Medicines turn sweet to pop, but bitter to make

Medicines turn sweet to pop, but bitter to make

Thus you have the share price of many drug makers tanking since the policy was announced a week ago even as the BSE healthcare index has gained a bit. GlaxoSmithKline or GSK dipped 1%, Cipla plunged 3%, Ranbaxy and Cadila Healthcare declined 0.5% and 2.4% each after the draft policy was out on Department of Pharmaceutical website on 29th of October.

Not without reason. GSK is the most leveraged to the domestic market; 90% of its sales are local. Additionally, since the products are likely to be at higher price points, it may be forced to take price cuts putting additional pressure on its profits. Others such as Cipla, Cadila, Sun Pharma, Ipca, Torrent, Glenmark and Lupin have 27-43% revenue coming from the domestic market, said brokerage India Infoline group.

Profit before tax for GSK may be affected by 18%, according to the data sourced from All India Organization of Chemists and Druggists. Similarly, profits of Cipla, Ranbaxy and Cadila might decline between 3.5-6.5% each.

The good news is that all this may only be temporary.

“In the long term, the new policy is good because it is moving away from the cost based system to the market based system and the companies will also be able to hike prices to the extent of whole sale price index changes," said a pharma analyst who refused to be named.

Revenue may go up for most companies as pills become cheaper, offsetting potential losses. Also companies which do not have price leadership may be at an advantage and may see a rise in profit as they adjust to the regulated ceiling prices.

The best bets –in an already defensive sector – would be Sun Pharma and Lupin as they will have limited impact of the proposed policy, said a note from Edelweiss.