Impact of New Pricing Policy on Pharma Sector To Be Very Low

The Group of Ministers (GoM) in the last week approved new Pharma Pricing Policy that covers 348 essential drugs under it. The immediate market reaction to this has been volatility in the pharma stocks. Currently a total 74 drugs have been controlled by the National Pharmaceutical Pricing Authority (NPPA).

The talks to bring more drugs under the pricing control gained the ground last year and a new policy was proposed. Under that policy the drug price was to be decided based on the market share of the top three drugs. The GoM however have now proposed that the ceiling price (maximum price at which the drug could be sold) will be decided by using the weighted average price of the brands with market share of over 1%. In our previous article we had said that the drug pricing policy announced at that time wouldn’t have brought the prices down. Well, we believe the GoM must also have thought the same and have brought a new concept to consider all brands with market share over 1%.

The discussion in all these days had been revolving around who will get impacted the most. We believe that the impact on the pharma sector would be of low magnitude. Notable amount of Indian pharma companies export their products and they have so much presence overseas that the impact of the drug pricing would be negligible, e.g. Wockhardt, Claris life, Strides Arcolab, Lupin, etc. There are also companies who have some 20-25% exposure to the domestic pharma sector (in terms of revenues) but their overseas business is growing at very high pace and the profits there can easily make up the pricing impact of the pharma policy.

The companies that will have significant impact are the small pharma companies who cater only to the Indian pharma sector and the MNCs who make most of their revenues from selling drugs in India. The share price performance on the bourses in fact shows the same. From the talks of the pricing policy on 17th September 2012, the share prices of most pharma MNCs have declined.  Astra Zenecea an Indian arm of British-Swedish pharma giant of the same name has declined 6% on the bourses. Similarly pharma MNCs Abbott, Pfizer and Novartis are also showing decline. On the other hand Claris lifesciences has shown 23% price appreciation. IPCA Laboratories and Aurobindo pharma have also shown price appreciation of over 10% which means that the impact would remain muted on their business.

Investors who have invested in the pharma sector must not sell their stake in panic but remain invested. we remain upbeat on pharma sector growth story.