Pharma stocks heaved a sigh of relief last week after the Group of Ministers (GoM) recommended a new pricing policy. While some form of drug price control was expected, the new policy has removed the overhang of a cost-based pricing mechanism for pharma players. This is why most pharma stocks gained between 1 per cent and 4 per cent on Friday, cheering the policy announcement.

The proposed policy will cap the selling price for the 348 molecules listed in the National List of Essential Medicines (NLEM). The policy envisages imposing restrictions on the maximum selling price of 614 formulations, which are based on the 348 NLEM-listed molecules. This will cover 30-40 per cent of the country’s Rs 62,000-crore pharma market.

According to the new policy, the weighted average price of brands with a market share of more than 1 per cent is likely to be fixed as the ceiling price for each drug. This formula may result in a lower ceiling price as compared to the earlier proposal of averaging the prices of top three brands. But the extent of control has been reduced to 30-40 per cent of the pharma market as compared to 60-70 per cent proposed in the erstwhile draft policy. This is a big positive for the industry. Also, combination drugs using the NLEM-listed molecules will not come under price control under the new policy. This is a departure from the previous draft which aimed at bringing all combination drugs under price scrutiny.

Revenues may fall by 8-12 per cent for the pharma industry, sources said, on implementation of the new policy. Multinationals such as GlaxoSmithKline Pharma may take a greater hit in their earnings than listed Indian majors such as Ranbaxy and Cadila. Sun, Lupin and Glenmark are expected to be the least hit.

The new policy will now be recommended to the Cabinet Committee on Economic Affairs for its nod. After this approval, the policy will be presented to the Supreme Court.

Booster for power companies

Power distribution companies (discoms) have been given another lifeline to get their finances in order. The restructuring package, announced by the Central Government, will reduce the debt burden. If the package is implemented, the State governments will assume liability for half of the short-term loans of discoms (giving bonds to banks). The rest will be restructured by banks, allowing discoms more time for repayment. Restructuring may help distribution companies buy more power and reduce load shedding. The package will immediately reduce interest costs, which make up over a third of the losses of discoms.

High receivables have increased working-capital needs of power suppliers and pegged up interest costs. The improved financial standing of discoms may shorten the working-capital cycles of generation and transmission companies.

Power generation through merchant route may improve too. The frequency of tariff hikes may also go up, as regulators will be required to review tariffs annually.

Much of the estimated Rs 2.4-lakh-crore accumulated losses of discoms (as of March) was funded by banks and financial institutions. If the State Governments agree to restructuring, the risk of default from the power sector (including power generation companies) will decline for banks. But banks may bear a loss on a net-present-value basis. Lower yields on State Government bonds (by 3-4 percentage points) may also affect bank margins.

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