The Indian pharmaceutical industry is highly fragmented with about 24,000 players (around 330 in the organised sector). The top ten companies make up for more than a third of the market. The revenues generated by the industry are approximately US$ 5.2 bn and have grown at an average rate of 8% over last five years.

Budget Measures 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 bn for AIDS control programme. Provision of Rs 13 bn 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  Budget Impact The fringe benefit tax exemption of free samples is a positive step for the Indian pharma industry and is also in line with the expectations of the pharma companies Allocation of funds for anti-AIDS drugs and exemption of excise duty on life saving vaccines is a positive for companies having product pipeline catering to these segments. The service tax exemption on clinical trials and 150% weighted deduction on R&D is a big positive for companies into contract research.  Sector Outlook Our outlook on the pharma industry is positive from a long-term perspective. One of the reasons for the same is that besides the considerable generics opportunity, even outsourcing of clinical trails (by global innovator companies) is likely to emerge as a major opportunity for Indian pharma companies in the next couple of years due to the impact of the product patent regime. The thrust on rural health programmes, life saving drugs and preventive vaccines, as announced in the budget today, also augurs well for the pharma companies. Increased competition and the consequent price erosion in the generics space, however, might dampen growth going forward.  Company impact Allocation of funds for anti-AIDS drugs is a positive for companies like Cipla. The excise duty tax exemption on life saving vaccines is appositive for vaccine manufacturing companies like Panacea Biotech. Service tax exemption on clinical trials will facilitate companies like Nicholas Piramal that are into the CRM (contract research and manufacturing) space. The extension of time frame for 150% weighted deduction on R&D to benefit companies like Dr. Reddy's and Ranbaxy.  Industry Wish List Rationalisation of excise duty from the current level of 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 10 years i.e. upto March 2017. The scope of weighted deduction should be extended to include depreciation on investments made on land to set up research facilities, costs related to clinical trials and filing of regulatory dossiers overseas.  Budget over the years Budget 2004-05 Budget 2005-06 Budget 2006-07 All drugs and materials used in clinical trails to enjoy customs and excise duty exemption. The list of life saving drugs that enjoys tax exemptions or concessional tax rates of 5% to be expanded. Customs duty on Glucometers and Glucomteric strips reduced to 5% from existing 10%. The government has proposed a health insurance scheme. As per this insurance plan, an individual will get a cover of Rs 30,000 in case of hospitalization for a premium of just Rs 365 a year. The government aims to bring 5m families who are below the poverty under the coverage of this scheme. Concessions under the section 10 (23G) to be granted to institutions lending to hospital with more than 100 beds. Depreciation rate on life saving medical instruments increased from 25% to 40% Corpus for the R&D fund to be increased in phases. Stable policy environment and incentives to be provided to help the two industries (biotech and pharma) 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 Customs duty for 9 specified pharma and biotechnology machinery cut to 5%. Corporate tax pruned to 30% from 35%. 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%.
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 US 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 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) segment 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 has led to a structural change in the industry, which has encouraged innovation and greater investment in R&D. While the 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.		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 mist 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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