Indian pharma industry is in transition phase which will sped up from the year 2005. While MNC companies are gearing to the opportunity, Indian companies are taking advantage of their competitiveness on both cost and quality front to explore the global pharmaceutical market.

Budget Measures Allocation of Rs 2.6 bn for prevention and control of HIV/ AIDS. Universal Health Insurance scheme to be made exclusive for below poverty line families and premium reduced substantially. A new group insurance scheme started for self help groups. VAT to be implemented from April 1, 2005. 150% exemption on the R&D expenditure to continue.  Budget Impact The budget impact is likely to be minimal on the companies, barring general things like corporate taxes, excise and custom duties. Continuation of exemptions on R&D expenses is likely to have a positive impact on companies, which spend a large sum of money on R&D (like Ranbaxy, Dr Reddy's, Wockhardt and Sun Pharma). Higher health care expenditure by the government and health insurance schemes will bring in structural change. More number of people will be brought under the health insurance net due to lowering of insurance premium, which will result in higher penetration of medicines.  Sector Outlook The budget measures are likely to affect the pharma companies in a very limited way. The outlook for the industry remains positive, as there has been indication from the Finance Minister that he would like to abide by the of WTO regulation regarding the transition into a product patent based regime. Also, the objective of sustaining higher GDP growth is a positive, as the growth in the domestic pharma market tracks the overall GDP growth.  Industry Wish List - Dr Brian Tempest, JMD & CEO designate, Ranbaxy "The pharma industry is preparing to face the challenges of a product patent regime post 2005, and looks forward to a comprehensive fiscal package of reforms from the Govt in order to encourage investments in New Drug Discovery. This package should enable the industry to offer innovative medicines to patients at an affordable price." The weighted deduction for R&D expenditure should continue upto 2010 and should be enhanced from current 150% to 200%. To improve international competitiveness this must also allow expenditure incurred for regulatory and legal expenses incurred for patent challenges outside India, as well as for land and buildings for new R&D facilities. 100% Tax exemption on overseas earnings accruing from out licensing of IPRs, if re-invested in R&D. The span of control of NPPA to be reduced. A Settlement Commission to be appointed to avoid delays in litigation. Financial support to the Ministry of Health to restructure the drug regulatory system in India along the lines suggested by the Mashelkar Committee. Customs duty exemption for equipment and consumables for use in R&D for pharma and biotech industry.  Budget over the years Budget 2001-02 Budget 2002-03 Budget 2003-04 The Finance Minister announced a 'significant reduction in the span of control' of the DPCO. The 150% exemption that is available on the R & D expenditure would now include the costs of filing a patent, the cost of clinical trials and the cost of bio-studies. The budget has also hiked the allocation for the health and family welfare ministry from Rs 49.2 bn to Rs 57.8 bn for the year 2001-2002. Of this Rs 1.8 bn would be allocated to combat AIDS. Anti AIDS drugs to be fully exempt from excise duty. Specific drugs used for treatment of Cancer and other critical diseases would be exempt from custom duty. Incentives earlier given on such drugs, which are now manufactured indigenously, have been charged 5% customs duty. Customs duty on Glucometers used for diabetes reduced from 25% to 10%. All drugs and materials used in clinical trails to enjoy customs and excise duty exemption. The list of life saving drugs that enjoys tax exemptions or concessional tax rates of 5% to be expanded. Customs duty on Glucometers and Glucomteric strips reduced to 5% from existing 10%. The government has proposed a health insurance scheme. As per this insurance plan, an individual will get a cover of Rs 30,000 in case of hospitalization for a premium of just Rs 365 a year. The government aims to bring 5m families who are below the poverty under the coverage of this scheme. Concessions under the section 10 (23G) to be granted to institutions lending to hospital with more than 100 beds. Depreciation rate on life saving medical instruments increased from 25% to 40%
Key Positives Exports thrust - Indian companies are following a two-pronged approach. The first approach is weaved around looking for an opportunity to tap an existing patent viz. challenge the patent of existing products or wait for the patent to expire and then launch the generic version in the lucrative markets of US and Europe. The second revenue stream is an even more ambitious. Top Indian companies plan to offer research and development (R&D) services to global majors or carry out work on their own. Cost competitiveness - A new concept that is gaining momentum in the pharma industry is contract research apart from contract manufacturing. Given the low cost high quality advantages, Indian companies are poised to benefit from contract research business on behalf of multinationals. As for contract manufacturing, large global pharmaceutical companies are finding it profitable to outsource production. To cash on these opportunities, many large production houses in the country are becoming US FDA compliant. Structural changes - The penetration of health insurance is abysmally low in the country. The entry of private players would not only bring in quantum leap in the health insurance business but also increase capital inflows into this sector. It would also bring in the concept of managed healthcare in the country. These would finally lead to overall increase in per-capita usage of drugs. New growth opportunities - In spite of the price war, the domestic pharma industry continues to show decent growth rates, led by the chronic therapeutic (lifestyle) segment like anti-diabetic, cardiovascular and central nervous system. Higher awareness, exposure to newer therapies and aggressive introduction of new drugs at reasonable price has been responsible for growth in the chronic/lifestyle segment. This trend is also likely to continue going forward. Shift towards product patent regime - One of the positive developments that are happening in the industry is the shift towards product patent regime form 2005. This will lead to a structural change in the industry, which will encourage innovation in the industry. While the there would not be any impact in the short term, in longer term this will lead to strengthening of the industry. MNC majors are waiting for this opportunity to capture the markets.		Key Negatives Lower end of value chain - Indian companies are cost competitive in manufacturing bulk drugs, which has made them an outsourcing destination for the global pharma majors. But a bulk drug manufacturing belongs to the lower end of the pharma value chain and is a commodity in nature due to low entry barriers. Also, the Indian industry lacks facilities and resources to develop a molecule, conduct clinical trials and then launch the product. Indian companies will thus have to depend on their international peers to undertake the more expensive clinical trials and product launches. Weakness in domestic markets - Fierce price competition has become order of the day for the domestic pharma industry, which has restricted the ability of the domestic pharma market to grow in the value terms. Due to its highly fragmented structure the pricing power of the players has been reduced to a great extent making the industry's growth lacklustre. The Indian markets have traditionally been and continue to remain price sensitive and premium pricing of product is extremely difficult to maintain. Stumbling blocks - Indian companies have been trying to enter US markets through para IV. But recently there have been certain setbacks to the pharma majors. This has reduced the companies' ability to generate strong cash flows to invest in ambitious R&D activities. This might lead to delay in the R&D plans of the pharma majors of the country. Patent Regime - New patent regime brings in lot of promises for the industry in India, but it might not be good for the smaller players in the industry, as they will not be able to survive in the environment leading to consolidation of the industry. So, smaller players may cease to exist after few years.

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.