New drug policy | Consumers to benefit, companies to feel the heat

Price of drugs under control to see price revisions up to 80%. MNC's to feel maximum heat on profitability

Thursday 16th of May was an eventful day for the companies in the Pharmaceutical space. The day that saw the Healthcare index touch a new 52 week high on the bourses also saw the government throwing a spanner on the prospects of the companies with the new drug price control rrder.

On the eventful day the stock prices of 14 out of 17 companies had surged higher in anticipation of growing profitability of the companies in the sector.

However with the Government in the evening announced that Drug Price control Order (DPCO)2013 replacing the earlier 1995’s order , the BSE Healthcare index that had touched 52 week high of 9,233.12 on Thursday closing at 9,220 lost 0.39% on Friday.

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.

The DPCO2013 is broadly in line with the National Pharma Pricing policy (NPPP) 2012 of December’12 which brings 348 drugs into Ambit of price control unlike earlier when only around 74 drugs were under price control.

What it means for consumers

With new DPCO, the consumers in general are likely to benefit as almost number of drugs coming under price control is likely to go up to five times compared to earlier. While the Ceiling price for the drugs is yet to be decided experts believe that price of certain essential medicines will come down by as much as 80%.

For calculation of the ceiling price, simple average of all brands with a Market Share of and  over 1% in May’12 will be considered. The Ceiling price will include the retailer’s commission of around 16% to arrive at the MRP. The consumers will have to pay MRP plus the local taxes as applicable.

The new drug policy to hit MNC’s maximum
 
Amongst the companies the maximum impact is likely to be felt by MNC’s that generally have premium pricing. So with their portfolio coming under price control the impact will be severe. The analysts at Edelweiss see 8% impact on Glaxo’s Profit before tax (PBT)in FY14 as Ranbaxy, Pfizer and Wyeth see 7% 6% and 11% impact respectively.

   
Among large caps, Cipla and Cadila are estimated to see 4‐6% impact on FY14E PBT, While among mid caps, IPC and Unichem are estimated to see an impact of 2.5% and 5.3% respectively. Glenmark, Sun Pharma and Lupin will have lower impact (1‐2% of FY14E PBT)
 
However 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 get corrected and add that they have factored the same based on the AIOCD 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.
 
Their Top Picks are: Dr. Reddy’s Labs, Lupin, Cipla & Ranbaxy in Large-cap space, Torrent Pharma in Mid-cap space and Unichem Labs in Small-cap space.