Dear All,

In the last 15 years, Japan has invested around USD 18 Billion in Indian companies.1 Unsurprisingly, around 27.5% of the investment has been made into pharmaceutical companies2 as the industry presents tremendous opportunities. In 2014, Rohto Pharmaceuticals Japan acquired 40% equity stake in Deep Care Health Private Limited and was one of the major Japanese deals of the year.

BRIEF BACKGROUND OF THE INDIAN PHARMACEUTICAL INDUSTRY

India is among the top five emerging pharmaceutical markets, with sales expected to reach USD 27 billion by 2016.3 The industry is typically involved in four types of businesses - production of branded medicines, production of branded generic medicines, production of unbranded generic medicines and production of active pharmaceutical ingredients which are used as ingredients in medicines. India has also become a popular destination for outsourced contract research and manufacturing service. The contract manufacturing and research Industry has grown immensely and is currently estimated to be worth around USD 7.8 billion.4

IMPORTANT TRENDS IN THE PHARMA INDUSTRY

  • The Indian Pharmaceutical industry is witnessing healthy foreign direct investment, amalgamations and collaborations (such as licensing, co-development, joint distribution and joint ventures).
  • Domestic manufacturers are looking to tap into international generic markets with high margins and a healthy export growth is likely, with a large proportion of Abbreviated New Drug Application (ANDA) approvals being received by Indian manufacturers.
  • The Industry is witnessing a paradigm change as the focus is shifting from manufacturing of generic drugs to drug discovery and development. Indian companies are moving from manufacturing raw materials and APIs for supply to other companies who make finished medicines, to becoming full-fledged producers of finished products.
  • The industry is expected to undergo major reforms as well as favourable tax and policy structures under the new government.

INVESTING IN INDIAN PHARMA COMPANIES

Doing business in India is a challenge as well as an opportunity.

Foreign Direct Investment (FDI) is now permitted in almost all the sectors in India without obtaining prior regulatory approvals (i.e. under the “automatic route”) barring some exceptional cases like defense, housing and real estate, print media, etc. (referred to as the “negative list”). If the FDI is not in accordance with the prescribed guidelines or if the activity falls under the negative list, prior approval has to be obtained from the Foreign Investment Promotion Board (“FIPB”) (this route is also referred to as the “approval route”).

In the case of the pharmaceutical sector, FDI is permitted to the extent of 100% under the automatic route for a greenfield company (i.e. an undertaking that was not pre-existing). FDI in a brownfield company (i.e. an undertaking that is already in existence) is also permitted up to 100% but it has to come under the approval route. However, there has been a recent government clarification to reflect that any additional foreign investment into the same entity (within an approved foreign equity percentage) or into a wholly owned subsidiary will not require fresh governmental approval.

Moreover, in case of investment into existing companies, a non-compete condition with the existing shareholders is not permissible except in special circumstances with the approval of the FIPB.

LEGAL FRAMEWORK

To be aware of the legal framework is another must. Specifically, investors must keep an eye on the exchange control laws as they govern how profits made by the company can be realized out of India. Also, if a multi-national company is operating a wholly owned subsidiary in India, it must be make sure that the subsidiary is compliant with the regulatory framework and other product liability related laws to avoid any unpleasant legal proceedings.

The laws enumerated below are some of the most important laws that concern the Industry.

  • The Drugs and Cosmetics Act, 1940 and Rules, 1945: It regulates manufacturing, import, distribution and sale of pharmaceuticals (includes certain medical devices) and cosmetics.
  • The Drugs & Magic Remedies (Objectionable Advertisements) Act, 1954 and Rules, 1955: It Regulates advertisements of drugs relating to diagnosis / cure / mitigation / treatment / prevent of certain prescribed diseases and conditions.
  • The Indian Patents Act, 1970: It provides the framework for grant of process and product patents. The patent term for a product and process patent is 20 years.
  • The Drugs Price Control Order, 2013 (DPCO): It lays down the framework for price control of drugs identified as essential under the National List of Essential Medicines, 2011.
  • The Uniform Code for Pharmaceutical Marketing Practices (UCPMP): It regulates the marketing practices of the pharmaceutical industry.
  • The Income Tax Act, 1961: Income tax is a tax on income imposed by the Central Government. Residents in India are taxed on their worldwide income. Non-residents are taxed on the Indian source of income. The Indian tax rates applicable to non-residents could be up to 40% (excluding applicable surcharge). If the tax payable by any company, including a foreign company taxable in India, is less than 18.5% of its book profits, it will be required to pay Minimum Alternate Tax. The payments towards royalty and fees for technical services are subject to withholding taxes.
  • The Customs Act, 1963: It imposes import duty on all imported goods. Import of pharmaceuticals is liable to basic customs duty, additional customs duty and countervailing duty.
  • Central and State-specific Sales Tax / Value Added Tax (VAT) legislations: It imposes sales tax. Sales tax is a tax levied on the sale of pharmaceuticals.
  • The Excise Act, 1944: It imposes a duty on the manufacture of goods called Excise Duty. Excise duty is also referred to as CENVAT. It is payable on the manufacture of pharmaceuticals in India.
  • The Finance Act, 1994: It imposes a tax on all services unless a service qualifies as an exempt service. All contract research organizations have to pay service tax.

CONCLUSION

The Indian Pharmaceutical Industry has shown great potential and continues to grow consistently. Though, since health is an important subject, the industry continues to be regulated. Multiple Ministries continue to regulate the pharmaceutical industry such as the Health Ministry, Chemicals and Fertilizers Ministry, Science and Technology Ministry, Food Ministry etc.

However, the Indian generic drug sector is robust and is establishing its presence in foreign markets. Given that the regulatory framework has been streamlined further in the last couple of years, Indian generic companies have been seeing an increasing number of foreign investments. The new drug sector is also expected to record a healthy growth owing to significant industry wise increase in R&D expenditure and proposed new drug launches. Thus, the Indian pharmaceutical sector continues to be an attractive destination for multinational pharmaceutical companies and investors.