The past year has been tumultuous for the pharma industry, which has had to contend with a steeply rising rupee, severe price erosion and regulatory changes in the global generics markets and rise in raw material costs.

Having said that, some positive developments also ensured that the overall scenario was not too bad. These developments included announcements by some major domestic pharma majors of hiving off their R&D units into separate companies, bagging out-licensing deals with global innovators in return for milestone payments and settling patent lawsuits with innovators to ensure a more stable and balanced Para IV portfolio.

Industry Wish List

FICCI's wishlist

• Rationalisation of excise duty from the current 16% to 8% in a bid to make medicines more affordable.
• Weighted deduction benefit of 150% on R&D expenditure incurred should be extended for another 5 years i.e. upto March 2017. The same should also be increased to 200%.
• The scope of weighted deduction should be extended to include all expenditure incidental to basic research carried on at any outside R&D facility, as also clinical trials, bio-equivalence studies that are done outside the R&D facility whether in India or in any foreign country.
• All life saving drugs to be exempted from customs duty so that they are available to patients at reduced prices.

Budget over the years

Budget 2005-2006

• Corpus for the R&D fund to be increased in phases. Stable policy environment and incentives to be provided to help the two industries become world leaders.
• Units in knowledge-based industries such as pharma and biotech to be provided equity support through the SME Growth Fund.
• The exemption date for weighted deduction of 150% of in-house R&D facilities of pharmaceutical and biotechnology companies has been extended by 2 years to March 31, 2007.
• Also, the exemption for 100% deduction of profits of companies carrying on scientific R&D, which is approved by the Department of Scientific and Industrial Research has also been extended by 2 years to March 31, 2007.
• Custom duty for 9 specified pharma and biotechnology machinery cut to 5%.
• Corporate tax pruned to 30% from 35%.

Budget 2006-2007

• Reduction of customs duty on 10 anti-AIDS and 14 anti-cancer drugs to 5%. Reduction of duty on certain life saving drugs, kits and equipment from 15% to 5%. These drugs will also be exempt from excise duty and countervailing duty (CVD).
• Expenses on free samples of medicines and medical equipment distributed to doctors exempt from fringe benefit tax.
• Increased allocation for health and family welfare by 22%.

Budget 2007-08

• Reduction in general rate of import duty on medical equipment to 7.5%.
• Section 35(2AB) that allows a weighted deduction of 150% for expenditure relating to in-house research and development extended for five more years, until March 2012.
• Life saving vaccines exempt from excise duty.
• Free samples not under the purview of fringe Benefit Tax.
• Clinical trial of new drugs exempt from service tax to make India a preferred destination for drug testing.
• Provision of Rs 9.7 billion for AIDS control programme.
• Provision of Rs 13 billion in FY08 for increasing the number of polio rounds and vaccines to be introduced with intensive coverage in the 20 high risk districts of Uttar Pradesh and 10 districts of Bihar.

Key positives

Strong generic fundamentals -- Despite the pricing pressure witnessed in the generic markets of US and Europe, the fundamental factors driving the generics industry remain strong.

In the United States and Europe, the aged population as a percentage of total population is on the rise and is expected to rise further by 2025 resulting in a strain in the healthcare budgets. To give a perspective, the ageing population of Europe (as a percentage of regional population) is expected to rise from the current 20% to around 26% by 2025.

Similarly that of the US is expected to rise from the current 16% to around 25% by 2025 (Source: Ranbaxy [Get Quote] presentation).

At the same time, the governments in these regions are under pressure to reduce healthcare costs, which can be achieved through relatively cheaper generics.

Cost competitiveness -- A new concept that is gaining momentum in the pharma industry is contract research apart from contract manufacturing. Given the low cost high quality advantages, Indian companies are poised to benefit from contract research business on behalf of multinationals.

As for contract manufacturing, large global pharmaceutical companies are finding it profitable to outsource production. To cash in on these opportunities, many large production houses in the country are becoming US FDA compliant. To put things in perspective, excluding US, India currently has the highest number of US FDA approved plants at 75.

Structural changes -- The penetration of health insurance is abysmally low in the country. The entry of private players would not only bring in quantum leap in the health insurance business but also increase capital inflows into this sector. It would also bring in the concept of managed healthcare in the country. This would finally lead to overall increase in per-capita usage of drugs.

New growth opportunities -- In spite of the price war, the domestic pharma industry continues to show decent growth rates, led by the chronic therapeutic (lifestyle) segments like anti-diabetic, cardiovascular and central nervous system.

Higher awareness, exposure to newer therapies and aggressive introduction of new drugs at a reasonable price has been the key driver of growth in the chronic/lifestyle segment. This trend is likely to continue going forward.

Increasing R&D focus -- One of the positive developments has been the shift towards product patent regime from 2005 onwards. This will lead to a structural change in the industry, which will encourage innovation and greater investment in R&D.

While there would not be any impact in the short term, in longer term this will lead to strengthening and consolidation of the industry.

Companies have been increasingly stepping up their R&D expenditure in a bid to be recognised as research and discovery oriented companies in the global arena from a long-term perspective. Hiving off the R&D division into a separate company is gaining momentum of late as a strategy to de-risk the core business model, secure funding for the hived off R&D entity and thereby unlock value for the shareholders.

Key negatives

Lower end of value chain -- Indian companies are cost competitive in manufacturing bulk drugs, which has made them an outsourcing destination for the global pharma majors.

But this is the lower end of the pharma value chain and is basically a commodity making skill due to low entry barriers. Also, the Indian industry still lacks facilities and resources to develop a molecule, conduct clinical trials and then launch the product. Indian companies will thus have to depend on their international peers to undertake the more expensive clinical trials and product launches.

Weakness in domestic markets -- Fierce price competition has become the order of the day for the domestic pharma industry, which has restricted the ability of the domestic pharma market to grow in value terms. Due to its highly fragmented structure, the pricing power of the players has been pruned.

The Indian markets have traditionally been and continue to remain price sensitive and premium pricing of products is extremely difficult to maintain.

Challenging generics environment -- Competition in the US and European generics market has intensified in the past couple of years on the back of increased competition leading to brutal price erosion.

While the product flow is set to increase in the coming couple of years, pricing pressure is expected to continue. Generic players also have to contend with a host of other challenges such as increased difficulty in securing Para IV wins, presence of authorised generics and making the right acquisition to acquire scale and effectively compete in the market.

Impact of the patent regime -- The new patent regime brings in lot of promises for the industry in India, but it might not be good for the smaller players in the industry, as they will not be able to survive in the environment leading to consolidation of the industry.

Also, the introduction of this law will gradually lead to a slowdown of new product launches from domestic pharma majors in the Indian markets.

At the same time, the law provides an attractive opportunity to MNC pharma companies to step up product launches from their parent's product stable thereby providing competition to their domestic peers. Having said that, the going may not be that easy for the MNC players as the patented products launched in India will most likely be subject to price negotiation.

Government control -- This attribute simply refuses to go away, despite all the overall moves to liberalise the industry. DPCO still continues.

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