Shot In The Arm

UNLIKE LAST year’s disappointment, this year’s Budget proposals are sure to cheer the pharmaceuticals industry. The finance minister has proposed a number of helpful measures, ranging from a reduction of the surcharge on customs duties to an extension of tax deductions to biotech firms.

The best news for the industry, however, is the proposal to significantly reduce the ambit of the Drug Price Control Order (DPCO). The finance minister did not specify the drugs that would be pulled from the DPCO, but did say that the pharma policy would be amended soon. Multinationals would be the biggest beneficiaries of this move. Glaxo India, for instance, gets 65 per cent of its sales from the DPCO drug list. Another big beneficiary is Hoechst Marion Roussel (nearly 60 per cent of its sales come from drugs currently under the DPCO). However, it is too early to evaluate the impact of this measure, as much will depend on the type of drugs that are removed from the DPCO.

The Budget also envisages an extension of the tax deduction (currently available only to pharma companies) to biotech firms. The limit: one-and-a-half times the expenditure incurred on research. The big gainer here is Wockhardt. On the other hand, companies such as Ranbaxy and Dr Reddy’s are unlikely to be satisfied with the clarification that the deduction currently claimed on research expenditure is inclusive of money spent on clinical trials, regulatory approval and filing of patents.

The abolition of the 10 per cent surcharge on the customs duty could benefit MNCs that import products from their foreign parents. According to pharma analysts, these gains are unlikely to be passed on to customers in the form of lower prices. However, in a number of cases, intense competition from domestic manufacturers may result in a fall in prices. In toto, the gains are unlikely to be anything substantial.

One slight blip in an otherwise favourable Budget is the 15 per cent customs duty imposed on the drug Enaxoparin (used for blood clotting and treatment of thrombosis) -- and the simultaneous withdrawal of exemption from countervailing duty (CVD). This, according to Shahina Mukadam of DBS Securities, may have an adverse impact on Rhone Poulenc, which imports the drug from its parent.

"If there is a domestic manufacturer selling at cheaper rates, the effect is likely to be more severe," says Mukadam. "If not, the impact can be minimised by passing on the increase in prices to consumers." Another disappointment, from the point of view of the pharma industry is the fact that the Budget has not exempted import duty on R&D equipment and the royalty income earned on R&D. The industry had been eagerly looking forward to this.