The Indian pharmaceutical industry is one of the most attractive investment destinations in the

world. With ever increasing returns, lowering risks and anticipated multifold growth, investors are
more interested in this industry than ever before. Since 2000, the drugs and pharma sector has
attracted one of the highest foreign direct investment (FDI) inflows of approximately $12,689
million (April 2000 to September 2014).1

Bhavik Narsana
From its nascent stages in the 1970s, the Indian pharma industry has become a mature industry.
While, the industry was previously known for manufacturing generic drugs, the industry dynamics
have now undergone a sea of change. Presently, the Indian pharma industry stands diversified
into various spheres of activities including research and development (R&D), manufacturing of
branded, generic and branded generic drugs, manufacturing APIs, laboratory testing and clinical
research. The Indian pharma industry ranks fourth in terms of volume and 13th in terms of value
globally.2
India has become a prime destination for manufacture of branded, generic and branded generic
medicines with a strong export element. It is estimated that around 40 per cent of the generic
drugs in the US come from India and with Obamacare being introduced this figure is set to rise
further.3 The spending pattern of an erstwhile manufacturing-oriented industry has also changed
with the industry spending around 18 per cent of revenue on R&D activities.4

Arijeet Mukherjee
Unlike many other countries, the involvement of the Indian government in the pharma industry
has been deep and often controversial. The government has made numerous efforts to stimulate
organised growth of the industry. In the pursuit of achieving global leadership in the manufacture
of end-to-end drugs, the government unveiled its Pharma Vision 2020, which inter alia, provides
for reduction in approval time for new facilities to boost investments. Further, robust mechanisms
such as the Drug (Prices Control) Orders and the National Pharmaceutical Pricing Authority
(NPPA) have been implemented to address the issue of affordability and availability of
medicines.5

The growth story of the Indian pharma industry into a mammoth industry is an impressive one
marked with numerous important turning points. These turning points have typically stemmed
from the issues faced by the industry and have changed the nature and mechanisms of the
industry, and to a large extent have sculpted the trends in the industry. In this article we aim to
explore a few issues that have affected the Indian pharma industry and how the scenario is
changing.
IPR: A changing face
Intellectual property rights (IPR) in the pharma sphere have been a contentious issue globally.
Previously, the IPR debates were typically between the branded pharma companies and generic
pharma companies. India was no exception to this IPR tussle and in view of the large poor
population in need of basic healthcare, the Indian authorities were initially not keen on granting
substantial IPR protection. However, over a period of time, the Indian authorities have become
more sensitised to the need and importance of IPR protection for the long-term good of industry.
Better patent protection
The (Indian) Patents Act was enacted in 1970 and inter alia contains provisions relating to
pharmaceutical patents. A major change in the patent laws in India was the enactment of the
Patent (Amendment) Act, 2005, which made patent laws in India compliant with the TRIPS.
Prior to the 2005 amendment, only processes were patentable and not the end product itself.
Therefore, if a company chose to manufacture the same product but used a different process, it
could do so without violating Indian patent laws. This regime naturally caused concerns to
various companies, especially branded manufacturers, as it did not protect their inventions fully
and allowed others to manufacture the same drug, which would have otherwise enjoyed patent
protection in other jurisdictions. With the 2005 amendment being enacted, product patents and
process patents have been permitted for a period of 20 years and special provisions have been
introduced to prevent ever-greening of patents.
The 2005 amendment is viewed as a milestone which substantially changed the protection
regime in India. However, patent disputes have regularly arisen in India, recently in the context of
compulsory licensing.
Locking horns on compulsory licensing
Though there was an overall improvement in patent protection in India, recent issues such as
granting of compulsory licenses (CLs) have been contentious. Under Indian patent law CLs can
be awarded inter alia if:

The reasonable requirements of the public with respect to the patented invention have not
been satisfied; or

The patented invention is not available to the public at a reasonably affordable price; or

The patented invention is not worked in the territory of India.6

In the pharma context, the conditions for grant of a CL are aimed at preventing a situation where
the public health is prejudiced by the exclusivity granted to the patented product. Recently, the
Supreme Court of India dismissed a Special Leave Petition for reversing the CL awarded to
Natco Pharma.7 The Natco-Bayer case was the first case on CL, wherein Natco had been
granted a CL for Bayers patented drug Nexavar, since all the grounds for granting a CL under the
(Indian) Patents Act, 1970 had been met.
While CLs have been viewed in the developing world as a necessary evil, they have also caused
grave concerns in the industry due to the revenue loss that CLs tend to cause. In a recent order
by the Controller of Patents, it has been held that granting a CL should be the last resort and
efforts for obtaining a voluntary license should be made first.8 This order provides some comfort
to the industry, as it clarifies the legal position that so long as the patentees does not meet the
conditions for grant of CLs under the Patents Act, 1970, its patent rights would not be interfered
with.
Though there is a lure for short-term decisions which bring relief to the public, but such decisions
should not prejudicially affect the pharma industry on the whole. There is a dire need for carefully
balancing the requirements of the public and the industry.
Stricter trademark enforcement

Another observable trend in the IPR sphere is the stricter enforcement of

trademark contraventions in India. In the pharma sphere this trend is comforting as trademark
contraventions may lead to use of wrong drugs.
The Indian courts have, through various judgments, taken a very strict view on issues of passing
off by using deceptively similar marks and even formulating criteria to examine competing claims.
A case in example is of Cadila Health Care Cadila Pharmaceutical Ltd,9 wherein it was held that
in an action for passing off on the basis of unregistered trade mark, for deciding the question of
deceptive similarity inter alia the following factors have to be considered:

The degree of resemblance between the marks, phonetically similar and hence similar in
idea;

The similarity in the nature, character and performance of the goods of the rival traders;
and

The class of purchasers who are likely to buy the goods bearing the marks they require,
on their education and intelligence and a degree of care they are likely to exercise in
purchasing and/ or using the goods.

Though trademark disputes are common in India, decisions such as the Cadila judgement have
helped in bringing clarity to the legal scenario in India.
Anti-trust: Changing the old workings ways
The archaic Monopolies and Restrictive Trade Practices Act, 1969 was replaced by the
Competition Act in 2002, which established the Competition Commission of India (CCI). Since its
inception, the CCI has passed various orders on prevalent working practices of the Indian
pharma industry.
The pharma market in India was dominated by a number of national and state level chemist and
druggist associations. Whenever a pharma company wanted to appoint stockists, wholesalers or
distributors, it had to obtain a NOC/ letter of consent from such associations as pre-condition to
such appointment. The CCI has been closely examining this issue and in numerous orders had
held such practices as anti-competitive.10
Many pharma companies, who were often reluctant participants in such working mechanisms,
have breathed a sigh of relief. Previously, the pharma companies had to participate in certain
informal arrangements due to a lack of alternatives; these orders of the CCI have paved a way
for greater transparency.
Such orders of the CCI have impacted the root market mechanics of drug distribution in India.
Now, stakeholders are wary of entering into such arrangements or other informal arrangements
which may have anti-competitive effects and the industry can look forward to more transparent
domestic drug distribution system.
M&A in Indian pharma sphere General outlook towards foreign investments
India has a large population with a limited access to affordable healthcare. In this regard, some of
the primary concerns in allowing foreign investment in the Indian pharma industry included
ensuring (i) continuous availability and supply of drugs, (ii) non-discontinuance of essential
medicines, and (iii) an increased supply of drugs over a period of time. Therefore, the policy
allowing foreign investment into the Indian pharma sector has to play a balancing act between
meeting the needs of the people and the capital needs of the industry.
Presently, FDI up to 100 per cent is permitted in brownfield investments, with prior approval of the
Foreign Investment Promotion Board (FIPB) and for greenfield investments, FDI up to 100 per
cent is permitted with no requirement of prior FIPB approval.
The drugs and pharma sector has attracted one of the highest FDI inflows in India. It has been a
matter of debate whether such investments have indeed benefitted the Indian pharma industry or
not. Recently, there have been demands from certain quarters of the government for banning
brownfield foreign investments altogether. While increased access to capital is necessary for
growth of any industry, in the pharma context such increased investments should be

accompanied with technology sharing, increased production and increased employment

generation. FDI coupled with such accompaniments can achieve long-term sustained growth and
could ensure world class facilities in India.
It is necessary that FDI fuelled growth should not be artificial in nature and should act as a
catalyst in developing a world class pharma industry which takes care of the needs of the vast
populace of the country.
Non-competes in M&A
An issue typically faced in foreign investment transactions in the Indian pharma industry is that of
non-compete clauses which restrain the selling promoters from engaging in similar business.
Non-compete clauses have been a constant demand of acquirers/ purchasers.
The rationale and effect of non-compete clauses has been contentious and due to the nature of
the pharma industry, the effects of non-compete can be positive as well as negative. The CCI
frowned upon long periods of non-compete, and in the past contracting parties have modified
their transactional documents to reduce the duration of non-compete.11
Since then, the position regarding non-compete clauses has been clarified to a certain degree by
the FIPB, now non-compete clauses are not permitted except in special circumstances.12
Presently, there is no clear guidance as to what constitutes special circumstances and there
remain many grey areas surrounding its interpretation e.g. non-compete clauses in transaction
structures such as stock transfers where the selling promoter is still employed by the company, or
non-compete clauses for a selling shareholder who does not sell his shareholding completely and
remains a party to the shareholding agreement. It would be interesting to see how non-compete
clauses in such structures and other complex structures are treated by the FIPB in the near
future.
Pricing: An age old conflict
Unlike the pharma sector in countries such as the US, Indian pharma market is a price controlled
one. Pricing remains a contentious issue and more often than not, the pharma industry and the
regulators lock horns on pricing issues.
The pricing conflict has been raging in India since the 1970s, where for the first time the
government had restricted the profitability of pharma companies through Drug (Prices Control)
Order (DPCO). Since then a number of DPCOs have been brought in for controlling drug prices.
In 1997, through a resolution of the Ministry of Chemicals and Fertilisers, an independent body of
experts was established called the NPPA.13 One of the primary objectives of the NPPA was to fix
/revise the prices of controlled bulk drugs and formulations and to enforce prices and availability
of the medicines in India.14 In addition to the National List of Essential Medicines, NPPAs

mandate extends to monitoring the prices of decontrolled drugs in order to keep them at
reasonable levels.
Recently, the NPPA has been flexing its muscles and has issued orders for price control of
various drugs and some of these decisions have been challenged in the courts of law. This trend
of a more active NPPA has been welcomed by the general populace as it prevents patients from
being priced out of affordable healthcare. At the same time, price control is seen as a major
setback for many pharma companies as consequential revenue losses may make the production
of price controlled drugs commercial unviable.
In view of the recent spike in the drug prices in the US, the question of decontrolling the Indian
pharma industry has been laid to rest and many believe that price control mechanisms are here
to stay. It is expected that with an ever more vigilant regulator and a growing industry, pricing of
drugs is to remain a contentious issue.
India: The next R&D destination
The privatisation and globalisation policy of the government of India in the mid-1990s provided
incentives to R&D in the pharma sphere. Innovative products were given exemption from price
control, a number of financial schemes were made available to firms for undertaking R&D,
technology collaborations were brought under the automatic approval route, and patent rights
were granted for a period of 20 years for products as well as processes.15
This incentivisation created a seismic shift from the practice of only manufacturing to a practice of
innovation. India was previously known as the generic capital of the world owing to the wide
spread reverse engineering industry, this is now changing and companies in India have started to
develop and innovate drugs.
More than 870 multinational companies have set up their R&D operations in India since 1985, the
first one being Texas Instruments.16 The prime reasons why R&D in India is viewed as beneficial
are:

Cost effectiveness: The cost of setting up world class R&D facilities in India cost a
fraction of what they do in the west. The overall R&D costs are about one-eighth and
clinical trial expenses around one-tenth of western levels;17

Skill: A large pool of English speaking technical skill power is available at a low cost with
highly developed R&D oriented skill sets;

Established R&D centres: Pre-established state of the art R&D centers offer logistic
convenience and cost effectiveness;

Growing biotechnology industry: Indian biotechnology industry has grown by leaps

and bounds and has some world class players;

Market access: India is one of the fastest growing markets in the world. R&D in India
allows companies to gain a foothold in this new and growing market;

Rising household incomes: The growing middle class in India is an attractive market
for drugs. With increasing disposable incomes, the market for non-essential drugs, is set
to grow rapidly;

Governmental incentives: Post the liberalisation era, the Indian government has offered
numerous incentives to R&D in India; and

Biodiversity: Some drugs aimed at the Indian market require certain gene specific R&D
and clinical trials. Indias rich genetic bio diversity offers a perfect destination for such
R&D and clinical trials.

Pharma R&D in India is expected to witness exponential growth in the near future, and with the
growth of the economy and pharma industry in India, innovation assumes new economic
importance in the Indian pharma industry.
Future of Indian pharma
The Indian pharma industry has come a long way and made significant progress in infrastructure
development and technical and R&D capabilities. With the integration of the Indian pharma
market with the global market, new issues are being faced and tackled by the industry. Some old
challenges such as IPR and pricing continue to be contentious issues in the market. The trends
of increased foreign interest in the markets and increased investments in R&D are expected to
stay.
With numerous strengths and a growing consumer class, the pharma industry in India may face
certain legacy and new issues, but it is expected to grow multifold and continue to be an
attractive investment destination