Pharma in foreign direct investment

FOREIGN DIRECT INVESTMENT IN PHARMA

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PHARMA

CONTENTS

1 . INTRODUCTION……………………………………………………………………………………………………………………2

2 . HISTORY………………………………………………………………………………………………………………………………2

3 . INVESTMENTS……………………………………………………………………………………………………………………..2

4 . GOVERNMENT INITIATIVES…………………………………………………………………………………………………3

5 . FACTORS…………………………………………………………………………………………………………………………….4

6 . INFLOWS OF FDI IN INDIAN PHARMACEUTICAL SECTOR…………………………………………………….5

7 . STRATEGIES AND IMPLICATION FOR FDI IN INDIAN PHARMACEUTICAL INDUSTRY…………….6

8 . CONCLUSION……………………………………………………………………………………………………………………..7


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INTRODUCTION

Foreign investments add a great deal to India’s economy. The continuous inflow of foreign direct investment (FDI), which is now allowed across several industries,

clearly shows the faith that overseas investors have in the country's economy. FDI inflows to India increased 17 per cent in 2013 to reach US$ 28 billion, as per a United

Nations (UN) report.

HISTORY

The number of purely Indian pharma companies is fairly less. Indian pharma

industry is mainly operated as well as controlled by dominant foreign companies having

subsidiaries in India due to availability of cheap labor in India at lowest cost. In 2002,

over 20,000 registered drug manufacturers in India sold $9 billion worth of formulations

and bulk drugs. 85% of these formulations were sold in India while over 60% of the bulk

drugs were exported, mostly to the United States and Russia. Most of the players in the

market are small-to-medium enterprises; 250 of the largest companies control 70% of

the Indian market. Thanks to the 1970 Patent Act, multinationals represent only 35% of

the market, down from 70% thirty years ago.

Most pharmaceutical companies operating in India, even the multinationals,

employ Indians almost exclusively from the lowest ranks to high level management.

Homegrown pharmaceuticals, like many other businesses in India, are often a mix of

public and private enterprise.

INVESTMENTS

US-based Nike has made a proposal to the Department of Industrial Policy and

Promotion (DIPP) to set up fully-owned stores in India. Nike is one of the world's largest suppliers of athletic shoes and apparel globally, with a market

capitalisation of US$ 68 billion.

US-based Milacron Llc plans to invest US$ 30 million in the next three years in its India operations – Ferromatik Milacron India Pvt Ltd (FMI), as per president and CEO, Mr Thomas Goeke. FMI manufactures plastic moulding machines at its

plants in Ahmedabad in Gujarat and Coimbatore in Tamil Nadu.


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Bengal looks set for one of its biggest foreign investments. A large private equity

firm which has exposure in social infrastructure and agriculture plans to invest over Rs 300 crore (US$ 49.02 million) in the proposed Dankuni food park

promoted by Keventer Group.

The Foreign Investment Promotion Board (FIPB) has approved a proposal from

InterGlobe Aviation, the company that runs IndiGo, to reclassify shareholding of promoter Rakesh Gangwal as Non-Resident Indian (NRI) from FDI at present.

This move enables the airline to have access to fresh FDI.

Chinese telecom equipment maker ZTE Corporation plans to establish a Global Network Operating Centre (GNOC) in India. The centre will seek to manage the networks of multiple telecom carriers in Asia and Africa.

Japan's Suzuki Motor Corporation (SMC), the parent company of Maruti Suzuki,

will spend Rs 18,500 crore (US$ 3.02 billion) to establish a new factory in Gujarat. SMC plans to establish a 100 per cent subsidiary, Suzuki Motor Gujarat (SMG), to manufacture cars on a strictly no-loss, no-profit basis for Maruti

Suzuki.

GOVERNMENT INITIATIVES

India’s cabinet has cleared a proposal which allows 100 per cent FDI in railway

infrastructure, excluding operations. Though the move does not allow foreign firms to operate trains, it allows them to do other things such as create the

network and supply trains for bullet trains etc.

Additionally, based on the recommendations of the FIPB in its meeting held on June 11, 2014, the government approved 19 proposals of FDI amounting to about Rs 2,326.72 crore (US$ 380.25 million).

The Union Cabinet has cleared a bill to raise the foreign investment ceiling in

private insurance companies from 26 per cent to 49 per cent, with the proviso that the management and control of the companies must be with Indians.

The Reserve Bank of India (RBI) has allowed a number of foreign investors to invest, on repatriation basis, in non-convertible/ redeemable preference shares or

debentures which are issued by Indian companies and are listed on established stock exchanges in the country.


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The drugs and pharmaceutical industry plays a pivotal role in the economic

development of india. being a very intense knowledge-based industry, it offers innumerable business opportunities for investors worldwide. indian pharmaceutical

exports accounts for export to more than 200 countries around the world. the annual turnover of pharmaceutical products contributes to about us$ 17 billion. in recent

times, the indian pharmaceutical industry has shown tremendous growth in terms of infrastructure development, product usage, and technology.

THE PHARMACEUTICAL INDUSTRY IN INDIA PROVIDES SEVERAL

OPPORTUNITIES FOR INVESTMENTS AND TRADE DUE TO THE FOLLOWING

FACTORS:

1. With respect to India's huge population it is an excellent center for clinical trials.

2. India has efficient and cost-effective sources for getting a hold of generic drugs, especially the drugs that are going off their patents in the coming years. 3. India has abundant manpower with strong scientific, technical knowledge.

4. The cost involved for research and development is very low. 5. The production cost of quality drugs in bulk quantities is very low. 6. India houses excellent laboratories with world-class facilities. It has laboratories that

specialize in process development and the development of cost-efficient drug manufacturing technology.

7. India is self-reliant in terms of the production of bulk drugs. Almost 70% of the requirements

for the formulation of drugs is available within the country itself.

8. Another important factor that is responsible for attracting foreign investments in the Indian pharmaceutical sector is the increasing balance of trade in the pharma sector.

9. India's fast growing biotech industry, which offers great potential in the international market, also has contributed in making the pharma sector in India an attractive industry to make

investments.

10. Besides the presence of different systems of medicines, such as Siddha, Naturopahy, Ayurveda, Homeopathy apart from its strengths in manufacturing makes the Indian

pharmaceutical industry an attractive industry to invest in.


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INFLOWS OF FDI IN INDIAN PHARMACEUTICAL SECTOR :

o FDI inflow in Indian pharmaceutical was only US$0.3 million in 1991 and reach highest

US$334.1 million in 2007; thereafter it declined to US$181.5 million in 2008 i.e. 605 times of the figure of 1991.

o The growth rates indicates considerable fluctuations both in positive and negative rates

and highest was in 1992 (3600%) (DOP, 2009). The share of pharmaceutical industry

FDI in total FDI was 2.05% on an average.

o The inflow in pharmaceutical takes the mean of US$94.3 million and SD (Standard Deviation) of US$ 100.9 million. The fluctuation is demonstrated by the CV (Coefficient of Variation) of 1.07.

o The growth rate is 27% during 1991-2008. One of the reasons behind such high growth

rate is the big difference between the minimum and maximum value of FDI inflows in pharmaceutical industry.

o The pharmaceutical investment was US$ 38.4 million in 1991 it gradually increased to US$4117.1million in 2008, i.e. almost 107 times of the figure of 1991. The inflow of FDI

in Pharmaceutical sector was only US$0.3 million in 1991 and increased to US$ 181.5 million in 2008 (CMIE, 2010).

o The mean of the FDI inflows in the pharmaceutical industry is US$ 94.3 million with a SD of US$ 100.9 million.

o The t-ratio is statistically significant at 10% level. The CV is 1.24 in case of the

investment in pharmaceutical industry and 1.07 in case of the FDI inflows to demonstrate

the unstable nature of FDI inflows in the industry.

o In 1991 the export of the industry was only US$564.4million and through a gradual increase it took the amount of US$6257 million in 2008, which is nearly eleven times that of the 1991 figure (CMIE, 2010).

o The average takes a value of US$ 1862.2million. The SD is however quite impressive at

an amount of US$ 1758.7 million.

o The t-ratio is 5.84 to indicate that the mean is statistically significant at 10% level. The

CV is equally high at 0.94 suggesting that the estimate observes the fair extent of instability.


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STRATEGIES AND IMPLICATION FOR FDI IN

INDIAN PHARMACEUTICAL INDUSTRY:

The presence of foreign firms boosts the competitive environment in the pharmaceutical sector and spillover effects are generated through the elimination of insufficient

firms and faster adoption of technology. It will be further increased in near future due to TRIPs (Trade-Related aspects of Intellectual Property Rights) implementation. Besides the MNCs

invest a lot in training and positive externalities in the form of human capital development seem to be generated.

The FDI inflow in India in absolute figure is quite impressive, but when compared to

global flows, it is far from satisfaction. Thus, India at the moment needs a well-balanced strategy for enhanced FDI inflows in pharmaceutical sector. The following measures to attract FDI in India:

In order to promote FDI and maximize further spillover effects, polices should be investor friendly, with a clear developing strategy. The policies in India should encourage domestic firms

to invest more in R&D and technology up-gradation and human resources by providing suitable fiscal and financial incentives.

SMEs (Small and Medium Enterprises) contribute 42% of total pharmaceutical production

and 62% of total employment. Government should ensure that the SSI grows at a healthy rate as it is employment intensive sector. Lack of awareness in the area of patenting of technology, GMP (Good Manufacturing Practice) and GCP (Good Clinical Practice) is an issue with SMEs.

Government with the help of BDMA (Bulk Drug Manufacturers Association) and IDMA (Indian Drug Manufacturers Association) can conduct awareness camps for SMEs

Since R&D in pharmaceutical is a highly risky venture, there is dire need to give incentive

through tax concession on a permanent basis. It is suggested that the tax holidays should be at least 20-25 years because the development of any molecule takes at least 15-20 years.

The level of FDI in an industry is an important factor for possible spillover effects. When

the level of FDI is relatively low in an industry it can lead in insignificant result. This is also the case in the IPI. This should be enhanced by providing more investor friendly policies.

Government at various levels should take active part in disseminating knowledge about the

IPRs (Intellectual Property Rights) and the possible strategies that can be adopted by the industry. Lesson should be drawn from the Chinese experience where systematic efforts were

taken to educate the bureaucrats, policy makers and the industry about the WTO and product patent in pharmaceutical industry. India will have to strengthen the patent examination process and speed up the processing procedures.


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CONCLUSION

FDI is often seen as a catalyst of Indian pharmaceutical industry. As FDI comes with financial and managerial resources, access to large markets, technical assistance and strategic

assets, such as brand name, which give the host firms domestic and international comparative advantages. It has been noticed that there has been ample opportunity for the concentration of FDI in the sector particularly export and profitability of the sector.

The rate of return in the sector during 1991-2008 observed a tremendous increase. The

classical theory suggests that FDI seeks high returns. Based on that theory, there should be an

influx of foreign investment in Indian pharmaceutical sector. But there has been limited

statistical observation in support of this view. This indicates that structural constraints still play

a crucial role in the inflow of FDI in India.

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Pharma in foreign direct investment