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Article: Fiscal Policy Imperatives for the Biopharmaceutical Industry

June, 2017

Rama Prasad, Vice President and Head – Finance & Accounts, Reliance Life Sciences, puts forth fiscal policy enablers for the biopharmaceutical industry 

The biopharmaceutical industry encompasses products in the plasma proteins, recombinant proteins, monoclonal antibodies and vaccines. The industry is in its infancy in India, and is thus an untapped opportunity for all the stakeholders. The Indian biopharmaceutical industry makes up just 2% of the global biopharmaceutical industry.

Current Industry Scenario

India is known as the pharmacy of the world and is a major contributor to the world’s pharmaceutical requirements. The success of story of Indian pharmaceutical industry can be emulated by the biopharmaceutical segment by focusing on creation of an ecosystem for innovation, international quality and cost-competiveness.  

There are a handful of biopharmaceutical players, such as Biocon, Reliance Life Sciences and Intas. Indian pharmaceutical companies like Cadila, Cipla, Sun and Torrent are entering into this space through co-marketing and principal-to-principal partnerships.

Industry Dynamics

The biopharmaceutical industry is very capital intensive, highly regulated and is compliance driven. Capital charges constitute a major part of the production cost. Success in this industry is contingent on optimization of the capital investment, scale of operation and productivity.

Drug Pricing

World over, there is a directional move by governments to bring down cost of health care so as to make it more affordable. A holistic focus and policy initiatives on health care costs  – from drug costs, hospital charges, physician fees and channel margins will help reduce costs of health, benefit patients and give much needed impetus to the industry.

Indian biopharmaceutical manufacturers are facing the burden of ever increasing costs of manufacture, regulated prices and high supply side value chain margins.

Fiscal Aspects

The present indirect tax regime does not differentiate between a chemical pharmaceutical product and a biopharmaceutical product. Both categories are subjected to same levy of Excise duty and Value Added Taxes.  Considering the inherent high cost structure of biopharmaceutical products, these taxes add further to the eventual cost of the product, thereby making it an expensive proposition to patients.

In certain biopharmaceutical products, even though the intent of the government is to exempt the final product in the hands of the customer, in reality, the inputs for manufacturers of products attracts all forms of taxes and eventually become very expensive.

Considering the fact that the GST rate schedules are yet to be announced, it will be worthwhile for the policy makers to consider lower rate of taxation for boosting the biopharmaceutical industry.

Research and development (R&D) is one of the driving factors to accelerate growth of any sector, more so in a technology-driven industry like the biopharmaceutical industry.  A six to eight year time frame is what a typical biopharmaceutical product requires from laboratory stage to market. The development expenses mainly constitute of clinical trial cost and the human capital cost.

The Income Tax Act 1961, provides for weighted deduction of expenditure incurred in approved in-house R&D centre. The benefit of this deduction is made available to companies that are already in existence and making profits.  However, for a start-up or a new entrant green field biotech company this benefit is only on paper, as the income tax act allows a span of 8 years within which the losses can be adjusted against profits.

It is to be noted that inclusion of expenditure on clinical trial activities, which by its innate nature, is carried out outside of approved R&D facility is still a matter of contention between industry and tax authorities.

It is also pertinent to note that The Finance Act, 2016 has reduced the weighted deduction available on in-house R&D expenditure to 150% from 200%. Also, with effect from 1 April 2020, the deduction will further be restricted to 100% of the expenditure. In this context, it is expected that policy makers should provide realisable tax breaks and continue weighted deduction to boost growth of biotech industry.

Conclusion

In order for the Indian biopharmaceutical industry to realise its full potential, having fiscal policies aligned with growth objectives of the industry is the need of the hour.  Consistent with “Make in India” campaign of the Government of India, policy changes in various aspects like holistic healthcare pricing, realisable tax incentives will give the much needed impetus to the growth of Indian biopharmaceutical industry.

The opinions expressed in this article are the author’s own.

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