MAY 13, 2020

By Dr Shrikant Kamat Advocate & Counsel - Taxation & Commercial Laws Founder & Proprietor - Shrikant Kamat & Associates

ONE industry sector in India that is relentlessly at the forefront of the battle against the spread of the Covid-19 disease is the pharmaceuticals and healthcare sector. While healthcare workers including doctors, nurses, virologists, lab technicians and other support staff are seen on the battle front (hospitals), it is the pharmaceutical companies, medical device companies and the research laboratories that are stretching themselves to not only discover the yet elusive vaccine for the coronavirus but to also keep the supplies of medical devices, drugs and medicines intact for treatment of all kinds of diseases and ailments, apart from Covid-19.

Most of the manufacturing facilities of medical devices, bulk drugs, drug intermediates and formulations remained closed in the initial phase of the nationwide lockdown and it was only towards the end of April or in early May 2020 that production activity appears to have been revived in pockets such as Ankleshwar, Vapi, Pimpri, Verna, Baddi, and many other locations across the country.

On its part, the Government of India tried to boost the morale of pharma and medical device producers in India right at the beginning of the spread of the Corona virus by announcing 4 diverse incentive schemes, exclusively for companies manufacturing Medical Devices and Bulk Drugs - Intermediates and Active Pharmaceutical Ingredients (APIs). As per the decision taken by the Union Cabinet on 21 st March, 2020, two separate Production Linked Incentive Schemes (PLIS) would be introduced to boost production of medical devices, bulk drugs and APIs in India.

PLIS for the Pharmaceutical Industry

Under the first PLIS, which would be run with a total budget allocation of INR 6,940 crore (approx. 70 Billion) over 8 FYs commencing from FY 2020-21 onwards, 53 Bulk Drugs/APIs have been identified for domestic manufacturing. Financial incentive will be given to eligible manufacturers of identified 53 critical bulk drugs on their incremental sales over the base year (2019-20) for a period of 8 years. Out of 53 identified bulk drugs, 26 are fermentation based bulk drugs and 27 are chemical synthesis based bulk drugs. Rate of incentive offered will be 20 % (of incremental sales value) for fermentation based bulk drugs and 10% for chemical synthesis based bulk drugs for a period of initial four years to investors proposing bulk drug units. The incentive will be 15 per cent in fifth year and 5 per cent respectively from the sixth year until the eighth year. ¹

PLIS for the Medical Devices Industry

In the second PLIS, to be implemented exclusively for Medical Devices Manufacturing Companies in India, a budget allocation of Rs 3,420 crore has been made to incentivise production of medical devices by these companies. This will be in the form of 5 per cent production-linked incentive that would be given to companies which set up projects for domestic manufacturing of medical devices for cancer, radiology, anaesthesia and heart patients. A lot of these devices are currently being imported.

The Scheme aims to boost domestic manufacturing by attracting large investments in the medical device sector. Under the Scheme, incentive at 5% of incremental sales over base year 2019-20 will be provided on the segments of medical devices identified under the Scheme. ²

Why PLIS were announced?

The Indian Pharmaceutical and Medical Devices manufacturing industry had been lately witnessing a steady stream of investment, amalgamations and collaborations (such as licensing, co-development, joint distribution and joint ventures). ³Also, domestic manufacturers were looking to tap into the international generic market with high margins. The Industry was witnessing a paradigm shift as the focus was shifting from the manufacturing of generic drugs to drug discovery and development.

Until the spread of the Covid-19 disease in India, a steady stream of local as well as global players intended to enter or consolidate their presence in the Indian pharmaceuticals and medical devices market, the opportunities being exciting and the potential tremendous. Several factors contributed to this attraction to invest in India: namely - low cost of production due to variety of factors including cheap labour and raw material cost; adequate infrastructure for conducting research and development activities in India (India has more than 300 medical colleges and over 20,000 hospitals); existing manufacturing capability to produce APIs as well as intermediates at lower cost while maintaining quality and a large number of USFDA approved plants outside the USA. ⁴

However, in the wake of the coronavirus outbreak, there has been disruption in supply chain of imported APIs and key starting materials from China, which is likely to impact production of commonly-used drugs like antibiotics, vitamins and paracetamol. Of the total imports of APIs by India, China accounts for around 70%, while in specific ingredients like cephalosporins, azithromycin and penicillin, the dependence is as high as 80-90%. Over 8-10 years ago, India was self-reliant on key intermediates and ingredients used in antibiotics and fermentation products. ⁵

Going forward, the domestic industry is primarily focused on manufacturing of generic medicine and export of bulk drugs or strengthening the domestic APIs producing facilities to boost domestic manufacturing in India to counter dwindling Chinese supply because of the coronavirus outbreak. The scheme is expected to reduce manufacturing cost of bulk drugs in the country and dependency on other countries for bulk drugs. It is expected that the PLIS in the Pharma sector will lead to expected incremental sales of Rs. 46,400 crore and significant additional employment generation over 8 years. ⁶ This appears to be the primary reason for the Government in announcing the PLIS for the pharma manufacturers.

The reason being offered by the Government for the PLIS for Medical Device manufacturers however is that, "The Medical Device sector suffers from a cost of manufacturing disability of around 12% to 15%, vis-a-vis competing economies, among other things, on account of lack of adequate infrastructure, domestic supply chain and logistics, high cost of finance, inadequate availability of quality power, limited design capabilities and low focus on R&D and skill development, etc. There is, thus, a need for a mechanism to compensate for the manufacturing disability." ⁷

Both the schemes shall be implemented through Nodal Agencies. Such Nodal Agencies shall also act as the Project Management Agency (PMA) and be responsible for providing secretarial, managerial and implementation support for the PLIS. Detailed constitution, functioning and responsibilities of the PMA are expected to be elaborated in the Scheme Guidelines likely to be published soon.

Evaluating PLIS for the Healthcare sector in the wake of the Covid-19 outbreak

It is pertinent to note that both the said PLIS for the pharmaceutical manufacturers as well as medical devices manufacturers were announced on 21st March, 2020, just when the country was on the verge of going into a 8 week long total lockdown at a time when it was difficult to envisage how the landscape would unfold in the aftermath of the Covid-19 outbreak for most of India's manufacturing establishments. Gradually, over the past 8 weeks, supply chains across most industries and regions in the country collapsed significantly, bringing the entire production activity to a complete standstill. It is not difficult to envision that these supply chains and the production activity won't resume normal operations until atleast the onset of the third quarter of this FY. It is anybody's guess then that given the conditions currently prevailing in the country and across the world, the sales revenues for this year would really struggle to match those achieved in FY 2019-20, leave alone exceed those.

In such circumstances, the question that begs an answer is how many manufacturing companies in the Bulk Drugs and APIs segment as well as medical devices does the Government of India really expects, will be applying this year under the respective PLIS? Would any company even contemplate making fresh capital expenditure during FY 2020-21 unless a clear picture on the spread of the pandemic and its containment emerges in the country and in the world? The answer is most likely to be an emphatic No for most of the large and medium companies in this sector in the country.

What can be done to salvage the schemes and still make it attractive?

It is highly unlikely that many companies would be interested to apply for incentives which are pegged at 20 percent of incremental sales for pharma or 5 percent of incremental sales for medical devices, in the initial couple of years as the scenario of making incremental investments and registering incremental sales is seemingly improbable. Rather, it would be wise on the part of the Government to tweak the PLIS in its current form by either doing away with the condition of incremental investment and incremental sales in the first year succeeding the base year and instead introducing incremental investments and incremental sales from the second year onwards for the next 5 years with incentives pegged at 2 percent of total sales for pharma and 1 percent of total sales for medical devices in the first year after the base year and retaining the current terms and conditions for the rest of the tenure of the scheme. If something on these lines is undertaken, then one can hope that large manufacturers in the pharma and medical devices sector will go for the respective schemes and the sector will get the much vaunted boost inspite of the corona virus.

(Views expressed are strictly personal.)

¹ Press Release dated 21st March, 2020 of the Government of India accessed at https://pib.gov.in/PressReleasePage.aspx?PRID=1607483

² Press Release dated 21st March, 2020 of the Government of India accessed at https://pib.gov.in/PressReleasePage.aspx?PRID=1607485

³ India Brand Equity Foundation, Industry Report on Pharmaceutical Industry, available at https://www.ibef.org/ industry/indian-pharmaceuticals-industry-analysis-presentation

⁴ India Brand Equity Foundation, Industry Report on Pharmaceutical Industry, available at https://www.ibef.org/ industry/indian-pharmaceuticals-industry-analysis-presentation

⁵Source: The Times of India dated 4th March, 2020 accessed at https://timesofindia.indiatimes.com/business/india-business/govt-plans-incentives-for-bulk-drug-makers/articleshow/74466401.cms

⁶ Press Release dated 21st March, 2020 of the Government of India accessed at https://pib.gov.in/PressReleasePage.aspx?PRID=1607483

⁷Press Releases No. 1607483 and 1607485 issued by the Government of India regarding the PLIS for Pharmaceuticals and Medical Devices respectively