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New drug prices to cut industry’s margin by half

Experts expect the R&D budgets of local firms to be pared as a result of the new model
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First Published: Fri, Nov 23 2012. 10 31 PM IST
The industry had sought a weighted-average method based on the prices of the top-selling brands in each segment. Photo: Pradeep Gaur/Mint
The industry had sought a weighted-average method based on the prices of the top-selling brands in each segment. Photo: Pradeep Gaur/Mint
Updated: Sat, Nov 24 2012. 12 41 AM IST
Mumbai: The new drug price policy approved by the government on Thursday is expected to reduce the profitability of drug companies in India by half, say industry analysts and pharma executives.
The price control policy that is applicable to the 348 drugs referred in the national essential medicines list, up from 74 earlier, reduces the average profitability of drug companies on these products to 6.4% from the current 12.5%, said Dilip G. Shah, secretary general of the Indian Pharmaceutical Alliance (IPA) that represents the country’s top drug makers.
“Half of our profitability will be wiped out with the new policy,” he said.
The new price control policy covers 652 formulations, or 30% of the domestic drug market. The government will fix prices of these formulations by taking the average price of all medicine brands that have at least a 1% market share in each treatment category.
A ministerial panel headed by farm minister Sharad Pawar, in consensus with finance minister P. Chidambaram, recommended this market-based pricing mechanism for medicines on Wednesday.
Though it was the pharma industry that suggested market-based pricing, in place of the previous cost-linked model, the government’s decision to base this on a simple arithmetic average of all prices will hurt profitability, said a pharma company executive, declining to be identified.
The industry had sought a weighted-average method based on the prices of the top-selling brands in each segment. This, too, would have reduced profit margins by a more comfortable 16 percentage points, the executive said.
“The overall impact on the Indian pharma market is close to 3%,” said Hitesh Mahida, researcher with Fortune Equity Brokers (India) Ltd, estimating that the sales of India’s top pharma companies will be hit by Rs.27-300 crore and profits by 3-23%.
Domestic and foreign companies—such as Cadila Healthcare Ltd, Cipla Ltd, Ranbaxy Laboratories Ltd, GlaxoSmithKline Ltd and Pfizer Ltd—that sell a large number of drugs to be governed under the new policy will be affected the most, he said.
Muralidharan Nair, partner (healthcare and life sciences) at consultancy firm Ernst and Young India, said the government’s method was justified.
“The companies which focus mainly on a price-controlled portfolio (under the new policy) are bound to lose in this scenario. But the government’s view taking a simple average of prices of all brands with 1% market share is a fair decision,” he said.
The government fast-tracked its decision on the matter as the Supreme Court is hearing a public interest litigation filed by non-profit organization All India Drug Action Network seeking a quick notification of a new drug pricing policy. The next hearing in the case on Tuesday is likely to determine the final outcome of the policy.
The local pharma industry is already weighing options to overcome the impact of the new policy.
“While the first option for any impacted company will be to quit the controlled segment, as it has happened in the past, many have been planning to increase their focus in the international market, which already contributes 60-80% to their revenue,” said another industry executive, who didn’t want to be identified.
IPA’s Shah expects the research and development budgets of local companies to be pared as a result of the new pricing model. “Rather, companies would prefer investing in other countries such as Dubai and other Middle East countries, where governments are offering several incentives to set up units,” he said.
And, even if pharma companies want to sell their products in India, they would rather import the drugs as these wouldn’t be subject to price controls, he said.
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First Published: Fri, Nov 23 2012. 10 31 PM IST
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