Pharma sector seeks sops to make medicines afford

Rationalisation of excise duty from the current level of 16% to 8% in a bid to make medicines more affordable.

Weighted deduction benefit of 150% on R&D expenditure incurred should be extended for another 10 years i.e. upto March 2017.

The scope of weighted deduction should be extended to include depreciation on investments made on land to set up research facilities, costs related to clinical trials and filing of regulatory dossiers overseas.

All drugs and materials used in clinical trails to enjoy customs and excise duty exemption.

The list of life saving drugs that enjoys tax exemptions or concessional tax rates of 5% to be expanded.

Customs duty on Glucometers and Glucomteric strips reduced to 5% from existing 10%.

The government has proposed a health insurance scheme. As per this insurance plan, an individual will get a cover of Rs 30,000 in case of hospitalization for a premium of just Rs 365 a year. The government aims to bring 5m families who are below the poverty under the coverage of this scheme.

Concessions under the section 10 (23G) to be granted to institutions lending to hospital with more than 100 beds. Depreciation rate on life saving medical instruments increased from 25% to 40%

Corpus for the R&D fund to be increased in phases. Stable policy environment and incentives to be provided to help the two industries (biotech and pharma) become world leaders.

Units in knowledge-based industries such as pharma and biotech to be provided equity support through the SME Growth Fund.

The exemption date for weighted deduction of 150% of in-house R&D facilities of pharmaceutical and biotechnology companies has been extended by 2 years to March 31, 2007.

Also, the exemption for 100% deduction of profits of companies carrying on scientific R&D, which is approved by the Department of Scientific and Industrial Research has also been extended by 2 years to March 31, 2007

Customs duty for 9 specified pharma and biotechnology machinery cut to 5%.

Corporate tax pruned to 30% from 35%.

Reduction of customs duty on 10 anti-AIDS and 14 anti-cancer drugs to 5%. Reduction of duty on certain life saving drugs, kits and equipment from 15% to 5%. These drugs will also be exempt from excise duty and countervailing duty (CVD).

Expenses on free samples of medicines and medical equipment distributed to doctors exempt from fringe benefit tax.

Increased allocation for health and family welfare by 22%.

Strong generic fundamentals: Despite the pricing pressure witnessed in the generic markets of US and Europe, the fundamental factors driving the generics industry remain strong. In the US and Europe, the aged population as a percentage of total population is on the rise and is expected to rise further by 2025 resulting in a strain in the healthcare budgets. To give a perspective, the ageing population of Europe (as a percentage of regional population) is expected to rise from the current 20% to around 26% by 2025. Similarly, that of the US is expected to rise from the current 16% to around 25% by 2025 (Source: Ranbaxy presentation). At the same time,

Cost competitiveness: A new concept that is gaining momentum in the pharma industry is contract research apart from contract manufacturing. Given the low cost high quality advantages, Indian companies are poised to benefit from contract research business on behalf of multinationals. As for contract manufacturing, large global pharmaceutical companies are finding it profitable to outsource production. To cash in on these opportunities, many large production houses in the country are becoming US FDA compliant. To put things in perspective, excluding US, India currently has the highest number of US FDA approved plants at 75.

Structural changes: The penetration of health insurance is abysmally low in the country. The entry of private players would not only bring in quantum leap in the health insurance business but also increase capital inflows into this sector. It would also bring in the concept of managed healthcare in the country. This would finally lead to overall increase in per-capita usage of drugs.

New growth opportunities: In spite of the price war, the domestic pharma industry continues to show decent growth rates, led by the chronic therapeutic (lifestyle) segment like anti-diabetic, cardiovascular and central nervous system. Higher awareness, exposure to newer therapies and aggressive introduction of new drugs at a reasonable price has been the key driver of growth in the chronic/lifestyle segment. This trend is likely to continue going forward

Increasing R&D focus: One of the positive developments has been the shift towards product patent regime from 2005 onwards. This has led to a structural change in the industry, which has encouraged innovation and greater investment in R&D. While the there would not be any impact in the short term, in longer term this will lead to strengthening and consolidation of the industry. Companies have been increasingly stepping up their R&D expenditure in a bid to be recognised as research and discovery oriented companies in the global arena from a long-term perspective.

Lower end of value chain: Indian companies are cost competitive in manufacturing bulk drugs, which has made them an outsourcing destination for the global pharma majors. But this is the lower end of the pharma value chain and is basically a commodity making skill due to low entry barriers. Also, the Indian industry still lacks facilities and resources to develop a molecule, conduct clinical trials and then launch the product. Indian companies will thus have to depend on their international peers to undertake the more expensive clinical trials and product launches.

Weakness in domestic markets: Fierce price competition has become the order of the day for the domestic pharma industry, which has restricted the ability of the domestic pharma market to grow in value terms. Due to its highly fragmented structure, the pricing power of the players has been pruned. The Indian markets have traditionally been and continue to remain price sensitive and premium pricing of products is extremely difficult to maintain.

Challenging generics environment: Competition in the US and European generics market has intensified in the past couple of years on the back of increased competition leading to brutal price erosion. While the product flow is set to increase in the coming couple of years, pricing pressure is expected to continue. Generic players also have to contend with a host of other challenges such as increased difficulty in securing Para IV wins, presence of authorised generics and making the right acquisition to acquire scale and effectively compete in the market.

Impact of the patent regime: The new patent regime brings in lot of promises for the industry in India, but it might not be good for the smaller players in the industry, as they will not be able to survive in the environment leading to consolidation of the industry. Also, the introduction of this law will gradually lead to a slowdown of new product launches from domestic pharma majors in the Indian markets. At the same time, the law provides an attractive opportunity to MNC pharma companies to step up product launches from their parent's product stable thereby providing competition to their domestic peers. Having said that, the going may not be that easy for the MNC players as the patented products launched in India will mist likely be subject to price negotiation.

Government control: This attribute simply refuses to go away, despite all the overall moves to liberalise the industry. DPCO still continues.