In its bid to lower prices of 348 essential drugs, the government has accepted the recommendations made by the Organisation of Pharmaceutical Producers of India. The body had recommended that the price of a drug be fixed at the weighted average price of all brands having market share of one per cent or more. As the dust settles around this development, analysts are beginning to work out the actual impact on profitability.
For starters, this move will hurt those companies most which have higher exposure to the domestic market. Over the years, Indian pharmaceutical companies have concentrated on developed markets. Given that the list of drugs constitute 30 per cent of the industry, most Indian players may be relatively unscathed by the move. However, multinational drug companies like GSK Pharma and Sanofi India, which focus mainly on the Indian market, will be hurt more than domestic companies.
Companies that follow a premium pricing model will be affected more by this move, as their operating margins will contract significantly. According to Karvy, companies such as Dr Reddy’s, Sun Pharma, Lupin, Ranbaxy and Cipla would be lesser impacted due to their presence in the export space. MNC pharma companies like GSK and Pfizer are likely to see their FY13 earnings per share (EPS) being adversely impacted by 15-20 per cent, while Indian companies like Cipla, Cadila and Ranbaxy will see their EPS erode by five to seven per cent in FY13, says Emkay Global. Other pharma players are likely to see their EPS reduce by two to three per cent.
Though the implementation may take at least six months or so, initial estimates suggest that the likely impact on the industry is higher than what was initially estimated. This move would also have a bearing on the inventory, which would be in the system and would require a recall, explain analysts. While it is known that the move will impact 30 per cent of the industry and bring down prices by 10 per cent, there is no clarity on price hikes. If the industry is allowed to hike prices of drugs under control, then the impact would only be one-time but there is no clarity on this yet. Another negative is the likely impact of this move on the industry’s revenues. Motilal Oswal Securities says: “Preliminary estimates indicate that the hit to the overall industry will be approximately Rs 6,000-8,000 crore, implying that the industry has lost approximately one year of growth.”