Budget 2011: Pharma

The Indian pharma sector witnessed a stronger performance in 2010. For generic companies, revenues from the overseas markets witnessed robust growth in sales. Plus, there were many new product launches that also enabled companies to report higher growth in sales and profits. Moreover, this year, certain companies benefitted by launching products having the exclusivity window. One trend that is taking place is the entry of more pharma MNCs in India by acquiring businesses or stakes in Indian companies. In this regard, Abbott’s acquisition of Piramal Healthcare’s domestic formulations business hogged the limelight in 2010. That said, those focusing on contract manufacturing and research (CRAMS) did not do too well due to weak conditions in the developed markets. From a long term perspective, the prospects for the sector appear bright led by increasing focus of governments across the world to reduce healthcare costs and many drugs going off patent. Infact, the next 2-3 years are expected to be strong ones for domestic companies focusing on generics with many branded drugs having huge sales losing their patents. Further, as the developed world recovers, tie-ups in the R&D space would also go a long way in enhancing the fortunes of the Indian pharmaceutical industry.

Budget Expectations

	Increase abatement from MRP (for calculating assessable value for the levy of excise duty) from the current 35%.
	Restore the MAT rate back to 15% from the current 18%.
	Provide tax deductions to units engaged in contract R&D.
	Allow weighted deduction on R&D incurred outside the in-house R&D facility as well.

Budget Measures

	Plan allocations for health stepped up by 20% to Rs 267 bn.
	Scope of the Rashtriya Swasthya Bima Yojana to be expanded to widen coverage.
	Concessional rate of 5% of basic customs duty is being provided on four life saving drugs with nil CVD along with on bulk drugs used in the manufacture of said drugs.
	While a tariff rate of 5% is being prescribed on vaccines (other than those included in National Immunisation Program) they would be subject to the concessional duty of 1% without CENVAT credit facility.
	Rate of Minimum Alternative Tax proposed to be increased from 18% to 18.5% of book profits.
	Surcharge on domestic companies reduced to 5% from 7.5%.
	Weighted deduction on payments made to National Laboratories, Universities and Institutes of Technology to be enhanced to 200% from 175%.

Budget Impact

	Increased allocation towards healthcare is a positive for the entire pharma sector as a whole.
	Although MAT has been increased by 0.5% to 18.5%, the reduction in surcharge for domestic companies comes as a relief.
	Increase in duty for vaccines could have a negative impact on companies manufacturing and selling the same.

Company Impact

Both domestic and MNC pharma companies will stand to benefit from the increased focus on healthcare. The increase in duty for vaccines (other than those included in National Immunisation Program) could have a negative impact on companies such as GSK Pharma and Aventis who market these products.