The Indian pharmaceutical industry, which is still finding its feet in drug research, will be on tenterhooks as finance minister P. Chidambaram outlines the government’s policies for the coming year in the upcoming Union Budget.
The reason for this apprehension is the imminent expiry, in March, of a crucial tax benefit on research spending.
The top 10 Indian drug makers today spend roughly 6-7% of their revenues on drug research and development (R-D). This figure has increased manifold in the last few years, driven by an increasingly strict patent regime and ambitions to break into advanced markets such as the US and Europe.
Indian tax rules currently allow pharmaceutical companies to avail of a setoff of 150% on R&D expenditure while paying taxes. This means for every Rs 100 spent, the company will deduct Rs 150 while calculating its tax liability. Now, however, the worry is that this benefit may not be available after 31 March 2007 unless extended by Chidambaram in this Budget.
According to industry insiders, while the big companies are wary of their bottomlines being hit, the smaller ones — on the verge of getting into research — might also pull out.
“We want the government to continue it for another 10-15 years and increase it as well, to 200%,” said Dilip Shanghvi, managing director, Sun Pharma and chairman of industry lobbyist Indian Pharmaceutical Alliance. “If it doesn’t come by, it will be difficult for the industry to spend on R&D.” He admits that companies can’t pull out of existing projects, but future ones might get the axe.
The drug industry made the same demand last year as well, but it was turned down.
Smaller companies will bear the brunt if the incentive is reversed, Glen Saldanha, managing director, Glenmark Pharmaceuticals, said.
The Indian pharmaceuticals industry, which spends 2% of its sales on R&D, has been struggling to catch up with global peers which spend an average of 10-20%. Merck & Co, for instance, invests 14.5% of its revenues in research, and Sanofi Aventis 15.6%. According to consultant KPMG, in fiscal 2005, the five leading drug makers in India increased their R-D spend by nearly half to $192.3 million (Rs847 crore) from $131 million the previous year.
The R&D investments resulted in tax savings of roughly Rs192 crore for the top ten drug makers in India.
Malvinder Mohan Singh, managing director of Ranbaxy Laboratories, India’s country’s biggest pharmaceuticals firm, underlines the need for developing drugs for diseases neglected by the developed world. He points to the R&D investment Indian drug makers are making to chase cures for diseases such as tuberculosis, malaria and measles.
While Ranbaxy, Wockhardt and Glenmark have three new drugs each being developed in their labs, Dr Reddy’s Laboratories is a few paces ahead with five new medicines under development.
One analyst recommends that the tax benefits be extended as research involves high risks, long gestation periods and uncertain outcomes.
“R&D is still a fledging investment and needs to be given for 10 years rather than a year at a time. We need two sets of tax shields: one that caters to the start-ups, looking for venture funds or debt financing. The other should be for the existing biggies,” said Utkarsh Palnitkar, who leads the health sciences practice at the Hyderabad offices of consultant Ernst & Young.
Not all agree. “I don’t think Indian companies will stop R&D activities as it is something they badly need at this juncture in their growth plans. It is part of their strategic outlay and they won’t be shifting it out,” said Nimish Mehta, assistant vice-president, Edelweiss Capital.