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n a bid to open its economy, the Indian government will allow foreign investors to buy up to 74 percent of Indian drug makers without prior government approval. But the move is raising questions that it may open the door to a gradual takeover of the domestic pharmaceutical industry and eventually alter its role as a supplier of low-cost generic medicines to much of the world.

The shift is part of a broader change in policy toward foreign investment that was announced two days ago by Indian Prime Minister Narendra Modi. However, it also comes as the Indian government is under increasing pressure from global drug makers and United States officials to strengthen patent protection on pharmaceuticals. Just last month, for instance, the government issued a new policy to bolster intellectual property.

For this reason, there is concern the revised policy might create upheaval in the global generics market.

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“It’s a bit of posturing from the Indian government to try to appease its critics and to also try to show they’re doing something for the economy,” said Tahir Amin of the Initiative for Medicines, Access & Knowledge, which has challenged Gilead Sciences patents filed in India. “But I also think they’re inviting people to knock on doors and we believe this is a starting point for swallowing up small suppliers.”

Such speculation reflects the outsized role that the Indian pharmaceutical industry plays in supplying generics. In the United States, for instance, Indian generics accounted for slightly more than 20 percent of copycat drugs sold last year, according to the India Brand Equity Foundation, a trust established by the Indian government.

Moreover, Amin noted Indian companies have, for years, been key providers of essential medicines for many life-threatening illnesses, especially to developing nations. Given their desire to influence patent policy, Amin worried that global drug makers may become tempted to pursue acquisitions, and, eventually, diminish the role that Indian companies play in providing affordable medicines.

To what extent Indian drug companies are attractive targets, however, is debatable.

A key issue is quality. For several years, numerous Indian drug makers — big and small — have been cited by the US Food and Drug Administration for serious production lapses. A notorious example was Ranbaxy Laboratories, which became a poster child for manufacturing gaffes. The company paid a $500 million fine and pleaded guilty to violating drug safety laws for filing false reports and improper testing.

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Before the scandal erupted, though, Daiichi Sankyo bought a controlling stake in Ranbaxy, an investment that proved disastrous, since the FDA continued to ban some Ranbaxy drugs from entering the US. Earlier this year, the family that controlled the company was ordered to pay approximately $400 million in damages to Daiichi Sankyo for concealing information about extensive quality-control problems.

The heightened regulatory scrutiny, which followed this episode, may give some potential acquirers pause.

“It certainly should make them think twice,” said Dinesh Thakur, a former Ranbaxy research director who became a whistleblower and worked with US authorities to expose the manufacturing lapses. “If they were smart, they would very carefully assess any presentations and conduct their due diligence.”

Indeed, investing in a large Indian company may be desirable for drug makers that want to grab a share of low-price markets where cost is more important than quality control, said Erik Gordon, an assistant business professor at the University of Michigan. But most global drug makers, he added, don’t want to inherit problems that can’t be cured by sending in new management or cash.

Moreover, such a move would also represent a strategic shift, since most of the largest drug makers do not have generic businesses. Some do, though, such as Pfizer and Novartis, which owns Sandoz. But given quality issues, for global drug makers that aren’t already in generics, “the troubled Indian companies would be a difficult way to start,” said Gordon.

There is another reason the government policy shift may not spark many deals. Previously, a foreign investor could buy up to 50 percent of an Indian drug maker without government approval. And so, one industry consultant noted, potential acquirers face the same barriers as before — namely, government imposed price controls and government requirements for manufacturing essential medicines.

“Any time you can streamline the (investment) process, it may allow some companies to … look for acquisitions,” said Vince Suneja of the Suneja Law Group, an attorney who advises drug makers on international markets. But “the majority of companies that look to invest/buy Indian pharma companies were not necessarily deterred by the previous limitations.”

He noted that before 2011, there were no such restrictions on foreign investment in Indian drug makers, which prompted some big acquisitions. Besides the Ranbaxy deal, Abbott Laboratories bought Piramal Healthcare and Mylan purchased Matrix Laboratories. But after the 2011 restriction was put in place, there were no sizable deals. Of course, quality issues were also generating concerns.

“At the end of the day, [the change in policy] is likely to have an overall neutral impact,” he said.

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  • Great posturing on part of Government of India. However, with the current bureaucracy, infrastructure challenges and a generic producer at every corner why would a foreign brand company want to open a generic “me-too” company especially when their business model is to invent new drugs and therapies. Let the generics be someone else’s headache has been their position.

    Government of India would control drug prices and that would be another deterrent for brands to open or acquire generic competitors. Indian companies are keeping brands honest through their pricing and global supply. I don’t see much happening for a long time.

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