Drug pricing policy: Pharma majors may see impact of 5-10%

Prabhudas Lilladher has come out with its report on pharma space. According to research firm the current policy, Cipla  , Dr Reddys Lab , Ranbaxy , GSK Pharma's revenue from domestic formulation is likely to be impacted by 5-10%.

The government will present the New Pharma Pricing Policy (NPPP) in the Supreme Court which was proposed by the Group of Ministers on November 21 and subsequently approved by Cabinet on the next day. Now it needs to be seen as to what stance the Supreme Court takes on the new policy which was modified to fix ceiling price for the drugs covered by National List of Essential Medicines (NLEM) 2011 based on the simple average price (versus weighted average price earlier) of all the brands having market share of more than 1%.

Are we near to the end of a logjam? There has been a logjam over the finalization of the NPPP as the Supreme Court objected to the NPPP 2011 proposed by Government in 2011 in which the ceiling price was based on Weighted Average Price (WAP) of top three brands, post which the government formed a GOM to look into the matter and come out with a new policy. The GOM, in September 2012, proposed a new policy in which the ceiling price was based on WAP of all the brands having market share of more than 1%. However, there was objection from both Finance Ministry and Supreme Court to this policy on various grounds. Now, the policy has been finally approved by the cabinet which is based on simple average price mechanism to decide the ceiling price of the drugs covered under NLEM.

What Next? The Supreme Court hearing is scheduled for today to decide on the new policy. Our discussion with industry players suggests that since the cabinet has approved the policy, the government can go ahead and implement the same. However, we feel that the stance of the Supreme Court on the policy is very important in order to implement the policy smoothly. In case of favourable stance by the Supreme Court, the policy is likely to be implemented within the next six months. However, as we understand, in the previous hearing, the Supreme Court had asked government not to tamper with the existing costbased pricing mechanism to determine the price of essential medicines. In this context, it is very important to see what stance the Supreme Court takes on the new policy which is based on market-based pricing.

Some other issues that may further delay the entire process: Though we don't have the fine print of the new pharma policy, as we understand, the policy does not include the combination drugs in the price control. This is a major issue in our opinion and can be raised by various health NGOs and activists in the Supreme Court as combination drugs form large part of Indian pharmaceutical industry. We believe that the possible inclusion of combination drugs will have serious implications on the pharmaceutical companies as this will expand the coverage of price control from the current 30% to 60-75%.

Based on the current policy, Cipla, Dr Reddy's Lab, Ranbaxy, GSK Pharma's revenue from domestic formulation is likely to be impacted by 5-10%. As per the analysis done by AIOCD, based on the new policy, some of the large companies like Cipla, Dr Reddy's Lab, Ranbaxy and GSK Pharma's revenue from domestic formulation business will be impacted by 5-10%. The least impacted companies from our coverage universe will be Sun Pharma, Lupin, IPCA and Torrent Pharma in terms of revenue. However, if we look at the impact on the overall PAT of these companies, Dr Reddy's Lab will have less than 5% impact on overall PBT due to lower contribution of domestic formulation business to the total revenues. Further, Sun Pharma, Lupin, Torrent and IPCA will be other companies with lower impact.