Excise holiday was the sole criteria that had lured pharma companies in the southern, western and eastern states to invest in the north. Once the excise benefits came to an end, the region lost its allure. Companies are now flocking to new destinations like Sikkim which offers the much needed tax benefits, said industry experts.
In an effort to spur economic development and drive growth, the Union government in 2002, identified Baddi, Uttaranchal and Jammu & Kashmir as excise free zones. These special considerations were notified in 2003 and by early 2005, pharma companies began setting up facilities there. But when the government took away the excise free component, the region lost its significance. Now Sikkim is the only excise free zone but Baddi provides an extension of excise duty tax benefit for companies which upgrades facility.
Large pharma companies were unable to keep a watch on the production practices of the SMEs who undertook their work. From Karnataka two companies: Micro Labs and Bal Pharma had established facilities in Baddi and Uttaranchal respectively.
“Baddi and Uttaranchal are no longer preferred, considering the logistics, infrastructure and skilled manpower which are far better established outside these former excise free zones. Now as the excise benefit period is over for most of the companies, it is no longer an attractive proposition. . However Sikkim still continues to be a destination to get excise benefits and several big and medium size pharma companies have established their manufacturing units, said Kaushik Desai, honorary general secretary, Indian Pharmaceutical Association and a pharma consultant.
In October 2016, Micro Labs sold its Baddi unit to Indoco Remedies. “We invested in Baddi only because of its tax benefits as the Union government then declared its excise free zone status. This facility mainly catered to the domestic market. Now we have shifted the production to cater for domestic market needs to Sikkim where we benefit from both infrastructure and work culture. At this facility on a single shift basis the monthly capacity for tablets is Rs.25.50 crore, capsules is 4.5 crore and eye drops is 20 lakh. The annual capacity here for tablets is 306 crore, capsules is 54 crore and eye drops is 2.4 crore,” said Dilip Surana, managing director, Micro Labs.
“We are manufacturing for international markets and slated to strengthen our exports from our Uttaranchal unit. New upgradation of plant capacity opens up organic growth prospects,” said Shailesh Siroya, managing director, Bal Pharma.
According to Sunil Attavar, president, Karnataka Drugs and Pharmaceutical Manufacturers Association, there are some positive provisions in the proposed GST for companies who have set up in Sikkim . They will get a refund of duties after appropriate deductions which will be a positive for them. The benefits of Baddi and Uttaranchal are now over, but Sikkim and other North East Areas is still on. In the case of large companies like Micro Labs from Karnataka , the benefits of income tax are more attractive than the benefits of excise or VAT or GST . There is a long holiday from income tax and hence I think the larger companies who manufacture their own brands will still find Sikkim interesting to invest.
GG Gurudatta, CEO, Estima Pharma said that in Sikkim there are a lot of companies including Sun Pharma, Lupin and Micro labs. Sikkim is a big pull because of the tax benefits and in future Assam also will be identified for the same. The present government has now announced a slew of benefits to drive development with projects in energy and infrastructure to bolster industrial growth in North East India.
Harish Jain, secretary, KDPMA and director, Embiotic Laboratories said that with GST implementation, the excise benefits will not be there. But companies are flocking to Sikkim for income tax benefits while minimum alternate tax (MAT) is applicable. For companies which have large margins it is best to stay invested to maximise the few benefits here and will get the much-needed return on investment in 12-24 months.
LSSSDC skill upgradation initiative in Baddi
Life Sciences Sector Development Council (LSSDC) was primarily formed to upgrade the skills of the technical manpower. It recently conducted a Himachal Pradesh Life Sciences Sector Skill Development Summit at Baddi ,supported by the department of industries, FDCA,-HP, FOPE, HDMA and BBNIA. Around 115 pharma manufacturing units participated in the event. For small scale units with annual turnover below Rs.150 crore, LSSSDC will be utilizing the funding from PMKVY and will be conducting assessment free of cost.
“Similar workshops in Sikkim are needed here to train the workforce. Moreover the regulatory infrastructure need to be further strengthened particularly in this region, said Desai.
Challenges in Sikkim
Sikkim has its own issues like connectivity through road, rail and air and the weather conditions makes it difficult to reside for professionals from outside state. Availability of skilled manpower continues to be a challenge, said Desai.
“We may see an outward migration of smaller companies who were dependent on contract manufacturing . Also companies who used to manufacture their products here may slowly pull out as there will be no benefit for them, Attavar said.
Going by the tax incentives in Sikkim, it should be seen whether companies would prefer to stay invested in India or move to South East Asia and Africa for additional production capacity and de-risk the manufacturing infrastructure, Gurudatta said. “If it is Malaysia or Indonesia, manufacturing costs in Malaysia are higher than India. Similarly labour costs in Indonesia and Malaysia are on par with India so it makes no sense to opt for these two countries” , he added.
However in the case of Vietnam, Cambodia and Myanmar, the cost of manufacturing and labour cost are lesser. Specifically Vietnam, the cost of utilities like power and water is comparatively lesser than in India. Therefore we see a lot of Indian companies investing in Vietnam. This is also because Indian products are blacklisted as imports because the government of Vietnam wants to promote the growth of local companies so it would be more appropriate for Indian pharma to set a base or enter into joint ventures to maximise earnings. Even in Myanmar, a lot of companies across the globe have set up manufacturing bases. Moreover Myanmar is looking to be self-reliant in drug production. So it is a good opportunity for Indian companies to consider this country to establish a manufacturing plant there.
Now it would make more business sense for companies to invest in these countries over Sikkim. This is because the climate conditions which may not be conducive for all drugs to be manufactured. The hilly terrain, incessant rains and fogs are a deterrent for production. The roads are narrow resulting in major traffic jams and this would hamper the movements of goods and people, said Gurudatta adding that this was one negative factor in investing here, noted Gurudatta.
It would better for companies in south India to stay located in their region. For instance, in Karnataka and specifically Bengaluru , due to the conducive climate , one does not have to invest much on utilities to safeguard from hard weather conditions. Next is access to qualified and skilled workforce sourced from the pharmacy colleges in Karnataka. There is a presence of contract research organisations for exports and product development. In India it would make more business sense to invest where they have been headquartered. If companies are looking at outside India, what we see is that every country wants medicine security of the essential drugs, said Jain.
“ We have been approached to put up plants for manufacture of IV fluids and antibiotics, from Sri Lanka which offers a 15-year buy-back agreement. Sri Lanka has two corporations ,one is the Sri Lanka Pharma Corporation which distributes the medicines to the healthcare system and the other is the Sri Lanka Manufacturing Corporation which has their own factory and whoever wants to invest in that country they enter into an MOU.
The MOU signed is cleared by the president of Sri Lanka. Here when a company enters into an agreement, the price is fixed beforehand. It is a profitable move for companies to look at this option. In Malaysia too even though manufacturing is expensive, there are lot of other benefits said Jain.
NE prospects for herbal cultivation
States of the North East in the country are best suited for medicinal plant supply with their topography, soil and climatic conditions, said Dr DB Anantha Narayana, CSO, Ayurvidye Trust, and former chairman, Phyto-pharmaceuticals Committee, Indian Pharmacopoeia Commission.
However, the major hurdles are lack of market contacts, know-how, paucity of finance and poor infrastructure, he added.
Dwelling on the prospects of pharmaceutical development in the North East India, Dr. Narayana said that there is a need for locals to invest in this area, its state governments should provide support and a CSIR lab can be set up here to provide scientific inputs. The region needs to be developed as a biomass supply chain hub. Incentives should be offered.
“Those engaged in medicinal plant business need to begin supplying initially to nearby mainland areas of Kolkata and New Delhi. Once this takes off ,the state governments of the North East can set up high quality biomass export zones, primary-secondary herb processing centres and manufacturing companies with minimum technologies can be set up. This will promote the branding the North East region for its medicinal plant wealth and the pharmacists can play a major role in this,” he noted.
The medicinal plant sector will provide employment opportunities which can spur economic growth. Collection of raw herbs across forest zones with required permissions ,will create job avenues for the farming community for raw herb segregation and drying. For the educated workforce, minimal processing of raw herbs can add value for developing ready to use products. Authentication and labelling, checking for quality and adulterants can enable access to end-user industry or authorized dealers.
A visible trend is that herbal extract manufacturers undertaking backward integration.
There are considerable opportunities for cultivation for oil bearing plants like for instance peppermint oil, rosemary oil, rose oil, spearmint oil, lemon grass oil, clove oil etc., stated Dr Narayana.