India Weighs Investment Cap in Pharmaceutical Sector; Proposal Would Bar Foreigners From Owning More Than 49% of Makers of ‘Rare and Critical’ Drugs

India Weighs Investment Cap in Pharmaceutical Sector

Proposal Would Bar Foreigners From Owning More Than 49% of Makers of ‘Rare and Critical’ Drugs

RAJESH ROY And KENAN MACHADO

Updated Nov. 18, 2013 10:01 a.m. ET

NEW DELHI—India is considering sharp new limits on investment in the country’s pharmaceutical industry that would bar foreign companies from taking control of makers of “rare and critical” medicines, a senior government official said Monday.New draft rules before the cabinet would bar foreigners from owning more than 49% of Indian manufacturers of such drugs, the official said. The official said the aim is to ensure adequate supplies of inexpensive, lifesaving medicines in India.

If approved, the measure would represent a significant retreat from an earlier liberalization of the industry, which in recent years has become a magnet for investment by international drug makers eager to boost production of generic medicines and build business in emerging markets.

It could also further weaken investor sentiment in India, which has flagged as economic growth has decelerated in the past year, focusing attention on the bureaucratic hurdles and other obstacles to businesses in the world’s second-most-populous country.

Under current law, foreigners are allowed to buy 100% of local drug makers. But Prime Minister Manmohan Singh ordered a reconsideration of that policy earlier this year after U.S. pharmaceutical companyMylan

Inc. MYL -1.31% struck a $1.6 billion deal to acquire Agila Specialties Pvt. Ltd., a maker of antibiotics and chemotherapy drugs.

That deal, which was approved by the government in September, caused an outcry among Indian politicians who complained that multinational drug companies could export Indian-made pharmaceuticals to more-profitable markets. India controls some medicine prices domestically.

The new proposed restrictions were framed by the Indian commerce ministry’s Department of Industrial Policy and Promotion. It would be up to the health ministry to decide what medicines qualify as rare and critical.

“We expect the cabinet to take a decision by end-November,” the official said.

If the rules are adopted and the health ministry takes a broad view of what medicines it considers critical, the deal-making environment for pharmaceutical companies and their investment bankers would become increasingly complicated.

Most Indian drug makers have products that could potentially fall into the category of rare and critical, said Rajesh Laddha, chief financial officer of Piramal Group, an Indian drug maker. “This will restrict foreign investment,” he said.

“The [Indian] industry will be a divided house,” said D.G. Shah, secretary-general of the Indian Pharmaceutical Alliance, a trade group for domestic drug makers.

Founders of Indian companies that want to sell might be disappointed by the restrictions, which could affect the value of their companies, he said. But others could welcome the proposals because they are likely to reduce competition from foreign companies, he said.

The proposed new rules would also include other provisions governing foreign investment in rare-and-critical-drug producers, the official said.

Among them, the official said: Companies would be required to devote 25% of their total investment within the first three years to building new manufacturing plants or research centers. It would also bar them from divesting themselves of any of the factories or R&D capabilities they had acquired.

The official cited a government study as finding that of the nearly $2 billion invested by foreign companies in India’s pharmaceutical sector between April 2012 and June 2013, just $90 million was used to construct new manufacturing facilities.

The study also said that if India’s top three drug makers were acquired by foreign companies, the share of India’s drug market controlled by foreigners would increase to 41% from about 25% now, the official said.