Pharma looks attractive after pricing policy nod

Nov 24 2012, 02:59 IST
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SummaryThe Union cabinet has cleared the long-pending drug-pricing policy.

The Union cabinet has cleared the long-pending drug-pricing policy. The GoM proposed a revised formula to fix the ceiling price for 348 drugs under NLEM. The new formula for calculating the ceiling price will be a simple average of all brands with a 1% market share cut-off. We expect the department of pharmaceuticals to notify the policy by Nov 25, which will provide more details.

Under the proposed policy, only molecules that are mentioned in NLEM will be under the scope of control. Combinations of these ingredients will not be controlled by the policy. This has been a concern, given that it allows an opportunity to move out of the span of control by shifting the market to combinations.

The impact of revised formula may vary across molecules but we see the incremental impact as being negative for most companies. However, the extent of the impact is likely to be limited. Our initial working under the revised formula suggests the negative impact on EPS will be highest for GSK Pharma (over 10%) while among domestic companies, Cadila and Ranbaxy will be most impacted (EPS impact of 7-8%). We expect Dr Reddyís EPS to be impacted by 5% and the EPS of Cipla, Lupin, Glenmark and Sun Pharma to be impacted by between 3% and 5%.

Our workings are indicative and the actual impact over a period is likely to be lower with changes to product portfolio and incentive structures helping to soften the impact. Besides, a significant part of the negative impact for most companies is due to a few molecules. In most cases, the companies tend to have a very high market share in these molecules. We expect companies to rethink their focus molecules/therapies given the changes in the pricing environment.

Overall, we see the market price-based policy mechanism as a structural positive in the long term.

Kotak Institutional Equities

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