Even as the government remains determined to expand the range of medicines that come under price control, the domestic drug industry argues that there is no case for squeezing the profits of pharma companies. Reason: The industry is way below, or at par with, other industrial sectors in making profits. The government’s proposed National Pharmaceutical Pricing Policy (NPPP) aims to bring over 60 per cent of the estimated Rs 60,000-crore drug market under price control.
In a submission to the Department of Pharmaceuticals, the Indian Pharmaceutical Alliance (IPA), the grouping of top domestic drugs makers, stated that the inter-industry comparison of profitability (2009-10) using the Centre for Monitoring Indian Economy (CMIE) data shows that the pharmaceutical industry averages about 10 per cent profit after tax (PAT) on net income and 11 per cent return on investment (RoI).
“This, compared with information technology, steel and cosmetics, is not excessive by any standard. The comparison is made with knowledge-based industry (IT) at the one end and commodity (steel) manufacturing at the other, with lifestyle (cosmetics) thrown in to show that the profitability of pharmaceutical is not excessive, whichever way one compares,” IPA Secretary General D G Shah said.
| NOT THE HEALTHIEST Profitability for different sectors (%) | |||
| Industry | PAT net of P&E / Total income net of P&E | PAT net of P&E / Avg capital employed | No of firms |
| Cosmetics | 10.4 | 35.8 | 62 |
| Dairy products | 6.8 | 35.0 | 33 |
| IT | 19.2 | 20.8 | 559 |
| Pesticides | 7.0 | 12.2 | 57 |
| Pharmaceuticals | 10.2 | 11.1 | 332 |
| Chemicals | 4.6 | 10.1 | 1215 |
| Manufacturing | 5.1 | 8.8 | 5392 |
| Steel | 7.9 | 7.8 | 248 |
| Metals & met products | 7.7 | 7.7 | 703 |
| Inorganic chem | 3.7 | 5.9 | 58 |
| Sugar | 4.2 | 4.1 | 86 |
| Polymers | 2.5 | 2.9 | 39 |
| P&E = Prior period income & extraordinary income Source: CMIE’s Financial Aggregates & Ratios, Feb 2011 | |||
According to an analysis carried out by Business Standard Research Bureau, using Capitaline data, the average operating profit margins (OPMs) of top 25 companies (by market capitalisation) listed on the Bombay Stock Exchange during 2005-11 was 27.5 per cent. The six-year period was chosen to understand the profitability of domestic companies after India changed its patent rules to allow product patents in pharmaceuticals.
“The profit margins of Indian pharmaceutical companies range from 10 per cent to 30 per cent. While the leading players have an average of over 25 per cent profit margins, the small companies in the unorganised sector have made much lower profits”, Ranjit Kapadia, an analyst with Centrum Broking, said. Kapadia pointed out that the proposed NPPP would see Indian drug companies taking a hit of over 10 per cent on their net profits.
He argued against further profit squeeze. “When the government is unable to control the prices of essential commodities like pulses and oil, where there has been a price increase of over 30 per cent, why should they punish the pharmaceutical sector,” Kapadia asks.
AIOCD Pharmasofttech AWACS Pvt Ltd, the pharmaceutical market research company formed by the association of India’s drug traders, had come out with an analysis that showed the drug industry could take a hit of about Rs 4,500 crore if the new pricing policy was to get implemented. However, the bulk of the loss, according to its calculation, was expected on the drug trade sector and not on drug makers. Indian drug manufacturers would suffer a loss of over Rs 1,500 crore, the data had suggested.
This is in contrast with the IPA estimates that said domestic price reductions alone would result in aggregate loss of sales of approximately Rs 3,000 crore to the industry. In a submission to the government, IPA said the impact would mainly be on the leading domestic companies and would directly translate into a loss of Profit Before Tax (PBT) of Rs 3,000 crore, or 22.4 per cent of the industry’s PBT.
The global pharmaceutical industry, which functions entirely differently from the domestic drug sector, records an average OPM of less than 20 per cent. A pharmaceutical expert from a leading global consultancy said the two should not be compared. “Both are very different markets. The Indian market is branded generic market, while others are driven by innovative medicines. The R&D expenses of domestic pharmaceutical industry are much lower than global players. In the Indian context, branded generic players can make good profits from their domestic sales, though the profit margins may not be that high from their generic exports,” he said.
But IPA feels otherwise. “It takes about 36 months and investment of between Rs 1 crore and Rs 2 crore to bring to the market the first generic version of a product going off-patent. This does not include cost of litigation with the brand name companies that now take Indian companies to courts even in India. This underlines the risks associated with the business and knowledge-based nature of the industry,” Shah says.
According to Shah, “a new generic introduction faces severe price erosion, as at least three to four new players enter the fray within six months from the introduction of the first generic version of an off-patent medicine. The 10 per cent profitability is not excessive by any standard”.
