By Kiran Mazumdar-Shaw
The Indian pharmaceutical industry has been playing a key role in improving global health through its affordable and high-quality generic medicines. We are the third largest pharmaceuticals supplier in terms of volume, supplying 60,000 generic brands across 60 therapeutic categories worldwide. India now needs to capture value share as well. To move up the pharma value chain, we need to focus on emerging opportunities across novel biologics, biosimilars, mRNA and other new-generation vaccines, orphan drugs, anti-microbials, precision medicines, cell & gene therapies etc. They account for two-thirds of the global pharma value pool.
To rank among the Top 5 countries in value terms and No. 1 in volume terms, India will need to grow from USD 44 billion currently to USD 120-130 billion by 2030 and USD 500 billon by 2047.
R&D Investment Is Key
Developing these new, cutting-edge therapies is a complex and lengthy process. The scientific, technical and regulatory bars are considerably higher, making drug development difficult, more time consuming and very expensive. In 2019, the global pharmaceutical industry spent USD 186 billion on R&D and it is expected to reach USD 233 billion by 2026.
India will need to make exponential investments in R&D, manufacturing and digital transformation to become a global pharmaceutical innovation hub, as well as achieve its vision of self-reliance in pharmaceuticals and biopharma. It is here that the government can play a key supporting role.
Government Needs to Be an Enabler
Globally, there is an established link between investments in R&D and the ability of countries, sectors and firms to identify and adopt new technologies to propel themselves forward. Studies suggest that a 1% increase in R&D investment, on average, leads to a rise in output of between 0.05-0.15%.
India’s current public expenditure on R&D remains low at less than 1% of GDP. Other BRIC countries spend more. China spends 2.1% of its GDP on R&D, Brazil’s R&D spending stands at 1.3% and Russia’s at a little over 1%. Moreover, R&D incentives only accounted for 7.5% of total tax incentives and R&D incentives for pharma were 2.3% of this in FY2018-19, according to an analysis by the Association of Biotechnology Led Enterprises (ABLE).
The government needs to urgently explore mechanisms to incentivize investment in R&D and evaluate various funding mechanisms that can help the industry. This year’s Budget offers a great opportunity to give the pharma industry a shot in the arm.
Tax Subsidy for R&D
The weighted tax deduction under Section 35 (2AB) on in-house R&D expenditure was available till March 31, 2020. As the deduction was reduced from 200% to 100%, R&D spending by lndian pharma companies stagnated in value and decreased as a percentage of revenue from 8% in 2018 to 6.6% in 2021. The government should restore the 200% weighted tax deduction on R&D expenses, covering all expenditures pertaining to a product’s ‘lab to market’ journey, including patenting costs.
Research Linked Incentives
Research Linked Incentives (RLIs) can provide the impetus for industry to increase R&D investments, as well as encourage industry to build the much-needed linkages with academia to co-innovate. Despite the availability of several government instruments, many brilliant ideas from entrepreneurs often do not come to fruition due to their inability to access adequate funding. Therefore, it is imperative that all potential ideas, even from the remotest corners of the country, can be harnessed and fostered. RLIs can be based on progress in product development, with higher incentives being provided at advanced stages.
Recalibration of Patent Box Regime
The scope of the current Patent Box regime under Section 115BBF is limited to a concessional tax rate of 10% on royalty income. The scope of this section should be extended to income generated from commercialization of such patented products by a company. The income from exploitation of IP registered overseas whose exclusive license is with Indian companies should also be eligible for the concessional tax rate.
Corporate Tax Concessions
The government should offer companies that spend at least 10% of their revenues on R&D (with a minimum threshold of Rs 50 Crore per year) a special concessional corporate tax rate of 15%.
Innovation Bonds
To provide low-cost funding and support to R&D projects in the pharmaceutical sector, the government can float long-term, secured ‘innovation bonds’ that are tax free. Just like tax-free infrastructure bonds were used by public sector companies to fund long gestation projects, these ‘innovation bonds’ should be used to raise funds from the public to finance R&D projects.
Conclusion
For India to move into advanced therapies and biopharma products, the government needs to incentivize the shift to a discovery-oriented and science-driven approach. It needs to introduce fiscal incentives, enabling policies as well as build the necessary infrastructure that supports breakthrough advances in science and technology to drive innovation and give the India pharma and biopharma industry its rightful place under the sun.
A version of this article first appeared in Live Mint on 28 Jan 2022.
