Opinion
Budgetary support could propel our quest for pharma innovation
Summary
We need incentives for R&D and an enabling ecosystem for India to be a hub of innovation for new-generation biopharma
The Indian pharmaceutical industry has been playing a key role in improving global health through its affordable and high-quality generic medicines. We are the third-largest pharmaceutical supplier in terms of volume, shipping 60,000 generic brands across 60 therapeutic categories worldwide. India now needs to capture value share as well. To move up the pharma value chain, we need to focus on emerging opportunities across novel biologics, biosimilars, mRNA and other new-generation vaccines, orphan drugs, anti-microbials, precision medicines, cell and gene therapies, among others. They account for two-thirds of the global pharma value pool. To rank among the top five countries in value terms and No. 1 in volume terms, the Indian industry will need to grow from $44 billion currently to $120-130 billion by 2030 and $500 billion by 2047.
Research and development (R&D) investment is key: Developing these new, cutting-edge therapies is a complex and lengthy process. The scientific, technical and regulatory bars are considerably higher, making drug development difficult, more time-consuming and very expensive. In 2019, the global pharmaceutical industry spent $186 billion on R&D and this is now expected to reach $233 billion by 2026.
India will need to make exponential investments in R&D, manufacturing and digital transformations to become a global pharmaceutical innovation hub as well as achieve its vision of self-reliance in pharmaceuticals and biopharma. It is here that the government can play a key supporting role.
The government needs to be an enabler: Globally, there is an established link between investments in R&D and the ability of countries, sectors and firms to identify and adopt new technologies that propel them forward. Studies suggest that a 1% increase in R&D investment, on average, leads to a rise in output of between 0.05-0.15%.
India’s current public expenditure on R&D remains low, at less than 1% of gross domestic product (GDP). Other BRIC countries spend more. China spends 2.1% of its GDP on R&D, Brazil 1.3%, and Russia a little over 1%. Moreover, R&D incentives only accounted for 7.5% of total tax incentives and those for pharma were just 2.3% of this in 2018-19, according to an analysis by the Association of Biotechnology Led Enterprises (ABLE).
The government needs to urgently explore mechanisms to incentivize investment in R&D and evaluate various funding mechanisms that can help the industry. This year’s budget offers a great opportunity to give the pharma industry a shot in the arm.
Tax subsidy for R&D: The weighted tax deduction under Section 35 (2AB) of the Income Tax Act on in-house R&D expenditure was available till 31 March 2020. As the deduction was reduced from 200% to 100%, R&D spending by lndian pharma companies stagnated in value and decreased as a proportion of revenue from 8% in 2018 to 6.6% in 2021. The government should restore the 200% weighted tax deduction, covering all expenditures pertaining to a product’s lab-to-market journey, including patenting costs.
Research-linked incentives: Research-linked incentives (RLIs) can provide an impetus for the industry to increase R&D investments, as well as encourage it to forge much-needed linkages with academia to co- innovate. Despite the availability of several government instruments, many brilliant ideas from entrepreneurs often do not come to fruition because of their inability to access adequate funding. Therefore, it is imperative that all potential ideas, even from the remotest corners of the country, can be harnessed and fostered. RLIs can be based on progress in product development, with higher incentives being provided at advanced stages.
Recalibration of the Patent Box regime: The scope of the current Patent Box regime under Section 115BBF is limited to a concessional tax rate of 10% on royalty income. The scope of this section should be extended to income generated from the commercialization of such patented products by a company. Income from the exploitation of intellectual property registered overseas whose exclusive licence is with Indian companies should also be eligible for the concessional tax rate.
Corporate tax concessions: The government should offer companies that spend at least 10% of their revenues on R&D (with a minimum threshold of ₹50 crore per year) a special concessional corporate tax rate of 15%.
Innovation bonds: To provide low-cost funding and support to R&D projects in the pharmaceutical sector, the government can float long-term, secured ‘innovation bonds’ that are tax free. Just as tax-free infrastructure bonds have been used by public sector companies to fund long-gestation projects, these innovation bonds should be used to raise funds from the public to finance R&D projects.
In conclusion, for India to move into advanced therapies and biopharma products, the government needs to incentivize the shift to a discovery-oriented and science-driven approach. It should introduce fiscal incentives and enabling policies, and also build the necessary infrastructure that supports breakthrough advances in science and technology to drive innovation and give the India pharma and biopharma industry its rightful place under the sun.
Kiran Mazumdar Shaw is chairperson, Biocon Group
