The proposed market-based pricing mechanism for the pharmaceutical industry is expected to impact near term earnings of companies with relatively higher dependence on Indian market, rating agency Icra said today.
With the National List of Essential Medicines (NLEM) estimated to cover almost 20% of the Rs 72,800 crore domestic formulation business, an expected price cut of 15-20% will erode the market by 3-4%, it said.
Its impact on earnings will be higher, as much of this will directly eat into the relatively higher margin India business, Icra said in a report.
Companies with higher dependence on the Indian market like Indian arm of MNCs, mid-size pharma companies and greater share of acute therapy segments (like 70% of NLEM) will be impacted the most, it added.
Conversely, the impact of the new policy would not be substantial on companies that have sizable share of earnings from regulated markets, especially US generics, it said.
The Department of Pharmaceuticals released a detailed note paving the way for the implementation of the proposed pricing policy recently.
In line with the earlier proposal, the policy has adopted a market-based pricing mechanism wherein the ceiling price for each branded drug or a generic version will be determined by taking a simple average of all drugs with market share equal to or greater than 1%.
The policy will control prices of 348 drugs that are classified as 'Essential' and form part of the National List of Essential Medicines (NLEM). The companies will be allowed to revise prices of these molecules once a year in line with the change in the Wholesale Price Index (WPI).
After the detailed guidelines, the government will notify the ceiling prices, post which the policy will come into effect with 45 days.
Companies will have to adjust their MRPs within this period which would result in some inventory de-stocking in the coming few months by the distribution channel.
Overall, a market-based pricing mechanism is more acceptable to the industry and, over a longer period, it may limit the adverse impact on it though there would be some challenges and uncertainties in its implementation, Icra said.
