In a country of 1.22 billion people, and a fourth of them, or 300 million, living below the poverty line, a drug pricing policy is of unimaginable significance. Still, it took the government over nine years to decide how to make essential medicines affordable for the common man in India. It was 2003 when the Supreme Court had struck down a proposal to bring down the number of drugs under price control from 74 to 38 and directed the government to frame a policy to regulate prices of all essential drugs. However, it was only last month that the Cabinet at last approved the National Pharmaceutical Pricing Policy (NPPP), 2012.
The new policy caps prices of 348 essential medicine formulations at the arithmetic average of all drugs in a particular segment with a minimum of one per cent market share. Right now, the government has been fixing the prices of 74 bulk drugs on a cost-plus basis. As a result of the switch, while prices of various expensive branded drugs are likely to drop significantly, it is also expected that the new regulation would allow prices of various low-cost medicines to go up.
Though the span of price control under the new policy has increased to 30 per cent of all medicine in the country from around 17-18 per cent earlier, the industry has heaved a sigh of relief as it had feared worse. “Though the average profitability of the pharmaceutical industry will be impacted badly by about 25 per cent, we are reconciled to the new policy as it moves away from the intrusive and opaque pricing regime to a more transparent system of pricing and balances the need for affordable medicines with the compulsions of growth of the domestic industry,” says Indian Pharmaceutical Alliance (IPA) Secretary General D G Shah. Almost all large domestic pharmaceutical companies, including Cipla, Sun Pharma and Dr Reddy’s Laboratories, are members of IPA. “The new mechanism for ascertaining prices is more realistic in terms of reflecting what the market can bear. Also, it is easier to monitor than the cost-plus mechanism where the cost data varied for different companies and required rigorous monitoring by the National Pharmaceutical Pricing Authority,” says Anjan Sen, director (strategy & operations), Deloitte.
Another key feature of the new policy is that companies will be allowed to annually raise prices of regulated drugs in tandem with the wholesale price index (WPI). As a corollary though, the companies will also have to cut these prices if there is a decline in the index. WPI-based inflation hovered between 7.4 per cent and 8 per cent till October – way beyond the Reserve Bank of India’s comfort zone of four-five per cent. Also, the new policy allows leeway to the industry in case of drugs that are out of price control. Under the previous regime, the government did not allow an annual price increase of more than 10 per cent on such drugs. The new policy says prices of these drugs will be determined by market forces. The government reserves the right to intervene within the next 12 months if prices increase by more than 10 per cent annually.
Besides, existing combinations of the listed 348 drugs are also exempted from the purview of price control. However, following last-minute objections from finance ministry, the regulation mandates that companies introducing new combinations of the 348 drugs will have to seek approval of the price from the government. According to Shah, including existing combinations would have created undue pressure not just on the industry but also on the regulator who would have to monitor price movements of all these medicines in the future. “Going beyond formulations specified in the National List of Essential Medicines (2011) and including all formulations and combinations of these 348 drugs will bring 75 per cent of the Indian pharmaceutical market under price control,” Shah says.
| BRANDS THAT MIGHT TAKE A HIT | |||
| GSK | Ranbaxy | Cipla | Cadila |
| Amoxycillin + Clavulanic acid | Diclofenac | Amoxycillin | Atenolol |
| Paracetamol | Amoxycillin | Mifepristone | Atorvastatin |
| Ceftazidime | Atorvastatin | Azithromycin | Pantoprazole |
| Albendazole | Ofloxacin | Ondansetron | Artesunate |
| Cetirizine | Amoxycillin + Clavulanic acid | Misoprostol | Omeprazole |
| Allopurinol | Clotrimazole | Amoxycillin + Clavulanic acid | Norethisterone |
| Medroxyprogesterone | Losartan | Metoprolol | Bisacodyl |
| Cefixime | Ampicillin | Atorvastatin | Tramadol |
| Atracurium | Betamethasone | Ofloxacin | |
| Hydrocortisone | Diazepam | ||
| Source: Emkay Research | |||
Denting profits
Still, the new policy has serious implications for the Rs 67,000-crore Indian pharmaceutical market. According to sector analysts, large companies such as GlaxoSmithKline (GSK), Abbott, Pfizer, Cipla, Ranbaxy and Cadila, which record high domestic sales, are likely to be hit the hardest. Multinational pharmaceutical companies are seen to be impacted most because of the high presence of essential drugs in their portfolio. Price leaders will be hit hard, while laggards will gain. “For multinationals, this would be negative with 15-20 per cent impact on Ebitda due to their price leadership in a few of the drugs,” says SBI Cap Securities Institutional Research Associate Kunal Mishra.
| IMPACT ON TOP COMPANIES (%) | ||||
| Company | Domestic sales as (%) of total sales | Impact (%) of total sales | Consolidated Ebitda margin | Net impact on Ebitda** |
| Sun Pharma | 36 | 7 | 32 | -5 |
| Ranbaxy | 18 | 4 | 9 | -8 |
| Dr Reddys | 13 | 3 | 20 | -3 |
| Lupin | 27 | 5 | 20 | -5 |
| Biocon | 12 | 2 | 24 | -2 |
| Ajanta | 38 | 8 | 19 | -8 |
| Cadila HC | 47 | 9 | 20 | -9 |
| IPCA | 33 | 7 | 20 | -7 |
| Cipla | 41 | 8 | 25 | -7 |
| Glenmark | 25 | 5 | 20 | -5 |
| GSK | 98 | 20 | 33 | -18 |
| Average sector impact | -9 | |||
| *Assuming 20% incremental coverage; **Assuming 20% price cut form ceiling Source: Company | ||||
For instance, according to a distributor, GSK’s antibiotic drug Augmentin (amoxicillin and clavulanate), which costs Rs 266 for a pack of six tablets, may see a significant drop because various brands in the segment charge less. For instance, Mankind Pharma’s Moxikind is priced at Rs 60 for six tablets, while a similar drug from Cipla costs Rs 120 for a pack of six. Similarly, Novartis could see a sizeable price cut in one of its bestselling painkiller brands, Voveran, the distributor says. While the drug is priced at around Rs 67 for 15 tablets, another company, Systopic, sells the same under the Net brand name for Rs 17 for a pack of 10 capsules. “We believe the new pricing policy would result in price correction for all premium brands which are largely being marketed by multinationals and leading domestic companies, resulting in moderated growth momentum for the overall domestic formulation business in the near term,” a report by Systematix Institutional Research says.
Among domestic companies, Cipla is likely to be hurt the most as domestic sales contribute 40 per cent to its revenue and a large number of its drugs will fall under price control. Ranbaxy and Cadila are likely to record significant revenue losses too. Bestsellers like Cipla’s Ciplox, Cadila’s Ciprobid and Ranbaxy’s Cifran, all based on the ciprofloxacin formulation, will come under price control. Companies like Dr Reddy’s, Lupin, Glenmark and Sun Pharma, either export-oriented or with limited exposure to the 348 essential medicines, could see only a moderate impact on their margins, say analysts. While the profits of big companies are likely to be impacted in the near term, mid- and small-cap companies could bleed more in the long run. “It is likely that big players will gain volumes going forward which would act as a mitigating factor for them. But this in turn will hurt small companies who will not have brand advantage and may lose their market share to equally-priced branded products sold by major companies,” an analyst says.
Though the policy may trigger temporary moderation in domestic formulations growth, analysts do not see it as a major dampener for the industry. “The impact of the policy would not last long. It is a manageable proposition, and companies would recover all the damages very soon by gaining volumes,” says Nitin Agarwal of IDFC Securities. According to Praful Bohra, senior research analyst, Nirmal Bang, companies may reshuffle their brand promotion strategies. “In the near term also, companies may look at various options such as inventory rationalisation at distributor level and renegotiations with distributors to mitigate losses,” Bohra said. Analysts are also optimistic that Indian drug industry with its fantastic future growth projections would continue to attract foreign firms and the policy is unlikely to be a deterrent. According to industry estimates, the Indian market would grow at 14-17 per cent during 2012-16. In comparison, US is expected to grow 1-2 per cent, while Europe is expected to remain flat till 2016.