Hridkamal Roy, Assistant Editor, India Pharma Outlook
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In an effort to seek a one-time exemption from the price control measures related to the declining WPI, the Indian Pharmaceutical Industry aims to put forward a request to India’s drug pricing authority. It suspects that this year’s revision of drug prices under Drug Price Control Order (DPCO) 2013 based on last year’s WPI will lead to a marginal reduction of prices and hence will request an exemption owing to a rise in input costs in manufacturing. In this regard, it is to be noted that there was a 12 percent increase in the prices of essential medicines last year that are linked to the WPI.
"In the process many units will see closures, resulting in drug prices going up and shortages. The implementation of the new norms would be challenging for smaller firms, which may lead to a rise in near-term capex and a permanent increase in operating costs", said Sanjay Singla, Representative, Laghu Udyog Bharti (LUB), an association of small businesses affiliated by Rashtriya Swayamsevak Sangh (RSS) to media.
The pharmaceutical industry in India is facing various challenges burdened by the decline in the WPI. The wholesale price index experienced a decline of 4.12% as a whole in June 2023 which was driven by lowered prices of textiles, fuel, and a few food products. It has also made an impact on the pharmaceutical industry of the country as 651 essential medicines experienced a price drop of 6.7 percent around the same time. In order to understand why the decline in WPI has had a negative impact on pharma, one needs to understand the various aspects involved with it.
According to a report published by a pharmaceuticals market research company, AWACS, the domestic pharma market in India did not grow as expected due WPI inflation which forced the companies to increase drug prices that ultimately resulted in a volumetric decline. Compared to an anticipated growth of 9-11 percent, the industry grew by 5.6 percent and missed out by 340 basis points in May 2023. Reports say that most of the companies took a hike of more than 10 percent for all price-controlled products, the volumes for which seemed dragged to them.
In this regard, The National Pharmaceutical Pricing Authority (NPPA) is looking to fix the ceiling prices of more than 200 scheduled formulations under the Revised Schedule I of the Drugs (Prices Control) Order, 2013 which will be based on the database of October 2023. Till December 15, 2023, the Authority has already fixed the ceiling prices for 700 formulations under the NLEM 2022 by making use of the market database for July 2022. Around 225 formulations remain to be fixed with revised ceiling prices, according to official data.
The volumetric decline in sales last year had increased considerable amount of growth expectations for the current financial year. This pressure is specifically focused on the domestic market and might trim down valuation for products because of overproduction which might result in the loss of growth points again. These growth pressures are visible in the market and are leading to pharma acquisitions at unjustified valuations.
In a report presented by Elara Securities to the media, the company states that cash generation and return on capital are the most crucial parameters that the pharma sector stands and both are currently deteriorating. However, in the meantime, the US generics business is estimated to undergo significant improvement both in terms of growth rate and profitability in the next 2-3 years and that will dictate the stock prices.
WPI decline can have both positive and negative effects on pharmaceutical production as a whole. In case of lowered prices, the input costs for raw materials for medicine or API manufacturing will be lower because of which procurement will become easier for companies. This will result in improved profit margins and increased confidence on the part of the investor. A decline in raw material costs will boost manufacturer confidence for export globally and engage in various growth initiatives. On the other hand, the decline in prices may result in lowered prices for end products which will give a boost to the existing competition in the market. In this regard, the pricing control mechanisms by the government can affect the extent up to which companies can adjust product prices in relation to the decreased prices of raw materials.
To give an example, Cetzine is a tablet that is used to treat allergic symptoms, itching, cold but since COVID-19, many other similar formulations by various other manufacturers have entered the domestic pharmaceutical market which has resulted in degrading profit margins and increase in the market competitiveness.
The impact of WPI on the domestic pharma industry is intricately linked with several economic factors, market dynamics, and government policies. Furthermore, the pharmaceutical industry is under massive regulations, and factors such as quality standards, research and development, and compliance with international regulations play a considerable role in shaping its performance as well.
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