Budget 2016: Implement Katoch Committee recommendations to boost pharma sector

Charu Sehgal, Saket Saurabh

The Indian pharma industry continues to be dominated by me-too generics which focus on exporting cheaper generics with very little innovation. Although in the short term, this helps us take advantage of drug patent expiries in developed markets, in the medium to long term it creates very little differentiation, thereby exposing us to price competition.  Lack of innovative R&D might also force us to depend on foreign MNCs to access to break-through drug therapies.

The Atal Innovation Mission articulated in the last budget is a welcome step to drive us towards better R&D focus. However, we need a focused Pharma Task force that clearly defines the 5-10 years vision and targets around innovation (number of Novel patents, therapy areas of focus, number of local New Chemical Entity approvals etc).

The specific focus on pharma will help drive the focus on innovation especially in the area where Indian companies have historically had a significant global advantage.

Continuing the focus on R&D, the Income Tax Act offers tax benefits and deductions for both revenue and capital expenditure for R&D.  However, there is no clear differentiation for Incremental R&D efforts as opposed to transformational R&D efforts.

While maintaining the existing deductions, it might be beneficial to provide tax incentives for transformational R&D efforts (using some targets mentioned above) so that Indian companies, get added incentives to drive transformational R&D efforts.

Boost competitiveness

Pharma manufacturing is usually split in two broad steps.

Manufacturing the Active Pharma Ingredient (API) and then formulating the API into the finished dosage forms that are eventually consumed by the patients.

Indian generic companies have historically had a leadership position in formulation science and processes. However, many Indian companies have not been able to meet the scale and hence the cost of Chinese API producers.

Ironically, although India manufactures close to 30 percent of the global generics drug consumption, more than 80 percent of APIs required to produce these medicines come from China.

The department of pharmaceuticals (DoP) had declared 2015 as the year of the API and has reiterated the urgent needs to bring about self-sufficiency in the field.

Some of the key areas that the Budget needs to focus on include:

Actively implementing the recommendations of the Katoch Committee recommendations especially in areas like:

• Establishment of mega API parks
• Extending fiscal benefits to creation of the entire community cluster infrastructure and individual unit infrastructure
• Financial investment from the government for development of clusters which may be in the form of a professionally managed dedicated equity fund for the promotion of manufacture of APIs
• Duty exemptions for capital goods imports

The above recommendations, some of which are relatively easier to implement will help energise the establishment of new cost-effective R&D units.

Priority API lists

The government needs to identify a priority API list especially of key life savings medications and also drugs that require specialized skills (bio-similar cancer drugs, etc.) and offer special incentives to companies that are looking to enhance existing capacity or develop new capacity.  The primary impact will be to reduce over-reliance on Chinese supplies.

(Sehgal is Partner and Saurabh, Director, Deloitte Touche Tohmatsu India LLP. Views expressed are personal)