Indian industry warns of ‘incapacitating’ effect of large foreign takeovers

Scrip Magazine

30 August 2011
Anju Ghangurde

Second rung Indian firms, which account for less than 20% of the country’s pharmaceutical exports, cannot fill the shoes of first tier companies if the latter continue to be acquired by foreign firms, a leading domestic industry body has told a government committee looking into issues concerning India’s foreign direct investment (FDI) policy in the sector.

Data provided last week by the Indian Pharmaceutical Alliance (IPA), which represents leading domestic firms, to a high level committee chaired by India’s Planning Commission member, Arun Maira, suggested that while the top 20 firms contributed about Rs232 billion ($5.03 billion) or 63.1 % of total pharmaceutical exports, the next 30 contributed just 18.4%.

“It reflects the wide gap between the first and second tier companies. Hence, the thinking that the second tier companies will replace the first tier companies, if they are acquired by the multinationals, does not hold promise,” the IPA’s secretary general Dilip Shah warned. The IPA believes that India’s second tier firms have “not yet come of age” and currently lack “grit, determination and deep pockets” to keep the Indian generic industry on the global map.

The industry body said that it was worrisome that the decline in India’s pharmaceuticals export growth rate, down to 9.8% in March 2010 from 23.0% in March 2009 and 15.4% in March 2005, coincides with the decline in gross fixed assets formation in 2009-10 in the Indian pharmaceutical sector. The IPA had earlier pointed out that foreign companies invested just Rs30.22 billion in fixed assets, as against Rs540.10 billion by domestic companies between 1995 and 2010 (scripintelligence.com, 9 August 2011).

The IPA, which is seeking a review of India’s current FDI policy, had in a presentation to the committee on 19 August urged the government not to kill “the goose laying the golden eggs”, adding that the continuation of India’s current FDI policy would be perceived as an endorsement of takeovers by the government, encouraging acquisitions by multinationals. It would also push Indian founders wanting to encash their value to sell, anticipating fewer buyers in future, it cautioned.

India’s current FDI policy permits 100% foreign equity through the automatic route in the pharmaceutical sector. The policy has been a subject of intense debate in view of several big ticket acquisitions of domestic pharmaceutical firms by foreign companies over the recent past, and apprehensions about how these deals would impact the availability of affordable medicines both in India and overseas markets dependent on India.

Earlier, the Planning Commission had, with the approval of India’s prime minister, constituted the high level committee chaired by Mr Maira, to consider all the relevant aspects of the issue.
high valuations

The IPA has also sought to highlight the need to look into the ‘unrealistic’ valuations at play in past takeovers of Indian firms by multinationals, though the committee is said to have brushed these worries aside as ‘speculative’. Such valuations have also prevented consolidation in the fragmented domestic industry, the industry body said.

The IPA has alleged that multinationals, with the support of their governments, have attempted to use initiatives in multilateral and plurilateral fora, such as the Substantive Patent Law Treaty at the World Intellectual Property Organization, the International Medical Products Anti-Counterfeiting Taskforce at the World Health Organization and the Anti-Counterfeiting Trade Agreement and Trans-Pacific Partnership Agreement, to block Indian generics. However, such attempts have in the past been thwarted by the timely intervention of the Indian government and the support of certain developing countries.

The IPA sought to link the high valuations in foreign takeovers to multinationals’ attempts to safeguard their turf. It claims that since only Indian generics companies are capable of making use of the compulsory licensing provision under the TRIPS Agreement, it makes “imminent business sense” for multinationals to “incapacitate” them with a view to protect their future. “Hence, the unforeseen valuations,” the IPA said.

“After the manoeuvres and the intimidation (seizures of in-transit medicines in Europe) failed, the lure of money is now being deployed to buy out the front ranking Indian companies to eliminate the generic challenge. The valuation of Rs170 billion for a company earning profit of Rs2 billion should be seen in this context. This is just the beginning. If one were not to take note of it and initiate appropriate action, the damage to the domestic industry and the public health will be irreversible,” the IPA warned.

In 2010, Abbott acquired Piramal’s local formulations business for $3.7 billion, including an upfront payment of $2.12 billion and additional annual payments of $400 million for the next four years starting in 2011. The deal valued Piramal’s business at about eight times sales and 30 times EBITDA (earnings before interest, taxes, depreciation and amortisation), a record in the Indian pharmaceutical industry.

The IPA has urged the committee to “channelise FDI flow” through the automatic route for bringing in new technology, building up local production of active pharmaceutical ingredients from the basic stage and the local production of patented medicines, and to promote discovery research in India.

India has seen a flurry of large inbound deals over the past few years in addition to the Abbott transaction, including Reckitt-Benckiser’s acquisition of the OTC products firm, Paras Pharmaceuticals and the acquisitions of Ranbaxy Laboratories by Daiichi Sankyo and Shantha Biotechnics by Sanofi.

 

This entry was posted in Compulsory Licensing, FDI, Generics, Mergers and Acquisitions, Seizures, TRIPS and tagged , , , . Bookmark the permalink.

One Response to Indian industry warns of ‘incapacitating’ effect of large foreign takeovers

  1. Pingback: FDI and the United States « Capturing the World

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