The recent Supreme Court order advocates use of the existing cost-based pricing (government has proposed market-based) mechanism to determine prices of all essential medicines under NLEM 2011. We have analysed the impact on our coverage universe by using market price of a least cost brand as ceiling price. We believe that lowest cost brand would make ~50% gross realisation and thus will be equivalent to ceiling price on cost plus basis. Our analysis concludes that cost-based pricing will steeply impact future earnings. However, we strongly believe that the government has final authority to decide upon the pricing mechanism.
��
-->
Supreme Court advocates cost-based pricing
The Supreme Court, in its order dated October 03, 2012, has advocated the current cost-based pricing mechanism to determine prices of all essential medicines (including drugs notified under NLEM 2011). Moreover, it has also clearly sought a timeline from the government before the next hearing (October 10, 2012) on inclusion of essential medicines under the price control order, failing which it will pass an interim order. The apex court’s stance is pro-consumer and in lieu of anticipated price hikes from the new pricing formula (weighted average price of brands with more than 1% MS by volume).
Impact on industry: Negative
The Cabinet will decide upon EGOM recommendations; however, if cost-based pricing is adopted, potential outcome could be negative for the industry, leading to steeper impact on earnings of companies. The total market to come under price control is ~20% or INR120bn and cost-based pricing could lead to potential loss of INR60bn in revenue/profits (10% of domestic sales) from earlier estimated 2.5-3.0% (INR20bn). However, the impact on individual companies will vary.
Options for government
We believe the government has the option to go ahead and submit the pricing policy in its current form, and thereby put forward its views in favour of market-based pricing. However, in case the court disagrees with it and enforces cost-based pricing, the government can file a petition through Presidential reference, seeking clarifications from a different trial bench (as was seen in 2G spectrum case). Another option could be to change the DPCO act on retrospective basis, as was done by amending the relevant tax section in Vodafone tax case.
Authority to formulate, enact pricing policy rests with government
We strongly believe that the Supreme Court does not have a mandate to decide on the final pricing policy as the right to legislate lies only with the government. Industry, as per our discussions, also strongly believes that the government will be able to convince the apex court on enforcement of market-based pricing, which is a more transparent mechanism.
Regards,
No comments:
Post a Comment