In new pharma pricing policy, hope beyond bitter pill

Analysts say the new mechanism would impact revenues in the short term only

The Indian pharmaceutical industry is likely to see a dip in valuations in the near term as a result of the recent pricing policy that aims to intensify the regulatory hold over essential drugs. Profit of major drug makers, including that of GlaxoSmithKline (GSK) Pharma, Abbott, Cipla, Ranbaxy and Cadila could be hit the most. But, analysts are optimistic that the revenue impact might not last for more than 18 months to two years.

“The impact of the policy would not last long. It is a manageable proposition, and companies would recover all the damages very soon, by gaining volumes,” said Nitin Agarwal of IDFC Securities.

Kunal Mishra, Institutional Research Associate, Sbicap Securities, concurred: “Though the policy overhang (Draft National Pharma Pricing Policy by the ministry of chemicals & fertilisers) has weighed down the stock prices since October 2011, we feel some clarity has emerged in terms of policy action, removing the fear of sharp erosion in the earnings, hence the sector de-rating concerns” Mishra said.

NOT A KILL PILL Impact of the policy on total revenues of leading  pharmaceutical companies
	% of total revenue hit on price control
Glaxo	11.3
Alembic	8.0
Dr Reddy’s Labs	7.3
Ranbaxy	6.2
Cipla	5.8
Cadila	5.8
Novartis	3.8
Pfizer	3.0
Sun Pharma	2.1
Source: AIOCD data

Analysts said India would continue to attract foreign firms because of the impressive growth outlook. According to industry estimates, the pharma industry in India would grow at 14-17 per cent during 2012-16, against one-two per cent in the US, the world’s largest pharmaceutical market. In Europe, another major market, the growth is likely to remain flat till 2016.

“The India growth story is promising and will continue. Besides, volumes would continue to grow, and for all these MNCs whose patent pipelines are drying, emerging markets like India provide great opportunity, with benefits of low-cost manufacturing and state-of-the-art facilities,” an analyst said.

There were anticipations a stringent pricing mechanism might deter foreign direct investment in the sector, and multinationals eyeing acquisitions might no longer find India impressive, leading to a significant drop in valuations. The policy, approved by the Cabinet last month, has quelled speculation. The National Pharmaceutical Pricing Policy, notified by the department of pharmaceuticals, caps the price of 348 essential medicines at the arithmetic average of all drugs in the segment that have a minimum one per cent market share.

According to the previous policy, the price control was based on the cost-plus mechanism, but it did not cover so many formulations.

So far, only 74 bulk drugs were under direct price control, and all medicines containing one or more such bulk drug was under regulation.

Under the new pricing regime, though the span of control would expanded to 30 per cent from 18 per cent of the Rs 67,000 crore Indian pharma market, the market-based price fixing mechansim has come to the industry’s rescue. The cost-plus mechanism applied on 348 formulations would have impacted the industry revenues far more than what has been adopted as a policy.

“Given the price competition, the policy is unlikely to have any major negative implication for the sector,” a recent report from Angel Broking said. “The domestic companies not having very huge exposure to the domestic market, will be insulated to a large extent, as the pricing is not the key growth driver for their growth.”