Event Update - Drug pricing policy: Moderate impact

Ministers panel finalised the pharma pricing policy under which 348 Active pharmaceutical ingredients (APIs) that are sold in 654 formulations as specified in the National List of Essential Medicines (NLEM), 2011, will come under price control. GoM will be sending their recommendations to the Cabinet within a week for approval. Following are the highlights and analysis of the proposal. Though, the final document is yet to be released and there is limited clarity on timelines and procedures for implementing the proposed policy, prima-facie we conclude the following:  

• 348 molecules mentioned in the NLEM-2011 will be moved under price control (~30% coverage).
  The coverage under the policy is likely to be limited to strengths and formulations mentioned in the NLEM. The combinations of the molecules (in NLEM) are not covered by the proposed policy which is positive overall as the original draft was set to cover the 348 APIs and their combinations (covering ~60% of the market). At present, the government fixes prices of medicines (cost-based pricing) which are made using 74 bulk drugs (APIs), covers about 18% of the drug market.
  

• Shift from the current cost-based control (under DPCO 1995) to a market price-based control mechanism
  The move of shifting current cost-based pricing to market-based pricing is positive for the industry. The MRP of molecules under coverage will need to be lower than the reference price. The calculation of the reference price for each molecule will be based on the weighted average price of brands that have at least 1% market share. The prices of drugs that are higher than the reference price will need to be reduced by companies to comply with the policy. There is also provision of inflation-related price increases.
   

• Price ceiling is set at a weighted average of all brands with >1% market share in value terms.
  Earlier, the expectation was either a 5% market share cut-off or an average of top 3 brands. The current verdict of weighted average of all brands with >1% market share makes it incrementally negative. The estimated impact will likely be more manifesting for MNC companies like Glaxo and Pfizer (derives more than 90% of revenues from domestic businesses and drugs are priced at premium). We believe there would be a moderate impact of ~4-5% on earnings in FY14E for larger Indian companies like Ranbaxy, Sun Pharma and Cipla and ~2-3% impact on Lupin, Glenmark and Cadila. However, in the long run, the impact would be neutral as companies would align their portfolios to limit the impact on earnings.

We maintain our BUY recommendations on Dr Reddy’s and Glenmark and retain our Market Performer ratings on Cipla, Sun Pharma, Lupin and Ipca Labs.