FDI in brownfield pharma projects – Critical analysis
Arvind Sharma, Partner, Shardul Amarchand Mangaldas & Co informs that the extant regulatory regime for FDI in brownfield projects follows a balanced approach as it safeguards supplies for domestic consumption and ensures foreign investments as well as technological advancement for the pharma sector
The COVID-19 crisis has bought the pharma sector back to the limelight, and foreign investors are seeing India as a viable option for investments and setting up and developing their manufacturing bases. To capitalise on this opportunity amid an increased focus on healthcare, it is important to ensure that the regulatory environment in India is conducive and aligned with global standards and practices.
Foreign Direct Investment (FDI) may either be in a:
- a) Greenfield project – where 100 per cent FDI is permitted without any prior approval from the Government of India (GOI); or
- b) Brownfield project – where up to 100 per cent FDI is permitted, with prior approval from the GOI for FDI exceeding 74 per cent.
To ensure that there is an adequate supply of pharma products for domestic consumption, and with a view to increase research and development (R&D) in the pharma sector, the extant FDI laws mandate the following requirements to be fulfilled for FDI in brownfield pharma projects under the automatic and approval route:
(a) Maintaining the production level of essential medicines, drugs, consumables and their supply to the domestic market at an absolute quantity level;
(b) Maintaining research and development expenses in value terms for five years at an absolute quantity level, and
(c) Providing complete information relating to the transfer of technology to the concerned ministry.
In addition to above, the GOI may incorporate additional conditions for brownfield project investments at the time of granting approval. It may be noted that with a view to curb opportunistic takeovers of domestic companies, the GOI has recently prescribed a prior approval requirement where investments are coming in any sector from countries sharing land borders with India.
Thus, the extant regulatory regime in respect of the FDI in brownfield projects follows a balanced approach as it safeguards supplies for the domestic consumption, and ensures foreign investments and technological advancement for the pharma sector.
News reports suggest that Indian pharma companies are trading at their lowest valuations in the last 8-10 years, therefore opening up a huge opportunity for brownfield investments. Recently, US-based private equity giant Carlyle has completed the acquisition of 20 per cent stake in Piramal Pharma for approximately Rs 3500 crores. Another US-based private equity firm KKR has agreed to acquire 54 per cent stake in JB Chemicals and Pharmaceuticals for around Rs 3100 crores. Advent International has signed a definitive agreement to acquire a controlling stake in RA Chem Pharma, a vertically integrated pharma company, at a valuation of Rs 1000 crores. Earlier this year, True North has invested $100 million in Biocon Biologics. The significant rise in pharma M&A deals in the last few years goes on to show the success of the brownfield pharma regulatory regime in India.
As per the Department for Promotion of Industry and Internal Trade, Indian pharma attracted FDI worth Rs 3600 crores in the financial year 2019-20, up by 98.1 per cent from Rs 1850 crores in the financial year 2018-19. According to a GlobalData report, there is immense potential for private equity investment in India’s contract manufacturing organisation market, with over 1600 manufacturing facilities (across close to 1000 companies).
Looking at the recent pharma deals and the attractive valuations, I am sure that there will be a lot of mergers and acquisitions in the pharma sector in the near future. This will definitely help in strengthening the economic sentiment and lead to several opportunities for various stakeholders.
Inorganic growth has been key for the pharma sector, and every stakeholder benefits in the process – for domestic companies, there is immediate access to latest technology and capital; for the domestic populace, there are new employment opportunities and a better standard of living; and for the economy, there is accelerated economic growth and increased foreign exchange inflow.
FDI in brownfield pharma projects is further necessitated by the COVID-19 pandemic with India being a supplier of 50 per cent vaccines for the whole world, and global majors looking to enter into various partnerships and collaboration arrangements with Indian companies. For instance, Bharat Biotech, based in Hyderabad, is collaborating with a US biotech firm, FluGen, amongst others, for developing a coronavirus vaccine. Russia’s sovereign wealth fund RDIF is looking for partnerships with India, for mass production of its Sputnik V vaccine, and it has already announced a partnership with Dr Reddy’s for clinical trials and distribution of vaccine in India.
To enhance self-sufficiency on active pharma ingredients (APIs) and key supply materials (KSMs), the GOI has laid the red-carpet for foreign investors who are looking to set up a base or develop their base in India. Besides, industry experts believe that the cost of manufacturing in India is around 30 per cent lower than that in the US. India has been a preferred destination for many foreign companies with advantages such as low cost of production and undertaking R&D activities, skilled manpower, adequate infrastructure facilities and evolving regulatory set-up. It also is notable that India has recently introduced key reforms in labour legislations where multiple labour laws have been combined into four labour law codes to ease compliance and hiring activities for companies. Further, at the regional level, various state governments have also come up with attractive policies to woo pharma companies.
A pharma package of Rs 140 billion was introduced to facilitate setting up of bulk drugs and medical devices parks under a production linked incentive (PLI) scheme which is currently applicable for greenfield projects only, and as many as 29 companies have applied for the PLI scheme.
The PLI scheme intends to bring down manufacturing costs of bulk drugs by providing financial assistance to set up bulk drug parks where common infrastructure facilities are made available to pharma companies. Given the response to the PLI scheme and the recent rise in the brownfield pharma investments, one would expect that the PLI scheme will also be extended to brownfield project investments, with sufficient safeguards in place.
The advantage that India offers for the manufacture of pharma products and recent progressive policy measures will contribute to incentivising investments in the brownfield pharma sector.