The Ministry of Health and Family Welfare, through a paper issued on February 11, 2020, has notified all medical devices as drugs and has brought them under the purview of the Drugs and Cosmetics Act, 1940 (Drugs Act), effective April1, 2020. As maintained by ICRA, the regulatory action continues to be the overarching challenge for the healthcare sector and the latest notification paves the way for higher regulation of medical devices under the Drugs Price Control Order (DPCO).
According to Mr. Kapil Banga, Assistant Vice President, ICRA, “This notification paves the way for higher regulation of medical devices under the Drugs Price Control Order (DPCO). Companies will now have to obtain approval to manufacture, import and sell medical devices in the country, thus increasing the cost of compliance, leading to longer lead time and higher expenses in launching new products, thereby resulting in increase in costs. The measure comes post the imposition of the health cess of 5% on import of medical devices in the country, making these devices costlier for hospitals. It is believed that much of the price hike will be passed on to the patients, cushioning the impact on the profitability margin of hospitals.”
The National Pharmaceutical Pricing Authority (NPPA) under the Ministry of Chemicals and Fertilisers had earlier announced price caps on cardiac stents on February 13, 2017, leading to a reduction in stent prices by up to 84%. These had led to a significant adverse impact on the margins of the hospitals as that change came with the rider that the hospitals cannot pass it on to the patients for a certain period. Thereafter, the NPPA announced a cap on the prices of knee implants on August 16, 2017. The resultant reduction in stent prices was as much as 84% while that for knee implants was as high as 69%. Though the current notification does not immediately indicate any price cap, the increased regulatory requirements will lead to higher input costs.
The latest notification covers all devices that are used for diagnosis, life support, treatment of any ailment and the ones used to disinfect other medical devices. It also covers the software used in medical instruments. Thus, almost the entire gamut of medical devices will come under the ambit of the notification.
Post the notification, medical devices will be regulated by The Central Drugs Standard Control Organisation (CDSCO), under the Ministry of Health and Family Welfare. The order will come into effect on April 1, 2020 and the consumables/devices will be brought under regulation in a phased manner up till April 1, 2021. Also, the rules will be voluntary for the first 18 months and will become mandatory post that. Syringe, heart valve, I.V. Cannule, surgical dressing, and cardiac stent will come under the regulation on the effective date, while ultrasound equipment will come under the regulation on November 1, 2020. Nebulisers and digital thermometers will be included on January 1, 2021 and high-end medical devices such as PET scanner, MRI equipment, dialysis machines will come under regulation on April 1, 2021.This comes at a time when the hospital sector performance was recovering on the back of improvement in occupancy and average revenue per occupied bed (ARPOB), post the absorption of the impact on profitability due to the earlier regulatory restrictions imposed by the NPPA and the Goods and Services Tax.
As per ICRA analysis, during Q2 FY2020 the aggregate revenues of companies in its sample set grew by a healthy ~14% on a Y-o-Y basis, from Rs. 4,206 crore in Q2 FY2019 to Rs. 4,807 crore in Q2 FY2020. The EBITDA grew by a robust ~38%, from Rs. 547 crore to Rs. 757 crore, and the EBITDA margin improved substantially from 13.0% to 15.7% during the same period on account of better revenues and the positive impact of implementation of IndAS 116.
ICRA continues to maintain a stable outlook on the sector. Mr. Banga added: “We believe the performance of healthcare companies will improve further going forward, though concerns on any incremental regulation having a transient impact remain. Structurally, in the long term, underlying fundamentals like the significant shortage of beds in the country, and the increase in the disease burden and an ageing demographic profile continue to favour the sector. Further, the demand for quality healthcare will be supported by the rising per capita income, increasing penetration of medical insurance, riding healthcare awareness and double-digit growth in medical tourism.”