Opinion A different medicine needed

Roughly 11 years ago,India liberalised the FDI norms for the drug industry. It allowed the automatic approval of FDI,up to 100 per cent,in Indian drug companies. For about five years,nothing much happened. Then,Indian businessmen began to sell out to foreigners in big-ticket deals and the policy,while not actively encouraging them to do so,definitely did not stand in their way. These sales rattled some parliamentarians,homegrown industry bodies and civil society groups. They voiced fears that this would lead to a shortage of affordable,essential medicines for the Indian consumer as the buyers restructured the businesses and whittled down the local industry.

So in 2012,the government bowed to their demands and changed the policy slightly. An acquirer who wished to buy over 49 per cent in a company (that is,a controlling stake) now needed the approval of the Foreign Investment Promotion Board,which,among other things,required the buyer to maintain a level of investment in research and development and the production of essential medicines for five years. This by itself seemed fairly arbitrary. Why not four or six years?

However,this did not satisfy the worrywarts,including India’s commerce ministry. The latter recently proposed the creation of a new category of “rare/ critical” drugs,such as vaccines,where FDI beyond 49 per cent would be forbidden. It also proposed onerous conditions on any buyer,such as investing a minimum of 25 per cent of the deal value in enhancing manufacturing/ research capabilities. Additionally,it wanted the removal of non-compete clauses between the buyer and seller. Buyers usually insist on this clause to prevent sellers from using their knowhow of the acquired business to start a rival firm. It is this proposed iteration of the FDI policy that the Union cabinet has rejected as hostile to foreign investors,though it has agreed — in its wisdom — to do away with the non-compete clause.

The government would do well to tinker no more. For one,there really is no connection between essential medicines and FDI. Companies — whether Indian or foreign — make drugs that turn a profit and get out of making those that don’t. It is worthwhile to note that when India recently cut prices of a host of essential medicines,MNCs were hit badly,as were Indian companies. Some MNCs even more so. It is well known that under the old price-control regime MNCs in general had a larger percentage of their turnover coming from price-controlled drugs than homegrown companies did. What matters is not the companies’ provenance but their strategy and focus areas. Some companies make money from antibiotics,others from Botox. And it is unlikely that a company that is bought at top dollar rates,say for its malaria franchise,will turn anytime soon into a cosmeceuticals manufacturer because its ownership changed hands.

True,shortages do occur,for a variety of reasons such as uneconomical pricing or manufacturing issues. They have occurred in India and abroad. But the way to prevent them or mitigate their impact is by making companies inform the government in advance of imminent shortages,which could be caused by a variety of reasons. This helps to prepare alternative arrangements and is what the US has resorted to.

Two,there is the bigger question of free markets. India already has a Competition Commission to prevent monopolies. Why then should the government micromanage deal-making in specific industries?

The most important reason to resist the temptation to toy with this policy is that the bigger the spotlight on FDI,the smaller the focus on the issues that really impact the availability of essential medicines. First and foremost is the attractiveness of the market. Assume for a minute that the private market for an essential medicine is unattractive. The answer to this is to create transparent and predictable public procurement. If Indian businesses find the pharma business unattractive,the answer lies in encouraging,through fiscal and non-fiscal incentives,new firms to emerge.

India is an attractive market. Foreign companies will pay generously for a slice of the pie. But using their eagerness to make them agree to more than what is expected of Indian companies is unfair. What’s worse,this could create a situation where companies agree on paper but bribe their way out of actual implementation. I cannot imagine an outcome worse than that.

The writer is a Mumbai-based commentator on pharmaceuticals and healthcare and founder,Apothecurry.

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