Pharma policy to impact cos; buy Lupin, Cipla: Edelweiss

A Group of Ministers (GoM) headed by Agriculture Minister Sharad Pawar on Thursday finalised the pharma pricing policy under which 348 essential drugs will come under government price control. Manoj Garg of Edelweiss Securities believes it is a balanced policy and will help to reduce prices by about 15-20 percent. In some cases, it might even be lowered by as much as 40-50 percent.

According to him, it will have an impact on the revenues of Indian  as well as the multi national companies. He recommends a sell on Ranbaxy and maintains a buy on Lupin, Cadila and Cipla. From the midcap space, his favourites are Ipca Laboratories and Glenmark Pharma. He asks investors to hold Sun Pharma. Here is the edited transcript of the interview on CNBC-TV18. Q: Yesterday evening a Group of Ministers had put forth a new price control policy and that will affect the prices of 348 drugs. A lot of drug prices are already controlled in India and this is a different way of calculation of controls where you take the average of the prices of all people who supply a drug provided. They have over 1 percent of the market share and that becomes the controlled price for that drug. That affects a lot of industries and we understand that MNCs like GSK Pharma and Pfizer will be impacted much more and within the Indian basket Cipla is a possible casualty. What kind of an impact do you see on various companies? A: I think the EGoMs have done very good work with this current proposed policy which is a pretty balanced policy. When we look at it from the patient's perspective, obviously for these 348 drugs the prices will come down by 15-20 percent and in some cases, the prices will even come down to as low as 40-50 percent of the current market prices. From the pharma companies' perspective, it would affect 3-4 percent of their domestic revenues while I am talking for the Indian companies. Though, among MNCs like GSK the impact on the revenue could be around 10-12 percent and for Pfizer the impact on the revenue could be around 5-6 percent. In terms of profitability, the impact on Indian companies like Cadila and Cipla could be to the extent of around 4-6 percent in terms of FY14 PBT. While for other large companies like Sun Pharma, Lupin, Dr. Reddy’s the impact will be marginal, anywhere between 1-2 percent of their FY14 profits. For MNCs, the impact on GSK could be in the range of around 18-20 percent of the PBT for CY13 while for Pfizer I think the impact will be in the range of around 9-10 percent. Q: The interesting bit is that every analyst today morning was saying GSK is the worst impacted, 15-17 percent EBITDA downside, but the stock is in the green, so is it the fact that they haven’t come up with a cost plus kind of pricing policy that has led to this relief rally? What would you attribute the stock performance to at this point? A: If you look at the day when the Supreme Court has given the directive to the Government of India to come out with a policy within two weeks, from there the stock has already corrected almost around 8-10 percent. Knowing that the stock has a very low liquidity, probably the investors or the holders feel that in the longer term the policy is not as detrimental as it was being perceived as. It could probably be one reason that prices are still holding up for Glaxo. Q: Do you have a sell on any of the stocks because of this or even anyways? A: No, we do have a sell on Ranbaxy because of the valuations which are ahead of the fundamentals. We have hold recommendations on Sun Pharma. Otherwise, among the picks where we have buy rating is Lupin, Cadila and Cipla. In the midcap space, we are recommending Ipca Laboratories and Glenmark Pharma.