Ranbaxy, Dr Reddy’s to benefit from tax sops - Views on News from Equitymaster

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Ranbaxy, Dr Reddy’s to benefit from tax sops

May 4, 2000

The government has granted full tax exemption (for a period of ten years) for inflows from milestone payments received by pharmaceutical companies on the sale of New Chemical Entities (NCE) and Novel Drug Delivery Systems (NDDS). This exemption currently stands at 50% of the payments received. Besides, the existing tax benefit of 125% of expenditure on R&D has been increased to 150%. This will further serve as a major incentive to the domestic pharma companies to invest in research as the cumulative tax benefit on such investments amounts to 57.75% (Corporate tax rate – 38.5% factored 1.50 times amounts to 57.75%).

Since the multinational companies do not carry out research in the country it will be the domestic pharmaceutical companies who will benefit from this move. Notable among these are Ranbaxy and Dr Reddy’s Laboratories (DRL).

Ranbaxy, for instance, received US $ 10 m (Rs 435 m) last year when it signed the deal with Bayer. Over the next 24–30 months the company would receive another $ 50 m (Rs 2,175 m) apart from a royalty of 10% on the sales of the new dosage form by Bayer. All these incomes would be tax–free.

Similarly, DRL has three new original molecules in its research pipeline. One is an anti–cancer compound, another was a Cox II inhibitor (anti–pain) and third was a compound indicated for metabolic disorders. The company foresees licensing out two of these to MNCs for clinical trials in the near future.

Any deal DRL enters into is likely to be modeled along the lines it has with the Danish company Novo Nordisk which is developing DRL’s diabetes lead molecules. The company is also working on a new class of diabetes products called PPAR, expected to have considerable potential.

Notable among the other beneficiaries are Cipla, Sun Pharma and Nicholas Piramal, which also have aggressive plans in the NCE segment.

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