Wednesday, June 3, 2020

Understanding how FDI in Pharma Sector takes place and the Opportunities that Covid19 Presents


INTRODUCTION

Over the years, India has been a center point for manufacturing and supply of affordable generic medicines across the world and has witnessed a steady flow of foreign direct investment (FDI) in this sector. Foreign investors looking to invest in India often consider Brownfield Pharmaceutical by tapping the M&A route.

However, FDI in this sector stood at $266 million for the period, a huge dip from $1,010 million in the corresponding period of the previous year, data recently released by the Department for Promotion of Industry and Internal Trade showed. Medical devices too reported an FDI dip to $66 million in the year ended December 2018, compared to $439 million in 2016.
 
But owing to the crisis put forth by Covid19 pandemic pharma sector has gained much of the global attention, with many global players opting to move operations out of China, and therefore India offers to be a strong alternative contender. India has a distinct advantage in this area and the Indian government is also pushing for reforms and rolling out the red carpet for businesses looking to invest in India.

Let us now understand how FDI in Indian Pharma sector takes place.

FDI Policy

According to present FDI Policy, the FDI in Pharmaceutical sector makes a distinction between greenfield and brownfield investment.

Greenfield Pharmaceuticals

Greenfield investment means the investment in new plants. It implies establishing new production capacity by an investor, and requires availing of industry licences etc.

FDI in Greenfield Pharmaceuticals is allowed under 100% Automatic Route, which implies that no government approval is required for making the investment.

Brownfield Pharmaceuticals

Brownfield investment refers to investment in an existing plant. Brownfield investment is usually made through M&A. Brownfield investment saves the initial time and cost to start-up a project because essential infrastructure (such as production facility, capital equipment, local labour and local approvals, etc.) already exists, and is a relatively quicker and cheaper alternative to a greenfield project.

FDI in Brownfield Pharmaceuticals is permitted for up to 74% under the automatic route. However, investments above 74% are made under the approval route, for which the government approval is required.

The competent authority for grant of approval for FDI in the Pharmaceuticals sector is the Department of Pharmaceuticals.

Medical Devices
FDI up to 100%, under the automatic route is permitted for manufacturing of medical devices. This is applicable to greenfield as well as brownfield projects.

Definition of Medical Devices:
Medical device means-
(a.) any instrument, apparatus, appliance, implant, material or other article, whether used alone or in combination, including the software, intended by its manufacturer to be used specially for human beings or animals for one or more of the specific purposes of-
-      diagnosis, prevention, monitoring, treatment or alleviation of any disease or disorder;
-       diagnosis, monitoring, treatment, alleviation of, or assistance for, any injury or handicap;
-     investigation, replacement or modification or support of the anatomy or of a physiological process;
-        supporting or sustaining life;
-        disinfection of medical devices;
-     control of conception, and which does not achieve its primary intended action in or on the human body or animals by any pharmacological or immunological or metabolic means, but which may be assisted in its intended function by such means;
(b) an accessory to such an instrument, apparatus, appliance, material or other article;c. a device which is reagent, reagent product, calibrator, control material, kit, instrument, apparatus, equipment or system whether used alone or in combination thereof intended to be used for examination and providing information for medical or diagnostic purposes by means of in vitro examination of specimens derived from the human body or animals. 

(The definition of medical device above would be subject to the amendment in Drugs and Cosmetics Act)

OTHER IMPORTANT CONDITIONS

Following are the conditions that are applicable to both, greenfield and brownfield FDI:

(i) ‘Non-compete’ clause would not be allowed under both automatic and government approval routes, except in special circumstances and that too only with the approval of the Government.
(ii) The prospective investor and the prospective investee are required to provide a certificate along with the application for foreign investment as per Annexure-10.

(iii) Government may incorporate appropriate conditions for FDI in brownfield cases, at the time of granting approval.

Furthermore FDI in brownfield pharmaceuticals (under both automatic and government approval route), is further subject to the compliance of following conditions:
  1. The production and supply level of certain medicines at certain rate to be maintained at the time of induction of FDI, being maintained over the next five years.
  2. R&D (Research and Development) expenses being maintained in certain value terms for 5 years at the time of induction of FDI.
  3. The administrative Ministry will be provided complete information pertaining to the transfer of technology, if any, along with induction of FDI into the investee company.
  4. The administrative Ministry (Ministry of Health and Family Welfare, Department of Pharmaceuticals or any other regulatory Agency/Development as notified by Central Government from time to time), will monitor the compliance of these conditions.

OPPORTUNITIES PRESENTED BY COVID19
As mentioned earlier, owing to the crisis put forth by Covid19 pandemic, the Pharma sector has gained much of the global attention lately, with many global players opting to move operations out of China, and therefore India offers to be a strong alternative contender. India has a distinct advantage in this area and the Indian government is also pushing for reforms and rolling out the red carpet for businesses looking to invest in India.
 
Now more than ever, the investment in the sector is likely to gain further momentum. India has a distinct advantage in this area and the Indian government is also continuously bringing welcoming reforms for investors desiring to invest in India. Such investments would also reduce the domestic dependencies of Indian manufacturers who look over to China for importing APIs (Active Pharmaceutical Ingredients).

Recently, the Government of India has recently announced a package of INR 140 billion for setting up bulk drugs and medical devices parks. Funds allocated herein are to be utilized for financing common infrastructure facilities and incentivising domestic production of bulk drugs/ APIs and medical devices, in order to reduce the dependency on China for import, and further giving a further boost to pharma manufacturing in India and attracting further investments in the Pharma sector.

CONCLUSION
India’s FDI policy for investment in the pharma sector has undergone significant changes in the past decade, steering the industry to the present scenario. And now owing to the Covid19 crisis, the Pharma sector is in the center of hot global attention, and with the businesses willing to move out of China, India stands a much prospective opportunity in the near future in terms of attracting Foreign Direct Investment in the Pharmaceutical sector. 

References:
-  Consolidated FDI Policy(Effective from August28, 2017)
- https://corporate.cyrilamarchandblogs.com/2020/06/fdi-in-brownfield-pharma-will-covid-19-be-the-catalyst-for-policy-reform/
-  https://www.fdi.finance/sectors/pharmaceuticals