Post Budget Analysis - Pharma sector – Missing The Boaster Dose

Indian Pharma sector recently witnessed a landmark event for the generic drug manufacturers. The medium sized firm Natco Pharma was awarded a compulsory license to manufacture a high cost cancer drug which was exclusively sold by the giant global Pharma Company Bayer. With the judgment in the favor of the generic manufacturer, we believe that more patented drugs will be susceptible to the generic challenges which also augurs that going forward Research and Development (R&D) related activities will play a crucial role in the Pharma and healthcare industry. Over many years the industries demands have remained concentrated around the same and the current budget we believe has failed to meet the industry expectations.

We believe that only handful of the wishes has come true in this budget, with many key issues have remained unaddressed and hence the overall impact will be neutral.

Positive

• Currently in house R&D expenses are eligible for the weighed deduction at 200% of the incurred costs under section 35(2AB). This benefit is expiring by 31 March, 2012. The clause has now been extended for further period of five years i.e. up to 31st March, 2017. This will be the only announcement for the Pharma sector and we believe this could benefit all major companies like Dr Reddys laboratories, Lupin, Sun Pharma, Cipla, etc.
• The basic customs duty on Iodine is reduced from 5% to 2.5% which will benefit the healthcare segment as it has a role in the diagnostic tests.
• Custom duty on probiotics is reduced from 10% to 5%, which is of little benefit to the companies making nutritional supplements, clinical trials etc.
• Custom duty on six specific life saving drugs/vaccines and their bulk drugs is being reduced from 10% to 5%, the excise duty has also been removed. This will prove to be good for the healthcare segment due to the growth in the infectious diseases.
• Full exception from the basic custom duty and CVD is provided to certain medical products like steel tube and wire, cobalt chromium tube, Hayness alloy-25 and polypropylene mesh used for Coronary stent, artificial heart valve etc. We see positive impact of this on healthcare sector as there is growth in the lifestyle diseases and surgeries related to the same.

Neutral

• Import duty on certain products used in hospitals like Syringe, needles, catheters, Gluco-meters, blood pressure monitors etc has been reduced from 5% to 2.5% while CVD has been increased from 4% to 6%. We see a neutral impact of this.

Negative

• The Pharma industry was seeking addition of the non in-house R&D expenses like clinical trials, land, building etc in to the section 35(AB). This has been ignored by the finance ministry and we believe it is negative to the sector as we mentioned in the opening paragraph.
• What also disappoints to the Pharma sectors is the no announcement on the tax sops to the large scale monoclonal antibody plants. The current import duty of 30% on the imported equipments required to manufacture monoclonal antibodies has also not been reduced.
• The excise duty has been increased from 10% to 12% which is negative to the Pharma sector as well. The sector is already recognized as a defensive sector and hence levy of the excise duty may reduce the profits.
• The service tax on the first year’s premium on the health insurance policies has been increased from 1.5% to 3%. For the subsequent years it will be 1.5%. the healthcare policies are one of the main drivers of the healthcare sector. With the increased service tax the already slowed down insurance sector may see decreased volumes of the policies impacting the hospitals revenues.

We believe that this budget has failed to deliver the long term pending demand of the Pharma sector to include non in-house R&D expenses. With the Indian Pharma companies spreading the wings on the global canvas, R&D expenses have become very crucial. Now with the Indian Pharma market also getting competitive, the growth of the domestic Pharma sector will be dependent on the innovation and hence this will not be positive on the sector. Beside the industry was expecting the reduction of the excise duty on Active Pharma Ingredients and formulations which instead has been raised to 12% increasing negative sentiment.

We believe that the status of infrastructure sector has not been awarded to healthcare sector which otherwise would have been a boaster dose for overall healthcare facilities in the country. Though healthcare has got few things in its side in this budget which we believe is good for the sector.

After the budget was announced, healthcare index declined by 2.02%, showing thumbs down to the budget.