A wave of change hits pharma industry, triggers hope for better growth

Jayashree Padmini - New Delhi

Faced with at least three regime changes simultaneously giving the initial impression of total chaos for the Indian pharmaceutical industry, experts feel that this will lead to a better regime for overall growth.

The past couple of months have seen fast changes for the pharmaceutical sector, starting from the MRP-based excise duty structure to WTO Patent regime and the latest in all, the VAT regime. Express Pharma Pulse talked to industry players across the country to get a feel of their anticipations and strategies in this context.

While all the three new regimes are apprehended to be the death knell for small-scale sector, the medium to large companies are looking at the regime change positively. However, with regard to both patents and VAT, companies are keeping a wait and watch approach and says, “There is need to actually analyse the Patent Act Amendment and see how the government implements the VAT structure across the country”.

VAT is this!

Kewal Handa, ED-Finance, Pfizer India, said, “Manufacturers will not be affected much by the new VAT regime, rather all trade related issues will be sorted out”. According to Rajiv Gulati, CMD, Eli Lilly, “VAT is a good move though there are many implementation ambiguities. There is no mechanism to recover tax paid on inventory as on April 1, 2005 and many others could pop up once the regime takes off”. Pfizer’s Handa thinks that this could facilitate for uniform prices for drugs across the country by having MRP inclusive of VAT and printing the same on medicine packs from April 1. For this, the government will have to amend DPCO to effect this on controlled drugs and the Excise Authority will have to notify the abatement inclusive of VAT.

D B Mody, director, J B Chemicals & Pharmaceuticals, says, “While the system is good, there are still many imponderables with regard to the system coming into force whether in all the states or in some of the states effective from 1st April 2005”. According to the domestic drug major Ranbaxy Laboratories, “The VAT regime will prove to be good for manufactures, traders and consumers at large. The system will bring in more transparency and reduce bureaucratic hurdles”.

Owing to uncertainties of the new regime in the past couple of months the trade has cut down intake by at least 25 per cent and in line with this manufacturers reduced production. This has caused for dip in sales for almost all the pharmaceutical manufacturers. Ideally VAT would have reduced the tax incidence on drugs by about 3.5 per cent thereby benefiting users had not the MRP-based excise duty structure is put in place that will see increase in tax by around 8 per cent, says experts.

“Sales of our company like others has been affected during Feb-March 2005,” Mody pointed out. Some of the states are yet to fall in line with the VAT regime and there is uncertainty about how the sales tax on closing stock as on March 31, 05 will be offset and when.

Overall it is positive sign as the rate for medicines is agreed upon at 4 per cent. Ranbaxy said that VAT is a welcome move and that the company does not see any rise in medicine prices. “With the 4 per cent uniform VAT structure, the prices will either come down in the states having a higher tax rate or will become stable,” says Ranbaxy.

“The government should introduce eight digit HSN for VAT as well as it has been proposed for levy of customs and excise duty in the Union Budget. This would not only align tariff practices to global standards, but will simplify implementation. There would be less litigation as far as the classification issues are concerned,” pointed out Kewal Handa of Pfizer. There is also need to remove the Union Sales Tax and ensure that VAT is a single taxation system as it is in other countries.

Dil Maange More!

According to Sun Pharma, “VAT and MRP based excise are issues that affect across the sector as they have a direct impact on the bottomline”. Pfizer’s Handa opines, “The excise on MRP is a good move and this will bring all parallel trade into VAT chain”. “Although some companies may like to neutralise the cost increase due to the MRP based excise and may be forced to take marginal price increase, with the price reduction owing to VAT, ultimately consumers will stand to benefit,” he adds.

At an abatement of 40 per cent and under the current excise duty at 16 per cent, an MRP-based excise regime will see less of contract manufacturing outsourcing by pharma majors thus hitting the small scale sector directly, says analysts. It will also double the pace of shifting plants to tax havens. Collectively the industry is seeking an abatement of at least 45 per cent and excise duty reduction by 8 per cent from the current 16 per cent.

Mody puts it as, “The new system has been hurriedly put into force without seeing the implications on the pricing front and more particularly the very survival of SSI units”. “SSI and mid-size units may not be able to survive and quite a few units in the industry will migrate to the excise exemption areas like Himachal Pradesh, Uttaranchal & J&K,” Mody adds. Companies like Nicholas Piramal are now betting on their manufacturing plants in tax free areas such as Himachal.

At last it clicked!

The strong IPR regime is unleashing a new era that will put domestic players in the global turf. The new regime opens up avenues for growth and economic prosperity given the scientific strength and biodiversity of the country. Genuine innovative R&D and a strategic patent portfolio management policy are the key to long term growth of the drug industry in India.

Although the WTO Patent regime should ideally trigger growth and innovation, there is much apprehension that the small player will be compelled to down shutters. However, experts point out that if used the regime to their advantage by aligning themselves to global standards in manufacturing the regime will open up new areas of collaboration.

Further, the government is coming out with more and more innovation support schemes and building up infrastructure facilities that will help small companies do original R&D in collaboration with public funded institutions. The new era is not the end of business, but a new path to prosperity if positioned appropriately, says a pharma expert.

According to Indian Pharmaceutical Alliance, the new regime will encourage international companies to leverage India’s intellectual and cost advantages to establish research centres here and encourage reverse brain drain to make the country a global centre of pharmaceutical research.

H Khorakiwala, chairman, Wockhardt, and President, IPA, said, “The new patent regime will help the domestic industry meet its ambitious target of acquiring one-third of the global generic market”. Sun Pharma, said, “We support the IPA stand which in brief supports TRIPs but with adequate safeguards against ever-greening. We think it is very important to see that we do not go beyond the purview of the law, and ensure appropriate redressal mechanisms in place”.

The foreign MNCs with their subsidiaries doing roaring business in India are upbeat about the WTO patent regime, although with a little apprehension as to how good the enforcement would be here. The new regime will see more of simultaneous clinical trials in the country for the MNC parent pipeline drugs and leveraging the strength of Indian markets.

Kewal Handa, ED-Finance, Pfizer, said, “In the short term there wouldn’t have much impact, but it will be benefiting in the medium to long term”. Domestic pharma biggie Ranbaxy says it is quite happy if a patent is granted to a pharmaceutical product based only on the criteria of novelty, innovation and commercial utility”.

“There would be a testing period for IPR, and companies will be cautious in taking strategic decisions mainly due to the ambiguity in the law and the IPR not being TRIP compliant. More R&D will move to India only in a stable IPR regime with Data Protection norms and good infrastructure in place,” Handa says.

Ranbaxy is quite sure about the generics and says, “We don’t see any products actually being withdrawn from the market in the new patent regime. There will however be a progressive decline in the number of new launches. This will not be immediate, but will be gradual”.

Companies like Ranbaxy, Dr Reddy’s, Nicholas Piramal, Wockhardt, Cadila, Dabur, Sun, etc., have been readying themselves to meet the challenges in the WTO regime. According to Krishna Ella, Bharat Biotech, Hyderabad, “Long term interests of the drug industry in India will be served by turning to genuine R&D and a strategic patent portfolio management policy would establish themselves as competent players in the global arena”.

Over the past many years, domestic companies diverted money to R&D, developing both new drugs and delivery systems and built up sustainable pipeline. Some of the drugs are in the Phase II and Phase I trials while there are many in the early stages of development, thereby positioning the companies to benefit in the strong IPR regime.

The Indian Pharma industry fragmented with around 20,000 players will see in the new Patent regime, many a structural changes in the industry and the marketplace over a period of time. A re-emergence of ORCs (Original Research Companies) will take place, says Ranbaxy.

Top bracket companies with a strong focus on R&D will be able to innovate cost-effectively and deliver better value to the consumer. Such companies will emerge stronger. At the middle level, companies surfing the generics-wave offering a wide range of products will continue to flourish.

Some of these will focus on the export of generics but will have to transform themselves into research oriented organisations, as growth momentum through generics alone will not be sustainable in the long run due to the prevailing wafer thin margins. Finally at the bottom rung, outsourcing companies, contract suppliers and those capable of delivering economies of scale, will survive by supplying to larger Indian and global players.

Mody feels that the WTO regime in the present form is likely to slow down growth of the domestic industry and create monopolistic situations for the MNCs for their patented products, as and when marketed in India. Mody, a little apprehensive, states, “With the three simultaneous regime changes there will certainly be chaos in the next few months in the industry”. However, he is optimistic that in the medium to long term the industry will benefit.