New foreign direct investment (FDI) guidelines for India's pharmaceutical sector are set to be finalised this week, according to reports.
A framework designed to keep attracting overseas investors to the sector, while keeping the availability and prices of medicines under control, is to be approved by the government, India's Business Standard reported yesterday, quoting unnamed officials.
There have been a flurry of acquisitions of Indian pharmaceutical companies in recent years by multinationals, raising concerns in the Indian market - which thrives on the production of cheap generic drugs - that foreign companies will push more expensive patented products.
"The Indian pharmaceutical market has characteristics that make it unique," according to a report by McKinsey. "First branded generics dominate, making up 70 to 80 per cent of the retail market. Second, local players have enjoyed a dominant position driven by formulation development capabilities and early investments.
"Third, price levels are low, driven by intense competition."
Aiswariya Chidambaram, a senior research analyst at Frost & Sullivan, explains that "branded generics" are a "molecular copy of an off-patent drug with a trade name". But for years, India's industry used its sophisticated reverse engineering skills to produce copies of patented western drugs.
"Generic versions of molecules which still had patent protection in the rest of the world were produced by reverse engineering and marketed in India by domestic market participants until 2005, since India did not follow any patent protection laws up to 2005," Ms Chidambaram said.
India is a major exporter of generic drugs to countries including the United States and Japan.
Indian pharmaceutical companies produced 20 to 22 per cent of generic drugs globally in 2010, according to Frost & Sullivan.
The domestic pharmaceutical industry is made up of more than 20,000 registered units.
"Multinationals are expected to expand extensively into the Indian markets through acquisitions," Ms Chidambaram said. "The foreign acquisitions of Indian companies will enable the Indian companies to gain a foothold in the western regulated markets, diversify their portfolios, acquire recognised brands, and gain R&D capabilities."
India's pharmaceutical market is expected to grow to reach US$55 billion (Dh202bn) by 2020, as incomes and insurance coverage increase, McKinsey forecasts.
The country's major cities will contribute significantly to this growth amid urbanisation and economic development, while rural markets will grow even faster, the report stated. "At the projected scale, this market will be comparable to all developed markets other than the US, Japan and China," McKinsey said. "Even more impressive will be its level of penetration. In terms of volumes, India will be at the top, a close second only to the US market."
But there are risks to this potential growth, it warns.
"Pricing controls and an economic slowdown can wean away investments and significantly depress the market, allowing it to reach only $35bn by 2020."