No sign pharma takeovers result in production cuts
While the government tries to battle the perception that India is a bad place to invest in—it even plans to raise FDI caps in areas like defence production and telecom—a good place to begin would be to see what the bureaucracy has done to the existing policies. The case of retail is well known where, after the government put its soul into getting Parliament to clear FDI in multi-brand retail, the bureaucracy has ensured no project has come up for approval. All kinds of riders have been put in to make it impossible for a company to function, indeed the latest set of “clarifications” issued by the industry ministry made it even harder for foreigners to set up shop in the country. Even more absurd is the industry ministry’s move to try and get the government to not clear FDI proposals for taking over existing pharmaceuticals plants—in jargon, FDI can be allowed in greenfield projects, not in brownfield ones; let Abbott set up new plants in India, the industry ministry argues, but let it not feel free to buy up a Piramal Labs without explicit government permission. The idea, ostensibly, is to ensure that Abbott doesn’t stop producing the drugs Piramal Labs did. This, as we’ve pointed out before, is a frivolous objection in an industry where there are over 5,000 manufacturing units and where there are an average of 60 firms producing even drugs in the National List of Essential Medicines.
More interestingly, as FE reported yesterday, there is no evidence that production has fallen in the pharma firms taken over by MNCs like Abbott. In large-selling molecules like atorvastatin, between 2009 and 2012, industry sales rose over 14% per year. Which means, even if the MNCs lowered production in the units they took over, there were others who took up the slack. But detailed production data from the pharma firms taken over shows sales grew in even these cases—in the case of anti-inflamatory Volini, for instance, production at Ranbaxy rose from R57 crore when Daiichi took it over in 2008 to R186 crore in 2013. Similar numbers apply to production levels at other pharma firms taken over by MNCs. And why not, if something is profitable for Ranbaxy, why should a Daiichi stop producing it? At some point, the government has to start trusting the market. It is, of course, doing the exact opposite right now by stalling a hike in gas prices and it will be interesting to see the market impact of this since even the state-owned ONGC has made it clear it cannot explore for gas at the current prices. In the case of telecom, where the regulator allowed the market to function after putting certain systems in place, the market grew dramatically and prices fell to among the lowest in the world. This is the lesson the government needs to learn if it wants investors to start trusting it all over again.