People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 12

March 13, 2012


No to FDI in Pharma Industry

Amitava Guha


THE recent spate of merger and acquisition of Indian pharmaceutical companies by foreign multinational companies (MNCs) has become a cause of serious concern because if this is allowed unbridled, the domination of MNCs in the Indian medicine market will take us back to the worst situation of pre-independence era. About a year ago, the Department of Industrial Promotion and Planning (DIPP), under the Ministry of Commerce and Industry, has circulated a note expressing concern that the foreign multinational companies are speedily buying up a number of large Indian pharmaceutical companies. The purpose for circulating the note was to gather suggestions from the public to arrest such takeover of Indian companies. This process of acquisition is termed as ‘brown field investment’ since the acquiring company does not invest anything for production, establishment of offices or any new activities other than using the already existing facilities of the acquired company. This issue was subsequently taken up in the high level committee.




Only 16 countries in the world have at least some arrangement of medicine production among which comprehensive infrastructural development is found in not more than half a dozen countries.  The quantum of medicines manufactured by pharmaceutical industry in India is fourth largest in the world. Near self-reliance in medicine production has been achieved due to the policy of the government in encouraging domestic industry to grow. Even in the post TRIPS (Patents) era, Indian companies are capable of producing all essential medicines in the country. Therefore, the foreign MNCs have no significant role to play in medicine production in our country.


The concerns about FDI in pharmaceutical industry have arisen due to the recent upsurge of takeovers of large Indian companies by the MNCs. Earlier, in the mid-1990s, Indian companies were buying out the MNC pharma companies functioning in India. Text Box: Companies	Market Share %
37 existing Companies	19.00
Newly taken over companies:	
Fresenius Kabi India	0.02
Piramal Healthcare	4.35
Solvey	0.66
Ranbaxy	4.53
Santha Biotech	Not significant
Total	28.46
Source: AIOCD-AWCS data
 But the reverse trend in merger and acquisition now has destabilised the balance of the domestic companies. The figures available for 2010 show gradual outscaling of Indian companies’ market share by the foreign multinationals. The speed at which reverse takeovers are happening now would establish market monopoly of the foreign multinationals in the coming period. If the following six companies namely, Cipla (5.7 per cent market share), Sun (4.3 per cent), Cadila (3.9 per cent), Mankind (3.2 per cent), Alchem (3 per cent) and Lupin (2.9 per cent) are taken over, the MNCs will capture 50 per cent of the Indian drugs market.  The other game of the MNCs is to capture the export market of the Indian companies which is the third largest producer of medicines in the world. The danger of abolition of large Indian companies is therefore not an imagination. (Source: Data compiled from AIOCD-AWACS)


With tough business environment prevailing in the developed countries, many MNCs have embarked on multiple processes to dominate the pharma sector. Many of them who had enjoyed patent monopoly are facing threat due to expiry of patents for their blockbuster drugs. For example, Pfizer is about to lose the $10 billion market of their blockbuster drug ‘Lipitor’, a cholesterol lowering medicine, as the patent on this medicine will expire by 2012. The net profit of top 15 pharma MNCs declined sharply by 20.1 per cent in 2010 with major setback for companies such as Merck, Bristol- Myers and Glaxo-Smith-Kline. The International Federation of Pharmaceutical Association, the apex body of the industry, expects that the five major European markets (Germany, France, Italy, Spain, and the UK) collectively will grow at a 1-3 per cent pace, as will Canada. The US will remain the single largest pharmaceutical market, with 3-5 per cent growth expected next year. Pharmaceutical sales in the US will reach $320- $330 billion, up from $310 billion. This expected growth, though insignificant, yet may indicate recovery. However, real and spectacular growth is found in 17 countries, including India, where growth rate would be 15-17 per cent in 2011 amounting to $170-180 billion (Source: IMS Health, December 20, 2010). It is for this reason the MNCs are now targeting to dominate this emerging market in India.




The growth of domestic market in India has by no means been spectacular. Some studies indicate that Indian pharmaceutical industry witnessed only marginal growth in sales and operating profits during 2010-11. The net sales increased by 13.1 per cent to Rs 1,03,500 crore ($22.8 billion) during 2010-11 from Rs 91,518 crore ($20.3 billion) in 2009-10. The net sales growth of almost similar set of companies was just 11.6 per cent in 2009-10 over the previous year.  Only slight growth could be registered in exports also, despite stiff competition, conditions of economic crisis and cost-cutting measures in the US. The earnings before depreciation, interest, tax and adjustments (EBDITA) of 100 listed pharmaceutical companies increased by 21.9 per cent to Rs 23,317 crore from Rs 19,133 crore in the previous year. The EBDITA margins improved to 22.5 per cent from 20.9 per cent. These companies recommended handsome dividend to shareholders and created healthy reserve position during 2010-11. This market study includes sales in both domestic and exports, of which nearly 40 per cent is domestic sales. Therefore profitability in domestic market also further attracts the MNCs.


The other way by which the MNCs are increasing their influence in non-patented medicine area is by having strategic alliance with large Indian pharma companies. MNCs such as GSK, AstraZeneca and Abbott have entered into supply agreements with Indian companies like Dr Reddy’s, Aurobindo Pharma, Cadila Healthcare, Torrent etc. Dr Reddy's will supply about 100 branded formulations to GSK for marketing in different emerging markets across Latin America, Africa, Middle East and Asia Pacific excluding India. Dr Reddy's will get a pre-determined share of the revenue earned by GSK for these products. In some markets where Dr Reddy's has a presence, the formulation will be marketed jointly. Another example is Aurobindo-Pfizer deal. Aurobindo will supply more than 100 formulations to Pfizer for use in the regulated markets of USA and UK




In 1994 the investments in plant and machinery of the top 9 MNCs was Rs 4,555.10 million, accounting for about 70 per cent of that of the top 10 Indian companies. Thereafter whereas plant and machinery investment by the Indian companies increased rapidly, that of MNCs essentially stagnated. By 2010, MNCs investment accounted for only 5 per cent of the investments of Indian companies that had reached Rs 1,37,652.50 million. This data at current prices suggest that real investment by MNCs have actually fallen in absolute terms. As the MNCs had not been found in manufacturing activity much, they could not generate any employment. Actually, many of them had closed their manufacturing plants and outsourced production to small Indian enterprises.  


The present trend in imports is also a cause for concern where the MNCs are leading. After increasing sharply in the late 1990s, import stabilised a bit. But they began to rise since second half of 2000. The Indian companies and agents are also involved in such import of finished drugs. Those MNCs which are not operating in India are entering into marketing alliances to sell their products here. Indian companies which act as authorised agents for imported formulations include Elder, USV, Emcure, Cadila Healthcare, Piramal and Ranbaxy. Thus Indian companies are functioning as traders of the MNCs.


Patented medicines, of course, enjoy market monopoly and nearly all of them are imported. Post TRIPS, it is apprehended that India will have an uncontrolled price regime leading to all imported medicines going beyond anyone's reach. Most of these imported medicines are used in treatment of cancer and HIV/AIDS.


Greenfield FDI investment can help build the base of a country provided it comes in areas of technology assimilation and diffusion. But this happens only when manufacturing activities are undertaken by the MNCs. If they are more interested in selling imported drugs and drugs manufactured by others in India, obviously the question of advancement in technological progress does not arise. Unlike the Indian companies, the MNCs spend more in foreign exchange for imports, interest payments, royalty/technical fees, dividend remittances, etc. They however earn through exports and other means. Whereas the foreign exchange deficit of MNCs has gone up from $20.52 million in 1994 to $205.05 million in 2010 i.e. at least at least 15 per cent per annum (CAGR), foreign exchange surplus of the top Indian companies increased at 29 per cent per annum during the same period. Between 1994 and 2010, MNC export earnings increased by only 5 per cent per annum (compared to 22 per cent by Indian companies), but dividend remittance has increased by 16 per cent per annum. Export intensity, i.e. export as a percentage of sales had remained stagnant for MNCs at around 4 per cent in 2010 compared to about 50 per cent for the Indian companies.


In the given situation where the MNCs are posing threat to Indian companies, our main concern is about the availability and affordability of medicines for the common people. This concern was also expressed in the note circulated by Department of Industrial Policy and Promotion. But the remedial measure prescribed in the note of making licencing compulsory is not sufficient. Thereafter, a tug of war has ensued between two propositions – for approval by FIPB route and/or using the Competition Commission Act, 2002 to regulate such rampant acquisition by the MNCs.


Foreign Investment Promotion Board (FIPB) is mandated to play a role in the administration and implementation of the government's FDI policy. However as seen from above instances, FIPB route has limitation in addressing these concerns. For example MNCs may enter into informal agreements, by way of strategic alliances, to bypass the explicit restrictions. Similarly, section 5 of the Competition Act sets a very high threshold for Competition Commission of India (CCI) to act. As per Section 5 9(i) (A), CCI can intervene only when the asset value in India is more than Rs 1000 crore or turnover is more than Rs 1500 crore. There may be many deals below this threshold which together can cause domination by the MNCs either in one or multiple companies listed in different countries by the same MNC.




To summarise, the major attractions for the MNCs to rush to India are:


a.                  To utilise the domestic marketing network of the Indian companies

b.                 To utilise the lax regulatory system prevailing in the pharmaceutical sector

c.                 To pre-empt the already existing export market of the Indian companies


It is therefore required to enforce the following to protect the interest of common man:

·                    Establishing of strict price control regime to prevent reckless profiteering in the pharmaceutical sector

·                    Instead of automatic approval of FDI, FIPB should restrict foreign share holding up to 26 per cent (as recommended by Hathi committee). Remaining holdings should not be allowed to be dispersed but block holding can be encouraged

·                    Liberal use of Compulsory License, particularly by using public sector firms in manufacturing medicines

·                    Abolition of Loan license manufacturing.

·                    Formulate appropriate policy for encouraging bulk drug manufacturing by Indian companies.