Full control of powers on Mergers and Acquisitions of the Competition Commission of India (CCI) effective June 1, 2011, has now been notified.

In this evolving scenario, it is indeed difficult to understand, why is the FDI issue on M&A in the Pharmaceutical space of India is still catching headlines of both national and international media. Instead, should we not now keep our nose to the grindstone and take strategic measures to accelerate the inclusive growth of this life-line industry of the nation?

Stipulations for M&As under the Competition Act:

Section 6(1) of the Act prohibits any person or enterprise from entering into a combination which has an “appreciable adverse effect” on competition in India. It also stipulates that any enterprise which intends to enter into such M&A, shall give notice to the CCI furnishing details of the proposed M&A within thirty days of:

(i)  Approval of the merger by the Board of Directors of the concerned enterprise

or

(ii) Execution of any agreement relating to acquisitions referred to in clause 5(a) & (b) of the Act. S.6(2A) provides a period of 210 days to the CCI to complete the investigation relating to such combinations (if the CCI is unable to come to any conclusion within this period then the combination is deemed to be approved)

S.5 of the Act lays down the transactions which will qualify as combinations for the purposes of the Act. The following is the threshold limit for Mergers and Acquisitions:
• Transactions among Indian companies with combined assets of Rs. 1000 Crores or Rs 3000 Crores in turnover of the merged entity
• Cross-border transactions involving both Indian and foreign companies with combined assets of US $500 million or US $1.5 billion in turnover

• Transactions that have a territorial nexus with India, where the acquirer has US $125 million in assets or US $375 million in turnover in India.

Once any transaction reaches the threshold limit as specified in S.5, the enterprise has to take recourse to the procedure as specified in the Competition Act.

A time to keep our nose to the Grindstone:

Last year, though the growth of the Global Pharmaceutical Industry with a turnover of US$ 752 billion significantly slowed down to just 6.7% due to various contributing factors, the Indian Pharmaceutical Industry continued to maintain a robust of growth of 19% with a turnover of US$ 10.1 billion (IMS October, 2010).

R&D will fuel future growth:

However, on a longer term perspective, the domestic industry growth will be significantly driven by the newer products, which will be the outcome of painstaking innovative research and development initiatives. Keeping this point in mind, the fact that today India accounts less than one per cent of over US$130 billion of the worldwide spending on research and development for pharmaceuticals, despite its known strength in process chemistry and abundant talent pool, has started attracting attention of the government.

Government taking appropriate measures:

It is encouraging to note that the Department of Pharmaceuticals of the Government of India through its ‘Vision 2020’ initiatives is planning to create a new echo-system in the country to promote new drug discovery platforms. This is expected to catapult the country as one of the top five global pharmaceutical hubs, by 2020 attracting additional investments of around US$ 20 billion to the GDP of the country.

Primary role of the industry:

The Primary role of the Research based Pharmaceutical Industry in India, like in many other countries of the world, is to make significant contribution to the healthcare objectives of the nation by meeting the unmet needs of the ailing patients, with innovative medicines. This role can be fulfilled by developing newer medicines through painstaking, time-consuming, risky and expensive basic research initiatives. The research based Pharmaceutical Industry in India is committed to its prime function of discovering and developing new medicines not only for the patients in India but all over the world.

Encouraging innovation will be critical:

Despite immense progress made over the past decades in developing new medicines for numerous acute and chronic illnesses, innovation still remains critically important in the continuous and ever complex battle between disease and good health. Ongoing efforts in Research & Development (R&D) would require a robust national policy environment that would encourage, protect and reward innovation. Improving healthcare environment in partnership with the Government remains a priority for the Research based Pharmaceutical Companies in India, both global and local.

Continuous improvement in ‘Access to Medicines’ is critical:

Therefore, improving access to healthcare in general and medicines in particular should be on the top priority agenda of the policy makers in our country. High incidence of mortality and morbidity burden in a country like ours can only be addressed by improving Access to healthcare through a concerted partnership oriented strategy.

Some concerns still linger:

However, in the new paradigm, which has been designed to foster innovation in the country, there are still some loose knots to be tightened up to achieve the set objectives for the inclusive growth of the nation, in the longer term perspective.

These measures, in turn, will help improving the competitiveness of India vis-à-vis countries like China to attract appreciable investments towards R&D related to pharmaceutical and bio-pharmaceutical products. The Government has already initiated measures to expand the capacity of Indian judiciary and setting- up of fast-track specialized courts that can more effectively enforce Pharmaceutical patents with requisite technical expertise.

Industry should set examples in ‘Good Corporate Governance’ and ‘Global Good Manufacturing Practices’:

Another area of focus should be on corporate good governance. This encompasses adherence to high ethical standards in clinical trials, regulatory and legal compliance, working to prevent corrupt practices, high ethical standard in promotion of medicines and addressing all other issues that support good healthcare policies of the Government. In addition, Pharmaceutical Industry should take active measures to involve all concerned to fight the growing menace of counterfeit and spurious medicines, which significantly affect the lives of the ailing patients, all over the country.

All stakeholders should work in tandem:

It is obvious that the Pharmaceutical Industry alone will have a limited role to address key healthcare issues of our nation, especially when around 400 million Below the Poverty Line (BPL) population will not be able to afford any expenses towards healthcare, at all. All stakeholders like the government, corporate and the civil society in general, must work together according to their respective abilities, obligations and enlightened societal interests to effectively address such pressing issues.

Let us move ahead from ‘Price Control’ to ‘Price Monitoring’:

Despite Medicine Prices in India being one of the lowest in the world, mainly because of stiff competition within the industry and watchful eye of an effective price regulator, 100% of the Pharmaceutical market in the country is currently being price regulated by the Government even with the growth restrictive and ‘draconian’ ‘Third Schedule’ of the DPCO 95.

To enable the Industry to be globally competitive in all aspects of its operations, the government should move ahead from ‘Price Control’ to effective ‘Price monitoring’ mechanism and scrap the growth restrictive measures like, ‘third schedule’ of the current DPCO.

Transaction costs of medicines are too high:

Current transaction costs (all taxes) on medicines in India including trade margins is as high as over 50% of the ex-factory cost of a product.

This cost has been further increased in 2011-12 Union Budget proposal. The government should reduce exorbitantly high transaction costs to make medicines even more economical to the common man.

Conclusion:

I am confident, the entire Pharmaceutical Industry in India would continue to act responsibly with demonstrable commitment to help achieving the healthcare objectives of the nation.

Global players will keep on searching for their suitable targets in the emerging markets like India, just as Indian players are searching for the same in the global markets. This is a process of consolidation in any industry and will continue to take place across the world. Adverse impact of M&A on competition, if any, will now be effectively taken care of by the CCI.

So far as the ‘Financial Reform’ process is concerned, India has always been a slow starter, but it never walked backwards. This tradition, I reckon, will continue in the vibrant democracy of the country, in future too.

By: Tapan J Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.