The domestic pharma market grew 13.8% year-on-year in October 2011, recovering from the year?s low of 10.2% y-o-y (July). In our view, key growth drivers for the industry are new product launches and volume growth in older products. Among the key therapy areas, anti-diabetes and cardiovascular segments continued to grow above IPM (Indian pharmaceutical market) levels, with net sales growth at >20% in the month. The key laggards were the anti-infectives and gastrointestinal segments, which grew in single digits in Oct 2011.
We base our impact analysis of the National Pharmaceutical Pricing Policy 2011 (NPPP 2011) on a sample of 72 SKU (stock-keeping unit) that cover about 21% of the impacted market. Based on this study, we believe industry sales may drop by R1,500 crore (about 3% of the market) as higher priced products are brought below CP (ceiling price) AIOCD (All-India Organisation of Chemists and Druggists) estimates the impact to be higher in the range of R1,800-2,000 crore.
We believe MNCs are impacted the most as they are largely dependent on domestic formulation sales; a large portion of their portfolio (>50%) would come under price control and in general MNCs price their products at a premium, which would result in a greater drop in prices.
Among Indian companies, Ranbaxy?s base business earnings are at risk on premium anti-infective portfolio. We see Lupin and Glenmark as relatively less impacted, based on the limited sample study.
We believe the markets have so far ignored the impact of the proposed policy. This is reflected in the stock performance since the announcement of the policy. The policy presents risks to domestic business profitability.
The extent of impact on a company?s financials is determined by three factors; the percentage of overall sales in India, the percentage of India sales that would come under price control, and current pricing. Companies with large India dependence, high coverage under price control and premium pricing would be impacted most. MNCs are impacted on all three counts, in our assessment.
It is difficult to assess the exact impact on companies, as our analysis is restricted to a limited sample, which covers 21% of the impacted market. We appreciate that there can be material quantitative differences between the actual impact and what our sample study suggests. However, the assessment does help us get a direction and a sense of the relative impact.
Most companies have not indicated the potential impact of the policy as it is still at a draft stage and there can be material changes to the proposed policy over time. However, Cipla indicated that if the proposed policy goes through, the impact would be 2-3% of domestic sales, translating to an impact of R55-90 crore (our assessment is R51 crore).
We believe the markets have so far largely ignored the impact of the proposed policy. This is reflected in the stock performance since the announcement of the policy. The policy presents risks to domestic business profitability.
