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Pharma industry seeks sops for research

BS Bureau

The pharmaceuticals industry grew at a compounded annual rate of 15.9 per cent between 1995 and 2001. But it is highly fragmented with over 20,000 players, of which only 250 are in the organised sector. In formulations, the top 15 players account for 42 per cent share of the market with the share of each player being less than 6 per cent.

Till recently research in the Indian pharmaceuticals industry was focused on process re-engineering and development of drug delivery systems.

This is changing with increased emphasis on research into the discovery of new chemical entities. However, R&D expenditure by Indian firms is still very low compared to their global counterparts.

Of late, quite a few mergers and acquisitions have been witnessed in the industry. The M&A activity is not restricted only at the corporate level; players are acquiring brands to re-align their portfolios and strengthen their presence in certain therapeutic segments.

To spread their reach, a few multinationals have entered into co-marketing arrangements with established domestic players. The agreements are finding favour among domestic players depending on the therapeutic profile of their product portfolio.

Key issues:

Currently, the pricing of drugs in India is governed by the provisions of the Drug Price Control Order of 1995. The government recently announced the criteria for bringing bulk drugs and formulations under price control--as per the pharmaceutical policy to be announced later this year--wherein bulk drugs with an annual turnover exceeding Rs 250 million and a 50 per cent market share of a single formulator will be brought under price control.

Bulk drugs with an annual turnover between Rs 100 million and Rs 250 million and a 90 per cent market share of a single formulator will also attract price control. By this criteria, the number of drugs under price control will stand reduced from the existing 74 bulk drugs and formulations, which is likely promote competition among existing players. This will act as a key positive for the industry.

Implementation of product patent norms in 2005 under the WTO regime will significantly impact the local industry and the share of multinationals, which has declined over the past three decades, might climb again.

R&D expenditure in the Indian industry is very low: 2 per cent of operating income for the industry as a whole. This is largely in the areas of process re-engineering of existing drugs and development of new dosage forms.

Research into the discovery of new chemical entities was not conducted earlier because it needed deep pockets. With the recognition of product patents from January 2005 under the WTO regime, large Indian companies are undertaking research in this area.

Factors that can be addressed in the Budget:

  • Capital expenditure on scientific research: Currently, a weighted deduction of 150 per cent on in-house R&D is allowed. However, in Budget 2001-02, this deduction was extended to biotechnology, clinical trials, filing patents and obtaining regulatory approvals. This provision can be extended to include deduction on costs related to filing of international patents and obtaining approvals from international regulatory authorities.
  • Rationalisation of Customs duty on imports of R&D equipment: The Customs duty on imports of R&D equipment can be reduced. The Customs duty on consumables for R&D purposes and drug samples can also be reduced. This will promote contract research activity in India, a destination identified by global players for conducting clinical trials that are a key activity in pharmaceutical R&D.
  • Lowering of Customs duty on intermediates: The Customs duty on the raw materials used to manufacture bulk drugs can be reduced. This will help in reducing the tax burden on manufacturers which, in turn, can be passed to the consumers.
  • Higher depreciation on plant and machinery acquired to comply with the international manufacturing standards: The rate of depreciation admissible on plant and machinery is 25 per cent in the written-down value method. Exports command a big share in India's total pharmaceutical output and exports to developed countries are possible only on approval of manufacturing facilities by international regulatory authorities, which requires compliance with current Good Manufacturing Practices. To be competitive in existing markets and create new markets for exports, Indian companies need to acquire sophisticated manufacturing processes. A higher rate of depreciation will provide an incentive to Indian companies to undertake investments in plant and machinery and have their facilities approved by international regulatory
  • authorities.
  • Reduction in Customs duty on bulk drugs: The Customs duty on the import of bulk drugs where there are no or insufficient manufacturing facilities in the domestic market can be reduced because medicines are essential commodities.
  • Exemption to Essential Drugs: All the drugs listed in the Essential Drug List and the Drug List of the Ministry of Health and Family Welfare can be exempted. Currently, only a few drugs included in the Essential Drug List are exempt from excise duty.
  • Reduction in excise duty on formulations: This would reduce the overall indirect tax burden on consumers and increase the use of medicines.

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