Bitter pill to swallow: Price cut to hit drug makers' profitability

Mumbai: With the Drug Price Control Order (DPCO) coverage extending to almost 40 percent of the industry, the profitability in the domestic business of pharma companies is likely to come under pressure, rating agency ICRA said here.

Last week, the National Pharmaceutical Pricing Authority (NPPA) announced that it plans to bring an additional 50 drugs belonging to the cardiovascular and anti-diabetic segment under price control. This is in addition to the 348 drugs that were brought under price control following the implementation of the new DPCO in July 2013.

“With DPCO coverage extending to almost 40 per cent of the industry, the profitability in the domestic business of pharma companies is likely to come under pressure. We expect companies to therefore turn their focus on cost controlmeasures, new product introductions to circumvent the impact of pricing policy and lay greater emphasis on field force productivity initiatives,” ICRA Research said in its report.

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Among the domestic pharma majors, Sun Pharma, Cadila Healthcare, Torrent Pharma, Lupin, Ranbaxy and USV will see the most impact on their domestic business owing to their relatively sizeable exposure to the CVS and anti-diabetic segments and premium pricing strategies.

Among MNCs, Sanofi Aventis, Abbott and Pfizer are also likely to be affected owing to their sizeable share exposure on anti-diabetic segment and Indian market in general, the report said.

Sun Pharma has 19 percent cardiovascular and 11 percent anti diabetic segments exposure. Among other players, Lupin has 23 percent, Cadila Healthcare 17 percent, Torrent Pharma 36 percent and Unichem 54 percent exposure in cardiovascular segment, according to Icra Research data.

In 2013-14, the Indian pharmaceutical industry grew by 6.2 percent, decelerating from the 11.9 percent growth that it recorded in the previous year. Much of this slowdown was attributable to the implementation of the new drug pricing policy, which resulted in price cuts on 348 essential drugs and subsequently led to supply chain disruptions between industry and trade channel over trade margins.

As a result, the industry growth slowed down to sub 5 percent in the quarters preceding the implementation of the new policy. To some extent, the slowdown in the overall economy and relatively lower demand for anti- biotic drugs, which accounts 16 per cent to domestic industry also contributed to environment of subdued growth. With additional drugs coming under the gamut of price control, ICRA believes that the growth momentum in the chronic therapy segments wouldalso come under pressure, the report said.

“With many of the key drugs from these segments now falling under price control, we believe that a sizeable part of the industry would move into DPCO. The cardiovascular (CVS) and anti-diabetic together accounts for 20 per cent of thedomestic pharmaceutical industry and are among the fastest growing segments,” ICRA said.

As per industry estimates, the recent proposal will impact around 50-55 per cent and 20-25 per cent of the CVS and anti-diabetic segment, respectively. Thus, an additional 7-8 per cent of the industry would fall under restricted pricing, taking the coverage to 35-40 per cent of the industry.

With price erosion estimated to be between 10-12 percent, the inclusion of additional drugs under price control will erode between 1-1.3 per cent of industry value. Its impact on profitability would be considerably higher as it will directly eat into margins of domestic formulations business for many of the entities, the report said.

The domestic pharma players will be able to absorb the impact through higher earnings from their international business, ICRA said adding that for MNCs, the only respite may come from volume expansion as prices of some of the key brandswill fall sharply, doctors will be willing to prescribe well known brands vis–vis cheaper brands.

This may help some of the key brands to offset the impact of value erosion through volume expansion. Alternatively, they may also shift their focus back on patented products. NPPA’s rationale for bringing these drugs under the radar is primarily due to sharp price anomalies among brands, suggesting market’s failure to price drugs competitively.

Accordingly, it has proposed to cap the prices of 108 branded formulations whose prices currently exceeded 25 per cent of the simple average for the therapy segment. For these brands, the ceiling prices will be capped at 25 per cent of the simple average and will be allowed a revision of maximum 10 percent on annual basis.

In addition to bringing down the prices of 50 drugs under price control, the authority has also indicated that it will be monitoring six additional therapy segments where it feels that there may be scope for intervention and possibilityof bringing down the prices. Besides cardiovascular and anti-diabetic, the other therapy areas include anti cancer, HIV/AIDS, anti-TB, anti-malaria, anti-asthmatic and vaccines.

With NPPA indicating a possibility of including additional drugs under DPCO, regulatory intervention is likely to become a key variable in influencing the industry’s growth prospects, ICRA said.

PTI