Budget 2018: Pharma companies want a push on research, innovation

Many companies, with some leading players, are already coping with challenges around price erosion in generics, erosion of base business resulting from new competition and buyer consolidation in their biggest global market, the US.

By E Kumar Sharma  
Friday, January 12, 2018

The government needs to seriously re-think on the ways to promote research and innovation in the country, especially within the Indian pharmaceutical industry. This seems to be coming across as a clear message from the various stakeholders in the Indian pharmaceutical industry.

Perhaps, some of it has to do with the mood within the industry driven by the changing market dynamics in the two most important markets - the US and India, and the fact that most recent budgets have been largely disappointing for the sector.

Many companies, with some leading players, are already coping with challenges around price erosion in generics, erosion of base business resulting from new competition and buyer consolidation in their biggest global market, the US. They clearly see the writing on the wall: Moving up the value chain in terms of developing niche, hard to replicate products, is the only way out and are gearing up for that, with some already moving ahead in this journey.

This is one reason why most that Business Today spoke to were unanimous in picking research and innovation as the top item on the list of priorities for the sector. But then, given that research spending in the pharmaceutical industry is a risky proposition, specially in areas of drug discovery and innovation, fiscal incentives could provide the necessary fillip.

For instance, it is very likely that even after spending 10 years investing in research, the product may finally not get a regulatory approval. "If you want to promote innovation then incentivize investments into research and innovation. This could be done either by government offering a matching grant to a private enterprise or by extending a tax credit," says D G Shah, secretary-general at the Indian Pharmaceutical Alliance, that has leading Indian pharma companies as its members.

He feels the tax credit could be spread over a period of two to three years also. This backed by some procedural simplications, say around ease in filing of patents, could go a long way in encouraging research, he feels hoping the Union Budget would address this issue.

In fact, Kiran Mazumdar-Shaw, chairperson and managing director, Biocon, goes a step further and says, if India needs to move the needle with respect to its goals around Making in India and carving out a niche for itself globally, it needs to support research and innovation.

"India needs to spend at 2 to 3 per cent of GDP on science and research as against the 0.69 per cent at present," she says.  

According to a recent report by the department of science and technology India's gross expenditure on R&D as a percentage of GDP for the last couple of years has been at around 0.69 per cent.

But then, if funds are an issue, her suggestion: perhaps the government could look at deploying collections made from the R&D cess. There are enough media reports on the over Rs 7,000 crore that have have been collected by way of R&D cess.

This is crucial, she feels and points to a recent report by the European Commission which says that if you increase R&D investment by 10 per cent in public research institutions, it grows the GDP by 1 per cent. This coupled with focus on meritocracy, could go a long way in the Indian context, she feels.

Kiran Mazumdar-Shaw and others in the pharma industry, while not in favour of the government move towards gradually doing away with the weighted deduction on R&D for the private sector, want its scope expanded to all areas connected with R&D.

This is despite the government's roadmap that seems to favour a move towards a system where there is a reduced corporate tax rate with all the deductions eliminated, apparently to make it all simple.

"The budget should ensure that the weighted deduction on R&D is brought back (from 150 per cent) to 200 per cent and its scope expanded to cover various nuances of R&D such as inhouse intangible asset development, expenditure on R&D facility, clinical trials by CROs (contract research organizations)," says Kedar Upadhye, Global Chief Financial Officer at Cipla, a global major pharma player with significant presence in the Indian market.

That apart, there is also expectation that perhaps the budget would look at clearing some of the issues around GST payment , especially in cases where medicines cannot be sold , either on account of being damaged or for crossing their expiry date.

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