NEW DELHI—India is considering making it harder for foreign investors to acquire companies in its pharmaceuticals sector, in a bid to protect the country’s thriving market for low-priced generic drugs.
Such a move could restrict multinational pharmaceutical corporations’ access to a fast-growing emerging market at a time when they are dealing with aging drug pipelines and sluggish growth in the West. Any regulatory actions, however, may be tempered by concerns among some in the Indian government that a drastic move would send a signal that New Delhi is wavering in its commitment to economic liberalization.
A high-level government committee charged with looking into the matter is expected to submit a report in coming days to Prime Minister Manmohan Singh. The panel will likely recommend that India begin scrutinizing pharmaceutical mergers closely through the Competition Commission, an antitrust body, according to committee chairman Arun Maira, a member of India’s Planning Commission, an internal government think tank. He likened his favored approach to the way friendly security guards frisk visitors to nightclubs: “Please come inside and enjoy yourself, but we want to make sure you don’t cause any harm.”
India, which embarked on sweeping economic reforms in the 1990s, has allowed almost unfettered foreign direct investment in pharmaceuticals since 2001. But as foreign companies have stepped up their activity through a wave of acquisitions of Indian firms, some government officials and industry lobbyists fear that foreign companies simply want to buy up Indian firms whose cheap generic products pose a threat to them.
Bloomberg NewsAbbott acquired a unit of India’s Piramal. Above, its Illinois headquarters.
The long-term upshot, they claim, could be higher drug prices for India’s mostly poor consumers. “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,” D.G. Shah, secretary general of the Indian Pharmaceutical Alliance, an Indian industry trade group, wrote in an emailed statement.
Mr. Shah wants all foreign takeovers of Indian pharmaceutical firms to be subject to government approval through the Foreign Investment Promotion Board. Anand Sharma, India’s commerce minister, recently wrote to the prime minister echoing that stand, expressing concerns that foreign takeovers could be detrimental to the generics market and urging swift action to regulate the sector, according to several news reports. A Commerce Ministry spokesman referred questions to an official at the Department of Industrial Policy and Promotion, who wasn’t available for comment.
The more moderate approach that Mr. Maira said his panel will likely recommend—scrutinizing pharmaceutical deals on antitrust grounds but avoiding any explicit limits on foreign investment—will appeal to those in the government who don’t want to signal that India is reverting to the mindset of protectionism that prevailed in its Soviet-style economy until the 1990s. India can ill afford to scare away foreign investment: Overall foreign direction investment dropped 28% to $29.4 billion in the year that ended March 31 amid corruption scandals and uncertainties about government regulations.
For years, multinational drug makers stayed away from India due to the lack of intellectual-property rules to protect patents on their medicines and foreign direct investment barriers. In their absence, a home-grown pharmaceutical industry emerged that is dominated by copycat drug makers. India produces more than 20% of the world’s generics and its industry is expected to grow from $19 billion in sales in 2009 to $50 billion by 2020, according to a report last year by PricewaterhouseCoopers.
As India relaxed its barriers, those firms became attractive acquisition targets. Foreign companies acquired nearly 90 Indian firms for a total of over $15 billion since 2006, according to Dealogic. The biggest deal: Japanese drug maker Daiichi Sankyo Co.‘s $4.6 billion buyout of Ranbaxy Laboratories Ltd. in 2008.
Anubhav Aggarwal, an analyst at Credit Suisse Securities India Ltd., says Abbott Laboratories’ $3.8 billion purchase last year of a unit of Piramal Healthcare Ltd. valued the Indian firm at nine times its sales— a big premium. One of its key interests, Mr. Aggarwal said, was Piramal’s sales force of about 5,000 that had existing relationships with doctors across India. Building up such a network from scratch would be difficult, he said. An Abbott spokeswoman said advantages of the Piramal deal for Abbott also included a portfolio of more than 350 brands, a loyal customer base and “an accomplished local management team.”
The U.S. India Business Council, which represents the interests of American firms that do business in India, recently gave a document to India’s U.S. ambassador, Nirupama Rao, saying it wants to “prevent the enactment of protectionist measures” in India’s pharmaceutical industry such as foreign-investment barriers and compulsory licensing requirements for patented drugs.
Western companies have options other than mergers to tap into India’s market. Pfizer Inc. has entered into alliances with Indian firms Aurobindo Pharma Ltd. and Claris Lifesciences Ltd. for the rights to market their drugs outside India. Companies also can build their own businesses in India from the ground up.
Some Indian firms think foreign investment restrictions in the sector are a bad idea. “Companies will do what makes business sense for them,” said Kiran Mazumdar-Shaw, chairman of Indian drug-maker Biocon Ltd. “This is a high-growth sector and you will devalue it if you start putting restrictions.”
Mr. Maira said foreign companies shouldn’t complain about stepped-up antitrust enforcement, since it would mean increased scrutiny for domestic deals as well as buyouts by foreign companies. India, he said, would simply be following the lead of the U.S., whose antitrust regulators have sued to block telecom giant AT&T Inc.’s proposed purchase of T-Mobile USA.
—Jonathan D. Rockoff and Megha Bahree contributed to this article.
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