‘‘Only good words are not enough incentives for pharma sector’’

EPP News Bureau - New Delhi

DESPITE nice words and the promise for a stable regime, the Finance Minister (FM) has not extended enough benefits to promote growth in the pharmaceutical industry. Analysts have rated the budget neutral with regard to pharma sector.

The industry which has been looking forward to receive enhanced support at various levels in the Union Budget 2005-06 to promote R&D in the sector is highly disappointed and this is reflected in the opinions received from various company heads.

According to Satish Reddy, MD and COO, Dr Reddy’s Laboratories, watching the budget has become redundant because there are no industry defining policy announcements.

Analysts have pointed out that the increased allocation to healthcare expenditure at 22 per cent to Rs 102.8 billion which will include cost of medicines as well, could benefit companies manufacturing life saving drugs and drugs for the national health programmes. The beneficiaries include Cipla, Ranbaxy Labs, Cadila Healthcare, FDC, Lupin and Wockhardt.

The Finance Minister has proposed in the Budget to extend the weighted average deduction of 150 per cent on R&D expenses for pharma, biotech and chemical companies by another two years to March 31, 2007. This would benefit companies like Ranbaxy, Dr Reddy’s, Nicholas Piramal, Sun Pharma, Wockhardt, Aurobindo Pharma, Dishman Pharmaceuticals, J B Chemicals and Lupin.

However, industry appears dissatisfied and this is evident from comments of Ajay Vij, COO, Dabur Pharma, ‘‘In the new IPR regime, where we need to go for R&D led growth the weighted deduction should have been increased to 200 per cent and for longer tenure. Because, new drug discovery research takes 8-10 years and substantial investment at each stage.’’

Further, Rajiv Gulati, CMD, Eli Lilly India, quips, ‘‘The Budget despite mentioning that the objective is to encourage R&D doesn’t offer much, but nice words. How will India become R&D hub if the government doesn’t facilitate for a conducive environment for research?’’

Dr Brian Tempest, CEO & MD, Ranbaxy, echoes the same sentiment. ‘‘Investment and gestation horizons for research in new medicines are long, typically 15 years or more, and research is expensive. We expected much more in this area from the Budget.’’

Initiatives in terms of a Rs 150-crore corpus to fund research in biotech and pharma sectors, the extension of 150 per cent weighted deduction for R&D expenditure, reduction of withholding tax, the lowering of customs duties on capital goods and correction of inverted duty structures shows the governments’ intent to support entrepreneurship, indigenous industries, provide low-cost base for research, manufacturing and encourage investments into the sector, according to Kiran Mazumdar Shaw, MD, Biocon.

Although the government has announced its intention to enhance in phases the Rs 150-crore R&D fund the commitment looks low as the fund is yet to go fully operational. The government has also announced the formation of corpus fund of Rs five billion called SME growth fund to provide equity support to small and medium units in pharma and biotech sector. This will benefit all SMEs.

Maintaining the excise duty at 16 per cent on MRP with an abatement of 40 per cent would mean an effective duty of 9.6 per cent which is likely to be passed on to consumer resulting in a price hike of around 1.6 per cent. Dara Patel, Secretary General, Indian Drug Manufacturers’ Association (IDMA), has been expecting that if the excise duty is brought down to eight per cent as demanded it would have helped to reduce medicine prices across the board.

N H Israni, CMD, Blue Cross Labs, Bombay and ex-president IDMA said that the Budget is very disappointing for pharma sector. ‘‘While customs duty is reduced on imported bulk and finished drugs which will help MNCs, there is no reduction in central excise duty which should have come down to eight per cent in line with UPA agenda to improve consumer accessibility and safeguard local industry,’’ he said.

The reduction custom duty on capital goods to below 15 per cent and in some cases to 10 per cent or to 5 per cent and the reduction of customs duty on nine specified machinery for pharma and biotech sector to 5 per cent are likely to benefit industry. Likely beneficiaries in the sector include Ranbaxy Labs, Nicholas Piramal, Unichem Labs, Dishman Pharma, Cipla, among others, who are implementing new projects. Custom duty reduction will help benefit all the importers of raw materials. However, due to the reduction in import duty the finished goods, the industry will have to become more competitive. The major benefit is likely to go to MNC pharma companies such as Abbott Labs, Aventis Pharma, Fulford, GlaxoSmithKline Pharma, Merck, Pfizer, Novartis, Wyeth amongst others.

With the implementation of VAT from April 1, 2005, companies will be eligible for a set-off of input taxes. The corporate tax for Indian companies has been reduced from 36.6 per cent (35 per cent corporate tax plus 2.5 per cent surcharge plus two per cent education cess) to 33.7 per cent (30 per cent corporate tax plus 10 per cent surcharge plus two per cent education cess) resulting in savings of three per cent in corporate tax.

The savings in corporate tax will be partly offset by the reduction in the depreciation rates as these have been revised for general plant and machinery from 25 per cent to 15 per cent, according to a Mumbai-based analyst. This will reduce the provision of depreciation and will increase the provision for tax. However, the increase tax provision will get offset by reduction in corporate tax.

(With inputs from bureax)