Budget boost for pharmaceuticals sector partially neutralised

National Pharmaceutical Pricing Authority’s (NPPA) Tuesday order to cut prices by 4.58 per cent will force the makers of 74 drugs under price-control, to pass on most of the benefits to the consumer. This may partially neutralise the perceived positive effect of the Budget proposal to cut excise duty on all formulation products.

Pharma companies may now be forced to reduce prices, rather than retaining the excise savings to bolster earnings. Interestingly, the stock prices of pharma companies have withstood the recent market meltdown, buoyed by the Budget proposals.

The fresh order from NPPA affects prices of 74 drugs comprising penicillins, aspirin, ciprofloxacin, famotidine, naprozen, etc. While consumers would stand to benefit from this price reduction order, makers of these drugs (a majority of the listed players) would be left with no option but to reduce the price.

rate of abatement
This is because apart from the Budget proposal relating to excise duty (covering all drug formulations), the Finance Bill also proposed to cut the rate of abatement on the MRP based excise to 35.5 per cent, from the present 42.5 per cent. So effectively, the revised excise duty was to be levied on 64.5 per cent of the maximum retail price of a drug, instead of the 57.5 per cent earlier.

Therefore, the effective cut in excise duty incidence would have, in any case, been at about 4 per cent, leaving little room for any savings from the duty reduction.

With NPPA having announced cuts on the price-controlled drugs (which constitute 20-25 per cent of the total market), the bottomlines of companies manufacturing those drugs outside excise-free zones stand to gain very little. Indian units of MNC pharma majors like GlaxoSmithKline, for example, has its units outside of the excise free zones and also derives 30 per cent of its turnover from price-controlled products.

For a level field
A majority of the industry had pushed hard to have the excise duty halved so as to have a level playing field for the several small and medium players, who were losing out to those in the tax-free zones.

However, the reduction in prices of such scheduled packs will not apply on those categories of scheduled formulation packs where no excise duty has been actually paid to the Government. This will leave out companies with units in excise free zones.

The financial impact of the excise duty cuts and custom duty cuts on certain life-saving drugs proposed in the Budget may also be neutralised if NPPA decides to pass on the benefits even in the case of drugs which are outside Government price control, representing around three-fourths of the total pharmaceutical market.

Source : www.thehindubusinessline.com

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