The pharma pricing policy in India is in the last leg of finalization. Over the past three months, there have been numerous debates over the pricing policy framework for essential medicines. While clarity on the price control mechanism is yet to emerge, constant intervention by the Supreme Court should ensure implementation of the new policy soon. We believe the acceptance of a market-based pricing mechanism would be positive for the industry in the medium-to-long term, despite a one-time revenue/profitability hit for some companies. On the other hand, a cost-based pricing mechanism would be a huge negative. We highlight that current proposed methodology using the weighted average price of top three brands is unlikely to go through. While the exact impact will be known only after finalization of the policy, prima facie, companies with limited India exposure are likely to be least affected by any price-control mechanism. Based on our assumptions on the potential price cuts and its impact on profitability, MNC companies like GSK, Ranbaxy and Pfizer would be most impacted (10-23% of FY14 PBT), while among large Indian players such as Cipla (12% ) and Cadila (8.5%) are most impacted. The impact will be least on players like Sun, Lupin and Dr. Reddy’s (3-5%).
��
Revised NLEM to bring 41% of industry under its control
Currently, 76 drugs or 12% of the total market is under controlled pricing and the government is contemplating to expand the list based on the revised NLEM. If the drugs under price control (DPCO) list expands to include all 348 drugs, it could potentially cover 41% of total pharma industry. However, the impact on individual companies could differ based on exposure to these drugs and pricing in the market. We expect 25-35% of the incremental sales to be impacted for most listed players, while affect could be significant on FDC (48% of sales) and Unichem (42%).
Debate over pricing mechanism: No single pill
The Department of Pharmaceuticals (DoP) is proposing a market-based pricing approach, wherein the ceiling price would be the weighted average price of top three brands, with annual price revision in accordance with the change in Wholesale Price Index (WPI). However, Ministry of Health (MoH) opposed the policy and recommended that pricing should be based on average price of the three cheapest brands. On the other hand, PMEAC suggested a dual strategy with: (a) cost-based pricing for monopoly products; and (b) market-based pricing for all other drugs. Industry organizations such as Indian Pharmaceutical Alliances (IPA) and Organization of Pharmaceutical Producers of India (OPPI) are in favor of market-based pricing. We are of the view that government may consider PMEAC recommendation to arrive at ceiling price.
Impact on valuations
Domestic business enjoys premium valuations over generic business because of: (a) Structural growth story; (b) higher margins owing to branded generic in nature; and (c) higher RoCE and RoE because of lower working capital cycle. Any impact on profitability in the domestic market has a potential to impact the valuations metrics for the industry as a whole. Though the financial impact on the Indian companies could range from 2-12%, however the valuations impact could be large.
Regards,
No comments:
Post a Comment