Court Dismisses Petition in Favor of Pharma Companies
Staff Report
The Lahore High Court has dismissed the case in favor of the pharmaceutical industry, lifting the stay order against the deregulation of Maximum Retail Prices (MRPs) of drugs, according to our channel checks with pharma companies. A detailed order is awaited for further clarity.
On February 20, 2024, the government approved the deregulation of drug prices falling outside the essential category. However, on February 22, 2024, an individual approached the Lahore High Court and obtained a stay order, prompting the court to seek clarification from the Federal Government.
2018 Pricing Policy
Under the DRAP 2018 policy, retail prices of pharmaceutical products were linked to the Consumer Price Index (CPI) effective from July 1, 2018.
This pricing formula allows pharma companies to increase prices by providing 30 days’ notice to DRAP (without prior approval), as opposed to the previous 6-month lag that delayed price adjustments.
The DRAP pricing policy of 2018 categorizes drugs into two segments: essential and non-essential drugs. Pakistan Pharma Sector: Rupee Devaluation & High Interest Rates Dent Profits
Prices of essential drugs can be increased by up to 70% of the annual CPI or a maximum of 7%, while for non-essential drugs, prices can be increased by the full annual CPI, with a maximum allowed limit of 10%.
In hardship cases, prices are reviewed once every three years, where (i) locally manufactured drug prices are set considering the cost of API, excipients, and packaging costs; (ii) imported drug prices are set at landed cost plus a markup of 45% for anti-cancer and biologicals, while a markup of 40% is applied to anti-retroviral drugs, and (iii) imported drugs with local labeling prices are set at landed cost plus packaging cost plus a markup of 45%.
Last year in May 2023, the Cabinet approved a one-time dispensation, enabling manufacturers and importers to increase the existing MRPs of essential drugs and biologicals by up to 70% of the CPI increase (with a cap of 14%), and the MRP of all other non-essential biologicals up to the CPI increase (with a cap of 20%) based on the average CPI for the current year, i.e., July 2022 to April 2023, subject to certain conditions.
This measure was taken due to severe pressure on margins faced by pharmaceutical companies due to abnormally high inflation and PKR devaluation.
Limited pricing power had rendered pharmaceutical companies unable to sustain their margins, resulting in lower profitability and underperformance in share prices.
In the calendar year 2023, the earnings of Pakistan’s listed pharmaceutical sector dropped by 42% YoY to Rs7.9bn, primarily attributed to a decline in gross margins.
The decrease in gross margins was mainly due to a 20% devaluation of the rupee against the US dollar and an average inflation of 31% in 2023.
However, following deregulation, companies will now be able to adjust their prices of non-essential drugs in line with their costs. This is expected to lead to improved profitability for pharmaceutical companies.
Additionally, many pharmaceutical companies had previously faced challenges in launching new products due to pricing issues.
With the recent deregulation, they can now introduce new products with improved pricing, further enhancing their profitability.
We prefer high-quality stocks with a higher non-essential product mix, leverage, and better gross margins, including Searle Company (SEARL), Haleon Pakistan formerly Glaxo Consumer Health (HALEON), Abbott Laboratories (ABOT), and Highnoon Laboratories (HINOON),” Topline said.
