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Business opportunities in India

It is a widely accepted fact that Foreign Direct Investment (FDI) in the Pharmaceutical industry, just like in any other industry, is important for an emerging economy like India.

 

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Under the present scenario of rapid rise in pharmaceutical market it is expected through various analyst the total healthcare market could rise from Rs 1,030 billion ($22.2 billion) currently (5.2 percent of GDP) to Rs 2,320 billion ($50 billion)-Rs 3,200 billion ($69 billion) (6.2-8.5 percent of GDP) by 2012.

100 % foreign Direct Investment is permitted for manufacture of drugs and pharmaceuticals provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology and specific cell/tissue targeted formulations.

Foreign Direct Investment proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology and specific cell/tissue targeted formulations will require prior Govt. approval. Government vide its official Gazette dated 23 September 2005 has removed licensing requirements for Drugs & Pharmaceuticals sector.

FDI in hospitals is allowed upto 100%. In India this sector provides good opportunities and growth. Number of multi-specialty hospitals and healthcare centers are doing well and more are being established.

Key drivers for FDI:

Following are the key factors, which attract FDI in the pharmaceutical sector, especially in an emerging market like India:

Domestic market size, prospects for future market growth,

1. Cheaper operating cost

2. Cheaper input and English-speaking skilled manpower cost

3. Regulatory environment

4. Pricing environment

5. Robust IT infrastructure

6. Legal, IPR and financial framework

Types of FDIs in the Pharmaceutical sector of India:

There are mainly three types of FDIs that we have witnessed so far in India:

1. Green field investment: Like, setting up new manufacturing facility at Vizag by Eisai of Japan

2. Brown field investment: Like, acquisition of Ranbaxy by Daiichi Sankyo of Japan, Piramal Healthcare by Abbott USA or Shantha Biotech by Sanofi Aventis of France.

3. Joint venture: Like, Bayer Healthcare and Cadila Healthcare or Sun Pharma and MSD etc.

Besides these, as mentioned below, there have been some collaborative arrangements, as well, between global and Indian Pharmaceutical companies in the last five years like, GSK with Dr. Reddy’s Laboratories (DRL), Pfizer with Biocon etc.

Relationship between FDI and Intellectual Property (IP) Environment:

Some recent media reports in various parts of the world including India had highlighted that China attracts more investment from foreign drug makers due to more robust Intellectual Property (IP) laws in that country.

US Trade Representatives (USTR) is one such agency which evaluates the adequacy and effectiveness of protection of Intellectual Property Rights (IPR) with US trading partners in various countries of the world through annual release of their 'Special 301 Report'.

Some important FDI in India from 2006 to 2011

Year

Indian Companies

Multinational Companies

Value ($Mn)

Type

2006 

 

 

 

 

 

Matrix Labs

Mylan

736

Acquisition

 

Dabur Pharma

Fresenius Kabi

219

Acquisition

 

Ranbaxy Labs

Daiichi Sankyo

4,600

Acquisition

 

Shantha Biotech

Sanofi-aventis

783

Acquisition

2009 

 

 

 

 

 

Orchid Chemicals

Hospira

400

Business Buyout

 

Aurobindo Pharma

Pfizer

Not disclosed

Generic Development and Supply

 

Dr Reddy’s  Labs

GlaxoSmithKline

Not disclosed

Generic Development and Supply

2010 

 

 

 

 

 

Piramal Healthcare

Abbott

3,720

Business Buyout

 

Paras Pharma

Reckitt Benkiser

726

Acquisition

 

Claris Lifesciences

Pfizer

Not disclosed

Generic Development and Supply

 

Biocon

Pfizer

350

Insulin Marketing Deal

2011

 

 

 

 

 

Cadila Healthcare

Bayer

Not disclosed

Marketing Joint Venture

 

Sun Pharma

Merck & Co.

Not disclosed

Marketing, Manufacturing Joint Venture



Interview

'Pharma and life sciences to be one of top three FDI attracting sectors in India'


Over the past few years, the number of FDI investors has been increasing with keen interest in the pharma and life sciences sector. Vikram Gupta, Chief Operating Officer, India Venture Advisors discusses the nature of these FDI's in India with Usha Sharma

Could you explain the sudden FDI interest and activities in the Indian pharma and lifesciences sector?

The confidence of the international investors has been growing in the Indian pharma sector post the enactment of product patents in January 2005. Many global pharma companies have/are in the process of setting up their own base in India by increasing stake in their own Indian subsidiaries or collaborating with local pharma companies. Post 2005, about 17 patents have been filed in India for new products. This number is expected to increase over time as more and more companies gain positive experience of doing business in India. The Indian pharma and life sciences sector is expected to grow through the launch of new products from India's own New Chemical Entities (NCE) pipeline, increasing number of in-licensing and out-licensing deals between Indian and foreign companies and consolidation in the sector with Indian companies acquiring assets in India as well as abroad.

Another factor is that for the production of drugs and pharmaceuticals, an FDI of 100 percent is allowed, subject to the fact that the venture does not attract compulsory licensing and does not involve use of recombinant DNA technology.

Who are the major global players in Private Equity (PE) activities, specifically for pharma?

In the developed markets, many PE funds have been created with specific focus on pharma and life sciences sectors. Some of them have been increasing activity in India as well. Well known names that have been operating in the US and European markets are Domain Associates, MPM Capital, Alta Partners, SV Life Sciences Advisers, Burrill & Company, OrbiMed Advisors, Quaker BioVentures and Venrock Associates. On the Indian side, the Ajay Piramal Group sponsored IndiaVenture Fund. This fund is focused on making investments across the entire healthcare and life sciences domain including hospitals, pharma and biotech, healthcare IT, retail pharmacies, clinical research, medical devices etc.

In the current market situation, how are Venture Capital (VC) and PE companies structuring their investments and returns from pharma companies?

While VC and PE firms looking at pharma and life sciences sector are being selective with their money, the economic crisis has not had a substantial negative impact on their activities. Pharma and life sciences investors are in it with intent to capture the opportunity offered by the sector as they are not very susceptible to short-term problems. In fact, the sector's desperation for cash has led to better deal terms for VCs. And companies that do secure funding are using it wisely, since they cannot afford to waste money anymore. In many cases, the best business plans are able to raise funding while less promising ideas fall by the wayside.

Mostly PE companies structure their investments in order to protect their returns and to ensure that they are able to exit from their investments within their defined time frames (typically three to five years). The nature of the sector is such that VCs need to look at all the avenues for value creation once they have made the investment. In order to accomplish value creation, the PE companies negotiate for at least one board seat. PE funds also look for opportunities to create value through cross sector synergies across their portfolio of companies. In case of our IndiaVenture Fund, we get benefited by the relationships of Ajay Piramal group that have been created over two decades across the entire healthcare and life sciences domain.

What has been the estimated FDI in the pharma/lifesciences industry over the past five years?

The total cumulative FDI that has come into India till date is about $110 billion. However, 80 percent of this FDI inflow has happened from April 2000 to March 2009 (nearly $90 billion). In the financial year 2009, the total FDI was $27 billion and in the financial year 2008, the FDI inflow was at $24 billion.

So far the Indian drug and pharmaceutical sector has attracted close to $2 billion in FDI in cumulative value. The sector has been able to attract FDI amounting to $1.4 billion from April 2000 to December 2008. This sector has become one of the top sectors for FDI in India. However, with the recent downfall in the global economies, PE investments declined 34 percent to $303.0 million in 2008, compared to $459.2 million invested during first 10 months of 2007. Average PE deal size in 2008 came down to $16.8 million from $30.6 million in 2007.

Till now, which country has shown keen interest in India? Why?

Mauritius has contributed the maximum (about 40 to 50 percent of the total FDI), $40 billion from FY 2000 to FY 2009 and about $2.5 billion in FY 2010 so far. The top five countries with highest cumulative FDI into India are--Mauritius (44 percent), Singapore (nine percent), USA (seven percent), UK (six percent) and Netherlands (four percent). Mauritius and Singapore offer significant tax and regulatory advantages to the investors. That is the primary reason majority of the PE funds are housed in Mauritius and a few are based in Singapore.

What kind of returns have been observed by FDI investors?

There are not many examples in the Indian pharma and life sciences sector where the FDI investors have exited their investments. However, just to give an example, early investors in Biocon have made tremendous returns. ICICI venture paid Rs 18 crore for a 15 percent in March 2000, and sold its holding (it was diluted to 12.5 percent after intra-group mergers) in 2002 for Rs 46 crore to AIG investments and GW capital. That's a 156 percent return in just over two years. In March 2004, Biocon went in for an IPO at a price of Rs 315 per share. AIG investments and GW capital made huge returns on this investment. Not every investment would yield these kinds of returns, but the sector offers unique opportunities for making good returns if invested properly.

Why are developed countries investing their funds via other countries, and how does this channel of investment benefit them?

Each country has different regulations, taxes and exchange restrictions, as well as limitations on personal freedoms of speech, privacy and petition of grievances—that affects the decisions of investors about where to put their investments. Some countries have become highly specialised in attracting international investors and have created conducive environment for these investors. However, countries where the growth investment opportunities exist may not necessarily offer specialised tax or regulatory incentives even though they may have well defined tax treaties with countries offering better tax and regulatory environment.

What are the factors affecting the growth of FDI investments?

FDI in any country, directly or indirectly impacts the environmental, governance and social issues. Typically, the host country limits the extent of impact that may be made by the FDI to ensure adequate protection for small scale businesses. At times certain foreign policies may not be appreciated by the workers of the recipient country. Some disadvantage of FDI pertain to the fact is that there is a chance that a company may lose out on its ownership to an overseas company. This has often caused many companies to approach foreign direct investment with a certain amount of caution. India showed initial resistance to FDI because of the above reasons. However, the overall impact of the FDI investments has been positive for the growth of the country.

The Government of India has a well-defined and transparent FDI policy. This includes opening of many new sectors to FDI, raising FDI equity caps in sectors already opened and procedural simplification. The FDI policy in India is widely reckoned to be among the most liberal in emerging economies and FDI up to 100 percent is allowed under the automatic route in most sectors and activities.

Given the critical role that technological innovation plays in the sector and the role that IPRs play in the ability of the pharma sector to capitalise on that innovation, it is not surprising to find a positive relationship between IPRs and FDI in the sector. The strength of IPR protection appears to be one important factor, among others, influencing trade and investment decisions in the sector.

Where do you see FDI investments in the pharma and lifesciences sector in India in the future?

The Indian pharma and life sciences sector will continue to internationalise and seek to capitalise on new market opportunities around the world.

Moreover, as intellectual property standards in India continue to provide increasing comfort to the international community, one could reasonably anticipate geographic diversification in the types of investments in the sector, including R&D.

In this context, one can expect growth in the FDI as firms seek to exploit locational advantages of sites around the world and thereby contain costs or position themselves strategically.

In the coming years, I expect this sector to be one of the top three sectors attracting FDI in India.

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