No clear gainers if Pharma FDI is capped

Zee Research Group/Delhi
Even as the Union cabinet appears divided over the issue of FDI cap in the pharmaceutical sector, industry analysts argue against any cap since it would unlikely to result in any major change in prices of essential drugs in the country. They argue that unhindered induction of capital in the sector would grow the industry and consequently improve drugs affordability levels.

Rejecting the hypothesis that drug prices will shoot up if MNCs continued to acquire domestic drugmakers, S Abhaya Kumar, managing director, Shasun Pharma, said, “The fear that drugs will become costlier is very baseless as 85 per cent of the medicines which are already being used on a daily basis are outside of patent.”

Moreover, Indian pharma industry is pretty fragmented, so it is difficult for few players to control the whole pharma market. Recently, the Department of Pharma (DoP) has conducted a price analysis of the drugs for the period 2009-11. With regards to the six (Ranbaxy, Shantha, Paras, Orchid, Dabur and Piramal) major Indian companies acquired by MNCs, for almost 70.8 per cent of the packs, there has been no change in prices and only 6.8 per cent packs had price increase up to 5 per cent. As compared to that for domestic companies there has been no price increase for 67.3 per cent of the packs and only 6.7 per cent of the packs had price increase up to 5 per cent.

Further, the proposal floated by the Department of Industrial Policy and Promotion (DIPP), might eventually reduce the number of mergers and acquisitions (M&A) in India. While a brownfield investment entails acquiring existing plants and facilities, an investment is termed as Greenfield when a MNC sets its own plant and starts the production.

Currently, India permits 100 per cent FDI in Greenfield investment through the automatic approval route. However, the same level is allowed for foreign investment in existing pharma companies (brownfield pharma) only after the approval from the foreign investment promotion board (FIPB).

Between April 2012 and June 2013, around two billion dollars worth of FDI was received in brownfield Pharma projects while a mere 90 million dollars went into greenfield projects. Hence, majority of foreign funds came into the existing drug firms.

Moreover, from 2006 to 2011, FDI flowed into 74 existing companies. Of the 11 billion dollars FDI received between April 2000 and June 2013, nearly 7.5 billion dollars FDI came through the M&A route. During the period (2006-2010), seven major Indian firms have been acquired by foreign companies. For instance, Matrix Laboratories, Dabur Pharma, Ranbaxy Labs, Shantha Biotechnics, Orchid Chemicals, Paras Pharma, and Piramal Healthcare was acquired by Mylan (US), Fresenius Kabi (Germany), Daiichi Sankyo (Japan), Sanofi-Aventis (France), Hospira (US), Reckitt Benkiser (UK), and Abbott (US) respectively.

Referring to the deal size, in the largest deal ever in the Indian pharma industry, Japanese firm Daiichi Sankyo had acquired the country`s largest drug maker Ranbaxy in 2008 for 4.6 billion dollars. Similarly, in 2010, the second-largest deal happened in the Indian pharma industry where US-based Abbott Laboratories had bought out the pharmaceuticals solution business of Piramal Healthcare for 3.72 billion dollars.

Likewise, in September 2013, FIPB has cleared Rs 5,168 crore proposal of US-based pharmaceutical firm, Mylan to acquire Indian generic drugs company Agila Specialties (Injectable subsidiary of Strides Arcolab).

Most of these acquisitions have been done at higher than their actual value. MNC pharma companies paid huge premiums for these acquisitions. While Piramal Healthcare was acquired at a valuation of nine times of sales, Daiichi Sankyo paid Rs 737 per share of Ranbaxy which had an intrinsic value of Rs 365. Based on IMS moving annual total (MAT) sales as of September 2013, Abbott was ranked number 1 followed by Cipla, Sun Pharma, GSK, and Ranbaxy. In case of Ranbaxy, USFDA issues have continued to remain an overhang on the company.

Taking into consideration the 89 per cent rise in inbound FDI in the pharma sector in 2012, the commerce ministry is concerned that an overwhelming majority of foreign direct investment in pharma is coming only in existing units. MNCs are keen to acquire manufacturing facilities and companies in the area of anticancer, vaccines and injectables due to global shortage in their capacities.

Some global players have chosen acquisitions to step up this foray while others have chosen to go for strategic collaborations. While Abbott entered into strategic partnership with Cadila for branded generics in emerging markets (EMs), AstraZeneca (UK) formed a strategic partnership with Torrent Pharma for branded generics in EMs.

Venkat Jasti, CEO at Suven Life Sciences, said, “Restricting FDI is a short-sighted policy which will certainly hamper the growth of Indian pharmaceutical industry. Pricing policy is already affecting the growth. Moreover, with the involvement of the government, de-growth can be witnessed in the pharma sector.”

Reiterating the view, Ranjit Kapadia, senior VP-Pharma, Centrum Broking said, “If the government caps the limit at 49 per cent, the whole industry will get affected. There will be drastic reduction in FDI as no foreign company would like to have a minority stake in Indian Pharma company.”

Likewise, Kumar at Shasun Pharmaceuticals said, “It will have a negative impact on M&A scenario. Foreign firms will think twice before investing as they would like to have a controlling stake in the company. Further, in terms of research and technology, the decision is going to be a setback for the pharma industry.”