Ministry of corporate affairs is exploring possibilities of amending the Competition Act to exempt deals in the sector from the current turnover and deal size thresholds
The government’s attempt to strike a balance between public health concerns and need for foreign direct investments (FDI) by empowering the Competition Commission of India (CCI) to monitor all foreign takeovers of Indian drug firms may have no impact. Experts feel all domestic takeovers, irrespective of the turnover, deal size or the status of the acquirer, need to be brought under strict scrutiny.
With 135 foreign pharmaceutical companies already present through their registered subsidiaries, strong possibilities of takeover involving such entities and Indian firms — leading to indirect control of foreign entities without an immediate FDI inflow — may render CCI vigil meaningless, they say.
CCI’s mandate is not to look into public health implications of merger and acquisitions but to scrutinise the deal for possibilities of anti-competitive practices and guard against the monopoly situations, they say.
| MAJOR DEALS | |||
| Year | Indian company | Foreign acquirer | Size of the deal ($ mn) |
| Aug ‘06 | Matrix Lab | Mylan, US | 736 |
| April ‘08 | Dabur Pharma | Fresenius Kabi, Singapore | 219 |
| June ‘08 | Ranbaxy | Daiichi Sankyo, Japan | 4,600 |
| July ‘08 | Shantha | Sanofi, France | 783 |
| Dec ‘09 | Orchid | Hospira,US | 400 |
| May ‘10 | Piramal Healthcare | Abbott, US | 3,720 |
| Source: Discussion Paper on Compulsory Licensing, Department of Industrial Policy & Promotion, Ministry of Commerce & Industry | |||
“M&As in pharmaceutical sector is not just a competition issue. It has to be seen in a much larger context of the investment climate and the limitations before home grown drug companies to attain a critical size and, thereby, resist the temptations to sell off,” Biswajit Dhar, director general of Delhi-based policy think tank, Research and Information System for developing countries (RIS) said.
“The proposed system of scrutiny by CCI cannot stall an M&A if the companies involved agree to go ahead. There are hundreds of ways to clear the deal. A more holistic approach is required and the government should think if pharmaceutical sector should be considered as a strategy sector where domestic production capability is a national requirement,” Dhar said.
Pharma M&A advisory firms also feel the proposed CCI scrutiny of FDI proposals will not dampen the prospects of takeovers. “There are dozens of pharma and healthcare companies in Europe and the US that are interested in acquiring businesses in India. Most of them are looking at small ticket acquisitions and find high valuations, and not FDI norms, as a hurdle before them,” said Abhey Yograj, chairman & CEO of Gurgaon-based consultancy Tecnova India.
The observations come at a time when the ministry of corporate affairs (MCA) is exploring the possibilities of amending the Competition Act to exempt deals in the sector from the current turnover and deal size thresholds that trigger CCI scrutiny.
MCA was put on this task after the Cabinet in October 2011 approved the report of an expert committee set up by the Prime Minister’s Office to look into FDI policy in drugs and pharmaceuticals. The committee, headed by Planning Commission member Arun Maira had recommended control free FDI inflow in new projects and CCI scrutiny in foreign fund inflow into domestic companies that leads to change in ownership patterns.
Competition Act amendment will, however, not cover public health concern.
“CCI can only look from the competition angle. It would be better if one studies the impact of the entire foreign takeover that has happened before thinking of restricting FDI in this segment. In any case, CCI scrutiny will continue according to the Competition Act, irrespective of any other scrutinies,” said Dhanendra Kumar, former chairman, CCI.
Since 2006, there were six instances of such takeovers, leading to widespread call for monitoring pharmaceutical M&As’ involving foreign companies.
The parliamentary panel on commerce and industry is also looking into FDI in pharmaceuticals. It is trying to understand the likely impact of the recent M&As on domestic pharma industry, impetus on investments in R&D and technology transfer due to the FDI in the sector. In addition, the committee will also review the impact or likely impact of FDI on drug prices, structure of Indian pharma industry and its social responsibility in terms of access and cost, ways and means to ensure availability of cheap drugs to people at large.
It will also look at the efficacy and structure of regulations mechanisms, if any to be placed on FDI inflow so as to ensure balance between business and public interest.
The panel is currently talking stakeholder views and is expected to submit its report soon.
According to data available with the MCA, out of the 135 foreign pharmaceutical subsidiaries in India, 47 are purely engaged in trading activities at the moment and 75 are into manufacturing of medicines. Others are in areas such as clinical research, and allied services.
