India Doles out Pharma Incentives (Budget 2007-08)

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India Doles out Pharma Incentives

Drug industry receives some long-awaited tax breaks in government's

latest budget.

February 28, 2007 By Seema Singh

Caught between a newly adopted patent regime and flux in the global

generics market, the Indian pharmaceutical industry has been

clamoring for tax incentives, which it was finally granted Wednesday

when Finance Minister P. Chidambaram presented the annual budget to

India's Parliament.

An annual budget that emphasizes healthcare and education has brought

cheer to the pharmaceutical sector.

" We [in the pharmaceutical sector] are the torchbearers of the

innovative economy, " said Swati Piramal, director of strategic

alliances of Piramal, at a Confederation of Indian

Industries budget meeting in Mumbai. " We spend around $550 million

annually on R & D, which is 10 times more than the IT industry's spend

on R & D. "

The tax benefit for research and development has been extended by

five years to 2017. " A five-year extension is very important for us, "

said Ms Piramal. " Prior to this, it was every year. Research takes a

long time when it comes to the human body. "

`The budget has been a positive message in terms of the sops for

tuberculosis and malaria.' -Malvinder Singh, Ranbaxy

The Organization of Pharmaceutical Producers of India (OPPI) had

asked for international clinical trials conducted in India to be

granted tax breaks and its request has been granted. The service tax

on clinical trials of new drugs has been exempted " in order to make

India a preferred destination for drug testing. "

India is currently ranked No.1 in contract research on

pharmaceuticals, the bulk of which is clinical trials, according to

the Chemical Pharmaceutical Generic Association.

Immunization and HIV eradication programs have received an increased

focus in the budget, with an allocation of $213 million for National

AIDS Control Program Phase III, which starts from April 2007 to March

2008. Mr. Chidambaram said India is targeting a zero growth rate in

HIV/AIDS cases this year. That is good news for the companies

producing HIV/AIDS drugs.

Industry leaders are upbeat. " The budget has been a positive message

in terms of the sops for tuberculosis and malaria, " said Ranbaxy CEO

Malvinder Singh.

Narrowed VC Tax Exemptions

In a move that could be damaging to the venture capital community at

large but beneficial to the pharma sector, the finance ministry has

narrowed the tax exemptions on venture funds to a handful of sectors.

These include biotechnology, research and development of new chemical

entities in the pharmaceutical sector, and production of bio-fuels.

Furthermore, there has been a reduction in the customs duty on most

chemicals to 7.5 percent from 12.5 percent and on specified pharma

and biotech machinery to 5 percent from 7.5 percent. These cuts are

expected to accelerate Indian pharma, which is growing at 10 percent

a year, compared to the 7 percent annual growth rate of the global

industry.

According to a 2006 KPMG report, India currently represents merely $6

billion of the $550 billion global pharmaceutical industry. However,

even at just 8 percent of the global industry total by volume,

putting it in fourth place worldwide, it accounts for 13 percent by

value.

Unfulfilled Wishes

While the industry at large is happy, there are certain areas that

New Delhi has mercilessly ignored.

" The milestone payments that Indian research-based companies receive

in out-licensing their molecules to global pharma are not exempt from

tax, even though it's much the same kind of earnings that the IT

industry enjoys tax benefits on, " said Hitesh Gajaria, national

practice leader, pharmaceuticals, at KPMG in Mumbai.

" This could hinder plowing the money back into R & D, " he added.

The Indian Drug Manufacturers' Association (IDMA), which represents

more than 600 drug makers, had wanted expenses incurred due to filing

overseas regulatory approvals to be considered for tax relief under

R & D. It has been disappointed.

" This is discouraging as even the expenses incurred on clinical

trials overseas conducted by Indian companies are not covered by tax

benefits, " said Mr. Gajaria.

In sum, it's a mixed bag, with some long-pending demands being met.

And despite some disappointments, the sector is on a fast track.

KPMG estimates India has an opportunity of $48 billion in 2007 in

global generics production as well as the opportunity to become a

preferred offshore location for R & D, support services, and

manufacturing for global drug companies.

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