The government has reportedly decided to take away the pricing power from Pharmaceutical companies, effective July 2020. To this end, we understand the government will amend the Drug Pricing Policy 2018 and remove the clause allowing automatic pricing by pharmaceutical companies (under Paragraph 7). As a result, the government would effectively regain the power to determine prices of drugs.

Previously, Pharmaceutical companies were authorized to raise drug prices inline with the annual CPI (of the previous fiscal year), without approval from the Ministry of Health, only being required to inform the Ministry 30 days prior to the price increase. However, as per the new amendments, DRAP (the regulator) shall notify the revised prices within 30 days of the calculated price sought by pharmaceutical companies, while maintaining discretion to not raise prices in certain categories of drugs. Moreover, the amendment provides discretion to the Ministry of Health to disallow price increases of certain essential drugs in every revision. Currently essential medicines (nonscheduled drugs) stand at c.30%+ of the overall portfolio for most pharmaceutical companies within the listed space.

In our view, the above changes in Drug Pricing policy will not only cause a delay in implementing new prices but cause significant ambiguity about price increases (on a case-to-case basis). That said, other than these changes, the Drug Pricing Policy 2018 remains largely intact. As per our discussions with the managements of various Pharmaceutical companies, we understand that the delay in price increases will likely be longer than before this event (presently, c.90 days’ lag), and the above decision should not have a material effect on profitability. However, we think price changes of essential medicines (non-scheduled drugs e.g. drugs used in the treatment of cancer, hepatitis, malaria) will become more sluggish.

The above development follows the government having recently intervened in other sectors to prevent or reverse price increases (notably, Cement and Fertilizer). Hence, it appears likely that the government intends to moderate the pricing power of Pharmaceutical sector for the near term. Having said that, the present business environment for Pharmaceuticals companies in Pakistan is still much better than it was five years ago – when pricing was determined on an ad-hoc basis by the government. We await a formal notice from DRAP on the said amendments before adjusting our estimates accordingly. The listed Pharmaceutical sector is up more than 55% in the last 12m, being the top performing sector and significantly outperforming a flattish KSE-100 during this period. (Intermarket Securities Limited)