Simple average pricing formula may shrink domestic drug market by 3.4%

Written by Soma Das | New Delhi | Updated: Nov 23 2012, 06:53am hrs
Substituting the weighted average pricing (WAP) formula with the simple average formula (SAP) in the pharma pricing policy may increase the impact marginally for the industry, according to independent pharma marketing research firms IMS Health and Aiocd Awacs.

While implementing the WAP formula would have eroded the Rs 67,500-crore domestic drug market by 2.3%, applying the simple average formula would shrink the market by 3.4%, calculates market research firm Aiocd Awacs.

Compared to the previously calculated market value erosion of Rs 1,300 crore (which was based on WAP), the new methodology of using average price is likely to result in an added impact of approximately R100 crore, at an overall market level, IMS Health said, according to a preliminary analysis.

For most large companies, the unfavourable impact gets accentuated, albeit to different levels. For instance, Cipla which risked losing 2.9% of R3,423 crore, its domestic revenue under WAP, stands to lose 5.8% under SAP.

Similarly, Ranbaxy, which would have lost 3.6% of its domestic revenue, may possibly lose 6.2%. The R3,153 crore sales of GSK may erode by 11% under simple average formula while under WAP, its revenue would have shrunk by 7%. Dr Reddy's, which would have seen a 3.9% cut in sales of R1,326 under WAP would now have to brace for a deeper impact of 7.3%. Similarly, Torrent which stood to lose 0.9% of its R1,150 domestic sales under WAP, could lose 2.8%.

Interestingly, though some companies actually stand to gain from such a conversion in formula. For instance, Alkem, the largest domestic unlisted firm, which would have witnessed a 4.7% erosion of its R 2,027 crore revnue under WAP may now lose only 3.3% under simple average formula. Similarly Aristo, which stared at a 2.9% cut in its R1,542 crore sales, may only see its revenues declining by 0.3%. Similarly, the extent of loss for companies such as Wallace, Biochem may be less severe under SAP compared to WAP regime.

This is because in specific molecules when all brands were included compared to only top brands some generic brands were high priced and category benefited by a higher ceiling price after considering them, said Ameesh Masurekar, director, Aiocd Awacs.

According to IMS Health, applying the SAP formula on the R68,600-crore market would erode 2.1% of their revenues. The top 10 firms which clock over R28,000 crore would be losing 2.8% while firms ranking between 11 to 20 which post sales worth R15,000 crore stand to lose 1.2%, those ranking between 21 to 50 with revenues of R14,500 crore would lose 2.1% of their sales. Multinationals which post close to R20,000 crore revenue will see a sharper erosion at 3.4% compared to domestic firms, whose revenue R48,800 stand to decline by 1.9%.

A day after the government firmed up the final draft of pharma pricing policy, the public health groups strongly protested the move calling the shift to a simple average pricing formula from the weighted average formula a 'whitewash'."All escape routes used to wriggle out of the price regulation must be plugged. Thus all dosage forms of all 348 Essential Medicines and all Fixed Dose Combinations of these medicines must be brought under price-control. Otherwise in practice, the price regulation would be largely nullified," a convener of Jana Swasthya Abhiyan said.

The government should immediately set up a committee of experts to list crucial medicines thata have been left out of the current list of Essential Medicines and have been included in the Essential Drug Lists of States but which are not currently included in the NLEM and ensure these are included in an expanded list of Essential, Life Saving Drugs.