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FDI IN INDIAN PHARMA SECTOR

ECONOMY OF INDIA

The economy of India is the twelfth largest economy in the world by nominal value and

the fourth largest bypurchasing power parity (PPP). In the 1990s, following economic reform

from the socialist-inspired economy of post-independence India, the country began to experience

rapid economic growth, as markets opened for international competition and investment. In the

21st century, India is an emerging economic power with vast human and natural resources, and a

huge knowledge base. Economists predict that by 2020, India will be among the leading

economies of the world.

A revival of economic reforms and better economic policy in 2000s accelerated

India's economic growth rate. By 2008, India had established itself as the world's second-fastest

growing major economy. However, the year 2009 saw a significant slowdown in India's official

GDP growth rate to 6.1% as well as the return of a large projected fiscal deficit of 10.3% of GDP

which would be among the highest in the world.

India's large service industry accounts for 62.6% of the country's GDP while the industrial and

agricultural sector contribute 20% and 17.5% respectively. Agriculture is the predominant

occupation in India, accounting for about 52% of employment. The service sector makes up a

further 34%, and industrial sectoraround 14

India'sper capita income (nominal) is $1032, ranked 139th in the world, while its per capita

(PPP) of US$2,932 is ranked 128th. Previously a closed economy, India's trade has grown fast

India currently accounts for 1.5% of World trade as of 2007 according to the WTO. According

to the World Trade Statistics of the WTO in 2006, India's total merchandise trade (counting

exports and imports) was valued at $294 billion in 2006 and India's services trade inclusive of

export and import was $143 billion. Thus, India's global economic engagement in 2006 covering

both merchandise and services trade was of the order of $437 billion, up by a record 72% from a

level of $253 billion in 2004. India's trade has reached a still relatively moderate share 24% of

GDP in 2006, up from 6% in 1985.

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GROWTH RATE OF INDIA.

The Gross Domestic Product (GDP) in India expanded at an annual rate of 7.20 percent in the

last quarter. India Gross Domestic Product is worth 1217 billion dollars or 1.96% of the world

economy, according to the World Bank. India's diverse economy encompasses traditional village

farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of

services. Services are the major source of economic growth, accounting for more than half of

India's output with less than one third of its labor force. The economy has posted an average

growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage

points. This page includes: India GDP Growth Rate chart, historical data and news.

Country

Interest

Rate

Growth

Rate

Inflation

Rate

Jobless

Rate

Current

Account

Exchange

Rate

India 3.25% 7.20% 14.97% 7.32% -13 46.0850

Year Mar Jun Sep Dec Average

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http://www.tradingeconomics.com/Economics/Currency.aspx?symbol=INRhttp://www.tradingeconomics.com/Economics/Interest-Rate.aspx?symbol=INRhttp://www.tradingeconomics.com/Economics/GDP-Growth.aspx?symbol=INRhttp://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?symbol=INRhttp://www.tradingeconomics.com/Economics/Unemployment-rate.aspx?symbol=INRhttp://www.tradingeconomics.com/Economics/Current-Account.aspx?symbol=INRhttp://www.tradingeconomics.com/Economics/Currency.aspx?symbol=INRhttp://www.tradingeconomics.com/Economics/Currency.aspx?symbol=INRhttp://www.tradingeconomics.com/Economics/Interest-Rate.aspx?symbol=INRhttp://www.tradingeconomics.com/Economics/GDP-Growth.aspx?symbol=INRhttp://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?symbol=INRhttp://www.tradingeconomics.com/Economics/Unemployment-rate.aspx?symbol=INRhttp://www.tradingeconomics.com/Economics/Current-Account.aspx?symbol=INRhttp://www.tradingeconomics.com/Economics/Currency.aspx?symbol=INR

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2010 7.20 7.20

2009 6.70 6.70

2008 9.00 9.002007 9.70 9.70

In the third quarter of 2009, India's economy expanded 7.9%. And although it is expected that in

the last three months of 2009, the third largest economy in Asia might have recorded growth

over 8%, the beginning of 2010 may surprise us on the negative side.

Indeed, recent data is indicating that GDP growth in the last quarter of 2009 may beat

expectations. For example, since June industrial production has been accelerating, recording

11.7% growth in November, the fastest in two years and exports grew 18% yoy in November.

Yet, the stunning performance of the Indian economy has a lot to do with a significant fiscal

stimulus and loose monetary policy. In fact, it is estimated that government contributed around

50% of total GDP growth in the year to September. In addition, lower interest rates have

supported domestic demand for consumer durables.

However, despite some positive data, the rising inflation is a growing concern. Indeed, a weaker

monsoon has pushed price of food significantly higher in the last few months. This price

pressure combined with strong industrial production may soon lead to interest rate hikes and

tighten credit availability. Also, there is another danger by the corner. It is likely that due toextensive spending, Indian government may record huge fiscal deficit in the year to March. And

in order to balance the budget the authorities may decide to increase taxes thus crowding our

private investments.

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OVERVIEW OF PHARMACEUTICAL SECTOR

The Indian Pharmaceutical industry has been witnessing phenomenal growth in recent years,

driven by rising consumption levels in the country and strong demand from export markets.This

segment of Industry has shown tremendous progress in terms of infrastructure development,

technology base and wide range of products. The industry now produces bulk drugs belonging to

all major therapeutic groups requiring complicated manufacturing processes and has also

developed excellent GMP (Good Manufacturing Practices) compliant facilities for theproduction of different dosage forms. The strength of the industry is in developing cost effective

technologies in the shortest possible time for drug intermediates and bulk activities without

compromising on quality. This is realized through the country's strengths in organic chemicals'

synthesis and process engineering. India is today recognized as one of the leading global players

in pharmaceuticals. Europe accounts for the highest share of over 23% of Indian Pharma exports

followed by North America and Asia. Exports to USA have crossed the land mark figure of US

$1 billion during 2006-07. Internationally recognized as amongst the lowest-cost-producers of

drugs, India holds fourth position in terms of volume and thirteenth position in terms of value of

production in pharmaceuticals. It is estimated that by the year 2010, the Indian pharmaceutical

industry has the potential to achieve over Rs.1,00,000 crore production of formulations and bulk

drugs.

The Domestic Pharma Industry :

The domestic Pharma Industry has recently achieved some historic milestones through a

leadership position and global presence as a world class cost effective generic drugs'manufacturer of AIDS medicines. Many Indian companies are part of an agreement where major

AIDS drugs based on Lamivudine, Stavudine, Zidovudine, Nevirapine will be supplied to

Mozambique, Rwanda, South Africa and Tanzania which have about 33% of all people living

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97 to Rs. 13893 crores in 2007-08. Exports of pharmaceuticals registered a growth at the rate of

16.22% during 2007-08. The share of exports of Pharmaceuticals products to the total national

exports have been in excess of 2% during each of last 12 years ending 2007-08. It has exhibited a

long-term upward trend from 2.01% in 1996-97 to 2.55% in 2007-08.

Investment

According to Ministry of Commerce and Industry, Domestic investment in the

Pharmaceuticals sector is estimated at Rs. 31.43 thousand crores, which is equivalent to

US $ 7.14 billions.

The Drugs and Pharmaceuticals sector has been able to attract FDI amounting to US $

1428.96 million in the sector from April 2000 to December 2008.

So far, as domestic industrial proposals between August 1991-March 2008 are concerned,

total Industrial Entrepreneur Memorandum (IEMs) filed including Letter Of Intent (LOI)

& Direct Industrial Licences (DIL) add upto Rs. 31257 crores in Drugs & Pharmaceutical

Sector, according to Ministry of Commerce & Industry.

According to the Ministry of Commerce & Industry, Pharmaceutical sector is estimated

to have created 2.20 lakh employment opportunities.

According to Centre For Monitoring Indian Economy (CMIE), the aggregate sectoral

income grew by 18.9% during the quarter ending June 2008 while the growth in net

profits during 2007-08 was 8.2%.

Key Strengths

Strong manufacturing base

Cost competitiveness

Network of laboratories and R&D infrastructure

Highly trained pool of scientists and professionals

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World-class quality products

Strong marketing and distribution network

Strong process development skills

Potential ground for clinical trials

Fast growing health care industry

Rich biodiversity

Growing biotechnology industry

Highest Quality approvals from USFDA, EDQM, MHRA etc.

Ranks 4th in the world, accounts 8% by volume and 2% by value.

Very strong in Indian medicine systems of Ayurvedic, Homoepathy, Unani, Siddha and

Herbals medicines

An excellent center for clinical trials.

Research and Development

In no other Industry segment innovative R&D is as critical as in Pharma industry. Here, the New

Drug Discovery Research (NDDR) has to keep pace with the emerging pattern of diseases aswell as responses in managing existing diseases where target organisms are becoming resistant to

existing drugs. The NDDR is also an expensive activity. It is encouraging to observe that at least

10 Indian companies are into new drug discovery in the areas of infections, metabolic disorders

like diabetes, inflammation, respiratory, obesity & cancer. Most of these companies have

increased their R&D spending to over 5% of their respective sales turnovers. There is notable

success from some Indian companies in out licensing new molecules in the asthma and diabetes

segments to foreign companies. Introduction of Product Patent for Pharmaceuticals is an

important feature for Indian Pharma R&D scenario. This has boosted the confidence of MNC

Pharma companies in India where a number of western Pharma companies have already R&D

collaborations with Indian Pharma companies in the field of NDDR. Some Indian companies

have also got US-FDA approvals for their new molecules as Innovative New Drugs (lND).

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Western Pharma companies have recognized the attractiveness of India as a R&D outsourcing

destination due to low cost scientific manpower, excellent infrastructure, top quality with

capability to conduct modern research under GLP, GCP guidelines. Many of them have set up

independent R&D centres in India.

Clinical Trials to establish safety and efficacy of drugs constitute nearly 70% of R&D costs.

Considering the low cost of Research and Development in India, several MNC Pharma

companies as well as global Clinical Research Organizations are increasingly making India a

clinical research hub. In conclusion new drug discovery in India has made a promising start

wherein at least five to six potential candidates in the areas of Malaria, Obesity, Cancer, Diabetes

and Infections are likely to reach Phase II clinical trials.

Contract Manufacturing

Many global pharmaceutical majors are looking to outsource manufacturing from Indian

companies, which enjoy much lower costs (both capital and recurring) than their western

counterparts. Many Indian companies have made their plants cGMP compliant and India is also

having the largest number of USFDA-approved plants outside USA.

Indian companies are proving to be better at developing Active Pharmaceutical Ingredients

(APIs) than their competitors from target markets and that too with non-infringing processes.Indian drugs are either entering in to strategic alliances with large generic companies in the

world of off-patent molecules or entering in to contract manufacturing agreements with

innovator companies for supplying complex under-patent molecules.

Some of the companies like Dishman Pharma, Divis Labs and Matrix Labs have been

undertaking contract jobs for MNCs in the US and Europe. Even Shasun Chemicals, Strides

Arcolabs, Jubilant Organosys, Orchid Pharmaceuticals and many other large Indian companies

started undertaking contract manufacturing of APIs as part of their additional revenue stream.

Top MNCs like Pfizer, Merck, GSK, Sanofi Aventis, Novartis, Teva etc. are largely depending

on Indian companies for many of their APIs and intermediates. The Boston Consulting Group

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estimated that the contract manufacturing market for global companies in India would touch

$900 million by 2010.

Selected Contract Manufacturing Deals in India

Indian company Multinational Product

Lupin Laboratories Fujisawa Cefixime

ApotexCefuroxime Axetil, Lisinopril

(Bulk)

Nicholas Piramal Allergan Bulk and Formulations

Advanced Medical

OpticsEye Products

Wockhardt Ivax Nizatidine (anti- ulcerant)

Dishman Pharmaceuticals Solvay Pharmaceuticals Eprosartan Mesylate

IPCA Labs Merck Bulk Drugs

Tillomed Atenelol

Orchid Chemicals and

PharmaceuticalsApotex

Cephalosporin and other

injectables

Sun Pharma Eli Lilly CVS products, anti-infective

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drugs and insulin

Kopran SynpacPharmaceuticals

Penicillin- G Bulk Drug

Cadila Healthcare Altana Pharma Intermediates for Pantoprazole

Boehringer IngelheimGastrointestinal and CVS

Products

Biocon Bristol Myers Squibb Bulk Drugs

GROWTH OF INDIAN PHARMACEUTICAL INDUSTRY:

The pharmaceutical industry in India is among the most highly organized sectors. This industry

plays an important role in promoting and sustaining development in the field of global medicine.

Due to the presence of low cost manufacturing facilities, educated and skilled manpower and

cheap labor force among others, the industry is set to scale new heights in the fields of

production, development, manufacturing and research.

Industry Trends

The pharma industry generally grows at about 1.5-1.6 times the Gross Domestic Product

growth

Globally, India ranks third in terms of manufacturing pharma products by volume

The Indian pharmaceutical industry is expected to grow at a rate of 9.9 % till 2010 and

after that 9.5 % till 2015

In 2007-08, India exported drugs worth US$7.2 billion in to the US and Europe followed

by Central and Eastern Europe, Africa and Latin America

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The Indian vaccine market which was worth US$665 million in 2007-08 is growing at a

rate of more than 20%

In 2008, the domestic pharma market in India was expected to be US$ 10.76 billion and

this is likely to increase at a compound annual growth rate of 9.9 per cent until 2010 and

subsequently at 9.5 per cent till the year 2015.

The retail pharmaceutical market in India is expected to cross US$ 12-13 billion by 2012

The Indian drug and pharmaceuticals segment received foreign direct investment to the

tune of US$ 1.43 billion from April 2000 to December 2008

"The Indian pharmaceutical industry has grown from a humble Rs 1,500 crore turnover in

1980 to approximately Rs 1,00,611 crore in 2009-10," the pre-Budget survey said.

The growth of the Indian pharmaceutical industry has been fuelled by exports, which

increased 25 per cent in 2008-09.

FDI IN INDIA

FDI in India has increased over the years due to the efforts that have been made by the Indian

government. The increased flow of FDI in India has given a major boost to the country'seconomy and so measures must be taken in order to ensure that the flow of FDI in India

continues to grow.

Advantages of FDI in India:

The Indian government made several reforms in the economic policy of the country in the early

1990s. This helped in the liberalization and deregulation of the Indian economy and also opened

the country's markets to foreign direct investment.

As a result of this, huge amounts of foreign direct investment came into India through non-

resident Indians, international companies, and various other foreign investors. The growth of FDI

in India boosted the economic growth of the country. Major advantages of FDI in India have

been in terms of -

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Increased capital flow.

Improved technology.

Management expertise.

Access to international markets.

Amount of foreign direct investment in India

The total amount of FDI in India came to around US$ 42.3 billion in 2001, in 2002 this figure

stood at US$ 54.1 billion, in 2003 this figure came to US$ 75.4 billion, and in 2004 this figure

increased to US$ 113 billion. This shows that the flow of foreign direct investment in India has

grown at a very fast pace over the last few years. The various forms of foreign capital flowing

into India are NRI deposits, investments in the commercial banks of India, and investments in

the country's debt and stock markets.

FDI in major sectors in India

The major sectors of the Indian economy that have benefited from FDI in India are -

Financial sector (banking and non-banking).

Insurance

Telecommunication

Hospitality and tourism

Pharmaceuticals

Software and Information Technology

Foreign Direct Investment (FDI) is permited as under the following forms of investments.

Through financial collaborations.

Through joint ventures and technical collaborations.

Through capital markets via Euro issues.

Through private placements or preferential allotments.

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Forbidden Territories:

FDI is not permitted in the following industrial sectors:

Arms and ammunition.

Atomic Energy.

Railway Transport.

Coal and lignite.

Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

FOREIGN INVESTMENT

The Foreign Direct Investment (FDI) equity inflows during 2009-10, in the month of November

2009 were estimated at US$ 1.73 billion.

Cumulative amount of FDI inflows from August 1991 to November 2009 was US$ 125.92

billion.

The sectors attracting the highest FDI equity inflows during April-November 2009 have been the

Services Sector, Computer Software & hardware, Telecommunication, Housing and real estate,

Construction activities, Power, Automobile industry, Metallurgical industries, Petroleum &

Natural gas and Chemicals.

The top investing countries in terms of FDI equity inflows during April-November 2009 have

been Mauritius, Singapore, U.S.A, U.K, Netherlands, Japan, Cyprus, Germany, U.A.E, France.

A n Overview of Advantages of FDI

Foreign Direct Investment in India is allowed through four basic routes namely, financial

collaborations, technical collaborations and joint ventures, capital markets via Euro issues, and

private placements or preferential allotments

FDI inflow helps the developing countries to develop a transparent, broad, and effective

policy environment for investment issues as well as, builds human and institutional capacities to

execute the same.

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Some of the biggest advantages of FDI enjoyed by India have been listed as under:

Economic growth- This is one of the major sectors, which is enormously benefited from

foreign direct investment. A remarkable inflow of FDI in various industrial units in India

has boosted the economic life of country.

Trade- Foreign Direct Investments have opened a wide spectrum of opportunities in the

trading of goods and services in India both in terms of import and export production.

Products of superior quality are manufactured by various industries in India due to

greater amount of FDI inflows in the country.

Employment and skill levels- FDI has also ensured a number of employment

opportunities by aiding the setting up of industrial units in various corners of India.Technology diffusion and knowledge transfer- FDI apparently helps in the outsourcing

of knowledge from India especially in the Information Technology sector. It helps in

developing the know-how process in India in terms of enhancing the technological

advancement in India.

Linkages and spillover to domestic firms- Various foreign firms are now occupying a

position in the Indian market through Joint Ventures and collaboration concerns. The

maximum amount of the profits gained by the foreign firms through these joint ventures

is spent on the Indian market.

FOREIGN DIRECT INVESTMENT (FDI) IN PHARMA SECTOR

FDI Inflows to Drugs and Pharmaceuticals industry in India has grown over the last few

years due to the several incentives that have been provided by the Indian government. The

increase in FDI Inflows to Drugs and Pharmaceuticals industry in India has helped in the

growth of the sector

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Drugs and Pharmaceuticals ranks 8th in Indias top 10 FDI-attracting sectors. The government of

India has allowed foreign direct investment up to 100% through the automatic route in the drugs

and Pharmaceuticals industry of the country, on the condition, that the activity should not fall

into the categories that require licensing. Pharmaceutical industry accounts for about 2.91% of

total FDI into the country. The FDI in Pharmaceutical sector is estimated to have touched US$

172 million, thereby showing a compounded annual growth rate of about 62. The Industry has

received almost Rs 2141 crore investment from 36 countries through FDI between April 2007 to

April 2009 with most of the fund infusion directed to healthcare and biotech ventures. Out of the

total investment, almost 82 per cent of the FDI in Pharmaceutical sector was from five countries

- Mauritius, Singapore, USA, UAE and Canada. The increase in FDI Inflows to Drugs and

Pharmaceuticals industry in India has helped in the expansion, growth, and development of the

industry. This in turn has led to the improvement in the quality of the products from the drugs

and Pharmaceuticals.

Technologically strong and totally self-reliant, the Pharmaceutical industry in India has low

costs of production, low R&D costs, innovative scientific manpower, strength of national

laboratories and an increasing balance of trade. The Pharmaceutical Industry, with its rich

scientific talents and research capabilities, supported by Intellectual Property Protectionregime is well set to take on the international market as a global leader.

The Pharmaceuticals sector has been able to attract FDI amounting to Rs.21409 million during

the period from April, 2007 to April, 2009 including Rs. 43.42 million in the first month of the

current year. Out of 36 countries which contributed to FDI in India, 5 countries, led by Mauritius

(56.36%), Singapore (11.18%), USA (5.81%), UAE(4.73%) and Canada(4.00%), accounted for

over 82% of FDI in Drugs & Pharmaceuticals(Table-1).

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There were 208 foreign collaborators during the period April, 2007 to April, 2009 in so far as

Drugs & Pharmaceuticals are concerned. Of these, top 10 foreign collaborators contributed

48.70% of FDI. Further, out of top 10 collaborators, 7 were from Mauritius and one each from

Singapore, UAE and USA as may be seen from the Table-2.

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INDIAN PHARMA ATTRACTS RS 2141 CR FDI IN 2007-09,

MAJORITY FROM MAURITIUS

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FDI POLICY IN THE DRUGS AND PHARMACEUTICALS INDUSTRY IN

INDIA

In India, the Department of Chemicals & Petro-Chemicals, in the Ministry of Chemicals and

Fertilizers, is the concerned authority for the drugs and phamaceutical sector. The Department

aims at ensuring abundant availability of good quality pharmaceuticals of mass consumption, at

reasonable prices within the country. It also formulates and implements policies and programmes

for achieving growth and development of chemicals, petro-chemical and pharmaceuticals in the

country.

In order to attract investment into the sector, the Department has undertaken several initiatives.

The major being the Pharmaceutical Policy, with the objective of:-

Strengthening the indigenous capability for cost effective quality production and exports

of pharmaceuticals by reducing barriers to trade in the pharmaceutical sector.

Strengthening the system of quality control over drug and pharmaceutical production and

distribution to make quality an essential attribute of the Indian pharmaceutical industry

and promoting rational use of pharmaceuticals.

Encouraging R&D in the pharmaceutical sector in a manner compatible with the

countrys needs and with particular focus on diseases endemic or relevant to India by

creating an environment conducive to channelising a higher level of investment into

R&D in pharmaceuticals in India.

Creating an incentive framework for the pharmaceutical industry which promotesnew investment into the pharmaceutical industry and encourages the introduction

of new technologies and new drugs

As per all such initiatives, foreign Direct Investment (FDI) upto 100% is permitted (subject to

stipulations laid down from time to time) through the automatic route in the case of all bulk

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drugs cleared by Drug Controller General (India) along with all their intermediates and

formulations.

MEASURES TAKEN BY GOVERNMENT TO ATTRACT FDI

Recent Initiatives in Pharma sector

Government has taken various policy initiatives for the Pharma sector

Government has offered fiscal incentives to R&D units in Pharma sector

Steps have been taken to streamline procedures covering development of new drug

molecules, clinical research etc.

A number of inhouse R&D units holding recognition of DSIR have come up in the

Pharma sector. These units are eligible for weighted tax deduction@150% under Section

35 (2AB) of the Income Tax Act 1961 for the R&D expenditure incurred.

Government has also come up with two new schemes specially targeted at drugs &

pharmaceutical research.These are: 'The New Millennium Indian Technology Leadership

Initiative' (NMITLI) and the 'Drugs and Pharmaceuticals Research Programme' (DPRP).

As per Union Budget 2010.

Improving Investment Environment

Foreign Direct Investment (FDI) inflows during the year have been steady in spite of the

decline in global capital flows. India received FDI equity inflows of US$ 20.9 billion during

April-December, 2009 compared to US$ 21.1 billion during the same period last year.

Government has taken a number of steps to simplify the FDI regime to make it easily

comprehensible to foreign investors. For the first time, both ownership and control havebeen recognised as central to the FDI policy, and methodology for calculation of indirect

foreign investment in Indian companies has been clearly defined. A consistent policy on

downstream investment has also been formulated. Another major initiative has been the

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complete liberalization of pricing and payment of technology transfer fee, trademark,

brand name and royalty payments. These payments can now be made under the automatic

route.

Government also intends to make the FDI policy user-friendly by consolidating all prior

regulations and guidelines into one comprehensive document. This would enhance clarity

and predictability of our FDI policy to foreign investors.

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BUDGET 2010 - EXPECTATIONS OF PHARMA INDUSTRY

The last budget being neutral, the Indian pharmaceutical industry has drawn its unfinished

agenda with the hope that Budget 2010 would prove to be a remedy for the industry. Industry

believes that its wish list has a merit for consideration in this budget as some of these items have

not been covered in the aforesaid impending legislations.

Research tax credits

Drying pipeline of new drugs, increased R&D expenditure and increased pressure in the

developed nations to bring the health care costs down has compelled MNCs to offshore R&Dfurther. While India is perceived as an attractive destination to outsource R&D work due to its

low cost and high quality capabilities, to put India in a leading position, there is a need to

provide impetus to such activities in the form of tax and fiscal benefits. While currently,

weighted tax benefit is available for in-house R&D, there are no specific benefits available to

units engaged in the business of R&D. In this regard, the Government can play its role by

providing benefits to units engaged in the business of R&D by way of deduction from profits

linked to investments. Further, benefits in the form of research tax credits, which can be used to

offset future tax liability, similar to those given in developed economies can also be considered.

Include expenses related to research done outside R & D lab

The Indian pharma space has witnessed multiple innovative moves that have strengthened their

ability to make it big in the discovery/R&D space. These Indian companies incur huge

expenditure on overseas trials, preparations of dossiers, consulting/legal fees for NCE (New

Chemicals Entities) and ANDA (Abbreviated New Drug Applications) filings with the US FDA.

Also there is a significant amount of legal costs incurred in defending the patents and products.

While currently, weighted deduction is available for expenditure on in-house R&D facility, the

provisions do not specify that the expenditure incurred outside the R&D units are eligible for

weighted deduction. Accordingly, industry bodies have sought the inclusion of expenditure

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incidental to research carried outside R&D facility in India or in any foreign country, within the

ambit of weighted deduction.

Extend tax holiday to hospitals beyond rural areas

The quality and low cost advantage has boosted the medical tourism in India. Industry report

suggests that about 150,000 medical tourist visit India every year. Further, medical tourism to

India is expected to bring revenue of $2 billion by 2012. In order to capitalise on the opportunity

and to strengthen the position of India as a low cost health care tourist destination, there is a

greater need to set-up more and more state of the art health care facilities. Even otherwise, there

is a clear case of augmenting health care system in India. Given that large part of investment

would need to be contributed by private sector, the Government can play its role by providing

fiscal benefits and extending the existing tax holiday to hospitals set up beyond the rural areas.

Subsidy for rural healthcare infrastructure

Specifically with regard to rural and semi-urban areas, several companies have taken the

initiative to build the supply chain infrastructure and develop specific products--these steps are

not easy and carry huge investments. To promote the development of these areas and have better

access to healthcare facilities, the Government, in addition to its own programs, should support

the private sector as well--this could be in the form of subsidy, sharing infrastructure with privatesector, tax incentives and so on.

Rationalise assessment procedure

As per the industry practice, Pharma companies reach out to patients through doctors by

providing free samples of drugs to doctors and incur other promotional expenditure on seminars

and so on for education of doctors. This creates awareness about the drugs and ultimately helps

in boosting the sales of the companies. During the course of assessment proceedings, the revenue

authorities often challenge the promotional information and ask for voluminous documents

which are cumbersome to provide. They also often deny tax deduction on an ad-hoc basis. In this

regard, the Government can rationalize the provisions by providing for claim of expenditure on a

self certification basis or on the basis of specified documents such as CA certificate and so on.

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Harmonize pricing regulations

Transfer pricing is another area needing special attention for pharmaceuticals industry. While

transfer pricing regulations expect companies dealing in active pharmaceuticals ingredients

(APIs)/finished drug formulations (FDFs) imported from related parties to maintain higher

margins, Drugs Prices Control Order (DPCO) places restrictions on the end selling price. Equally

customs regulations create a reverse pressure by seeking to check any undervaluation of

imported APIs/ FDFs. There is a clear case to being in harmony in transfer pricing, customs and

DPCO regulations. Other issues which pharma companies face is comparison of prices of

innovator/ research oriented companies with generic companies without taking cognizance of

quality and efficacy. This causes significant hardship for innovators companies who spendsignificant costs on research. There is an immediate need to address these issues as well. Also,

while it is proposed that Advance Pricing Agreements (APAs) and safe harbor rules would be

introduced, it needs to be expedited.

Extend list of life saving drugs

On the indirect tax front, the Government can look at extending the list of life saving drugs,

which are eligible for customs duty exemptions in India. This will lead to availability of life

saving drugs to the patients at reduced prices and bring down the cost of treatment for these

ailments. Further, it could also consider reducing the duty on medical devices which would lead

to overall reduction in the cost of treatment of patients. Also, Government could consider

reducing basic custom duty for formulations to five percent in line with the Chelliah Committee's

long-term fiscal policy recommendation.

Rationalise duty structure

The levy of excise duty on API at eight percent and on output of four percent has led to

accumulation of Cenvat credit in the books of manufacturers, especially those who are not

engaged in exports and cater only to the domestic market. Further, there are no provisions to

recover the accumulated Cenvat credit, which becomes a cost to such pharma manufacturers.

The Government could consider rationalising the duty structure by making it at par with duty on

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final output. Another demand has been to increase the abatement limit allowed for computation

of excise duty on medicaments, from 35 to 45 percent. Further, industry has sought

rationalisation of Value Added Tax (VAT) on medicines across states with specific exemption of

life saving drugs and life saving medical devices.

In a nutshell, while the global developments have led to exciting opportunities for Indian pharma

industry, it is once again in search of support from the Government to tap the same. On the other

hand, the Government is making progress in bringing two major tax reforms, ie direct tax code,

and goods and services tax; they carry an underlying agenda of bringing tax reforms,

simplification of procedures and minimisation of tax incentives. Given that the Government

intends to implement these legislations in the near future, it appears that it may not bring in anymajor changes in this budget.

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IMPACT OF BUDGET ON PHARMA SECTOR

The Indian Pharmaceutical Industry (IPI), valued at around US$20 bn (Share: Domestic

59%, Exports 41%), is ranked 11th in value terms and fourth in volume terms in the

world. It manufactures about 400 bulk drugs and almost the entire range of formulations.

The industry, however, constitutes less than 2% of the total global industry turnover dueto low prices.

The industry is highly fragmented with around 20,000 players, of which around 250 in

the organised sector control over 70% of the total domestic market in value terms.

The industry has been growing at a healthy rate of 11-12% annually over the last few

years driven by good growth in both domestic and export markets. While growing share

of generics in the developed markets and opportunity from Contract Research and

Manufacturing Services (CRAMS) have been the primary drivers for exports, changing

demographics and shift in disease profile have been the major factors contributing to the

domestic market growth.

The IPI has remained largely immune to the global slowdown. Though the industry

achieved good growth in total turnover during FY2008-09, its profitability was

negatively affected due to exchange fluctuation losses, high interest burden and volatility

in raw material prices. Globally, the impact of economic slowdown has had varied impact

across different markets with overall moderation in growth rate vis--vis previous year.

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BUDGET PROPOSALS

1. Increase in the weighted deduction on expenditure incurred on in-house Research &

Development activities from 150% to 200% also increase in the weighted deduction on

payments made to National Laboratories, research associations, colleges, universities and

other institutions, for scientific research from 125% to 175%.

2. Increase in peak rate of excise duty from 8% to 10%.

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3. Increase in rate of Minimum Alternate Tax (MAT) from 15% to 18%.

*Excluding 2% education cess and 1% secondary & higher education cess

# On influenza vaccine and nine specified life saving drugs used for the treatment of breast

cancer, hepatitis-B, rheumatic arthritis etc and bulk drugs used for the manufacture of such drugs

IMPACT OF BUDGET ON PHARMA SECTOR

1. Increased weighted deduction on in-house R & D expenditure will further encourage

spending by pharmaceutical and biotech companies on research for New Chemical

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Duty Structure

(%) Existing Proposed

CUSTOMS DUTY*

BulkDrugs

7.5 7.5

Formulations

10.0 10.0

LifeSaving Drugs#

5.0 5.0

EXCISE DUTY

BulkDrugs

8.0 10.0

Formulations

4.0 4.0

LifeSaving Drugs#

Nil Nil

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Entities (NCEs), New Drug Delivery Systems (NDDS) etc carried out in-house or

outsourced to third parties like National Laboratories and research institutions.

Expenditure of capital nature and cost incurred on clinical trials conducted domestically

will also be eligible for enhanced rate of weighted deduction.

2. Impact of increase in peak rate of excise duty would increase the cost of bulk drugs &

drug intermediates for the formulation companies. However, the impact on bulk drug

manufacturers would depend upon their ability to pass-on the increase to domestic clients

while their export business would remain unaffected.

3. Increase in MAT rate is expected to result in higher tax outgo for pharmaceutical

companies covered under MAT and operating from tax-exempt locations.

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BUDGET IMPACT: COMPANIES

Company

% of Sales

Applicable

ProposalsOverall Impact

Bulk

DrugsFormulations

Ranbaxy Lab. 25 74 1,2 and 3 ??

Sun Pharma 11 89 1 and 2 ??

Dr. Reddy's Lab. 37 56 1 and 2 ?

Cipla 12 84 1 and 2 ??

GlaxoSmithKline 3 97 2 ?

Biocon 92 8 1, 2 and 3 ??

Aurobindo Pharma 56 44 2 ??

Lupin 18 82 1, 2 and 3 ??

Legends:

?? Highly Positive ?Marginally

Negative?? Neutral

? Marginally Positive ? ? Highly Negative No Proposals

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'PHARMA TO BE ONE OF TOP THREE FDI ATTRACTING SECTORS

IN INDIA'

Over the past few years, the number of FDI investors has been increasing with keen interest

in the pharma Sector

Could you explain the sudden FDI interest and activities in the Indian pharma and

lifesciences sector?

The confidence of the international investors has been growing in the Indian pharma sector post

the enactment of product patents in January 2005. Many global pharma companies have/are in

the process of setting up their own base in India by increasing stake in their own Indian

subsidiaries or collaborating with local pharma companies. Post 2005, about 17 patents have

been filed in India for new products. This number is expected to increase over time as more and

more companies gain positive experience of doing business in India. The Indian pharma and life

sciences sector is expected to grow through the launch of new products from India's own New

Chemical Entities (NCE) pipeline, increasing number of in-licensing and out-licensing deals

between Indian and foreign companies and consolidation in the sector with Indian companies

acquiring assets in India as well as abroad.

Another factor is that for the production of drugs and pharmaceuticals, an FDI of 100 percent is

allowed, subject to the fact that the venture does not attract compulsory licensing and does not

involve use of recombinant DNA technology.

Who are the major global players in Private Equity (PE) activities, specifically for

pharma?

In the developed markets, many PE funds have been created with specific focus on pharma and

life sciences sectors. Some of them have been increasing activity in India as well. Well known

names that have been operating in the US and European markets are Domain Associates, MPM

Capital, Alta Partners, SV Life Sciences Advisers, Burrill & Company, OrbiMed Advisors,

Quaker BioVentures and Venrock Associates. On the Indian side, the Ajay Piramal Group

sponsored IndiaVenture Fund. This fund is focused on making investments across the entire

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healthcare and life sciences domain including hospitals, pharma and biotech, healthcare IT, retail

pharmacies, clinical research, medical devices etc.

In the current market situation, how are Venture Capital (VC) and PE companies

structuring their investments and returns from pharma companies?

While VC and PE firms looking at pharma and life sciences sector are being selective with their

money, the economic crisis has not had a substantial negative impact on their activities. Pharma

and life sciences investors are in it with intent to capture the opportunity offered by the sector as

they are not very susceptible to short-term problems. In fact, the sector's desperation for cash has

led to better deal terms for VCs. And companies that do secure funding are using it wisely, since

they cannot afford to waste money anymore. In many cases, the best business plans are able to

raise funding while less promising ideas fall by the wayside.

Mostly PE companies structure their investments in order to protect their returns and to ensure

that they are able to exit from their investments within their defined time frames (typically three

to five years). The nature of the sector is such that VCs need to look at all the avenues for value

creation once they have made the investment. In order to accomplish value creation, the PE

companies negotiate for at least one board seat. PE funds also look for opportunities to create

value through cross sector synergies across their portfolio of companies. In case of our

IndiaVenture Fund, we get benefited by the relationships of Ajay Piramal group that have been

created over two decades across the entire healthcare and life sciences domain.

What has been the estimated FDI in the pharma/lifesciences industry over the past five

years?

The total cumulative FDI that has come into India till date is about $110 billion. However, 80

percent of this FDI inflow has happened from April 2000 to March 2009 (nearly $90 billion). In

the financial year 2009, the total FDI was $27 billion and in the financial year 2008, the FDI

inflow was at $24 billion.

So far the Indian drug and pharmaceutical sector has attracted close to $2 billion in FDI in

cumulative value. The sector has been able to attract FDI amounting to $1.4 billion from April

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2000 to December 2008. This sector has become one of the top sectors for FDI in India.

However, with the recent downfall in the global economies, PE investments declined 34 percent

to $303.0 million in 2008, compared to $459.2 million invested during first 10 months of 2007.

Average PE deal size in 2008 came down to $16.8 million from $30.6 million in 2007.

Till now, which country has shown keen interest in India? Why?

Mauritius has contributed the maximum (about 40 to 50 percent of the total FDI), $40 billion

from FY 2000 to FY 2009 and about $2.5 billion in FY 2010 so far. The top five countries with

highest cumulative FDI into India are--Mauritius (44 percent), Singapore (nine percent), USA

(seven percent), UK (six percent) and Netherlands (four percent). Mauritius and Singapore offer

significant tax and regulatory advantages to the investors. That is the primary reason majority of

the PE funds are housed in Mauritius and a few are based in Singapore.

What kind of returns have been observed by FDI investors?

There are not many examples in the Indian pharma and life sciences sector where the FDI

investors have exited their investments. However, just to give an example, early investors in

Biocon have made tremendous returns. ICICI venture paid Rs 18 crore for a 15 percent in March

2000, and sold its holding (it was diluted to 12.5 percent after intra-group mergers) in 2002 for

Rs 46 crore to AIG investments and GW capital. That's a 156 percent return in just over twoyears. In March 2004, Biocon went in for an IPO at a price of Rs 315 per share. AIG investments

and GW capital made huge returns on this investment. Not every investment would yield these

kinds of returns, but the sector offers unique opportunities for making good returns if invested

properly.

Why are developed countries investing their funds via other countries, and how does this

channel of investment benefit them?

Each country has different regulations, taxes and exchange restrictions, as well as limitations on

personal freedoms of speech, privacy and petition of grievancesthat affects the decisions of

investors about where to put their investments. Some countries have become highly specialised

in attracting international investors and have created conducive environment for these investors.

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However, countries where the growth investment opportunities exist may not necessarily offer

specialised tax or regulatory incentives even though they may have well defined tax treaties with

countries offering better tax and regulatory environment.

What are the factors affecting the growth of FDI investments?

FDI in any country, directly or indirectly impacts the environmental, governance and social

issues. Typically, the host country limits the extent of impact that may be made by the FDI to

ensure adequate protection for small scale businesses. At times certain foreign policies may not

be appreciated by the workers of the recipient country. Some disadvantage of FDI pertain to the

fact is that there is a chance that a company may lose out on its ownership to an overseas

company. This has often caused many companies to approach foreign direct investment with a

certain amount of caution. India showed initial resistance to FDI because of the above reasons.

However, the overall impact of the FDI investments has been positive for the growth of the

country.

The Government of India has a well-defined and transparent FDI policy. This includes opening

of many new sectors to FDI, raising FDI equity caps in sectors already opened and procedural

simplification. The FDI policy in India is widely reckoned to be among the most liberal in

emerging economies and FDI up to 100 percent is allowed under the automatic route in most

sectors and activities.

Given the critical role that technological innovation plays in the sector and the role that IPRs

play in the ability of the pharma sector to capitalise on that innovation, it is not surprising to find

a positive relationship between IPRs and FDI in the sector. The strength of IPR protection

appears to be one important factor, among others, influencing trade and investment decisions in

the sector.

Where do you see FDI investments in the pharma and lifesciences sector in India in the

future?

The Indian pharma and life sciences sector will continue to internationalise and seek to capitalise

on new market opportunities around the world.

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Moreover, as intellectual property standards in India continue to provide increasing comfort to

the international community, one could reasonably anticipate geographic diversification in the

types of investments in the sector, including R&D.

In this context, one can expect growth in the FDI as firms seek to exploit locational advantages

of sites around the world and thereby contain costs or position themselves strategically.

In the coming years, I expect this sector to be one of the top three sectors attracting FDI in India.

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CONCLUSION

The Indian pharmaceutical industry is a success story providing employment for millions

and ensuring that essential drugs at affordable prices are available to the vast population of

this sub-continent.

The increase in FDI Inflows to Drugs and Pharmaceuticals industry in India has helped in

the expansion, growth, and development of the industry. This in its turn has led to the

improvement in the quality of the products from the drugs and pharmaceuticals industry.

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