New drug pricing policy: Which cos will be impacted most?

The Cabinet has cleared the new drug pricing policy. The cost of 348 essential drugs will drop by 21 percent on average.

In an interview to CNBC-TV18, Chirag Talati, Espirito Santo Securities says the policy had been anticipated for long. According to him, Cipla, Cadila and Ranbaxy will be impacted negatively. Also read: Ranbaxy recalls generic Lipitor from US Below is the edited transcript of his interview with CNBC-TV18. Q: Which companies would be most negatively impacted? A: Clearly, this policy had been anticipated for long. I think it is a significant relief that we have not seen the cost-based model being adopted by the Group of Ministers (GoM). That was feared after the Finance Ministry note came out. Also, combinations are not included in the list of pharma pricing policy. That is very encouraging. In terms of the companies, which would be most impacted, clearly MNCs have a negative impact coming out from any sort of pricing policy. If you were to look at our coverage, particularly we think Cipla is one company that is going to be the most hit, then Cadila. We also think that Ranbaxy is likely to be hit, not so much on account of its overall exposure to the price controlled drugs, but given that its drugs are mostly premium priced compared to the peer drugs in the group. The profitability of the domestic formulations division is almost twice as that of the overall group. So, Ranbaxy also will slightly be hit on the negative side on the new pharma policy. Q: Do you think it is all now priced in? A: More or less, we think the investors have been anticipating the policy for a long time. It came out in October. There was revision in November. Now, it is set to go to the Supreme Court. So, it has been priced in to a lot of extent. I think what the market will now wait for is to look at the finer details. There is still a long policy roadmap. It goes to Supreme Court, then it will again go to Chemicals Ministry and there will be finer details. It will probably take six to nine months to implement it. So, once we have got the finer details, that is when I think we will get a firmer grip of what is eventually going to turn out in the next two years timeframe. But, at this point, I think lot of it is now priced in. Q: But there will be a general fall in prices. A: Yes, there will be a fall in prices of drugs. Q: How much of an impact do you see in terms of EPS for GSK Pharma in particular? We do understand that majority of their drugs or a large part of their market share would fall under this 348 essential drug list. A: We do not have GSK under coverage. So, I do not think it would be appropriate for me to comment on the hit to EPS. But you are right that a significant chunk of its sales are under price control. Let us not forget that GSK’s drugs are one of the most premium priced. So, there is going to be a significant hit definitely. Also, we should be looking that for a lot of these companies percentage of their existing sales are already covered under price control. Prices have not been revised for five-seven years. So, if there is any kind of uplift happening, even to the tune of 5-10 percent, I think that would help to mitigate to some extent the price fall that you would see on the newer drugs. _PAGEBREAK_ Q: Cipla and Cadila will be impacted. What are your views on the two stocks? A: We have a buy on Cipla. We have been significantly positive on this stock for a long time, primarily on account of the restructuring that is going on the exports market, on account of the optionality that is there in the inhalers’ franchise. I think a lot of pricing policy fears have been factored in into the Cipla price. If you look at the overall impact, clearly having 50 percent of sales coming from the domestic market and 35 percent of domestic sales coming under price control, there is a definite negative impact. On our estimates, both Cipla and Cadila will probably see an EPS or hit of not more than 5-6 percent. So, in overall scheme of things, given the diversification that these companies have, it is not going to be like a material kind of hit to the numbers. Q: What is the update with regards to combination drugs? What is your view with regards to Cipla in particular and the acquisition of Cipla Medpro? What would your views be on that? A: Firstly, the combinations are excluded from the purview of price control. But there has been some uncertainty that future combinations, particularly when any ingredient is covered under price control, you might have to take approval from the drug regulator for pricing of those drugs. That could mean that you might see a slowing down of new product introductions in the pharma market as such. That is slightly a dampener because if you hook at the overall growth rates, a significant chunk of the market growth is determined by new product introduction. So, we will needs to see how it unfolds because it is not yet clear at this point in time. Secondly, on the Cipla, Cipla Medpro acquisition, we are very positive on the move that has been done. If you look at it, historically Cipla has struggled significantly in the exports market. We argued that it is not a scalable business model that they have had in a lot of these emerging markets particularly. Despite the fact that its foot print in Africa is enviable, it has not kind of been able to do significantly in these markets primarily as it has been the back end manufacturer. If you look at Africa per se, it has grown by six times in seven years. So, it has been a growth driver for Cipla. What this acquisition does? It enables Cipla to acquire Cipla Medpro, which is the largest distribution globally accounting for 8 percent of its overall revenues. By acquiring Medpro, you are bringing in essentially 24 percent distribution margins that Cipla Medpro has for distributing Cipla’s drugs in the South African market. From that perspective, you would actually be bringing in margins at little risk because you are acquiring a company at 10-11 times PE, which you would not get in any other emerging market. On our estimates, we see a 51 percent stake resulting in a close to 4 percent accretion to Cipla’s EPS in FY14. So, we are very positive on the acquisition. Also, we think it opens the doors to widening Cipla’s footprints in other African markets, particularly Nigeria and perhaps in the neighbouring markets of Swaziland and Botswana where Medpro has a smaller presence.