What is the new drug pricing policy?

A Group of ministers (GOM) has finalised a new policy for pricing essential medicines in the country. Lets understand more what their recommendations are and what impact will it have on the industry as such.

Q. What is the new pharma pricing policy?

A. A GOM, headed by Agriculture Minister Sharad Pawar on Thursday finalised a new pharmaceutical pricing policy. In simple terms, under this policy 348 essential medicines will come under the government price control. Till now, through the National Pharmaceutical Pricing Authority, the government controls prices of 74 bulk drugs and their formulations.

Q. How will the prices be fixed?

A. The Group of Ministers arrived at a consensus and finalised market based weighted average prices for all the drugs, which have a market share of more than 1%. It includes the 348 drugs but not their combinations. The weighted average price of products having over 1% market share would be taken as the maximum retail price.

Q. When will the new pricing policy be implemented?

A. The group of ministers will now send their recommendations to the Cabinet for approval, within a week, which will be then forwarded to the Supreme Court. Rahul Sharma and Nishit Sanghvi of Karvy Stock Broking expect it would take at least 6 months to implement the policy as problems would crop up on the inventory in the system. The stocks in the market would have to be recalled and would have to be repacked/reprinted with new price and other details.

Q. How does the industry view the new policy?

A. Ranjit Shahani, president of Organisation of Pharmaceutical Producers of India, who is also vice-chairman and MD of Novartis India, feels the new proposal will have an impact on industry as the span of price controls will now increase to cover around 30% of the pharmaceutical market. However, several analysts, including Anubhav Aggarwal and Chunky Shah of Credit Suisse, say the new policy is more lenient than the draft policy in November 2011. Nilesh Gupta, ED of pharma major Lupin told CNBC-TV18 that market-based pricing was a rational measure and it is a relief that the policy will only affect around 40% of the market, while people had earlier talked about as much as 75%.

Q. What are analysts' opinions?

A. There is a general view among analysts that things could have been worse. Citigroup analysts Prashant Nair and Anshuman Gupta say their preliminary read of the draft pricing policy is that it is well short of the worst-case scenario. The market pricing base approach to set ceiling prices is less disruptive, and the apparent exclusion of combinations limits the span of control to some extent, they say. Nomura Financial Advisory and Securities India says this policy is most benign for pharma companies. The Credit Suisse analysts say unlike the old pricing policy (1995), which was based on cost plus model, the new pricing policy is based on market based pricing and therefore removes the de-rating overhang for the sector.

Q. Which companies will be impacted?

A. Multinational firms like GlaxoSmithKline Pharma and Sanofi India are likely to be the most hit. These companies have a pure domestic play, that is almost all of their revenue and profits are from India operations, and their products are priced at a premium, and so in a government controlled price mechanism, they will stand to loose a lot. Nomura expects around 11-12% impact on GSK at the EBITDA (earnings before interest, taxes, depreciation and amortization) level. On the other hand companies like Glenmark , Dr Reddy's Laboratories , Sun Pharma and Lupin would be less impacted as they have a big exposure to export markets. Credit Suisse expects GSK's earnings per share will be impacted by around 11%. Ranbaxy is another company that could be hurt from the policy. Its EPS is likely to take a 5% hit, once the policy is implemented. However, other companies like Sun Pharma, Dr Reddy's, Lupin, Torrent , Glenmark, Cadila Healthcare and Cipla are only likely to be impacted by 0.5-3.0%.