SECTOR UPDATE - Pharmaceuticals - Sharekhan

New drug pricing policy: Uncertainty lingers

Key points

New pharma pricing policy on bumpy roads: The new draft National Pharmaceuticals Pricing Policy (NPPP) is likely to face multiple hurdles before getting a legal status. While a majority of the industry players are set to oppose the draft, consumer groups find it a temporary solution to regulate drug prices. We expect the policy would be subject to long-drawn discussions before it finally reaches the implementation stage.

New policy favourable for mid-sized players: If implemented, the NPPP will not have any material impact on the revenues of most of the mid-sized Indian pharmaceutical companies. The market based pricing system infers that it is not mere coverage of medicines that will force the price cuts but it is leadership in particular molecules on which the price cut will depend. In fact, drugs which are sold at substantially lower prices than the top three brands in the same segment may find scope for upward revisions.

Competition to play a key role: In India there is a huge difference in prices of brands having similar molecules. Picking up only three brands for fixing the ceiling price leaves scope for products standing at fourth and further to increase prices. In such a scenario, it is competition that would bring down prices.

Expect ~30% incremental impact: We expect an average 30% incremental coverage for our pharma universe on implementation of the NPPP in its present form. Among our coverage stocks, we expect Sun Pharmaceutical Industries (Sun Pharma) and Cadila Healthcare (Cadila) to see a relatively higher impact of NPPP than other players like Glenmark Pharmaceuticals (Glenmark), Lupin, Ipca Laboratories (Ipca) and Torrent Pharmaceuticals (Torrent). However, due to uncertainty about the timing of implementation and net impact on earnings, we maintain our estimates and target price for the pharmaceutical stocks under our coverage for FY2012 and FY2013.

Source : Equity Bulls

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