Indian pharma majors are rushing to ‘Make in America’
US President Donald Trump's 'Make in America' pledge may have spooked many, but Indian pharmaceutical companies are optimistic.
Several Indian drugmakers that have large operations in the US are now pushing to acquire assets there by either investing in greenfield manufacturing facilities or through brownfield M&As.
Experts told ETthat the US tax policy, which slashed tax rates to around 21%, has certain advantages for Indian drug makers. ET has learnt that companies like Sun Pharma, Cadila, Aurobindo and Torrent are looking to acquire manufacturing assets in the US.
In an email response, Sun Pharma, India's largest drug maker and the world's fifth largest generic drug maker, said it has an annual capex plan that includes expansion in the West too. "Sun Pharma has an annual capex plan to take care of its growing business in North America, Europe, emerging markets and India. This includes investment in facilities where we anticipate new business," a spokesperson for Sun Pharma said.
Emailed queries to Cadila Healthcare and Aurobindo Pharma remained unanswered till as of press time.
On Thursday, Torrent Pharmaceuticals announced the acquisition of USbased Bio-Pharm.
Under newly introduced changes in corporate tax in the US, the government reduced tax for American companies to 21% from 35%. Experts told ET that the difference of about 15% between Indian and US tax rates is a big lure for Indian pharma companies.
"There is a need for India to take relook at its corporate tax rate, as many companies that have large exports to the US, like the pharmaceutical sector, could have upside to move their manufacturing base there," said Girish Vanvari, partner at KPMG India.
There is a tax arbitrage of about 15% for any company that has set up a base in the US, and regulators of the country may take a benevolent view of such companies."
The US tax overhaul says that any US-based company that is moving profits out of the country will have to bear certain penalties, like base erosion and anti-abuse tax (BEAT). However, if any multinational company wants to set up manufacturing base in the US, it will receive certain sops.
For instance, they can write off the cost of equipment they purchase.
Experts said it makes sense for many Indian companies to set up manufacturing base in the US as it would boost their bottom line.
Most of these pharma companies had got an impact analysis done about a month ago to find out benefits and risks of setting up manufacturing base in the US. People in the know said these companies are working on the quantum of initial investment needed, among other things and could finalise their plans by December this year.
For India's leading drug makers, the US is one of the biggest markets, accounting for at least 40% of their revenue.
Over the last few years, companies like Lupin, Aurobindo and Mankind have made significant investments in the US. Lupin, for instance, carried out a $750-million acquisition of Gavis Pharma, the biggest overseas acquisition by any Indian company.
Indian drug companies' search for US manufacturing assets is also to pump up the portfolio of complex generics products—expected to be the next big growth driver.
Also, there is fear that the new tax regime in the US could mean more trouble if there are several related party transactions between the American subsidiary and the Indian arm. The new US tax rules would mean additional tax of about 10% (BEAT) if the American subsidiary doesn't follow certain regulations and transfer profits outside the country in the form of interest payment, royalty or management fees.
Tax experts said BEAT in the US will work like minimum alternate tax (MAT) in India. Under BEAT, tax on normal profit will be 20% and 10% on adjusted profit, after disallowing payments like interest, management fees and royalties. Companies will have to pay the higher of the two. While the new tax regime has reduced the corporate tax rate to about 20%, exceptions have been carved out for companies shipping profits out and not creating jobs in the US, said experts. BEAT will be a risk for companies that have substantial revenue coming from the US.
"Several countries, including USA and China, have already moved to lower corporate tax rates to attract investment. The Indian corporate tax rate is actually 35%, and even higher if DDT is included; the time has come to reduce it to competitive levels, else even Indian multinationals will look at relocating operations abroad in more competitive jurisdictions," said Ketan Dalal, managing partner at Katalyst Advisors LLP.
Sujay Shetty, lifesciences head at PwC India, said, "Even before the tax overhaul came in the US, Indian companies were buying assets in the US. This new development will give them added incentive to do so. Companies will ultimately make decisions depending on the economic prospects of the market."
ET had, on January 13, reported that Indian companies that have a presence in the US are already working towards converting debt to equity, lowering royalties and management fees to reworking the whole business model. As not doing so could mean a spike in taxes they have to pay in the US.