The Hindu Business Line : Analgesic for the pharma industry

The cliché that there is no gain without pain could not have been truer in this case. After months of speculation on what could be the nature of recommendations in the proposed new pharmaceuticals policy, clarity appears to be emerging on the issue. And if the proposals being talked of do finally get implemented, the cloud of pessimism that has enveloped the sector in recent times should lift.

Background

Earlier, news reports that trickled in with the likely contours of the new policy suggested that it could be detrimental to the industry's interests. For instance, the proposal to expand the number of drugs under price control from 74 now to 354. This move would have led to certain domestic companies and most multinational corporations, which have a greater exposure to the domestic market, taking it on the chin.

Needless to say, industry associations were up in arms against the proposal. Apart from the impact on earnings, the sector itself would have undergone a price-earnings multiple de-rating to factor in a regulatory overhang. The initial proposal to bring 354 drugs under price control was, in the Government's view, an exercise to adhere to the Supreme Court directive that there should be some form of price control on essential medicines. As opposed to price control, the industry favoured a monitoring mechanism.

Beneficial announcements

According to announcements made a few days ago, it appears there will be no widening of the scope of price control, but a monitoring mechanism will be put in place instead. This would allay the industry's principal apprehension and be favourable for its prospects. Given the industry's fragmented nature, it would also not be incorrect to presume that competitive intensity in the market will more than ensure that prices are not too far divorced from fair value. The other proposal concerns the exemption of all those drugs from price control that cost less than Rs 3 per unit. This should, again, be a positive, especially for pharma MNCs, which have close to 30 per cent of their product portfolio under price control. Apart from lessening the span of control, it should boost realisations from several brands for a swathe of companies.

Another proposal revolves around capping trade margins on plain vanilla (unbranded) generics at 35 per cent for the retailer and 15 per cent for the wholesaler. Such unbranded generics constitute about 5 per cent of the overall market and this may not have any significant bearing on companies. In any case, margins on such products are low and the impact could be marginal, at best. On the contrary, this could turn out to be beneficial for the branded generics, as members of the trade do not have an incentive to push plain vanilla generics, on which the trade enjoyed extremely high margins in the past. Hopefully, this will ring the death-knell for counterfeit drugs.

Other proposals being considered include putting a ten-year moratorium on price control for drugs developed in India, apart from extending the weighted R&D deduction by a further 10 years. These are positive moves that should spur the process of developing new drugs in India.

The bottomline

Given their almost complete reliance on the domestic market, pharma MNCs should benefit the most, if the various proposals go through unaltered. It was not without reason that a clutch of stocks from this space — Glaxo, Aventis, Pfizer, Novartis, Wyeth and Abbott — posted impressive gains in Friday's trade. Among domestic outfits, companies with a relatively higher local exposure such as Nicholas and Lupin could stand to gain. The impact on Cipla, which has a slightly higher exposure to the plain vanilla generics business, could be only marginal, in our view.

Admittedly, the gains are likely to sustain only if these proposals find their way into the new policy. A committee made up primarily of industry representatives, apart from government officials, will review key issues pertaining to the new policy and submit a report by end-September. The proposals will become a policy after approvals from the other ministries concerned.

There is always the likelihood that the final policy will have a different complexion compared with that of the proposals being considered. But should there be a convergence between what is proposed and what is accepted, the recent weakness seen in pharma stocks may well be construed as a passing fever that afflicted an otherwise healthy industry.

Nath Balakrishnan

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