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Pharma: DPCO Still a haze - Views on News from Equitymaster
 
 
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  • Jun 28, 2002

    Pharma: DPCO Still a haze

    Indiaís entry into the WTO and the inevitable introduction of the product patent regime by the end of 2005 has forced the country to take a closer look at DPCO (drug pricing control order), which allows the government to regulate drug prices. The thrust seems to be to promote an environment for drug innovation and technology.

    Enforcement of the product patent regime by the end of 2005 will mean the end of reverse engineering of patented drugs, which is the mainstay of a majority of Indian pharma companies. Post 2005 drug innovation and generics may constitute a significant portion of the revenues of most Indian pharma companies.

    The government announced significant dilution of the DPCO in February this year. However, the industry is eagerly awaiting the final list of drugs, which could turn fortunes for MNCís in particular. The DPCO 2002 intends to reduce the drugs under its control to 32 from the existing 74. DPCO 2002 is expected to take 47 drugs off price controls, while adding 5 new drugs to the list. The effective number of controlled drugs is likely to be around 32. While the NPPA has taken steps in the right direction, there seem to be an inherent inertia to act on the proposals under DPCO 2002. Pending cabinet approval, the industry is eagerly awaiting the final list of drugs.

    Two criteria announced by NPPA for inclusion of drugs under DPCO are as follows.

    • Formulations in a therapeutic class with combined annual sales of Rs 250 m or more will be under price control if a single formulator commands a 50% of the total sales.

    • Formulations with a turnover in the range of Rs 100-250 m if any one manufacturer commands a market share of 90% or more.

    MNC companies could benefit due to older generation molecules. However, a fair amount of uncertainty exists in estimating the exact molecules that are likely to come in/out of the purview of price control, specifically with respect to the definition of the market share being used (whether category-based or molecule-based, or whether single-drug or multi-drug based) and possibility of inclusion of further criteria.

    DPCO 2002 is likely to benefit some companies more than others. Companies like Aventis, Cipla, Glaxo SmithKline Beecham Pharmaceuticals, Knoll Pharmaceuticals and Pfizer, which have a high exposure to DPCO, are likely to benefit from the reduction in the number of drugs under price control. Having said that, it is also important to understand that speculation on the final list and its impact on different companies is futile as the prices of certain drugs under price control are already below the maximum stipulated price due to intense competition. Investors will be in a better position to judge the impact once the new DPCO list is out. It is also important to note that domestic pharma companies have started to pay increasing attention to the export markets recognizing the limited potential of the domestic markets.

     

     

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