A naïve report from Parliament on FDI in the Pharmaceutical Industry

Over the last two decades, the Department-Related Parliamentary Standing Committees have slowly but surely matured into credible institutions that contribute significantly to policy formulation in India. Sadly though, the Parliamentary Standing Committee on Commerce continues to be an exception to this rule of evolution. 

Its latest report on “FDI in Pharmaceutical Sector” (available over here) comes to sweeping conclusions against FDI in the pharmaceutical industry with little or no supporting empirical evidence. Policy documents seeking to effect major policy changes are expected to base their conclusion on economic literature and the testimony of expert economists. It is not like there are no economists in India working in this area. For instance, the Committee’s conclusions bear an eerie similarity to the published research of Prof. Sudip Chaudhari at IIM-Calcutta. Yet, for reasons not apparent neither was his work referred to by the Committee nor was he deposed as an expert witness. The Committee however thought it important to invite Amir Khan since he had done a two hours episode on access to medicine as a part of his public-interest tele-series “Satyamev Jayate”. 

When the methodology is suspect, it is but obvious that the final conclusions too will be suspect. 

First a bit of background to the report – a couple of years ago, after Indian companies like Ranbaxy, Piramal & Matrix were being bought out by foreign companies like Diachii-Sankyo, Abbot & Mylan respectively, the Government of India started getting jittery over the possibility of Indian generics being taken over by foreign companies who would then shut down their low-cost competition and force Indians to buy more expensive formulations. In 2011 the Standing Committee began studying this aspect and laid its final report before Parliament on 13th August, 2013. The final conclusions of the report echo the government’s concerns when it recommends that “the Government must impose a blanket ban on any FDI in brown field pharma projects”. 

In pertinent part the report states “The Committee shares the concern that serial acquisitions of the Indian generic companies by the MNCs will have significant impact on the competition, price level and availability. It could incapacitate the domestic industry and slow down new investments and employment generation by the domestic companies. All these in turn could adversely impact the availability and access to medicines at affordable prices. A few more takeovers of this kind may destroy the benefits arising out of India’s generics revolution. This may even be a good strategy for the ‘innovators’ to ‘silence’ the generics frontrunners, thereby, retaining their innovation foundations while acquiring huge generic potential.”

These conclusions of the Committee are entirely baseless and display a lack of understanding of the global pharmaceutical industry. The acquisitions of Ranbaxy, Piramal, Matrix etc. was not done with an intention of destroying the generic business of these companies. Instead, these companies were acquired precisely because of their strong generics business. Innovator companies world over have discovered that their shrinking pipeline of blockbusters requires them to diversify their business into the rapidly growing generics space, especially since an estimated $ 50-70 Billion dollars of drugs are going off-patent over the next few years. In other words innovators want to augment their revenues by investing in generics. So when Abbot buys Piramal, they are not going to shut down the generics business as claimed by the soothsayers who appeared before the Standing Committee. Instead they will seek to sell more generics and profit from the same. Moreover some of the foreign companies like Mylan, which bought Matrix Labs, have a purely generics driven model even in its home territory of the U.S. What would a company like Mylan do without generics? 

Image from here

Similarly, the Committee’s apprehension that the foreign acquisition of Indian generics would reduce the number of challenges to weak patents in India is completely unsubstantiated. Mylan has been aggressive in challenging patents owned by foreign MNCs in India. For example, recently it was Mylan’s IP counsel who wrote to the Patent Office objecting to the manner in which Genentech’s patent applications were being entertained after statutory deadlines. Mylan has also challenged Roche’s patent on Tarceva in the past. Similarly GSK’s patent on Tykerb was revoked on the basis of a petition made by Fresenius Kabi Oncology, a Germany pharmaceutical company. Similarly Ranbaxy, even after its acquisition by Diachii has continued to challenges patents own by BMS for Entacavir. Clearly foreign owned generics are as interested as Indian generics in striking down patents and making money. If patent litigation isn’t a sign of competition, what else is? 

Last year, public health activists filed a complaint with the Competition Commission of India (CCI) complaining about certain supply agreements for AIDs drugs, between Gilead and Indian generics, which were allegedly anti-competitive and leading to a rise in prices. After a careful evaluation of the evidence the CCI dismissed the complaint on the grounds that the market for AIDs drugs in India was immensely competitive with over 150 brands being manufactured by more than 20 companies. I had blogged about it over here. AIDs drugs are a relatively specialized area and if even this sector is competitive, it is indicative of the degree of competition in the Indian pharmaceutical industry.

Last but not the least the Committee’s constant suspicion about “foreign MNCs” seeking to hike up prices of generics and their unethical practices in the clinical trial sector is also misplaced. Some of the biggest violators of the Drug Price Control Order (DPCO) have been Indian generics like Cipla. The most recent Drug Price Control policy was challenged first by Indian generics like Cipla and Sun Pharma, not “foreign MNCs”. Similarly the unethical clinical trials in India are carried out by Indian “Contract Research Organizations” and Indian doctors. 

The Government of India should not accept the recommendations of the Committee because the report as a whole is poorly researched and has no empirical data to back its conclusions. Thankfully, the PM appears to be reluctant to accept these conclusions – he recently ordered the DIPP to clear Mylan’s $1.6 billion dollar takeover of Agila Specialities. As per the ET, the DIPP is to float a new discussion paper on the issue and submit recommendations after consultations with all Ministries. Let’s hope we see some better economic analysis.