The Indian Government notified the pharma Drug Price Control Order (DPCO), 2013, on May 16. Contrary to expectation, the new policy announcement turned out to be a non-event for the stock markets.
The BSE Healthcare Index lost 3.8 per cent since the policy announcement, a tad higher than the 2.4 per cent decline for Sensex. Interestingly, the industry did not express distress over the new policy. It welcomed it instead.
Reading through the fine print of the policy, it is clear why. The new pricing rules that have been notified now seem more industry-friendly than the existing cost plus pricing formula.
How is this? The earlier policy – DPCO 1995, aimed at ensuring availability of drugs – imposed controls on the prices of 74 active ingredients used in manufacturing various drug formulations.
The prices of medicines containing even one of these 74 active ingredients came under the scrutiny of the regulator. The prices of combination drugs, in which one or more of these molecules were used with others, were also controlled by the regulator.
So effectively, the selling prices for 1577 such formulations were actually fixed by the regulator – National Pharmaceutical Pricing Authority (NPPA). Companies manufacturing these drugs were allowed to charge only a nominal profit above the cost of production. This did not prove beneficial to the industry and eventually pharma companies claimed it was unviable to continue selling many of these drugs. As a result, only 47 out of the total 74 active ingredients under this DPCO are today under production.
Big change
But the new policy is a big departure from the earlier one. Under it, drugs under price control have been determined on the basis of whether they are ‘essential.’
The new policy has identified as many as 348 essential drugs whose prices will now be brought under the regulator’s purview. The prices will not be linked to cost of production. Instead, a simple average of the selling price of brands with a share of one per cent and above in the market, will be the ceiling price for each drug. Pharma companies will be free to fix their prices at any level below the ceiling price.
This may force brands priced at the higher end to cut prices, impacting profitability on premium priced brands. However, companies are allowed price adjustments linked to wholesale price index annually. This should provide respite to the industry.
Relief for industry
This market-based pricing formula has come as a big relief for the industry. Compared to the erstwhile cost plus pricing formula, the new pricing methodology gives pharma companies a lot more room to grow volumes, by pricing drugs cheaper. However, this will be at the cost of margins in the near term.
Had the cost plus pricing approach been extended to the essential drug list, it could have been a big dampener for the industry, reducing both revenues and profits. Now the price cap will be applied just to these 348 molecules.
The exclusion of combination drugs from direct control is yet another positive for the industry. However, companies who want to sell such combination drugs, including one or more of the 348 molecules, may have to get their selling price approved by NPPA.
For instance, paracetamol used to treat moderate pain, has now been included in the list of essential medicines. So, a company that wants to sell a drug combining paracetamol and codeine will have to seek the regulator’s approval while fixing the selling price for the drug.
lower prices
Though the new policy will expand the span of price control from a limited proportion to nearly 20 per cent of the pharma market, higher volume growth can compensate for the lower selling prices. For instance, Ranbaxy’s largest selling brand, Storvas, is currently among the highest priced brand in the atorvastatin category.
With the notification of the ceiling price, even a 15-20 per cent cut in the price of Storvas can make the brand far more affordable.
This may lead to patients improving their dosage compliance, and increase market share for the brand. But for mid-tier companies, this would mean more competition from the bigger players.
Under the new policy, there has been no change in the pricing of drugs outside the essential list.
Prices of these drugs will be monitored on a regular basis and price increases on such drugs will be restricted to 10 per cent annually. Innovative drugs which have patent protection are also excluded from price control.
The prices of drugs which are under DPCO 1995, but do not figure in the essential drugs list, will be frozen for a year. Thereafter, an annual price increase of 10 per cent will be allowed on such drugs.
An analysis by the pharma research firm AIOCD AWACS pegs the revenue impact of the new policy at 3 per cent for the industry.
While the policy may not be a major deterrent for the industry as such, MNCs such as Wyeth and GlaxoSmithKline stand to be affected.
This is linked to the fact that their key brands are priced at the premium end of the band. The revenue impact is likely to be 9 and 11 per cent for Wyeth and GlaxoSmithKline, respectively.
But the policy will have to clear certain legal roadblocks. The Supreme Court’s verdict on the policy on the pending civil suit by the NGO, All India Drug Action Network (AIDAN), and others may be the event to watch out for.
(The DPCO order notification date has been corrected to May 16.)