The Big Story. MNCs face regulatory risk

After a weak show in 2013-14 due to steep price cuts following implementation of the new pharma pricing policy, the Indian pharma industry made a comeback in 2015.

Domestic pharma sales have increased by 14.7 per cent for the 12 months ended August 2015, according to research firm AIOCD AWACS. This was driven by a strong pick-up in demand for drugs that cater to chronic ailments — diabetes and cardiovascular diseases, dermatology and urology. Given that barely a third of the country’s population has access to healthcare, there is significant room for growth in the home market. But there are challenges too.

Regulatory activism in India has increased in the last two years. The strong intent of the drug price regulator, the National Pharma Pricing Authority (NPPA), to address the anomalies in the pricing mechanism came out loud and clear when it imposed restrictions on the selling prices of 108 cardiovascular drugs outside the National List of Essential Medicines (NLEM) in July 2014.

This was done by invoking para 19 of the Drug Price Control Order 2013, which empowers the government to restrict the selling prices of all scheduled and non-scheduled drugs under ‘certain circumstances’ and in ‘public interest’. Though the NPPA had to withdraw the July 2014 order in less than two months due to inadequate legal backing, one cannot rule out the government using other ammunition in its armour to bring some sanity to the drug pricing mechanism.

For instance, the government could revise the NLEM list to include critical life saving drugs.

So, should the drug price regulator decide to wield the whip on the domestic pharma industry to ensure rationality in drug prices, which companies will be worst affected?

Where it will hurt Any move to crack down on the current free pricing regime for drugs outside the NLEM will impact companies that adopt premium pricing strategy. The Indian arms of multinational drug firms that have enjoyed premium pricing for many of their parent’s novel drugs even long after expiry of patent protection may have to bear the brunt of regulatory control. On the one hand, while price cuts may eat into their profits, on the other hand, they may lose market share to cheaper alternate Indian brands.

The revenues and profits of multinationals have taken a beating in 2013, post implementation of the new drug pricing policy. For instance, GlaxoSmithKline Pharma’s operating profit margin has slipped from 34 per cent in 2010 to less than 18 per cent in 2014-15, thanks to price cuts mandated by the new pricing policy.

Most multinationals derive a chunk of their revenues from the Indian market. Thus, high dependence on the domestic market makes them vulnerable to any adverse regulatory changes in India. In contrast, diversified pharma companies are better placed to weather any adverse development in the home market.

Healthy growth in other markets will likely offset the weak performance in the domestic market.

Also, given the fragmented nature of the market, consolidation would be the way forward. Indian pharma companies are pursuing aggressive acquisition strategies and could benefit from the consolidation in the domestic market, as against the multinationals. MNCs are majority owned by their foreign parent and may not have the freedom to take strategic decisions.

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