Weighing the verdict

It is the time of the year when the whole industry is busy analysing the effects of the budget, finding out on how much of their demands have been met with and which ones were overlooked. Suja Nair gets the reactions from the industry

One time when the whole country is glued to their chairs watching the TV or listening to radio is during the Union Budget, hoping that their demands will be heard ultimately. But as always, this year too was a let down for the pharma industry as many of industry demands remained unmet. In spite of this, Finance Minister Pranab Mukherjee did bring some relief to industry with measures like the abolition of Fringe Benefit Tax (FBT) and Commodity Transaction Tax, introduction of Goods and Service Tax (GST), scope of provisions relating to weighted deduction of 150 percent on expenditure incurred on in-house R&D to all manufacturing businesses, at present drug companies get 125 percent weighted deduction on research outsourced to a third party and 150 percent on in-house research.

A big breather that was welcomed by all has been due to the Government’s decision to cut down on basic customs duty on raw materials of life saving drugs, vaccines and medical devices. Among the life saving drugs, some important drugs that will become cheaper are human insulin, carbamezapine, salbutamole suphate, rifampicin, betamethazone and ranitidine etc. Apart from this, the Central Government has also totally exempted basic customs duty on influenza vaccine and nine other specified life-saving drugs used for treating breast cancer, hepatitis B, rheumatic arthritis, etc. Excise duties of certain drugs used in critical segments like cancer is already cut down to zero or four percent. National Pharmaceutical Pricing Authority (NPPA) has also reduced the prices of imported medicines marketed by MNC drug firms like Pfizer, Novo Nordisk, Sanofi Aventis and Eli Lilly. Another tax proposal that will benefit the industry is the tax incentives for setting up and operating 'cold chain' facilities which is an integral part of the supply chain required for vaccines and many other biotech products.

Excerpts from the experts:

This time round, the budget seemed more people rather than corporate friendly. When weighted against the positive moves it seems obvious that even this time, demands of the pharma and biotech industries have been given a blind eye. Many in the industry welcome some of the decisions from the budget, though they feel lot more could have been done. Here's a peek into what the industry expected and what they got.

Sanjay Pai Chief Financial Officer, Plethico Pharmaceuticals A very pragmatic budget	Nikunj Kanakia Chairman and Managing Director, Lifeline Industries It is a good budget from medium term perspective since may be the market's sentiment will revive having understood the impact of the budget
Tapan Ray Director General, Organisation Of Pharmaceutical Producers Of India (OPPI) The Finance Minister has rightly focused on improvement of the healthcare infrastructure by increasing allocation under National Rural Health Mission	Ranga Iyer President, OPPI The healthcare needs of the country have been given importance in the Union Budget proposals for 2009-10 and the proposals will help in improving the healthcare needs of the country
Vineet Kanaujia GM-Marketing, Safexpress Introduction of GST will play a very important role in the growth of warehousing business in India	Dr Swati Piramal Senior Vice President, ASSOCHAM and Director, Piramal Healthcare We hope that next year would see increased emphasis on R&D

Thumbs up

Giving his reaction to the budget Tapan Ray, Director General, Organisation Of Pharmaceutical Producers Of India feels, "The Finance Minister has rightly focused on improvement of the healthcare infrastructure by increasing allocation under National Rural Health Mission (NRHM). The budget proposal of covering all BPL families under Rashtriya Swasthya Bima Yojana (RSBY) with an increase in allocation by 40 percent, will help in improving healthcare access. Though reduction of customs duty for drugs used for heart diseases, influenza vaccine, breast cancer, hepatitis B, rheumatic arthritis and also for bulk drugs used for the manufacture of such drugs from 10 percent to five percent and total exemption of excise and countervailing duty for these drugs is a positive move, the industry expected that Government will take similar action for all life-saving drugs."

The Economic Survey 2008-09 highlights that the economy of the country has grown by 6.67 percent despite global economy meltdown. For the pharma industry, the Economic Survey comments that the drugs price control should be limited to essential drugs in which there are less than five producers. All others should have been decontrolled. OPPI hopes that this issue will be addressed in subsequent policy announcements by the Government.

Enjoining with Ray, Ranga Iyer, President, OPPI says, "The healthcare needs of the country have been given importance in the Union Budget proposals for 2009-10 and the proposals will help in improving the healthcare needs of the country."

Speaking affirmatively, K V Subramaniam, President and CEO, Reliance Life Sciences informs, "The Union Budget 2009-10 is a balanced, forward looking budget, which sets out to put the economy back on a high growth track. R&D activities will fillip due to the extension of the scope of weighted deduction of 150 percent on expenditure incurred on in-house R&D to all manufacturing businesses. The other significant step has been to encourage the use of environment friendly fuel and enhance its availability in the country by exempting excise duty and reducing the basic customs duty on bio diesel. This will play a vital role in boosting the efforts in building a greener India."

Speaking on the budget Teruo Yasufuku, Managing Director, Astellas Pharma India shares, "We welcome the budget by the Finance Minister. The budget is positive especially for overall development of the rural healthcare. An increased allocation of Rs 2,057 crore over and above Rs 12,070 crore to the NRHM will have a positive impact on national healthcare."

Reacting to the budget, Atul Sobti, CEO and MD, Ranbaxy says, "It is good to see a clear focus on growth, with an ambitious nine percent target and a belief in direct targeting of benefits to the poor (especially through NREGA). It also good to see a rollback of some ad hoc levies (income tax surcharge and FBT). It was very heartening to hear the government speak of the positive role of the private sector as also the role of foreign capital inflows."

Sanjay Pai, Chief Financial Officer, Plethico Pharmaceuticals feels, "Overall this was a very pragmatic budget, considering the fact that, Indian consumers have been (in various patches) been deprived of spending money either in terms of layoffs, salary cuts, high tax for individuals etc. 150 percent tax deduction for R&D is good for various companies especially pharma companies. Minimum Alternate Tax (MAT) increased from 10 percent to 15 percent was I think a counter balancing measure, but it should be fine."

Nikunj Kanakia, Chairman and Managing Director, Lifeline Industries feels that this budget is a decent effort within a short span and difficult times. Overall fiscal deficit of 6.8 percent is worrisome but situation looks different given the global financial scene. Stating the pros of the budget he avers, "Thrust to infrastructure is a good sign and the right avenue to deploy financial stimulus. Government's intention to stay on course with GST deadline is positive sign. While government is justified with its focus on socio-economic stimulus, some relief in corporate tax would have boosted the morale of business." Kanakia, feels that overall, it is a good budget from medium term perspective since may be the market's sentiment will revive having understood the impact of the budget.

Vineet Kanaujia, GM-Marketing, Safexpress says, "This budget is fundamentally strong and has been designed keeping in mind the overall good of the economy and the people. Also, the Government's clear focus on economic resurgence and long-term growth is very admirable." Commenting about the Government's initiative for implementation of GST, he informs, "Introduction of GST will play a very important role in the growth of warehousing business in India. It would enable manufacturers to manage distribution centers (DCs) across India at very few strategic locations. At present, to save on Central Sales Tax (CST), manufacturers have to maintain warehouses at multiple locations to show the movement of goods from one company warehouse to another. However, with implementation of GST and phasing out of CST by April 2010, manufacturers will readily outsource their warehousing requirements to Third Party Logistics (TPL) service providers. This will not only help the manufacturers to save costs, but they will also be able to focus on their core business."

Teruo Yasufuku Managing Director, Astellas Pharma India shares We welcome the budget by the Finance Minister. The budget is positive especially for overall development of the rural healthcare. An increased allocation of Rs 2,057 crore over and above Rs 12,070 crore to the National Rural Health Mission will have a positive impact on national healthcare	Supratim Majumdar Industry Analyst, Healthcare Practice, South Asia & Middle East, Frost & Sullivan When R&D and innovation are the buzzwords in the industry, and the R&D spending as a proportion of revenue is continuously increasing year on year, the finance bill remained silent on incentives for R&D investment
Dr Ajit Dangi President and CEO , Danssen Consulting We assume that the budget is only `work in progress`, I would rate the budget on a 0 to 10 scale on 6.	Ranjit Shahani Vice Chairman and Managing Director, Novartis India The budget did not quite reach the expectation but is certainly moving in the right direction
Hitesh Sharma Partner and National Leader, Health Sciences Practice, Ernst & Young Clinical trials and new research products have also not been given the weightage that they deserved	Sanjeev Saxena Chairman and CEO, Actis Biologics I would have been happier had the Finance Minister put in incentives which would have been allocated for new technology development or new drug development. Also, direct investments into the biotech would have been highly desirable
S Ramesh President, Finance and Planning, Lupin The budget is a promising one for the common man, it does not provide a significant fiscal stimulus for the industry as a whole

Good and bad

In her reaction to the Budget 2009, Dr Swati Piramal, Senior Vice President, ASSOCHAM and also Director, Piramal Healthcare says, that the Fringe Benefit Tax (FBT) abolition is on the right direction since this taxation had irritant effects. For the pharma industry, introduction of GST on time is a positive step and will reduce transaction costs significantly. However she is quick to add, "MAT was increased from 10 percent to 15 percent against the aspirations of ASSOCHAM which had earlier urged the Finance Minister to bring it down to 7.5 percent. And also we hope that next year would see increased emphasis on R&D."

Sanjay Nagrath, Vice President, Finance, Intas Biopharmaceuticals welcomes the exemption of advanced tax payment on small businesses, who are allowed to pay their entire tax liability at the time of filing returns and the abolition of FBT and Commodity Transaction Tax. Among other pros the discontinuation of service tax paid to foreign agents towards commission under reverse charge is a positive move for corporate houses. However, he feels, "Raising exemption limit of Rs 10,000 in personal income tax is hardly any relief given to individuals. Hike in MAT is disappointing for the industry. Even the induction of service tax in the field of Law, in case same is provided by Law Firms to Corporate, is a negative move."

According to Supratim Majumdar, Industry Analyst, Healthcare Practice, South Asia & Middle East, Frost & Sullivan, "This year budget failed to provide the much-sought impetus to the pharma industry. When R&D and innovation are the buzzwords in the industry, and the R&D spending as a proportion of revenue is continuously increasing year on year, the finance bill remained silent on incentives for R&D investment." However he is quick to add that the increased allocation for NRHM over and above the outlay in interim budget will expand the access of healthcare facility. This 'consumption-oriented' budget if implemented means more money in the hands of people and that is going to increase the private healthcare expenditure which includes expenses for medicines. That can be a boost for the pharma industry.

Majumdar adds, "Reduction of custom duty on 10 life-saving drugs from 10 percent to five percent along with total exemption from excise duty and countervailing duty will make the medicines more affordable for patients. Customs duty will also be reduced from 7.5 percent to five percent on two specified life-saving devices used in treating heart ailments. Pharma exporters hurt by the global economic turmoil are going to benefit from the one year extension of the export credit guarantee scheme till March 2010."

Thumbs down

Expressing his disappointment over the budget, Dr Ajit Dangi, President and CEO, Danssen Consulting, maintains, "Budget 2009-10 turned out to be a dampener, no wonder the market tanked by 869 points. Expecting radical reforms from the UPA II therefore appears to be a distant dream. There is also a disconnect between the President`s speech, the Economic Survey and the budget." However having said that he is quick to add that, in the precarious situation of high fiscal deficit of 6.8 percent, global economic meltdown, commitment to inclusive growth, the budget seems to have balanced the various conflicting factors reasonably well. "What it lacked is proper communication strategy and a roadmap to achieve the stated objectives. There is no rationale for reducing customs duty only on nine drugs from 10 percent to five percent as these drugs are out of price control anyway and unless the manufacturer passes on the benefit to the patients, this is unlikely to have any impact. Implementation of GST from April 2010 sounds ambitious but whether the pharma industry will benefit from uniform GST remains to be seen as it will depend on the rate," Dangi says.

Further he asserts, "The most important reform would be to increase the allocation to healthcare from 2.2 percent to at least four to five percent to make any meaningful impact on the healthcare of the poor and increase the equity cap from 26 percent to 49 percent in the insurance sector. All in all, if we assume that the budget is only `work in progress`, I would rate the budget on a 0 to 10 scale on 6.0."

Speaking about the budget, Ranjit Shahani, Vice Chairman and Managing Director, Novartis India, says, "The budget did not quite reach the expectation but is certainly moving in the right direction. The fine print is yet to be analysed but the budget leaves one guessing where the resources for such huge investments are going to come from given the projected fiscal deficit of 6.8 percent. Investments in infrastructure for example are expected to now go up to nine percent of GDP." He says that the tax incentive for setting up cold chain warehousing facilities is welcome and is beneficial to the pharma industry as there are several drugs that need a cold chain. "Of course there are some items which continue to remain on the wish list of the pharma industry such as increase in the R&D weighted deduction to 200 percent. While the market in its collective wisdom has given the budget thumbs down on day one, all in all it is a positive consumption oriented budget and we hope that the government will continue to propel the country on to a higher growth trajectory with tightly built delivery targets," Shahani shares.

Giving his insights on the budget, Hitesh Sharma, Partner and National Leader, Health Sciences Practice, Ernst & Young avers, "The Budget 2009 has been a rather neutral budget for the Indian health sciences industry. With only a few positives coming through, the industry wish list largely remained unaddressed. R&D activity, which could have gone a long way for the growth of Indian pharma sector, has not seen any development. Today, there is need to give impetus to innovation in the sector for India to be able to achieve a leading position in the global market. Clinical trials and new research products have also not been given the weightage that they deserved. The Finance Minister spoke about expediting the implementation of Goods and Service Tax regime, which has been much awaited by the pharma industry; but, the road map for this remains unidentified. The pinch has come in the form of increase in the rate of MAT (from 11.33 percent to 16.995 percent including surcharge and education cess). All in all, the prescription for growth for the health science industry remains unattended."

Sanjeev Saxena, Chairman and CEO, Actis Biologics strongly feels, "Incentives proposed should have some impact on the investments and hence may refuel the growth of economy. Though abolishing the FBT is a welcome move the problem, I see with this budget is that no incentives have been provided for R&D or the pharma and biotech sector. I would have been happier had the Finance Minister put in incentives which would have been allocated for new technology development or new drug development. Also, direct investments into the biotech would have been highly desirable."

S Ramesh, President, Finance and Planning, Lupin feels that in spite of the fact that the budget is a promising one for the common man, it does not provide a significant fiscal stimulus for the industry as a whole. He points out, "The budget fails to address some key issues that the pharma industry is faced with. The exemptions on EOUs which are set to expire by March 2010, will decrease the benefits availed by pharma companies till date. An extension to this date would have acted as a major boost for the industry given the large global opportunity that exists vis-à-vis generics, R&D and CRAMS for Indian pharma. Additionally, a correction in the excise duty would have provided much-needed relief to companies and facilitated the entry of cheaper drugs into the market. Another factor that would have helped drive prices of healthcare lower would be a further reduction in the overall tax rates and custom duties. This would help lower the cost of production, which in turn would help lower the cost of drugs for the consumers."

Expressing his displeasure, D Sucheth Rao, CEO, Neuland Laboratories points out, "The industry would have greatly benefited if the finance minister would have announced a 10 year extension of tax benefits for standalone R&D entities and offered incentives to pharma companies for R&D, clinical research, research and development, government should have taken steps to reduce import duty to nil on inputs for research and development activities. Also government should have introduced tax exemptions on the foreign currency payments to overseas consultants for research and development units." Further he adds that the decision by the government to reduce the customs duty on life saving drugs as well as some of the vaccine and cancer products will greatly benefit patients as this will make the treatment cost effective. However it would have helped if the government had announced a total excise exemption on 354 drugs specified in the national list of essential medicines. The government should also provide special tax concessions for encouraging Public-Private Partnership (PPP) initiatives in the health care industry. Healthcare policies should create a congenial business environment for the private players to invest in the space.

K Raghavendra Rao, Managing Director, Orchid Chemicals & Pharmaceuticals shares, "Though the Union budget reaffirms the Government's commitment to social welfare programmes like rural employment and housing and national food security, the budget fell short of market expectations on certain infrastructural and FDI investments as well as disinvestment roadmap. The upstream effects of investing in rural and agrarian uplifting programmes would however be significant and may be perceived positively in days and weeks to come. For the corporate sector, the abolition of FBT is a welcome relief but the increase in MAT would affect many companies."

Voicing his views regarding the demands of the vendors, Mukul Somany, Senior Vice President, AIGMF and Joint Managing Director, Hindustan National Glass & Industries says, "The request of glass industry for rationalisation of soda ash import duty remains unheard and pending. Higher cost of inputs particularly soda ash, which constitutes about 30 percent of cost of production of glass products, is one of the major factors contributing to higher cost of glass bottles. It is hitting the glass producers, especially in the small and medium sector. There has not been any direct benefit passed on to packaging industry in general and container glass industry in particular."

Simply put, the budget presented was a democratic one aimed in fulfilling the demands and needs of the masses, which is a good thing. However many crucial demands from the pharma industry went unheard. In India research is an area that needs active support from the government since it is in a very nascent stage. There is a need for more tax benefits and infrastructure that needs a lot of investments. There is a large scope of R&D in India but for that, the government needs to do a lot in promoting industries and providing support to the industries.

But unfortunately the long-standing demand for significant incentives for R&D has still not been met. In short, while it is a promising budget for the common people, from an industry point of view, it could had been a lot better if some basic and long lasting demands have been met, That would have, in turn, led to much needed booster to facilitate and stimulate growth of this sector and in turn need to more affordable medicine.

suja.nair@expressindia.com