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Impact of Pharmaceutical Pricing Policy 2012 - Views on News from Equitymaster

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Impact of Pharmaceutical Pricing Policy 2012
Dec 12, 2012

After various debates and different views, National Pharmaceuticals Policy (NPPP) got recently finalized. Here will give an outline of the policy and the impact it is likely to have on both domestic and MNC companies in the Indian pharma sector.

An overview of the pricing policy

Last year, the National Pharmaceutical Pricing Authority (NPPA) had proposed a new pricing policy. As per the National List of Essential Medicines (NLEM), 348 drugs will come under pricing regulation. As per the stated guidelines, the policy would cover prices of "formulations" only - that is medicines used by the consumers only and not to any manufacturing materials like intermediates or bulk drugs.

The method for fixing ceiling price (CP) of NLEM medicines will be - Simple average of price of all drugs having market share more than or equal to 1% (on the basis of moving annual turnover) of the total turnover of that medicine.

Thus, the formula will be: Total price of all brands falling in the above category/Total number of manufacturers producing such brands of medicines.

The CP will be based on dosage basis like per tablet, capsule, and standard injection. The authority will be using IMS data, as this agency provides market based data. It must be noted that the IMS data gives price figures at the stockist level. Hence in order to arrive at the CP, which will be MRP to be charged to the consumers, the IMS price will be further increased by 16% as margin to the retailer. For drugs which are not covered by IMS, NPPA would collect the data.

The companies will be able to increase the price annually, keeping April as the reference date. The price increase will be limited upto increase in Wholesale Price Index in the previous year. Thus ceiling price will be revised depending on change of the drug price by the manufacturer.

Drugs which are imported will also have to follow the same formula, and thus their pricing will fall under the extent of control and the ceiling price would apply to domestic as well imported products.

Scenario for non-price control drugs

The prices of Non-Scheduled drugs will be monitored. In case the prices of such drugs increase by more than 10% in a year, subject to certain criteria, the government will fix the price. In the proposed policy, all essential drugs are under price control. Thus the prices of all non-essential drugs will be determined by market forces.

The drugs that are exempted...

New drugs: If a manufacturer manufactures a new drug patented under the Indian Patent Act, 1970 (under product or process patent) or formulation involving a new delivery system in India and develops the same using indigenous research, than the said drug would be eligible for exemption from price control for a period of 5 years from the date of commencement of its commercial production in the country.

New combinations: If a manufacturer of a NLEM drug with dosages and strengths as specific in NLEM, launches a new drug by combining the NLEM drug with another NLEM drug or a non-NLEM drug or by changing the strength and dosages of the same NLEM drug, such manufacturers shall be required to seek price approval from the Government before launching the new drug.

Impact of this policy on companies

The pharma companies to get most impacted will be the ones whose drugs fall under the top brands list. In this, MNC pharma companies are most impacted by this as it is a known fact that a large part of MNC drugs are among the top selling drugs in India. Further, as this pricing methodology will be applicable to imported drugs also, they will be much impacted. It is believed while MNCs are expected to get impacted by 10% or more, the impact on domestic pharma companies will be in the region of 2%-5%.

Based on our interaction with the management, we were able to get a rough idea of the impact for a couple of companies. Thus, Sun Pharma expects impact of 2-3% on its domestic sales; on the other hand Glenmark will witness negligible impact due to this policy. Biocon states that when the policy gets implemented, the impact will be positive for its Rh Insulin business, since the company's price point is already below the innovators' brands. Biocon also believes that the impact on few other products (new products coming under this policy) will be small depending on the price point (whether the company's price is above or below the price point).

Keeping all this in mind, we have arrived at rough estimate of the impact of this policy on the domestic revenues of the pharma companies under our coverage as per the table below. We have not yet incorporated the same in our estimates and would wait for more clarity from each company.

Impact of Pricing Policy
Company Domestic revenues 
(FY14E/CY13E) - (Rs m)
% Impact assumed Domestic revenues
post Pricing Policy (Rs m)
Pfizer 11,219 10.0% 10,097
GSK 29,440 10.0% 26,496
Sanofi Aventis 13,800 10.0% 12,420
Novartis 7,352 10.0% 6,617
Cipla 42,491 4.0% 40,791
Ranbaxy 21,650 4.0% 20,784
Dr Reddy's 17,101 3.0% 16,588
Lupin 28,888 2.0% 28,310
Cadila 28,431 3.0% 27,578
Sun Pharma 42,332 2.0% 41,485
Wockhardt 15,274 2.0% 14,969
Glenmark 14,791 0.0% 14,791

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