- In a first, NPPA hikes ceiling prices for 21 drugs
- Drug shortage and steep increase in raw material cost main factors
- MNC players with presence for APIs & formulation key beneficiaries
-Ipca labs, JB Chemicals, Atul, Cipla, Medicamen Biotech catch investor eye
Drug regulator National Pharmaceutical Pricing Authority (NPPA) has hiked the ceiling prices of 21 drugs by 50 percent in exercise of powers under para 19 of the Drug Price Control Order (DPCO), 2013. This is the first time ever that the said provision has been used to raise prices.
Why did the regulator act? Simple. To make the medicines available as companies faced a rise in prices of active pharmaceutical ingredients (APIs), a major raw material. In fact, supply of some of the medicines turned thinner.
Pharma companies have been pitching for increase in prices for the past two years. The pricey input was a result of adverse developments in China where many API units had to shut down because of an anti-pollution drive, leading to sharp demand supply imbalance. Even those units which have been able to restart operations come with a higher operating cost linked to environmental compliance.
All this has led to a sharp increase in API prices over the last couple of years. As nearly 68 percent of bulk drugs/intermediates imported to India comes from China, this has become a lingering issue for domestic formulators. Furthermore, price caps for relevant drug formulations had made production unviable.
We list out key beneficiaries of this regulatory action and what it means for the overall sector.
Table: Ceiling prices increased for following drugs
Source: Companies, Moneycontrol Research
To be sure, this situation of supply shortage is not specific to India. Globally, key cardiac drug - Furosemide - was apparently discontinued by major players such as Mylan, Hikma, Teva and Sandoz. Merck anticipates supply demand imbalance for BCG drug (BCG Live Intravesical). Ascorbic Acid Injection from Mylan is reportedly not available.
Shortage of Vitamin C tablets (Ascorbic Acid) has been reported for more than a year, mainly due to shortage of relevant API supply from China. This seemingly is the reason why GlaxoSmithKline (GSK) sold its vitamin C tablet brand (Celin) to Koye Pharmaceuticals. GSK also offloaded close to 10 other brands to Koye pharmaceuticals in early January 2019. Similarly, Septran (co-trimoxazole) – an antibiotic used to treat a variety of bacterial infections in ear and intestine – changed hands. Co-trimoxazole is one of the drugs that faced supply crunch. Abbott's Bactrim appears to be a key beneficiary as it already has more than 30 percent market share in this category.
The story is more or less the same for Penicillin G Benzathine, a key drug used for treatment of rheumatic heart disease and syphilis, which is in shortage. Globally, a select few firms make the API for Penicillin G Benzathine, most of which are in China. Austria-based Sandoz too is a key player in this space.
Metronidazole is another category of drug facing challenges. JB Chemicals, through its brand Metrogyl, has a market share of about 10 percent. The drug contributes more than 11 percent to its sales, which implies that a 50 percent increase in Metronidazole prices can add nearly 5 percent to the top line.
Price increase for Dapsone (di-amino di-phenyl sulfone), a major API used for treatment of skin disorders like Hansen's disease, is expected to help Atul industries, which commands about 50 percent of the market. Dapsone comes under the life science chemicals segment, which in turn constitutes 32 percent of its FY19 sales.
In the September quarter, life science chemicals witnessed a sales decline of 8 percent YoY though profitability improved. This means Atul industries can possibly execute further improvement in margins on this front.
Most drugs and APIs that saw price hike have a heavy MNC pharma presence. For Furosemide and Prednisolone, Sanofi has a presence in the whole value chain, which is why it can be a big gainer without worrying about price negotiations in the supply chain. However, given its wide product range, the earnings impact may not be significant.
In short, the price increase helps in moderating the regulatory risk for the domestic pharma. The NPPA has a tricky job at hand. It has to ensure that overreliance on affordability does not takeaway accessibility or force patients to choose for costlier alternatives.
The sector has been grappling with adverse regulatory actions in the past and sourcing challenges for KSM (key starting materials) and APIs from China.
Recent domestic pharma industry data for November also augurs well for the sector. November sales growth of 14.5 percent has come with a healthy mix of volume, price and new launches.
In a nutshell, the domestic pharma industry should be a close watch for investors in days to come.
For more research articles, visit our Moneycontrol Research pageDisclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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