Strong medicine

OUTLOOK: INDUSTRY ANALYSIS

Pharma industry is on tenterhooks as there many things that could go frightfully wrong.

As the economy approaches the 1-trillion GDP mark, government expenditure in the overall mix is fast reducing in proportion to the private sector. Recent deals by Vodafone, purchase by Tata of Corus and valuation of Airtel, demonstrate that these companies have a budget that far exceeds the Indian government's annual defence allocation or their rural development programmes.

Even though the relative importance of the National Budgetary allocations and their impact, will reduce over time, the policy directions, social expenditure and the business environment created by the fiscal regime will be important cues.

In this article, I will look at the pharmaceutical sector that is growing at 9 per cent per annum "� a healthy rate, but far behind IT at 25 per cent plus! So why not pharma? Undoubtedly, as people in rural and urban areas become more affluent, the growth of drugs for chronic diseases such as heart, diabetes and anxiety, etc, will grow faster than the acute segment including infectives and pain killers, etc.

However, in 2006 the acute segment has grown faster (18 per cent, ORG-IMS) than the chronic segment (16 per cent) and the reason is the large number of epidemics, chickengunia, dengue etc. Is this reversal due to the emergence of a larger more affording rural area demanding acutes, or is it only a blip of 2006 with no change in trend? Only 2007 will tell.

The Budget 2007-08 needs to address the following issues, affecting both the large and small pharma units: First, reduce excise rate to 8 per cent, to stem the migration of units to tax havens like Baddi, Sikkim, etc. Overall, excise revenue collection does not match the growth in volume and value output of pharma, due to concessions in these excise havens.

What's more, it's hit smaller units hard as they have not been able to migrate to these tax havens with the same ease as the big players. In fact, many SMEs have been forced to shut shop "� despite their investments in quality upgradation in wake of the mandatory compliance requirements for quality in manufacturing.

Second, following the product patent regime in January 2005, emphasis has shifted in India from merely copying generics to innovation for ensuring growth. Investments in exploring new delivery systems are required for combination drugs and R&D of new drugs. The provision of 150 per cent weighted deduction for R&D in Income Tax, which ends in March 2007, needs to be extended by at least 10 years to generate confidence and boost R&D.

Third, most large pharma companies are aggressively looking at exports and going global through M&A strategy. Hence, a more conducive business entry environment is required in terms of lower non tariff barriers of product registrations, approvals, local compliance, uniformity in regulatory aspects (vis a vis other countries and economic groups) in areas like labeling, packaging, etc.

Fourth, there has been a move to include the marketing representatives of pharma companies, under the archaic Industrial Disputes Act 1947, as workmen! Fifth, under the newly amended Marketing Assistance Initiative scheme announced last month, the restriction of Rs 50 lakh per exporter for registrations needs to be substantially enhanced, given the actual costs being incurred in the registrations, especially in the regulated markets of the world.

There are several other more specific suggestions of the industry in the areas of clinical research, contract manufacturing etc, that have been given to government.

Finally, the outcome of the ongoing pharma policy dialogue is being watched with a mix of trepidation as, after all, the Ministry has already enhanced the regressive and outdated drug price control system for later this year.

(The writer is advisor, Crisil and Zydus Group)