Drug pricing mechanism to impact near term pharma sector revenues

Ratings agency ICRA today said that the proposed pricing mechanism of drugs would have an impact on the near-term earnings of pharma companies though longer term growth prospects remained favourable. 

ICRA said it expects the latest proposed market-based pricing mechanism for the Indian pharmaceutical Industry would impact near term earnings of pharma companies with relatively higher dependence on the Indian market.

With the National List of Essential Medicines (NLEM) estimated to cover almost 20 per cent of the Rs72,800-crore domestic formulation business, an expected price cut of 15 per cent to 20 per cent would erode the market by 3 per cent - 4 per cent.

Its impact on earnings will be higher as much of this will directly eat into the relatively higher margin India business.

Companies with higher dependence on the Indian market like the Indian arm of multinational firms, mid-size pharmaceutical producers would be impoqcted most on their strategy of premium-pricing and a greater share in their product mix of acute therapy segments 70 per cent of which are governed by the NLEM.

However, ICRA noted that the impact of the new policy would not be substantial on companies that have sizeable share of earnings from regulated markets, especially US generics.

"Overall, a market-based pricing mechanism is more acceptable to the industry and over a longer-period may limit the adverse impact on the industry," it noted adding that there would be some challenges and uncertainties in its implementation.
(Also see: National Pharmaceutical Pricing Policy, 2012 to replace DPCO)