When One?s Necessity turns out to be another?s Luxury

By Baisali Mohanty

“I have no money. I don’t even have enough to fetch two square meals for my family. Where do you think I will get the money to buy medicines for myself? I have left it all to my fate. I will die when I have to die and no one can stop that.” says 50 year old Kashi, whom I met in a nearby village in Koraput .He was diagnosed with tuberculosis a month ago in the government hospital situated miles away from his village, and since then he is living with the knowledge that he can’t afford to be in the hospital. He has decided to give up everything and silently witness his body withering away. Thousands like Kashi wither away every day unrecognized, unable to afford the luxury of medicine.

More than 85% of the world’s population live in developing countries and the vast majority of them have no or limited access to drugs that have saved and extended the lives of people in richer, developed countries. In the developing world, where 95% of the 40 million people with HIV/AIDS live, 20 million people have already died from AIDS. Every day, over 8,000 more people die and another 15,000 are infected with HIV. [1]The global epidemic is devastating entire countries and regions. Similarly, tuberculosis and malaria kill massively and mainly among the poorest and most vulnerable of the global population, given their extremely limited access to effective forms of treatment.

India, the second most populous country in the world, faces the twin epidemics of continuing/emerging infectious diseases as well as chronic degenerative diseases. The former is related to poor implementation of the public health programs, and the latter to demographic transitions with increase in life expectancy. One of the most essential elements of Public health care facilities includes that of the availability of essential medicines to the needy.

In India, although prices of medicines are among the lowest in the world, a National Sample Survey in 2012 showed that around 33 million (one-fourth of out-of-pocket) patients did not receive medicines because they could not afford them.[2]

This means cost still remains a barrier for thousands of patients. According to the health accounts data of 2012-13, medicines account for about three-fourths of all out-of-pocket health spending by households.[3] Therefore, the government needs to scale up its own health insurance programs and raise penetration of private insurers. At the same time, lowering the cost of essential medicines is a must. However the question remains – how is this to be accomplished?

One significant step towards answering the above question was taken by the government in the recent past by the implementation of the new National Pharmaceutical Pricing policy (NPPP), which has   changed the structure and dynamics of the Indian pharmaceutical industry. This is because the new policy moved a mechanism wherein the ceiling price for the 348 drugs covered under the National List of Essential Medicines (NLEM) 2011 is based on the simple average price (SAP) vis-à-vis the weighted average price (WAP) proposed earlier. This is applicable for all brands with a market share of more than 1 per cent. At present, 74 drugs and formulations are under price control, and their price fixation is on a cost-plus formula.[i]

The move curtails the prices of costly brands sold by domestic and international drug makers in a market that already has rock-bottom medicine prices.[4]“The NPPP-2012 approved by the Cabinet on November 22, 2012 has been notified on December 7, 2012,” Minister of State for Chemicals and Fertilizers Srikant Kumar Jena said in a written reply in Lok Sabha.[5]

The policy allowed an annual price increase of up to 10% for non-NLEM products, though the prices of existing price-controlled products are not included in the NLEM 2011, and they will be frozen for one year after which they will be allowed increases of up to 10% a year. [6]The department of pharmaceuticals will monitor production and availability of all NLEM products.

In May 2013,the department of pharmaceuticals notified the Drug Price Control policy 2013.This notification of the new order comes into effect immediately.  This policy calls for the enforcement of the National Pharmaceutical Pricing Policy of 2012.[7]

How it came about

The Indian pharmaceutical Industry, driven by knowledge, skills, low production costs and international quality products, has witnessed a robust growth from the production turnover of about Rs. 5000 crores in 1990 to over Rs1 lakh crore in 2009-10 comprising about Rs, 62,055 crores of domestic market and Rs. 42,154 crores of exports.[8] It is, globally, the 3rd largest producer of medicines by volume yet 14th in terms of value. However, India spends only 1.5% of its GDP on healthcare.

The lower value is due to the fact that Indian medicines are amongst the lowest priced in the world.[9] However, despite this medicine costs continue to be an important component in the overall medical expenditure in the country where more than 43% of the population cannot afford “essential medicines”. Therefore, price control comes into the forefront as an effective mechanism to increase penetration.

Price control over drugs was first introduced in the country in the aftermath of the Chinese aggression by Drugs (Display of Prices) Order 1962 and the Drugs (Control of Prices) Order 1963. These were promulgated under the Defence of India Act.[10] With these orders, the prices of drugs were frozen w.e.f. the 1st April, 1963. Thereafter, a series of price control regimes were notified through various Orders in the country from time to time based on different principles, in which the span the control of prices varied from Order to Order according to the disposition of the respective Drug Policies.[11]

The Drug Policy of 1994, as implemented through the Drugs (Prices Control) Order, 1995 was introduced in the context of the liberalization of economy and the abolishment of industrial licensing, as well as allowing foreign investment in the country, including in the drug industry. The principle for price control broadly adopted in this policy represented a radical departure from the earlier policies. This envisaged control over prices of drugs on the basis of economic criteria as represented in the market share of different companies in the context of total market sales turnover of various drugs. Thus, those drugs were brought under the ambit of price control, where the company turnover was beyond a set cut-off, and where the market share of leading producers was beyond a set cut-off. The control over prices was to be on the basis of the cost of production with allowance being given for post production expenses. As per the criteria of 1994 Policy, a list of 74 bulk drugs was identified and these drugs as well as the formulations based on these drugs (currently about 1577 in number) were brought under the price control regime. Certain exceptions such as for small scale units, drugs produced through indigenous research and development, etc were envisaged for exemption under the Policy.[12]

Further liberalization in the economy laid the demand for newer policies, in light of which, Foreign Direct Investment (FDI) in the pharmaceutical sector was brought into the automatic route and the limit raised upto 100%. Following this, a new pharmaceutical pricing policy was introduced in the year 2002, which further liberalized the span of control over pricing. The turnover limit for purposes of price control was raised from Rs. 4.00 crores to Rs. 25.00 crores and the parameters of market share were also relaxed further[13]. However this could never  be  implemented and the 1994 Drug Policy continued to be applicable and continued till the formulation of the new Pharmaceutical Pricing Policy,2012.

With time the flaws of the 1994 policy began coming to the forefront, thus laying the demand for a revised policy which would be able to meet the challenges brought about by the competitive international pharmaceutical industry in a globalised economic environment, as much as meeting the country’s requirements for safe and quality medicines at reasonable prices. Therefore, the government enunciated the National Pharmaceutical Pricing policy, 2012 which seeks to replace the Drug Policy enunciated in September, 1994 as well as “Modifications in Drug Policy, 1986”. The National Pharmaceuticals Pricing Policy 2012 presently seeks to limit itself to the central objective of promulgating the principles for pricing of Essential Drugs as laid down in the “National List of Essential Medicines – 2011 which was declared by the Ministry of Health and Family Welfare, Government of India.[14]

 The Group of Ministers headed by Sharad Pawar arrived at a consensus and finalised market based weighted average prices for all the drugs, which have a market share of more than 1%. It includes the 348 drugs but not their combinations. The weighted average price of products having over 1% market share would be taken as the maximum retail price.

What It Contains-Major Principles:

The key principles for regulation of prices in the National Pharmaceuticals Pricing Policy 2012 are:

(1) Essentiality of Drugs

(2) Control of Formulations prices

(3) Market Based pricing

The “Essentiality” criteria for drugs under the NPPP-2012 are met by considering the List of medicines specified in the National List of Essential Medicines as revised from time to time. The NLEM has been prepared by an Expert Core Committee constituted by the Director General of Health Services (DGHS) out of the WHO model list of essential medicines, Essential Drugs Lists of various States, medicines used in various National Health Programmes and Emergency Care Drugs.

The regulation of prices of drugs in the Policy would be on the basis of regulating the prices of formulations only.  This is different from the earlier principle of regulating the prices of specified Bulk Drugs and their formulations adopted in the Drug Policy 1994.

The regulation of prices of drugs in the Policy would be on the basis of regulating the prices of formulations through Market Based Pricing (MBP).  This is different from the earlier principle of regulating the prices through Cost Based Pricing (CBP) under the Drug Policy 1994. The methodology of fixing a ceiling price of NLEM medicines, by adopting the Simple Average Price of all the brands having market share (on the basis of Moving Annual Turnover) more than and equal to 1% of the total market turnover of that medicine.

A critical look:

While some view NPPA as being the harbinger of a stout future in the pharmaceutical industry, others criticize it rigorously for several loopholes present in the policy .It is thus important to generate equal concern for both the sides in order to procure an overall idea about the policy.

On August 6^th, 2013 the Supreme Court agreed to take up the PIL filed against this policy.

Observing that the centre is being guided by market-driven forces, a bench headed by justice GS SIGHVI sought a chart from The All India Drug Action Network (AIDAN),an NGO, on comparative analysis including the impact of the new policy on the ceiling drugs. The Supreme Court stated that the government is being guided by market driven forces and that is the reason why there has been a change in the formula for deciding the cap on prices of 348 medicines, i.e from a cost based mechanism to a market price-based mechanism. AIDAN also has reported to the court that the new policy, would lead to a higher cap than the earlier one and will further ”institutionalize the super profits” made by pharmaceutical industries.[15]

The Supreme Court criticized the policy as being biased and slammed the government for not being able to take any concrete steps in the issue of price fixation for the last 10 years despite having formulated various committees, which also includes parliamentary committee. The Supreme court while questioning the price fixed by the government stated that the margin of profit for manufacturers and dealers has become 10 percent to 1300 percent of the cost of manufacture of the drug through this policy. The Supreme Court further warned the government to not incur any extra burden on the common man’s shoulder through this faulty pricing apparatus.[16]

However, the government has whisked off these allegations and said that the 2012 policy bars companies selling cheaper drugs from raising their prices significantly. Additional solicitor general Siddharth Luthra submitted that there is nothing wrong with the policy and there is a difference in retail and bulk prices of medicines.

Contesting the argument of the Supreme Court, D. G. Shah, Secretary General, Indian Pharmaceutical Alliance (IPA), which represents large Indian players argued that though the market value has seen an increase, the sector overall has experienced a slowdown with its growth going down to 9.8 per cent from 16.6 per cent in 2012, the implementation of the National Pharmaceutical Pricing Policy 2012 by the government eroded margins from 20 per cent and 10 per cent to 16 per cent and 8 per cent for retailers and stockists respectively.[17]

Scaling benefit and loss:

A joint report by CII-PwC titled ‘India Pharma Inc: Changing Landscape of Indian Pharma Industry’ states that new drug pricing policy and tightened regulatory environment have collectively dragged down the growth of Indian pharmaceutical market to single digit at 9.8 per cent in the  financial year 2012-13 as against a healthy 16.6 per cent a year ago. It is argued that the policy has lowered the prices of several medicines by 50% to 70%, while reducing the profitability of the industry by around 25%.[18]

However, several analysts, including Anubhav Aggarwal and Chunky Shah of Credit Suisse, say the new policy is more lenient than the draft policy in November 2011. Nilesh Gupta, ED of pharma major Lupin said  that the market-based pricing was a rational measure and it is a relief that the policy has its impact on only 40% of the market, while people had earlier talked about as much as 75%. [19]

A DCA official pointed out that the price ceiling is a farce, reinforcing the argument of the Supreme Court. “We have a domestic pharma market worth around Rs 50,000 crore and another Rs 79,500 crore worth drugs are exported. For the Rs 50,000 crore, the manufacturing cost is just Rs 10-15,000 crore and manufacturers still retain a profit of around Rs 35,000 crore. So, the loss of Rs 900-Rs 1,000 crore is minimal and doesn’t really matter to the bigger pharma-industries, while consumers remain vulnerable as they were before”.[20]

Contrasting the above facts, Tapan Ray, director general of the organization of pharmaceutical Producers of India, argues that the method adopted by the government to control the prices of essential medicines is directionally prudent for the country.[21] He also expects an immediate revenue reduction of 1,8000 crore to Rs 2,000 crore.[22]

He is of the view that a market-based pricing policy, along with the government’s initiative to make essential medicines available free of cost through public hospitals and health centres, will benefit all sections of the society, giving a boost to overall consumption of medicines in India. It is good to see that to encourage pharma research and development initiatives in India, the new policy also promises price control exemption for patented drugs and products developed through indigenous research.[23]

Citigroup analysts Prashant Nair and Anshuman Gupta argued that the pricing policy  is well short of the worst-case scenario. The market pricing base approach to set ceiling prices is less disruptive, and the apparent exclusion of combinations limits the span of control to some extent. Nomura Financial Advisory and Securities India pointed that this policy is most benign for pharma companies. The Credit Suisse analysts vouching in favour of the policy argued that, unlike the old pricing policy (1995), which was based on cost plus model, the new pricing policy is based on market based pricing and therefore removes the de-rating overhang for the sector. [24]

On the other hand R Uday Bhaskar ,secretary general of All India Drugs Officers Federation criticizing the present method employed by the government for fixation of price of essential drugs, argued  the new drug policy to be arbitrary and to be the cause of greater  confusion. It’s not a consumer-friendly decision. “Fixing the price based on a simple average market price is not recommended as there’s no data with the government on the profits of the drug manufacturers and records can always be manipulated.” [25]

Impact on Foreign drug traders:

On the question of NPPP’s impact on the foreign drugs some analysts argue that, this move will plug a loophole in the country’s drug laws that allow foreign drug makers to arbitrarily fix prices. At present, prices of imported brands are based on the landed cost declared by firms — value Indian regulators cannot question or verify. Since there is no separate price determination (formula) for imported brands, their ceiling price has been linked to the cost of brands made locally,” says Manoj Tongra, a drugs control officer in Rajasthan[26]. The condition has left foreign drug makers enraged. “The proposal is unfair and unreasonable,” says Tapan Ray, director general of the Organization of Pharmaceutical Producers of India, the association of global drugmakers in India.[27]

Foreign drug makers, which focus on the Indian market, were more affected by the new pricing policy. Though the average profitability of the pharmaceutical industry was affected badly by about 25%, the Indian pharmaceutical alliance has reconciled the new policy as it moves away from the intrusive and opaque pricing regime to a more transparent system of policy. ’Multinational firms like GlaxoSmithKline Pharma and Sanofi India are likely to be the most hit. These companies have a pure domestic play, that is almost all of their revenue and profits are from India operations, and their products are priced at a premium, and so in a government controlled price mechanism, they  stand to lose a lot. Nomura expects around 11-12% impact on GSK at the EBITDA (earnings before interest, taxes, depreciation and amortization) level.

On the other hand companies like Glenmark, Dr Reddy’s Laboratories, Sun Pharma and Lupin would be less impacted as they have a greater exposure to export markets. Credit Suisse expects GSK’s earnings per share will be impacted by around 11%. Ranbaxy is another company that could be hurt from the policy. Its EPS is likely to take a 5% hit, once the policy is implemented. However, other companies like Sun Pharma, Dr Reddy’s, Lupin, Torrent, Glenmark, Cadila Healthcare and Cipla are only likely to be impacted by 0.5-3.0%.[28]

Long Way to go:

 While NPPP brings in fresh hopes for millions, it still remains shrouded in suspicion. Will it succeed in making drugs more available? In a country of over 1.2 billion people, 450 million and more stand below the poverty line in 8 states. The World Bank reports 58% of children below the age of five having stunted growth in India. Mal-nourishment is continuously rising. Medicines should not be a luxury, which only a few can afford. They are one of the basic necessities which every human being has a right to access and the state must facilitate this process. In the words of Nobel lauraute  Amartya Sen, ”Growth in national income by itself is not enough, if the benefits do not manifest themselves in the form of more food, better access to health and education.”

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      Major References:

• “New Drug Policy”,Economic and Political Weekly,Vol 52,No21(May 27,2012),pp 254-276.

• Rane,Wishvas.”New Drugs at What Cost”,Economic and Political weekly,Vol 32,No 26(jun 28-jul 4,1997),pp 1521-1522.

• Berndt Ernest,Danzon Patricia,Kruse Gregory.”Dynamic Competition in Pharmaceuticals:Cross National Evidence From New Drug Diffusion”,Managerial and Decision Economics,vol 28,Economic and policy issues in the pharmaceutical Industry(jun,Aug,2007),pp 231-250.

• Sengupta Amit.”New Drug Policy:Prescription for Mortaging Drug Industry”,Economic and Political Weekly,Vol 29,No.39(Sep 24,2001),pp 2526-2532.

• Olson Mary.”Pharmaceutical Policy Change and the Safety of New Drugs”,journal of law and Economics,vol 45,No.S2,part 2(October 2002),pp.615-642

• www.drugsregulation.org

• www.pharmaceuticals.gov.in

• www.nppaindia.nic.in