Last fortnight, the government announced new norms on Foreign Direct Investment in the pharmaceutical industry. As per these new norms, 74% FDI is allowed in “brownfield pharma” under the “automatic route”.

Before proceeding further, it may be necessary to deconstruct some of this phraseology. The phrase “brownfield pharma” means the existing pharmaceutical industry in India, as opposed to “greenfield pharma”, which is a term used to represent the creation of new pharmaceutical projects. The term “automatic route” is used to denote the fact that foreign investors are no longer required to take approval from the Foreign Investment Promotion Board before purchasing 74% equity in an existing Indian pharmaceutical company.

The decision to do away with the requirement of Foreign Investment Promotion Board permissions makes the process of foreign investment in the Indian pharmaceutical industry much easier.

Last week, Leena Menghaney of Medicins Sans Frontiers, wrote a piece on Scroll warning that this new policy undermines Indian generics therefore making drugs more expensive. The long and short of her argument is that this new policy would allow powerful western pharmaceutical companies to take over important Indian pharmaceutical companies like Cipla and make them mere cogs in the multinational pharmaceutical industry “whose sole aim seems to be to generate supra-normal profits for its CEOs and shareholders”. Such an approach, according to her, would lead to India losing “an independent generic industry that fiercely competes with patent-holding multinational pharmaceutical corporations to bring low cost essential medicines to the market”.

Large red flags over brownfield FDI

Menghaney, isn’t the only person raising the red flag on this issue. Three years ago, the 110th Report of the Department Related Parliamentary Standing Committee on Commerce headed by Shanta Kumar raised a much larger red flag. The Committee took due note of “the danger arising out of FDI in brownfield pharma projects to the entire health and IPR framework of our country in terms of access and affordability of medicines, domination and elbowing out of our pharmaceutical industry comprising of predominantly small and medium pharma units, undue demand and pressure on TRIPS arrangements, etc”.

On the basis of this conclusion, the Committee stated that it was of “the considered opinion that the government must impose a blanket ban on any FDI in brown field pharma projects”. And the committee also “strongly recommends that the Department take all measures to stop any further takeover/acquisition of domestic pharma units”.

According to the committee such measures were important since the pharma industry was one sector “which has to be dictated by public good rather than foreign investments, profit and revenue”.

The competition imperative

The analysis by both Menghaney and the Standing Committee on Commerce suffer from the same fatal flaws for several reasons. To begin with, both of them fundamentally misunderstand the reason foreign pharma companies are investing in the Indian generic pharmaceutical industry. Globally, the pharmaceutical industry has realised that to remain competitive in the market, it is necessary for even innovator companies to shore up revenues through investments in the booming generics business. No longer do these companies seek to earn only through patented drugs and almost every one of these patent owning innovator companies will own a business that earns through sales of generics drugs.

Thus when Piramal or Ranbaxy were acquired by foreign investors like Abbot or Diachi-Sankyo, the aim was not to acquire and shut down the generics businesses of either company. Instead, the aim was to ensure that the investors profited from the booming generics business.

Separate from these investments, are the brownfield investments made by foreign companies like Mylan Laboratories and Fresenius Kabi – both of which are purely in the generics business. While Mylan acquired Matrix Laboratories, Fresenius acquired Dabur Pharma. Given that both companies seek to profit from the generics business, there is no reason to suspect that these companies will be any less aggressive in expanding their generics business.

In fact, both Mylan and Fresenius have also aggressively taken on the western innovator industry in patent battles before Indian courts and the Indian patent office. Mylan took on Genentech on the Herceptin patent and also Roche on the Tarceva patent and was subsequently been sued by both Genentech and Roche. Similarly, Fresenius challenged the validity of the Tykerb patents owned by Glaxo Smith Kline before the Intellectual Property Appelate Board and succeeded in knocking down one of the two patents thereby reducing GSK’s exclusivity over the drug. All these drugs were oncology drugs.

This aggressive attitude by foreign generics in India demonstrates that these companies are in fact as competitive, or perhaps even more competitive than Indian generics.

The profit motive

The second problem with the opposition articulated by both Menghaney and the Standing Committee is that they presume that nationalism of Indian capitalists will somehow triumph over their fiduciary duty to generate more profits for their shareholders. Such an assumption has no basis in reality or logic. The constant litigation between the National Pharmaceutical Pricing Authority, which administers drug price control orders, and the Indian pharmaceutical industry (Cipla included) is a reminder of how the Indian generic industry is opposed to price control measures that curb its profits. Therefore notwithstanding the nationality of the capitalist, they will seek to generate profits in India.

Wanted: capital

The third problem, with both views above against FDI in brownfield projects, is that they fail to note that India is perpetually short of capital. Thus if foreigners are willing to invest a few billion dollars to purchase equity in existing pharma companies from Indian promoters and shareholders, it only means that Indians have more money, which they will invest that money in other businesses thereby creating more investment and jobs in India.

The promoters of both Piramal and Matrix, invested their earnings, from the sale of their companies, in new businesses.

Before closing this piece, it is also necessary to put in perspective the anectodal evidence offered by Menghaney with regard to the state of business at both Ranbaxy and Cipla. She claims that “Ranbaxy’s phenomenal growth stagnated after it was acquired by the Japanese company Daiichi, and it was finally resold to Sun Pharma in India, which was one of its competitors.”

The flip side

She however fails to mention the fact that four plants belonging to Ranbaxy were prohibited from exporting to the US by the country’s regulators after they discovered shocking fraud and fabrication of safety data at the company. Ranbaxy eventually pleaded guilty and choked up fines of up to $500 million dollars to the American government. Given that Ranbaxy’s business model was built on revenues from the American market, it was no surprise when the company went into a tailspin after the American banned the company from selling in the US. Last month, an arbitration panel in Singapore found the Ranbaxy promoters liable for concealment and misrepresentation of crucial facts during the sale to the Daiichi-Sankyo and ordered them to pay damages of Rs. 2,500 crores to the Japanese.

As for Cipla, it is true the company was once spunky and feisty, itching for a fight against the western pharma industry on the issue of patents. However, those days have long gone. Cipla, like other generics, has meekly lined up to seek licences doled out by Gilead for its now patented Hepatitis drug – Sovaldi, without raising any challenges to the validity of the patent. Even on the occasion that it hazards a patent challenge, its legal strategy is often hare-brained as was the case in its challenge last year against Novartis on 5 Onbrez patents.

As a nation it is time to move beyond these stereotypical notions about FDI and profits.

Prashant Reddy Thikkavarapu studied law at the National Law School of India University, Bengaluru, and at Stanford Law School. He is a practising lawyer based in Hyderabad.