The previous century brought a boon to the medical practice through the discovery of anti-biotic and other forms of drugs. This scope of discovery and research in this field developed a new market of a commodity that in this present market valuation has a turnover of 18.12 billion dollars per year and growing. These pharma companies, in general, has a huge impact on the lives of the people.
Pharmaceutical companies are a tightly regulated business, the Government through its regulatory, licensing, manufacturing and IPR guidelines makes a standard roadmap for the companies in functioning their business in India. So for a pharma company to be in business has to toil up with several guidelines and approvals. This also applies for the investor to know every bit of information that let a pharmaceutical company has its existence and its functioning in the market. This article discusses several points which the investor has to look after while investing in a target pharmaceutical company.
It is an obvious part of the investigation by the investor to get the incorporation documents of the company. The investor should know the incorporation type of the company whether it is a public or private limited company or a Limited Liability Partnership (LLP). The MOA and AOA of the company compromise the nature of the business of the company and the management of the company. The incorporation will provide the information of the Directors and managing officers of the company, the amount of authorized capital and share capital of the target company.
License & Regulatory Approvals
The Investor has to ensure that the target company has all the licenses and approvals from the Government department or ministry to manufacture or sale of drugs or medical equipment in India. A pharmaceutical has to attain a Drug License from the Department of Food & Drug Administration of the respective State Government from where the operation of the company is done. The Investor has to see what the type of license it is authorized to. The licenses are of either Drug Manufacturing or a Drugs Sale License which should be owned by the target company. The target company shall also have a PHARMAEXCIIL license if the target company has its sale operations overseas. A PHARMAEXCIL license is authorized by the Pharmaceuticals Export Promotion Council of India, Ministry of Commerce and Industry, Government of India.
The target company shall also have a factory license as provided by the Labour Department of their respective State Government if the target pharmaceutical company is a manufacturer of a Drugs. The company should have a valid factory license number without any discrepancy and objection from the authority and be properly renewed if the time period of the license number has lapsed its validity period, the investor has to check all the details within it.
The company shall also possess authorization from the local authority in attaining certain certification for running the company business. The local Municipal Authority will provide Chemical license to the company for running the business…
The Government of India has provided through its consolidated FDI policy for overseas pharmaceutical companies or Investors to invest in Indian companies or setup up their own manufacturing and sales operation. The FDI in pharmaceuticals is in two ways which may be either through a Greenfield or a Brownfield method. In a Greenfield method, the FDI is 100% of the equity and through an automatic route of investment. Whereas, in a Brownfield method the FDI cap is open up to 100% but 74% of the equity can be acquired through the automatic and above the limit can be done by the approval from the Government route.
The government has also imposed other restrictions and obligations for the foreign investors which are:
- A ‘Non-compete’ clause would not be allowed in automatic or government route except in special circumstances with the approval of the Government.
- The prospective investor and the prospective investee are required to provide a certificate along with the application for foreign investment as per annexure 10 of the consolidated FDI policy.
- The government may incorporate appropriate conditions for FDI in brownfield cases, at the time of granting approval.
- FDI in brownfield pharmaceuticals, under both automatic and government approval routes, have been restricted with certain levels of obligations which are provided in the FDI policy of GOI.
- The following rules will be according to the Drugs which can be produced as per the National List of Essential Medicines (NLEM) on which the government that decides the level of production for each of the drug in the list.
- FDI of 100% through automatic route is applicable to the manufacturing of medical devices in India.
Environmental related issues.
The Investor has to ensure that the target company has clearance from the Pollution Control Board of the respective State Government from where it has its operation and shall have a positive report on maintaining a healthy environmental practice in manufacturing drugs in the factory.
Type of Drugs or Medical Equipment Manufactured
The Investor should know the types of drugs which are manufactured and sold by the target company and the chemicals which are used in manufacturing such drugs as authorized by the Foods and Drugs Administration Department of Family Welfare of the respective State Government.
The types of drugs which are part of the portfolio of the target company should have approval from the drug authorities.
Intellectual Property Rights Related Issues
The Investor should also take note of the class of drugs which are manufactured or sold by the target company. The Investor should refer to the Fourth Schedule of The Trademarks Rule, 2000. Generally, a Drug or Medical Equipment manufacturer come under class 5, class 9, class 10 and class 44 of the said rules. The Investor has to ensure that the products that are part of Target Company come under these classes of Trademark. The Investor should also inquire into the patent licenses to manufacture drugs by the target company.
Litigations against the Company
The Investor has to also delve into the outstanding disputes and litigation the target company is facing in the Courts. The target company should produce all litigation related to the license, material contracts, intellectual property rights, employee or labour and taxation related issues. The Investor has to check the status of each litigation, especially the taxation whether direct tax or indirect tax cases in different courts in India or in the overseas jurisdiction. The cases wherein the target company has been fined and cost which is outstanding against the target company are also a matter of concern for the Investor. The Investor should calculate the aggregate amount of capital which are involved in this litigation.
The Investor should also know about the litigations involving the subsidiaries of the target company. Subsidiaries are companies in which companies have a majority or a partial interest in it. Subsidiaries involved in litigation will describe the legal aspect and disputes of the target company.
The Investor invest with the intent of fulfilling its financial interest form the target company. The target company has to be financially sound to the extent in providing the investor which shows a growth investing in the company.
To know the financial condition of the company has to check the Balance sheet, Profit & loss statement and Cash flow for the past financial years of the company. Through this, the Investor will have a sound financial understanding of the target company.
The Investor should also have to know about the outstanding balance with the creditors of the target company. The debts of the target company will also provide the financial position of the target company in paying the principal amount and the interest to its creditors. The Investor will also have to know the security which is given as guarantee to the creditors.
Contracts and Employee related issues.
The material contracts of the target company are also an important part of the investigation by the Investor. In the material contract which describes the relation of the target company with third party contracts and the kind of warrants and options which are guaranteed to or by the target company. In case of lease contracts, the warranty should specify the nature of the termination of the lease if on the basis of the change of the title of either party in such contract.
The company has to delve into other contracts form where the chemical or other equipment are acquired by the target company for its development of the product.
The investor also has to check into the employee-related agreements in the target company. The schemes that are offered and are active for the employees in the target company. The company offering ESOP to the employees or Provident Fund schemes for the employees.
Thus, the investor has to go through the incorporation documents of the company, the license and authorization which it has attained from the Government or other government agencies, the material contracts, the financial positions and the position of debts which are due by the target company, the pending litigation of the target, as well as subsidiaries of the company, the Intellectual properties of the company, are within the ambit of the IPR guidelines as framed by the Government. For an investor, a lot has to be taken care while acquiring a pharmaceutical company.