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Curbing FDI in Pharma Sector – Yes or No?

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Recently, during a small discussion with my family members on the Indian pharmaceutical industry; my mother made a typical comment saying,

Yeh videshi companies India ki sab pharma companies khareed lenge, phir yaha dawai ke daam badha denge; aur hamari sarkar kuch nahi kar payegi.”

[“These MNCs will acquire all our major pharma companies and raise drug prices domestically; the India government will have no price control at such times.”]

Frankly, I felt the above comment quite short-sighted and against the growth mantra that India Inc has propagated for almost a decade now, since liberalization. However, this controversial matter regarding the dominance of multinational giants in the pharma sector promises a heated debate as more and more Indian pharma companies are falling into the hands of foreign sharks.

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It all started few years back with Matrix Laboratories becoming a part of US generics drugs major Mylan Laboratories. This transaction worth $736 million helped Mylan establish a strong foothold in India and access to low-cost manufacturing platform of Matrix.

But, more than anything else, this deal sowed seeds of a new trend which hinted towards the Indian pharma industry having reached a certain level of maturity where they can become good acquisition targets at significant valuations.

The year 2008 saw another Indian pharma major, Ranbaxy Laboratories, going straight into the arms of Japan’s Daiichi Sankyo, in a bid to get best deal possible for the promoters while the going was still good and the global economy had just started showing signs of cracking down few months ago.

More recently, Abbott Inc completed its acquisition of Piramal Healthcare’s formulations business for a staggering $3.72 billion. With this acquisition, Abbott is likely to become No.1 pharmaceutical company in India powered by Piramal’s comprehensive portfolio of branded generics.

In latest, it was Paras Pharmaceuticals which moooooved (yes, manufacturer of Moov) into the hands of British company Reckitt Benckiser Group for Rs. 3260 crores. Paras Pharma is a manufacturer of a range of OTC medicines, which do not require a prescription from a physician.

Industry analysts are looking at these sell-off deals as a wave of consolidation within the sector in the form of economies of scale, increased collaborations, investments in research and the growing markets for the generics. However, a section of the Indian drug industry has approached the government to reduce the limit of FDI in pharma industry through the automatic route to 49% from 100% to allay fears of Indian markets being flooded by global MNCs.

While the issue of reducing FDI in the pharma sector remains, the above proposal may not find favor from the government as it would hurt India’s image as an attractive investment destination. However, this scenario is fraught with the fear that the Indian drug industry will be dominated by the MNCs taking over the Indian drug companies that could result in steep rise in prices of medicines, putting the country in serious trouble.

Daiichi Sankyo paid 4.5 times Ranbaxy’s sales in the acquisition; Abbott paid 9 times the annual sales for Piramal’s domestic business and Reckitt Benckiser-Paras Pharma deal valued the makers of Moov and D’Cold at 8 times its annual sales.

Without any doubt, all these pharma MNCs will look to recover their investment from the drugs that are sold in domestic markets and partially from the overseas markets. This price rise may not be administered over night. It might have to trickle down into the system at a snail’s pace but in a sure manner – like a slow poison.

Eh! Does the content from this article smell apprehensions shared by Obama for the US jobless citizens?

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