companies were acquired by MNCs.  Some of the high profile acquisitions include the acquisition of Ranbaxy, Shantha biotech and Nicholas Piramal by Daiichi Sankyo, Sanofi-Aventis and Abbott respectively.

These acquisitions have raised concerns with regard to the future availability of affordable medicines as well as the effective use of the WTO TRIPS flexibilities including pre-grant opposition and compulsory license.  The Ministry of Health and Family Welfare and Ministry of Commerce and Industry have publicly aired their concerns.  Civil society organizations also demanded concrete response from the government to check MNC acquisition of Indian pharmaceutical companies, which they say compromises access to affordable medicines.

In 2001 India allowed 100% foreign equity in pharmaceutical sector except in sectors involving the use of recombinant DNA technology and specific cell/tissue targeted formulations, without any difference between greenfield FDI and brownfield FDI. This loophole has been used by MNCs to acquire many domestic pharmaceutical companies. To address this concern the Government of India changed the FDI policy in the pharmaceutical sector in 2011. The new policy allows 100% FDI through an automatic route for greenfield investments and stipulates the government’s prior permission for brownfield investment. However, 100% brownfield investment is allowed in the pharmaceutical sector.

[Greenfield FDI refers to the investment to set up a new business. Brownfield refers to the acquisition of an existing business.]

The FDI report was tabled in parliament two days before the meeting of the Parliamentary Standing Committee on Commerce chaired by the Prime Minister to decide on the norms for FDI in the pharmaceutical sector.

The Committee is unanimous in its opinion on brownfield FDI. According to the Committee “the Government must impose a blanket ban on any FDI in brownfield pharma projects. It strongly recommends that the department take all measures to stop any further takeover/acquisition of domestic pharma units.”

The Committee stated that, “FDI in brownfield pharmaceutical sector has encroached upon our generics base and adversely affected our pharma industry”.

The Committee was of the opinion that that the current policy framework for brownfield FDI in the pharmaceutical sector, which allows brownfield FDI subject to the prior approval of the foreign Investment Promotion Board (FIPB), is “a feeble attempt which would not be able to measure up to the challenges posed by this route”.

The Committee stressed the importance of access to affordable medicine and stated that “we should not lose sight of the fact that access and affordability of medicines is integral to the fundamental right to life enshrined in our constitution. Any policy that contradicts the basic fundamental rights of our citizens must be discarded”.

The Report of the Committee assumes importance in the light of efforts by the Ministry of Finance to change the brownfield FDI policy in its effort to attract more FDI to finance the country’s current account deficit.

The Department of Industrial Policy and Promotion (DIPP) and the Department of Health and Family Welfare oppose this move.

In order to sort out the difference a meeting chaired by the Prime Minister of India was convened on 16 August 2013.  According to The Hindu news report, this meeting failed to come out with concrete policy recommendations in this regard. However, the meeting asked DIPP to start inter-ministerial consultations on the issue. DIPP is also to prepare a cabinet note on the proposed changes. It was reported that the Minister of Commerce conveyed to the Prime Minister: “In case the present FDI policy continues, then our domestic capability will gradually wither away. In that eventuality, India will be compelled to be dependent for life-saving medicines either on domestic facilities of MNCs or on imports” (http://www.thehindu.com/business/Industry/fdi-policy-for-pharma-set-for-overhaul-to-protect-local-units/article5029361.ece)

The Committee made its recommendations after examining the risk of MNC acquisition on the availability of affordable medicines, the role of brownfield FDI in research and development, technology transfer and employment.

Concerns on acquisition

The Committee’s recommendations acknowledges concerns expressed by certain departments of government, think tanks and civil society organizations on the adverse implications of MNC acquisitions on future availability of affordable medicines in India and in other developing countries.

Concerns were also expressed that MNC acquisition may neutralize the use of TRIPS flexibilities by India if the big Indian pharmaceutical companies with technological capabilities come under MNC control. The Committee recommended that, “the government optimally use the flexibilities and safeguards under the TRIPS and the Indian Patents Act and ensure that none of the flexibilities and safeguards entailed in our Act is watered down in any case for any country”. 

The Committee noted that the market share of foreign companies among the top ten companies have increased from 10.5% in 2004-05 to nearly 19% in 2010-11. The Department of Industrial Policy and Promotion informed the Committee that 52% of FDI inflow in the pharmaceutical sector from April 2000 to February 2012 was used for acquiring stakes in domestic companies (brownfield).

According to the Committee “the real concern is about the technological and financial capability of Indian companies to bring new generic medicines including the generic version of patented medicines. All acquisitions, with an exception of Mylan, have been carried out by MNCs having business interest in originator drugs, and they have been using patents as a main strategy to curb competition”.

Further, the Committee also shared the concerns expressed during its hearings that MNC acquisition of Indian companies would prevent the introduction of generic versions of patented medicines by utilizing the flexibilities contained in the Indian Patents Act such as compulsory license or pre-grant opposition. The Committee noted that “Initial evidence is available in the case of Ranbaxy where Daiichi-Sankyo, immediately after acquisition of Ranbaxy, withdrew all its patent challenges on Pfizer’s blockbuster medicine Lipitor filed in more than eight countries”.

Further the Committee noted that “the shift of ownership of generic companies to the hands of MNCs … result in the change of the business model and the marketing strategy. In the case of acquisition, the acquired entity’s business model is synchronised with the business model of the parent company whereby the acquired entity is not allowed to use flexibilities such as patent opposition or compulsory license to introduce new generic medicines”.

The Committee while noting the growth of the Indian generic industry and its potential to challenge MNCs, stated that the acquisition as “the old hackneyed route for monopolists to buy out competition in order to prevent the emergence of low price market is in full play … The Committee is unhappy over these developments since the real danger of the 100 per cent FDI and the selling/takeover of Indian companies is the decimation of competition as well as capabilities”.

According to the Committee, the increasing dominance of the foreign companies will hit domestic companies in two ways. “Firstly, the market dominance (time secured in the doctors’ chambers for detailing their products) will lead to more prescriptions for the foreign companies, driving away the domestic players from the Pharmaceutical Sector. The domestic companies took three decades to secure a position of eminence in the doctors’ chambers. This will be lost soon, if the foreign companies were to have unbridled freedom of acquisition.

“Secondly, the originator companies having entered the generic space and obtained product registrations held by the domestic companies in third countries will use their dominant position to throttle other domestic companies in the global market, impacting the export performance of domestic companies.”

Further, “the Committee shares the concern that serial acquisitions of the Indian generic companies by the MNCs will have significant impact on the competition, price level and availability. It could incapacitate the domestic industry and slow down new investments and employment generation by the domestic companies. All these in turn could adversely impact the availability and access to medicines at affordable prices. A few more takeovers of this kind may destroy the benefits arising out of India’s generics revolution”. 

According to the Committee such acquisition is a “strategy for the ‘innovators’ to ‘silence’ the generics frontrunners, thereby, retaining their innovation foundations while acquiring huge generic potential”.

The Committee rejected the view of the Department of Economic Affairs that foreign companies prefer the acquisition route rather than greenfield FDI due to costs involved in approvals, land acquisition, labour, environmental clearance etc.  The Committee termed this view as simplistic and stated that if the domestic companies could  “start from scratch and become lucrative then there is no reason as to why a foreign pharma company cannot come and similarly do business”.

The Committee also took note of the huge amounts paid for the acquisition of Indian pharmaceutical companies. Hence it wondered, “as to how MNCs are going to recover such huge costs. One possible way of doing so is to either concentrate more on manufacture and marketing of costly branded products or increase the prices of generic brands or it may resort to both the alternatives. In doing so, the pharma MNCs are likely to use the marketing and distribution network of Indian generic companies to push their costly patented/branded medicines and displace popular generic brands of the acquired company from the market”.

Research and Development

The Committee found dismal performance of FDI in pharmaceutical R&D. It found that out of the total FDI in the pharmaceutical sector, the share of FDI in R&D is below 3 per cent. Therefore the Committee concluded: “It can be deduced from the figures that the FDI inflow into Research & Development of the Pharma Industry has been totally unsatisfactory. The Committee expresses its dissatisfaction that despite the profusion of FDI into the pharma industry in general, R & D in pharma has not got any significant benefit in particular. This trend is indicative of the fact that FDI is primarily being used to strengthen the business network of pharma MNCs and in keeping the domestic pharma companies in a subservient position without adding anything positive to the Indian health scenario. It is high time the Government took concrete steps to attract and ensure substantial amount of investments into R&D sector of the pharma Industry with special thrust on tropical diseases”.

The Committee also noted that the acquisitions trend has resulted in neglecting of R&D priorities in tropical diseases and new chemical entity development capabilities. The Committee also noted that the current inflow of FDI in R&D is resulting from licensing of R&D outcomes at the pre-clinical stages to MNCs for further development. According to the Committee “the current FDI policy is heavily tilted in favour of MNCs and as a policy tool, it has not been able to help create a sustainable pharma research base or drive capacity creation in R&D for domestic pharma units in a significant manner.”

Regarding the collaboration between Indian companies and MNCs in the area of clinical trials the Committee “wonders what benefits this type of collaboration would yield to our domestic pharma companies in terms of development of our competencies in drug development.” The Committee expressed its displeasure on such collaborations and termed it as an “alliance of convenience”. According to the Committee the only benefit of such collaboration is providing Indian patients as guinea pigs for clinical research rather than developing competencies. While condemning the MNCs for pushing the unethical practices in clinical trials the Committee recommended the Government to frame guidelines for safe clinical trials and its implementation.

Technology transfer

The Committee underscored the importance of technology transfer for the success of India’s pharmaceutical industry and asked the government to take effective measures to develop strong technological capabilities in the pharmaceutical units.  It noted that even though various forms of collaboration between MNCs and domestic pharmaceutical companies resulted in improving the production capabilities of some firms through the enforcement of Good Manufacturing Practices there is no significant impact on technological capabilities of local firms.  

Regarding the contribution of FDI in enhancing technological capabilities “the Committee is convinced that FDI has failed to bring about any real change in the existing pharma R&D environment as domestic pharma companies are still to gain the competence and capacity to achieve cutting edge drug innovation by carrying a new compound through all stages of research up to marketing. After all these years of FDI in drugs and pharmaceuticals sector, India is still weak in laboratory stage drug discovery”.

The Committee stressed the need for public funding to enhance R&D capabilities and stated that attaining world-class R&D standards can happen only with state intervention and not by merely opening the sector to FDI.

Employment

The Committee remarked that it “has been given to understand that FDI has neither led to job creation or creation of gross fixed assets”. It also noted that the FDI flows merely resulted in change in ownership with no addition to manufacturing capacity. Therefore, “the Committee is of the view that FDI flow into brownfield projects has not added fresh capacity in terms of production, distribution network or asset creation to the desired level. As a result, significant strides have not been made in creating fresh jobs and transfer of technology”.

Road Ahead

In the third part of the Report the Committee made certain recommendations to address some potential challenges under the heading “Road Ahead”.  It expressed “the fears that these MNCs can change or tweak the product mix and can go from producing generics into branded or even more expensive patented medicines. Its direct impact will be on the availability of the cheapest priced generics for Indian population, which may decrease substantially. There is also the fear that a foreign company may not easily agree to compulsory licensing which will not be the case in an Indian company”.

According to the Committee “the issue was not about promoting FDI for takeover/requisitions of domestic pharma units but to promote more investments into the pharma industry so that there is greater research, adequate availability of medicines and more competition, which will ensure affordable and accessible medicines. It is important to ensure the presence of sufficient number of companies so that there is competition, which will keep a check on the prices of drugs. The decimation of the strength of local pharma companies runs contrary to the above desired position since there would be few or no Indian companies left having necessary wherewithal to manufacture generics once a drug goes off-patent or comply with a Compulsory License (CL)”.

The Committee noted the practices of delaying the entry of generics by MNCs and termed such practices as unfair trade practices.

The Committee shared the concern expressed by the Department of Health and Family Welfare that “with a sizeable presence of pharma MNCs operating in our domestic market and exporting the product from India for feeding their own domestic market, they would certainly acquire a very strong voice putting the Country under pressure on issues relating to TRIPS Agreement which may not be in its interest”.

Further, “The Committee desires that more such drugs must be identified on continuous basis and their prices be reduced suitably by utilizing the various instruments like compulsory licence, etc. and other safeguards envisaged under TRIPS and our Patent Act. The Committee is of the view that the availability of patented drug to the needy is more important than the interest of the patent holder”.

The Committee recommended that the Government of India should take up the amendment of TRIPS agreement to introduce a linkage between the duration of patent and R&D spending. Committee was “of the considered view that the Government must take up the TRIPS agreement afresh at an appropriate forum and collectively work with world governments to ensure that flexibility in periodicity of exclusive manufacturing right to a patentee company is introduced in the patent regime depending upon the amount of expenditure incurred by the patentee as well as the extent of its contribution in the R&D”.

The Committee stressed the need to revive, re-strengthen the public sector units for   manufacturing pharmaceuticals. The Committee observed that, “the absence of a robust public sector health service has impeded the universalisation of healthcare. In a situation when the private sector fails to step in and address the health needs of our country, the public sector would be a credible system to cater our growing health needs. A robust public sector would ensure self-sufficiency and shield the pharma sector from adverse effects of market dynamics and investment policies.”

 


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