New drug policy: Consumers gain, companies to feel the heat

The price of drugs under control could see revision of up to 80%. MNC's to feel the maximum heat on profitability, analysts say.

It was an eventful last week for the pharmaceutical sector. While on one hand, the S&P BSE Healthcare index hit a 52-week high on Thursday with 14 of the 17 companies logging smart gains, the government notified the new Drug Price Control Order (DPCO) post market hours that day that replaces the existing order passed in way back in 1995.

The new price control is likely to reduce prices of many drugs in the domestic market and will definitely impact the growth and profitability of the companies in the immediate term, analysts say.

The DPCO2013 is broadly in-line with the National Pharma Pricing policy (NPPP) 2012 of December 2012, which brings 348 drugs into under price control, unlike earlier when only around 74 drugs were regulated.

Impact on consumers

With the new DPCO in place, the consumers are likely to benefit as the number of drugs under the price control is likely to rise five-fold. While the ceiling price for the drugs is yet to be decided that will include retailer’s commission of 16%, experts believe that price of certain essential medicines will come down by as much as 80%. The consumers will have to pay MRP plus the local taxes as applicable.

Impact on companies

Amongst the companies, the maximum impact is likely to be felt by MNC’s that generally have premium pricing. Analysts at Edelweiss see 8% impact on Glaxo’s profit before tax (PBT) in FY14, while Ranbaxy, Pfizer and Wyeth see 7% 6% and 11% impact at the PBT level, respectively.

Among large caps, Cipla and Cadila are estimated to see 4 - 6% impact on FY14E PBT, while among mid caps, IPCA and Unichem are estimated to see an impact of 2.5% and 5.3% respectively. However, the impact on Glenmark, Sun Pharma and Lupin will be lower at 1-2% of FY14E PBT.

The Indian pharma companies have a well diversified market presence and for majority of large-cap companies, the international business or exports account for majority of their sales.

Analysts at Karvy observe that the stocks which have run-up will correct and add that they have factored the same based on the AIOCD (All Indian Origin Chemists & Distributors) input and their interaction with the companies. However, they believe that the companies with export bias and growth in regulated markets on back of niche and recurring opportunities will continue to outperform in the long-run.

A similar view is expressed by Sujay Shetty, leader at PWCIndia. He observes: “The impact on the pharmaceuticals industry revenues will be limited for around 12-18 months, post which, the product portfolio will evolve to overcome the dip in the revenue. For consumers, this pricing policy would help, to some extent, with the issue of affordability. Overall, this is a solution which the Industry and Government can live with as opposed to the alternative price control formulas based on cost of production etc.”    

The top picks as per analysts at Karvy are include Dr Reddy’s Labs, Lupin, Cipla and Ranbaxy in the large-cap space, Torrent Pharma in mid-cap space and Unichem Labs in small-cap space.