Taking Stock

FDI in Medicine
Siddhartha Gupta

Recently there was a great uproar across the length and breadth of the whole country for raising the cap of Foreign Direct Investment in Multi Brand Retail sector from 26% to 51%. The cabinet passed the proposal in September 2012 and it was voted in affirmatively in both houses of parliament in November 2012 and thus made into a Law.

There was major political fallout and impact of this decision. But an equally serious decision regarding Foreign Direct Investment (FDI) that failed to draw the attention of the concerned people is the introduction of 100% FDI in Pharmaceutical or Medicine sector which was passed way back in 2002. A decade is passed since its introduction and thus it is the time of stock taking to assess the impacts on the Indian market.

The total global pharmaceutical market is worth US$ 847, among which India's position is fourth, just next to USA, China and Brazil. India controls total 16% of the global market. India's position in generic drug (International Non proprietary Medicine) production is second, next only to Peoples' Republic of China Only.

Table I

Glimpses of Indian Drug Market
* Total Turnover          :  1,04,944.35 Crore
*  Total Domestic Turnover    :  57,393.09 Crore
* Total Export             :  47,551.26 Crore
* Rate of Growth        :  12%
* Projected Turnover by 2020   :  2,75,000 Crore

There are about 200 big players in the pharmaceutical markets, many of which are multinational and transnational companies. Almost 8000 are small and medium enterprises which are called SMEs. Public Sector units are only five, which have been grossly downsized in last one decade as per government policies. The number of bulk drugs needed for the Indian market is 465. Almost 90% of these (425) are manufactured in India and only 40 are imported. Out of the bulk drugs produced, 185 such medicines are exported to different Asian and African Countries. This is in nutshell the Position of India Pharmaceuticals.

But the per capita consumption of medicines remains one of the lowest in this country. As per India's WHW, 64.9% of Indian population does not have access to essential medicines. The per capita consumption of medicine in this country is only US$ 4 per year whereas that of Japan is US$ 412, Germany US$ 222 and USA, US$191 per year. Even in many other third world countries the per capita annual consumption of medicine is much higher than India.

In this backdrop, with a limited targeted Indian population, Indian pharmaceutical industry is one of the most vibrant industries which cater for the 95% of the domestic need with substantial export.

Types of Medicines
Medicines marketed in this country and elsewhere can be broadly classified into two groups.

1.    Branded medicines-Which may again be patented and non-patented.
2.   Generic medicines or International non- proprietary medicines.

Branded medicines are those medicines which are sold in the names given by the companies. Whenever a Pharma Company discovers a new molecule and establishes its efficacy as a drug, it claims the intellectual propriety of patent on the molecule. If it is proved to be the original research product of the concerned company and needed for the benefit of people, the patent claim is accepted and no other concern can produce the molecule for a certain period of time.

After the expiry of the period of patent, any company can manufacture the drug and sale it in a different brand name or a Generic Name i.e. the original pharmaceutical name of the medicine (e.g.: Paracetamol, Metronidazole, Ampicillin etc.)

Naturally the price of the generic medicines is much lower than the branded medicines due to competition.

The total global market of generics medicine is US$ 73 billion at present and it is expected to reach US$ 100 billion in next 2-3 years. The Indian Companies occupy 25% of the global generic market (only next to PRC) and it is also increasing in leaps and bounds. India exports antihypertensive, anti diabetic, anti cancerous and anti retroviral (HIV/AIDS) drugs, as well as many gynecological and neurological generic drugs in bulk quantity to many countries of Asia and Africa.

There is another term called 'Branded Generics'. To rip the profit of the growing generic market, many Multinational and Transnational companies have entered this sector to produce generic medicines with the name of the particular company mentioned in the bracket. These are called branded generics and costs much higher than the ordinary generic drugs. The issue of 'Branded Generics' are very important in understanding the entry of FDI in pharmaceutical sector.

Causes of success
The National Pharmaceutical policy 1978 gave emphasis on the following issues:
1.    Universal accessibility of essential medicines.
2.   Price Control of essential and life saving drugs so that they can reach common men.
3.   Quality control of pharmaceutical products.
4.   Self reliance in production of medicines in the line of Hathi Committee (1975).
5.   Establishment of pharma PSUs.

The patent law of 1970 helped the native pharma sector to grow. Patent was awarded for 5 years on the process of production and not the product itself. As a result, the Indian companies could produce the patented costly medicines at a much lower price through some other process. So, new drugs were available in Indian market only a few years after its invention abroad. The cheap drugs were exported to other developing countries also.

The other causes of prosperity of the Indian companies can be attributed to:
1.    Capping of Foreign Direct investment (FDI) in the pharmaceutical Companies to 40%. Such companies with low FDI enjoyed special status by the government and also got tax benefits.
2.   Government safeguards for Small and Medium Size Enterprises (SME) in the National Pharmaceutical policies of 1978 and 1986.
3.   Reservation of production right of 66 essential medicines by Indian Companies and PSUs only.
In a nutshell, all these nationalist measures gave an impetus to the production of quality but cheap medicines by the local companies and made them competitive with the multinationals.

The Great Leap Backward
The impact of neo-liberalism and open market economy brought a paradigm shift in the National pharmaceutical Policy of 1994. Instead of the policy of supplying cheap and quality medicines for all, the focus was shifted more and more toward business.

The new national pharmaceutical policy of 1994 incorporated the following changes:
1.    Abolition of likening.
2.   Abolition of reserved list of medicines for SMEs and PUSs.
3.   Abolition of all restriction for entry of foreign technology.
4.   31% FDI was allowed.
5.   Gradual withdrawal of price control of essential drugs.
The National pharmaceutical policy, 2000 went few steps further towards decontrolling and allowing more concessions for MNCs.

The upper limit of FDI was further raised to 74% in the year 2000 and in 2002, 100% FDI has been approved in the pharmaceutical sector. Along with these, all safeguards and tax exemptions for SMEs and PSUs were withdrawn.

The export duty on raw materials for manufacturing of all export oriented products was also abolished.

The new patent law of 2005, delivered an almost death blow on the Indian pharmaceutical sector. Though a detailed discussion is beyond the scope of this article, the salient points can be mentioned to bring home the fall-outs of the new patent law.

The important changes in the new law are:
1.    Patent on the final product in place of the process patent.
2.   Period of patenting–Increased to 20 years from 5 yrs.
3.   Abolition of Compulsory Licensing.
All these new rules promoted the cause of the MNCs undermining India's domestic enterprises.

Crisis of MNCs
In the recent years the Multinational Companies too are facing a severe ocrisis which is going to deepen in near future. Most of the multinational companies draw their maximum profit from a handful of blockbuster molecules, which are patented.

But most of these patents will expire within a span of couple of years and virtually there is no new drug in the pipeline which can fetch huge profit for them. 69% of the new drugs, approved in the period of 1992 to 2002, have not been considered as significantly better than the existing molecules by FDA, USA. Most of the new molecules introduced in US market after 1980, had short duration of exclusivity and lower revenue earning.

So, these MNCs are trying to evade this crisis by two pronged crisis management approach. Firstly, they are trying to increase the period of patent by hook or by crook. By making minor modifications, they claim to extend the period of patent by adding one or two new clinical indications for the old drug. This is called 'Ever greening' of the drug. It may be mentioned here that such effort of ever greening of an anti- cancerous drug called Gleevec by Swiss multinational Novartis, has been rejected by the Supreme Court of India. The Honorable Court, in its verdict, clearly stated that the Beta Crystalline form of Gleevec, whose patent was claimed, is not at all a new medicine.

The other path adapted by the MNCs/TNCs to maintain their profit margin is to switch to the market of Generic Drugs from the patent centric drugs. As already told, the market of Generic drugs are increasing day by day and there is even wider profit margins for branded generics. India has been selected as the Sourcing Hub of such generic drugs for the following reasons:

a)   Already existing huge business & infrastructure
b)   Cheap labor
c)    Huge number of English knowing Scientists, technocrats, R & D people etc.
d)   Purchasable Indian Companies (through FDI route) with fairly good infrastructure
e)   Last but not the least, a flexible government, more sympathetic to the cause of the MNCs than that of the people. Here lies the great similarity between the retail sector and pharma sector. The WAL-MART, TESCO, CARIFO etc. want to use India as a sourcing hub of goods at a very cheap rate for a worldwide business. Similarly, companies like ROCHE, PFIZER or Bristol-Myer-Squibb want to utilize India as a sourcing hub of cheap generic medicines for worldwide export.

The allowance of 100% FDI perfectly suits to their interest. How?

Routes Taken by MNCs/TNCs
a)   Taking the automated route granted by 100% FDI, Companies like Roche, MSD, Boehinger etc have started their business in India as totally foreign owned Companies.
b)   Shifting production, manufacturing and clinical Trial units in India to exploit cheap labor and lax laws. These are called upgraded contract manufacturing units. 161 such units have received US, FDA approval and 90 units are approved by UK, MHRA.
c)    Acquisition of Indian Companies.
d)   Increasing equity participation in Indian Companies or Joint Ventures

Table II

Acquisition of Indian Companies
Indian Companies    MNCs
Matrix Lab                        Mylan Inc.
Dabur Pharma                  Fresenius Kabi
Ranbaxy                            Daiichi Sankyo
Santha Biotech &
Universal Medicare          Sanofi-Aventis
Orchid Chemicals             Hospira
Piramal Health Care         Abbott
Paras Pharma                    Reckill Benckiser
Cosme Pharma                 Adecock Ingram
Wockhardt (India)             Danone

Table III
Increasing share in Indian companies
Company               Previous           New
Share (%)               Share (%)
1. Pfizer                       40              70.75
2. Novartis               50.93            76.42
3. Abott                      61.7             68.94
4. Sanofi-Aventis       50.1              60.4
5. Astra-Zeneca        51.5              90.0

Fallouts:
1.    MNCs investment in plants and machineries remained stagnant. 90% of the investment of US$ 2 billion (Rs.13, 426 Crore) between April to July 2011 went for the acquisition of Indian Companies.
2.   Increased market share of MNCs-Threat of reversal to pre 1970 scenario, when 90% of the market and 80% of ownership were in the hands of foreign multinationals.
3.   Sky rocketing of the price of medicines
4.   Diminished accessibility and affordability of medicines-not only for the domestic market, but also for the underdeveloped countries of the third world, depending on cheap Indian drugs.
5.   Huge Job cut due to closure of many SMEs, even with ‘‘good Manufacturing practice certificates’’.
6.   Impact on supply chain: Due to 100% FDI big players are likely to enter in the chain marketing.
In a nutshell, the self reliance and prosperity gained by the Indian Pharmaceutical Sector in last 5-6 decades is gradually vanishing in the blue to pave the path of the MNCs and TNCs through the disastrous route of allowance of 100% FDI, new patent law and abolition of all safeguards of SMEs. It is likely to snowball into a major crisis for the livelihood of common citizens of India in the days to come. ooo

Sources:
1.    Impoverishing the poor: Pharmaceuticals and Drug Prices in India- A Locost/ JSS Publication.
2.   National Rural Health Mission (2005-2012): Mission Document.
3.   The Politics of Patent: Dr. Sujit Kumar Das: Drug Action Forum.
4.   National Pharmaceutical Policies : 1978 and 1994.
5.   National Pharmaceutical Policies : 2002.

6. High Level Expert Group report on UNIVERSAL Health care in India.

Frontier
Vol. 45, No. 44, May 12-18, 2013

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