On July 10, the National Pharmaceutical Pricing Authority (NPPA) announced that it plans to bring an additional 50 drugs belonging to the Cardiovascular and Anti-Diabetic segment under price control. This is in addition to the 348 drugs that were brought under price control following the implementation of the new Drug Price Control Order (DPCO) in July 2013.
"The NPPA's rationale for bringing these drugs under the radar is primarily due to sharp price anomalies among brands, suggesting market's failure to price drugs competitively. Accordingly, it has proposed to cap the prices of 108 branded formulations whose prices currently exceeded 25 percent of the simple average for the therapy segment," says research firm ICRA.
Also read: Lupin, US firms weigh bids for GSK's mature drugs: Sources
For these brands, the ceiling prices will be capped at 25 percent of the simple average and will be allowed a revision of maximum 10 percent on annual basis.
Industry impact
With many of the key drugs from these segments now falling under price control, ICRA believes that a sizeable part of the industry would move into the price-control regime.
"The cardiovascular (CVS) and anti-diabetic together accounts for about 20 percent of the domestic pharmaceutical industry and are among the fastest growing segments. As per industry estimates, the recent proposal will impact around 50-55 percent and 20-25 percent of the CVS and Anti-Diabetic segment, respectively," it said.
Thus, an additional 7-8 percent of the industry would fall under restricted pricing, taking the coverage to about 35-40 percent of the industry, the research firm added.
The inclusion of additional drugs under price control would erode between 1-1.3 percent of the industry value while the impact on profitability would be even higher "as it will directly eat into margins of domestic formulations business for many of the entities."
Companies impact
"We believe Sun Pharma , Cadila Healthcare , Torrent Pharma , Lupin , Ranbaxy and USV will see the most impact on their domestic business owing to their relatively sizeable exposure to the CVS and Anti-Diabetic segments and premium pricing strategies," ICRA said, adding that among MNCs, Sanofi Aventis , Abbott and Pfizer are also likely to be affected owing to their sizeable share exposure on Anti-Diabetic segment and Indian market in general.
"Given NPPA's criteria of including brands that are price at least 25 percent above the simple average, companies that typically follow premium-pricing strategy will see the maximum value erosion," it added.
Indian pharma companies will be able to absorb the impact of recent development given their diversified business profile, according to the research firm.
With DPCO coverage extending to almost about 40 percent of the industry, the profitability in the domestic business of pharma companies is likely to come under pressure.
"We expect companies to therefore turn their focus on cost control measures, new product introductions (to circumvent the impact of pricing policy) and lay greater emphasis on field force productivity initiatives. Among companies, we believe that Indian players will be able to absorb the impact through higher earnings from their international business," ICRA said.
For MNCs, the only respite may come from volume expansion as prices of some of the key brands will fall sharply, doctors will be willing to prescribe well known brands vis-à-vis cheaper brands. "This may help some of the key brands to offset the impact of value erosion through volume expansion. Alternatively, they may also shift their focus back on patented products."
Cadila Health stock price
On July 23, 2014, at 11:14 hrs Cadila Healthcare was quoting at Rs 1100.00, down Rs 5, or 0.45 percent. The 52-week high of the share was Rs 1188.00 and the 52-week low was Rs 631.00.
The company's trailing 12-month (TTM) EPS was at Rs 43.13 per share as per the quarter ended March 2014. The stock's price-to-earnings (P/E) ratio was 25.5. The latest book value of the company is Rs 177.28 per share. At current value, the price-to-book value of the company is 6.20.
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