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Balancing Opportunity and Risk in India’s Pharmaceutical Sector

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India’s pharmaceutical industry has grown tremendously over the past thirty years and is now the world’s third largest drug producer as measured by volume.

Hyderabad is one of India’s major cities for pharmaceutical production.

Hyderabad is one of India’s major cities for pharmaceutical production.Just in the last few years, the pharmaceutical industry in India has experienced double-digit growth and is expected to be worth $55 billion by the year 2020, up from $20 billion in 2015. The country is the world’s largest producer of generic drugs and Indian generics account for 20% of global exports in terms of volume. Furthermore, India has a large talent pool of engineers and scientists who have the potential to help the pharmaceutical industry there grow even more.

Additionally, India’s Union Cabinet has approved amendment of the country’s existing Foreign Direct Investment (FDI) policy in pharmaceuticals to allow FDI of up to 100% for manufacturing of medical devices in certain cases. In short, the Indian pharmaceutical market is huge and represents potentially enormous opportunity for pharmaceutical investment.

Patterns of Drug Consumption in India

As recently as 2001, drugs for acute conditions, such as gastrointestinal drugs and anti-infective drugs accounted for half of India’s domestic pharmaceutical market, but by 2012, such medicines accounted for only 36% of demand. At the same time, drugs for chronic conditions, like cardiovascular disease, diabetes, and other chronic conditions have grown to account for 64% of total sales in India.

For example, as many as 50 million Indians have type 2 diabetes, and that number is expected to rise to over 73 million by 2025. Even at a per capita cost of treating diabetes in Indians of only $420 per year, the value of prophylaxis against diabetes could save around $8 billion per year in healthcare costs. On the whole, patterns of drug consumption in India are changing to be more like the patterns seen in western countries.

India Concerned about International Mergers and Acquisitions

Merger and acquisition action in India’s pharmaceutical sector is strong at the moment, and multinational companies are busily scouting potential targets in India to complement their existing portfolios and add to their growth.

The Indian government is concerned that M&A activity by multinationals could destabilize drug prices there. 

The Indian government is concerned that M&A activity by multinationals could destabilize drug pricesBut the Indian government is concerned about unrestrained M&A activity by multinational companies ultimately hindering the country’s ability to produce the low-cost generics it is known for. Government agencies fear that too much in the way of multinational M&A activity will destabilize drug prices, allowing foreign interests to take control of a bigger share of the country’s pharmaceutical sector. As a result, the Indian government is considering further changing their FDI policy by incorporating new conditions into it, like mandatory R&D investment by foreign pharmaceutical investment projects.

The Problem of Counterfeit Drugs in India

The immense growth in pharmaceuticals in India has resulted in a much bigger problem of substandard or outright counterfeit drugs in India. A recent WHO report states that 20% of the drugs sold in India are counterfeit, while at the same time India contributes 35% of the counterfeit drugs that flood the world market. This has had a measurable negative effect on India’s reputation as an international pharmaceutical investment market.

The main reason for the rise in counterfeit drugs in India is simple lack of manpower in India’s FDA, with not nearly enough drug inspectors to keep up with need. The fact is, with the tremendous growth of the pharmaceutical industry in India since the early 2000s, opportunities for charlatans to make fast money through counterfeits increased as well.

American Concerns about IP Infringement

American pharmaceutical lobbyists have long expressed concerns about possible Indian infringement on drug patents. In 2005, India implemented its own, flexible laws relating to patent protection in general, and it has had a huge effect on drug patents. Moreover, other drug companies in different countries may feel emboldened by India’s actions to stand up against global drug patents. No one can say what will happen, because technically India has not violated any treaty obligations and could look to the WTO for help if the U.S. should consider trade sanctions.

Pharmaceutical investment in India presents unprecedented opportunities, but they are tempered by problems with counterfeit drugs, potential Indian policies against unfettered FDI, and possibilities of countries like the U.S. fighting back against drug patent infringement through actions like withdrawal of tariff preferences for Indian exports.

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