The Hindu Business Line : MRP-linked duty a bitter pill for pharma sector

An expected central excise duty slash that did not come about for the pharmaceutical sector has apparently sent contract manufacturers - and their clients - into a post-Budget scramble for survival strategies.

Introduced in January last year, the 16 per cent excise duty based on the drug MRP continues to hit the pharma industry hard, sources in the industry said.

Last month, there was a hint of it being halved, but it stays.

The MRP-linked duty has been causing a flight of capital as the big sourcing companies rush to one of the three northern tax-free States to start production units or place cheaper orders there. The smaller ones elsewhere who have depended on their orders are feeling the squeeze, they said.

It is the same story across the country in the past year - estimated investments of Rs 2,000 crore have flown to Himachal Pradesh, Uttaranchal and Jammu; contract players have lost business in Maharashtra, Gujarat, Andhra Pradesh and Karnataka, said Mr Jatish N. Seth, Secretary of the 240-member Karnataka Drugs & Pharmaceuticals Manufacturers' Association.

Mr Seth said contract manufacturing forms a bulk of Karnataka's Rs 2,600-crore pharma turnover. These SMEs have lost 20 per cent of orders.

Lucrative States

On the flip side, those looking at lucrative North range from herbal majors Himalaya Drug Co, herbal product exporter Sami Labs, to mid-sized Bal Pharma and small new entrants like Trigenesis Lifesciences.

Bal Pharma said it is starting a Rs 20-crore unit in Uttaranchal. The Rs 500-crore formulations and bulks player Micro Labs has opted for Baddi.

Sami Labs' CMD, Dr Muhammed Majeed, said his company would go ahead with a Rs 3-crore cosmeceuticals and formulations unit in Uttaranchal for the domestic market in the next few months.

Himalaya's proposal

Himalaya's President & CEO, Mr Ravi Prasad, said, "We are still in the process of evaluating the option of setting up a facility at Baddi and the non-reduction in excise has not changed anything."

Trigenesis Lifesciences, which is into anti-diabetics and antibiotics, had planned a captive plant in Bangalore but will now look at a tax-free spot, said Mr T.K. Sudhir, Director (Sales & Marketing).

The who's who of the pharma world is already in the three tax havens; the rush apparently is because the zero-tax benefits of the havens far outweigh any problems with the distance, logistics, staff relocation and infrastructure.

Get back investments

Companies can easily recover investments in 2-3 years and save several hundred crore rupees.

According to Mr Shailesh Siroya, Managing Director of Bal Pharma, the duty's ripple effect would start showing from April 2007, when all the tax-free units must start operating.

"These are modern, cGMP compliant and the companies are already doing phenomenal business," he said.

Elsewhere, for the struggling small contract players, Mr Seth said, "The immediate concern is how to keep their job works."

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