The government is planning to link the drug prices, even those that are not under the price control to the wholesale inflation or to a special index of medicines. If implemented will replace the current system of a 10% cap on price hike in a year for medicines not under the price control.
Why is this important?
The move to cap price hikes using a broad index will be a blunt tool that will restrict price increases in all categories and brands. While the 10% cap was also a broad limit, giving enough opportunity to the pharma companies to increase prices in some brands. However, capping the increase to an overall index will make it difficult for companies to take decisions specific to some categories/brands.
Stocks to be impacted
The proposed pricing would further pressure margins for the Indian pharma companies which are already impacted from tough regulatory norms and pricing pressures in the US market. Companies such as IPCA (CMP: Rs. 637, MCap: Rs. 8037 crs, PE 14.6x FY2020) and Eris Lifesciences (CMP: Rs. 778, MCap: Rs. 10700 crs, PE 10.4x FY2020) having a high domestic market exposure are likely to get impacted.