Pharma to gulp one-time bitter pill

Pharma to gulp one-time bitter pill

Last Updated: Sat, Sep 29, 2012 13:01 hrs

Drug makers such as Abbott, Pfizer, GlaxoSmithKline (GSK), Cipla, Ranbaxy and Cadila, which record high domestic sales, might be hit the hardest if the proposals of the group of ministers (GoM) on a drug pricing policy are implemented. Companies like Dr Reddy’s, Lupin, Glenmark and Sun Pharma, either export-oriented or with limited exposure to the 348 essential medicines, could see only a moderate impact on their margins, say analysts.

In its recommendation to the Cabinet, the GoM, headed by Agriculture Minister Sharad Pawar, would recommend retail prices of 348 essential drugs be capped at the weighted average price of brands that have more than one per cent market share. While this would lead to a reduction in the prices of several expensive brands, it would also allow a rise in the prices of various low-cost medicines.

Among MNCs, GSK, for which the domestic market accounts for 98 per cent of sales, is likely to be hit the most. Vivek Kumar of SBI Cap Securities says GSK’s revenue may fall 20 per cent, while Pfizer (93 per cent of its sales are in the domestic market) might take a hit of 13-15 per cent on its revenue.

Sources say GSK’s antibiotic drug Augmentin (amoxicillin and clavulanate), which costs Rs 266 for a pack of six tablets, may see a significant drop because various brands in the segment charge less. Mankind Pharma’s Moxikind, based on the same formulation, is priced at Rs 60 for six tablets, while a similar drug from Cipla costs Rs 120 for the same pack.

Novartis, an MNC in India, is expected to see a major price cut in one of its best-selling painkiller brands, Voveran. While the drug is priced at Rs 67 for 15 tablets, another company Systopic sells the same under the Net brand name for Rs 17 for a pack of 10 capsules.

“For MNCs, this would be incrementally negative, with an impact of 15-20 per cent on the Ebitda (earnings before interest, tax, depreciation and amortisation) due to the pricing leadership in few of the molecules, with domestic exposure of 90 per cent,” says Kumar.

Among domestic companies, Cipla is likely to be hurt the most, as domestic sales contribute 40 per cent to its revenue and a large number of its drugs would fall under price control. Ranbaxy and Cadila are likely to record significant revenue losses. Cipla’s Ciplox, Cadila’s Ciprobid and Ranbaxy’s Cifran, all based on the ciprofloxacin formulation, would come under price control.

Analysts said if the present pricing mechanism (cost-plus formula) was implemented, it would hurt the industry.

The government decides the prices of 74 bulk drugs and all the formulations containing one or more of these.

For all other medicines, companies are allowed to raise prices by up to 10 per cent annually. For an increase of over 10 per cent, companies have to get approval. According to industry estimates, the proposed mechanism would expand the purview of price control to about 30 per cent of the drugs, against the current 18 per cent. “This will affect the revenues of the industry by 15-17 per cent annually,” says D G Shah, secretary-general of Indian Pharmaceutical Alliance, a group representing major domestic pharmaceutical companies.

The Indian pharmaceutical industry is estimated at Rs 65,000 crore.

“Price regulation seems to be inevitable, and since the government has now decided to expand the span of control, a market-based mechanism is preferred by the industry, against a cost-plus mechanism,” said an official from a leading pharmaceutical company.

Prima facie, calculations based on the proposed pricing mechanism imply a potential three to eight per cent one-time hit on domestic sales of companies, Bank of America Merrill Lynch stated in a report.

Kumar, however, said the industry was hopeful of recovering its losses in a year, as the government was likely to raise prices every year, based on inflation. “All the top 100 companies would be hurt the most. However, we expect these to make it up by increasing volume,” Shah said.

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