Govt finally gives drug R&D new life with tax reforms

Producing generic versions ofblockbuster drugs to make them more affordable in a market like India or, for that matter, anywhere else is something great. Most Indian pharma companies have earned their spurs doing exactly that, which makes them an instant hit. They mostly sell these drugs in an increasingly competitive market in the US, Europe and India.

[caption id=“attachment_49753” align=“alignleft” width=“380” caption=“What Indian drug sector needs is more reforms and liberalisation. Mukesh Gupta/Reuters”] [/caption]

But things are not going to be as rosy as it used to be. Intellectual property regulations are getting tighter across the world. The fact that there are so many players jostling for the same pie means that the prices are going to slide further. Consumers may be smiling, but Indian drug companies are literally sweating it out. Their profitability is under strain. Almost all have reported pressure on drug pricing across markets they operate for the June quarter 2011.

To fix it, the companies are ramping up their research and development spend big time. Drugmakers like Sun Pharma, Dr Reddy’s Laboratories and Glenmark have all created separate vehicles dedicated to molecular research. Smaller players, for their part, are joining forces with biggies to take drug development to the next level. Contract research has emerged as a big growth area.

But there is scepticism galore. Not many are hopeful that higher internal investment would lead to a spike in profits. The lack of adequate regulatory infrastructure is blamed for corporate apathy towards drug discovery.

This is where the government steps in. The Indian department of pharmaceuticals is finally getting its act together and has recommended a slew of tax incentives to give a push to R&D. Companies could benefit by receiving tax incentives for expenses incurred on the drug development process, according to news reports.

The government is also planning to create a National Drug Authority. However, things have been slow. Two years ago, a presentation was made by Surinder Singh, drugs controller general of India (DCGI), on the role of the National Drug Authority. The presentation clearly outlines timeline for approvals of a new drug or clinical trials under this new regulatory regime.

Investors are also pressing for a clear and time-bound regulatory framework. Take the case of Nitin Deshmukh, managing director at Kotak Private Equity. His firm has invested in drug companies in the past. Deshmukh says the process of regulatory approval is so slow that nobody is willing to bet money on new drug discovery in India. “There are scientist-entrepreneurs who left their well-paying jobs and are now struggling to take their great discoveries to the market,” he said.

A lawyer at a London-based firm pointed out that companies in India do not have the bandwidth to do drug discovery. Most of the post-graduate doctorates and chemists choose to work for big pharma companies overseas. Besides, the highly regulated market breeds corruption, according to him, and inordinate delays in approvals end up frustrating businesses.

Last year, Malvinder Singh, the former owner of Ranbaxy Laboratories, voiced the general anguish when he said founding families of many of India’s drug companies want to sell their businesses. Last week, Lupin Laboratories was reported to be looking to sell the domestic formulations business. Lupin promptly denied any such move.

Sector analysts point out that companies who chose to sell saw very little money ahead unless they had new blockbuster products in the market. To produce a blockbuster drug, it costs billions of dollars.

On an average, Indian companies spend 6% on research and development. In contrast, the figure for new drug development for global drug companies that innovate and make new drugs stands at over 13%. “Overall global expenditure on discovery and development of new medicines is pegged at $68 billion for 2010, down nearly 3% from the $70 billion spent in each of 2008 and 2009,” said a Reuters report in June 2011. Indian companies are nowhere near those values and spend only a fraction on research and development.

“Pharma companies were earlier feeling the heat only in generic drug space. Now, there is pressure in the domestic formulations market as well,” said a sector analyst.

This explains why Ranbaxy Laboratories and Piramal Healthcare structured two landmark transactions which changed the course of the Indian pharmaceutical industry. While there appears to be considerable interest from big pharma companies in Indian drug formulation firms, deals are not going through at this point of time. “The valuation of nine times revenue given to Piramal’s formulation business has raised expectations of many pharma company owners,” the analyst added.

However, not everyone is likely to get the top of the value price that Piramals and Singh brothers managed. Many of them would have to find out new ways to hold out against intense competition. They would have to focus on opportunities to strengthen their research over the next few years.

Deshmukh of Kotak Private Equity believes that beyond generics, Indian drug companies could partner with smaller companies on drug discovery and new molecules. The large players could partner with smaller companies in the drug discovery space that are nimble footed and offer them the capital support they need, he suggested. “Small companies have the ability to work on drugs while larger players have capital,” Deshmukh pointed out.

The government is contemplating a cut in the foreign direct investment limit in the pharma sector to 49% from 100% currently to ensure that Indian entrepreneurs do not sell out to foreigners.

This would be a retrograde thing to do. What Indian drug sector needs is more reforms and liberalisation. Protectionism could stifle cure to the next big Indian health hazard.