Cipla, Ipca Lab, Zydus Life to benefit most from drug price rise: Analysts

The recent price hike, analysts said, brings some respite for the industry facing multiple headwinds such as steep raw inflation, price erosion in the US market and higher freight costs.

The effects of inflation have spilled over to several industries with many of them forced to raise prices to stave off rising cost pressures. With this, even essential medicines are set to become costlier from April 1 as the national drug price regulator has allowed companies to hike prices of scheduled drugs by up to 10.8 per cent, the highest ever in the last 10 years.

Scheduled drugs (17 per cent of the domestic pharma market sales) fall under the national list of essential medicines (NLEM), the prices of which are directly capped by the government and are raised annually in sync with the wholesale price inflation (WPI).

The recent price hike will cover over 800 of these drugs across various therapies. The development, analysts said, brings some respite for the industry facing multiple headwinds such as steep raw material inflation, price erosion in the US market and higher freight costs.

Companies with high exposure to NLEM drugs in their sales portfolio, they believe, will benefit the most. Among the lot, Cipla, Alkem Labs, JB Chemicals, Zydus Life Sciences, Dr Reddy's, GSK Pharma, Lupin, Ipca Labs and Sun Pharma are the biggest beneficiaries as these companies have 25-40 per cent exposure to NLEM drugs, according to analysts at Anand Rathi. 

“With the new effective prices, companies should be able to pass on some of the input price increase to partially ease cost pressures as prices of key APIs such as paracetamol have risen 15-125 per cent, while excipient prices have increased 20-250 per cent over the past 12-15 months,” wrote Damayanti Kerai, an analyst at HSBC Global in a recent note.

Cascading impact

The price revision can also trigger a price escalation of non-scheduled formulations (83 per cent of domestic market sales) by 5-10 per cent, analysts said. Ceiling prices of non-scheduled drugs are not capped by the regulator, unlike for scheduled drugs, and these are permitted to be raised by not more than 10 per cent every year.

"Companies with larger and wider focus on domestic formulations will relatively benefit more and will likely see better re-rating and investor interest,” said Surya Patra, vice president, healthcare & specialty chemical research at Phillip Capital.

That said, the domestic pharma market sales growth has been highly volatile over the last few months. For February, the sector registered a flat 1.1 per cent growth as volumes slipped. The growth for 2022-23 (FY23) could further be weak on a high base of Covid-hit FY22.

HSBC Global, however, believes the NLEM price hike can help the sector deliver high single to low double-digit growth in fiscal 2022-23 (FY23), assuming an additional price rise of 5-8 per cent for non-scheduled drugs too. Kotak Institutional Equities adds that NLEM price increase presents a potential 150-200 bps points upside to its 4-11 per cent yoy domestic growth estimates for FY23. CHECK TABLE HERE