The Department of Pharmaceuticals? (DOP) notification on the Drug Price Control Order is likely to have limited negative impact to our coverage universe. We believe the proposed pricing formula balances the needs of consumers and industry ? while consumers will benefit from reduction in prices of most leading brands that are currently priced at a premium, the impact on industry will be limited to 10-12% of FY14e earnings.
Though in the near term, it will impact the industry?s profitability and return ratios, in the long term, we believe industry will able to sail through. Annual hike to the extent of WPI for NLEM products and up to 10% for non-NLEM products provides cushions for the industry.
Moreover, the fact that companies with brands currently under DPCO, but not in NLEM 2011, can take annual hike of up to 10% post one year of policy implementation is clearly a positive. Further, by including brands with more than 1% value share, the government is trying to address quality issues.
Among large caps, Cipla and Cadila will have 4-6% impact on FY14e PBT. Among mid-cap pharmaceutical companies, we see an impact of 2.5% on IPCA and 5.3% on Unichem while Glenmark, Sun Pharma and Lupin will have lower impact (1-2% of FY14e PBT). Among MNCs, we see 8% impact on Glaxo, 7% on Ranbaxy, 6% on Pfizer and 11% on Wyeth.
