The new National Pharmaceutical Pricing policy (NPPP), which is proposed to be implemented in the near future, could change the structure and dynamics of the Indian pharmaceutical industry. This is because the new policy proposes to move to a mechanism wherein the ceiling price for the 348 drugs covered under the National List of Essential Medicines (NLEM) 2011 will be based on the simple average price (SAP) vis-à-vis the weighted average price (WAP) proposed earlier. This would be applicable for all brands with a market share of more than 1 per cent. At present, 74 drugs and formulations are under price control, and their price fixation is on a cost-plus formula.

D. G. Shah, Secretary General, Indian Pharmaceutical Alliance (IPA), which represents large Indian players, told The Hindu that “This could see prices of some popular brands react by as much as 70 per cent. The policy would be welcome because it will not follow a cost-based pricing model, and will certainly benefit the consumer. However, it will hurt the industry’s profitability.”

Profitability impacted

He said the profitability of pharmaceutical companies could be impacted “at an average of around 27 per cent or more than one-fourth. Significantly, industry profit margins, which are around 12 per cent, could reduce to around 9 per cent.”

“Those companies with predominant pricing power would be impacted more vis-à-vis others,” said Rahul Sharma, pharma analyst with Karvy Stock Broking. Analysts felt that the impact could conservatively range from 10 per cent to 20 per cent on profitability depending on the product portfolio.

It is widely expected that when it comes into effect, the policy could effect a change in the industry structure.

“Today, the span of price difference for the same product sold by different companies is 20 times in some cases. With the ceiling price, the differential could come down to 5-7 times,’’ said Mr. Shah.

The mid-size and smaller companies could find the going tough, and, as a result, Mr. Shah said, “in the longer term, there could be increased M&As and market exits but patients will be the beneficiaries as cheaper, good quality products will be available.”

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