Drug cos' contingent liabilities on overcharging seen close to Rs10k cr

Written by Jayati Ghose | New Delhi | Updated: Jul 29 2013, 16:13pm hrs
The new market-based price regulation system covering 18% of the R72,000-crore retail pharma market is set to roll in from Monday, thanks to the reduction in retail prices of scores of essential medicines. Analysts, however, say the new regime, which replaces the opaque cost-based price controls, could be helpful for the drug industry in the medium-to-long term. They, however, add that most large-cap and mid-cap firms might see a 1-11% fall in PBT numbers in FY14 as a result of the new system, covering 652 formulations under 27 therapeutic segments.

In short term, there is also an added threat to some of the leading drug companies. Adverse court verdicts on decade-long cases of alleged overcharging is expected in the current financial year and the next, forcing these firms to cough up about R10,000 crore in total. This figure includes the interest component at the penal rate of 15%, which the price regulator NPPA might impose on these firms, in addition to the total overcharged amount of around R2,500 crore demanded by it over last 12 years and has already been disclosed by these companies as contingent liabilities. The courts may award interest over and above the demands made (by NPPA) in the notices for the period the dispute is abjudicated upon, said a senior lawyer familiar with the court cases, on condition of anonymity. If these cases are decided by the courts in favour of NPPA, the interest rate would be compounded over the period between issuance of the demand notice and time the litigation ends. At 15%, compounded annually, the interest would be roughly around R7,600 crore, said a source.

Companies which are eagerly waiting for the outcome of the court cases include Cipla, Ranbaxy, Dr Reddys and Cadila, as the NPPA demands on them are of substantial amounts.

The National Pharmaceutical Pricing Authority (NPPA) has, over the last 12 years, issued demand notices to over 900 drug firms claiming around R2,500 crore for allegedly selling drugs at rates higher than ceiling prices fixed by regulator. Over 95% of such cases have being challenged in courts.

Even as most part of demands on overcharging are unmet and caught in litigation, PPA continues to send fresh notices under the old Drug Price Control Order (which was replaced with DPCO 2013 in May). On July 17, NPPA sent a showcause notice to Cadila Healthcare demanding R30 lakh for over pricing anti-malarial tablets Nortee. Another notice amounting to R1.46 crore was sent to Aristo Pharma for overcharging anitidiabetic medicine Metagleg on July 3.

Earlier this month, NPPA had also issued notices demanding R100 crore from four firms Ranbaxy, Cipla, Cadila and Glenmark for selling anti-asthma drug Doxofylline at a price higher than the ceiling price fixed by the regulator. The move came soon after the Supreme Courts recent ruling that said Doxofylline was a bulk drug, the price of which was to be fixed by the Centre (NPPA).

Doxofylline is a derivative of bulk drug theophylline, which was brought under price control in 2006. Firms launched doxofylline as an alternative in 2008, allegedly to evade price control. In 2009, NPPA imposed a price cap on doxofylline as well. This resulted in some drug companies going to court against the regulators order. Cosmas Pharmacls, Dr Reddys and Mars Therapeutics are the other companies who could get overcharging demand notices for Doxofylline from NPPA soon.

Cipla has been sent notices for a total amount of R1,600 crore in relation to overcharging and all these notices have been challenged by the company in courts, Till June 2013 we have recovered only around R253 crore out of the total demand of R2,800 crore sought by us from companies pertaining to overcharging, said an official. According to the regulator, the total overcharged amount including interest for Ranbaxy stands at R80 crore while Cadila Healthcare, one of the major drug manufacturers, has allegedly overcharged consumers by R25 crore.

Medicines that were allegedly sold at higher-than notified prices include asthma drug salbutamol, severe pain relieving injections, and drugs based on ciprofloxacin used for treating infections in bones and joints, gastroenteritis among others.