Drug cos' contingent liabilities on overcharging seen close to Rs10k cr

Jul 29 2013, 10:43 IST
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SummaryIn short term, there is also an added threat to some of the leading drug companies

The new market-based price regulation system covering 18% of the R72,000-crore retail pharma market is set to roll in from Monday, thanks to the reduction in retail prices of scores of essential medicines. Analysts, however, say the new regime, which replaces the opaque cost-based price controls, could be helpful for the drug industry in the medium-to-long term. They, however, add that most large-cap and mid-cap firms might see a 1-11% fall in PBT numbers in FY14 as a result of the new system, covering 652 formulations under 27 therapeutic segments.

In short term, there is also an added threat to some of the leading drug companies. Adverse court verdicts on decade-long cases of alleged overcharging is expected in the current financial year and the next, forcing these firms to cough up about R10,000 crore in total. This figure includes the interest component at the penal rate of 15%, which the price regulator NPPA might impose on these firms, in addition to the total overcharged amount of around R2,500 crore demanded by it over last 12 years and has already been disclosed by these companies as contingent liabilities. The courts may award interest over and above the demands made (by NPPA) in the notices for the period the dispute is abjudicated upon, said a senior lawyer familiar with the court cases, on condition of anonymity. If these cases are decided by the courts in favour of NPPA, the interest rate would be compounded over the period between issuance of the demand notice and time the litigation ends. At 15%, compounded annually, the interest would be roughly around R7,600 crore, said a source.

Companies which are eagerly waiting for the outcome of the court cases include Cipla, Ranbaxy, Dr Reddys and Cadila, as the NPPA demands on them are of substantial amounts.

The National Pharmaceutical Pricing Authority (NPPA) has, over the last 12 years, issued demand notices to over 900 drug firms claiming around R2,500 crore for allegedly selling drugs at rates higher than ceiling prices fixed by regulator. Over 95% of such cases have being challenged in courts.

Even as most part of demands on overcharging are unmet and caught in litigation, PPA continues to send fresh notices under the old Drug Price Control Order (which was replaced with DPCO 2013 in May). On July 17, NPPA sent a showcause notice to Cadila Healthcare demanding R30 lakh for over pricing anti-malarial tablets

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