A taxing situation for pharma companies


In extension of an earlier post the Hindu Business Line has reported on the matter in greater detail.

Examining why Indian pharma companies are pushing so hard for tax incentives we see that:

greater regulation of drug prices in the domestic market, a depreciating dollar and pressure on pricing in large markets such as the US, has left the Indian pharmaceutical industry at the crossroads.
In the last nine months, only players with wider geographical presence (with a multiple currency exposure) and with a formulations-based business have managed to clock reasonable financial performance. Thus, the pharmaceutical industry has pinned its hopes on a host of R&D and tax incentives, which if approved in the Budget, would help the players to free up cash flows through tax savings to fund research activities that do not generate immediate earnings.

The proposal to extend income-tax benefits to profits of scientific R&D companies (which not only do innovation, but also focus on other forms of research) may help a larger universe of pharma companies to reap tax exemptions. Players are looking for an extension of this provision by another five years till 2012. Typically, stakeholders in R&D focussed companies do not enjoy meaningful earnings or dividends, till a successful deal is stitched together. With companies exploring options in areas such as oncology which require larger investments compared to other therapeutic areas, the exemption on income-tax will act as compensation. With Indian companies increasingly developing early stage molecules that could be used for further leads, the payments are usually in the form of minor upfront fees as well as larger royalties and milestone compensations, in case of successful commercialisation. This is where exemption of future income from intellectual property (new chemical entities) from taxes, will help.

Its a well written article which looks into a lot of different aspects of pharma companies and their current growth environment. Find it here.

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