Drugs likely to cost more after hike in excise duty

Drugs are expected to cost more following an increase in excise duty to 6% from 5% on formulations and to 12% from 10% on bulk drugs announced by the Finance Minister in the Budget, ratings agency Crisil has said.

"The impact of the increase in excise duty to 6% from 5% on formulations and to 12% from 10% on bulk drugs will be neutral. These increases are not expected to significantly impact Indian pharmaceutical players as they will pass on the duty increases to consumers," the rating agency Crisil said in its Budget analysis.

The concessional 5% basic customs duty has been extended to six life-saving drugs/vaccines and to bulk drugs used to manufacture these drugs. However, the impact of this on the industry will be neutral since these drugs account for a small proportion in the Indian pharmaceutical market.

The five-year extension of the 200% weighted deduction for in-house R&D expenditure will only marginally benefit Indian pharmaceutical players, as R&D expenditure, on an average, forms less than 5% of their net sales, Crisil said.

Crisil said that the phama industry is on strong footing and healthy growth to continue. In 2013-14, CRISIL Research expects the domestic pharma industry to continue to expand at a healthy rate of 13-14% y-o-y, reaching $36-37 billion.

The industry is estimated to grow by a robust 16-17% y-o-y (constant exchange rate) to USD 33-34 billion in 2012-13.

Exports (both bulk drugs and formulations) are estimated to grow by about 17% y-o-y during the year, driven primarily by formulation exports to regulated markets, especially the US.

The domestic formulations market is set to grow by an estimated 14-15% y-o-y in 2012-13 with a strong double-digit growth in drugs catering to chronic and lifestyle-related ailments such as anti-diabetic, cardiovascular and neuro/central nervous system.

Export growth of formulations as well as bulk drugs is expected to moderate due to lower opportunity from drugs going off-patent in the global market in 2013-14 coupled with a high base in the previous year.

As Indian pharmaceutical players increasingly tap the generics space in regulated markets and contract manufacturing opportunities for bulk drugs rise rapidly, exports of formulations and bulk drugs will grow by 21-23% and 14-15% respectively, Crisil said.

The domestic formulations market is expected to maintain its growth momentum, expanding at a steady 14-15% y-o-y to USD 13 billion in 2013-14. Growth will be driven by the chronic and lifestyle segments. The National Pricing Pharmaceutical Policy is expected to marginally bring down this growth rate post implementation, it said.