‘’Longer-term growth prospects’’

ICRA expects that the latest proposed market-based pricing mechanism for the Indian pharma industry would impact near term earnings of pharma companies with relatively higher dependence on the Indian market. With the NLEM estimated to cover almost 20 per cent of the Rs 728 billion domestic formulation business, an expected price cut of 15-20 per cent will erode the market by three to four per cent. Its impact on earnings will be higher as much of this will directly eat into the relatively higher margin India business.

Companies with higher dependence on the Indian market (Indian arm of MNCs, mid-size pharma companies), premium-pricing strategies and greater share of acute therapy segments (70 per cent of NLEM) will be impacted the most.

Conversely, the impact of the new policy would not be substantial on companies that have a sizeable share of earnings from regulated markets, especially US generics. Companies are likely to review their portfolios over the medium-to-longer term but in the near-term cost rationalisation measures like scaling down promotional/marketing budgets, consolidating field force etc. appear to be more achievable goals. Unlike earlier, price revisions, in line with change in WPI or otherwise for drugs that are not under NLEM, may become a common phenomenon now. The policy has also tightened the norms, for pricing drugs that involve any changes; especially combination therapies (involving even a single molecule from NLEM) will fall under price control. Besides benefitting the consumers, the policy’s key positive is the shift that it brings in from a cost-based approach to a market-based mechanism, which according to many market players is expected to bring in greater transparency.

– Subrata Ray, Senior Vice President, Co-head— Corporate Sector Ratings, ICRA