Report from India

On July 1, India's new Drug Pricing Control Order (DPCO) 2013 replaced the 1995 version. Under this new regime, the National Pharmaceutical Pricing Policy 2012 will regulate prices of 348 drugs covered under the National List of Essential Medicines (NLEM) 2011 compared with 74 drugs in the former list. Adopting the market-based price mechanism, the policy is based on the simple average price for all brands with a market share above 1% in their segment.

According to industry sources, the new drug-pricing policy will affect two thirds of the Indian pharmaceutical industry. Consumers, on the other hand, will benefit greatly. Tapan Ray, director general of the Organization of Pharmaceutical Producers of India (OPPI), said in an interview with Pharmaceutical Technology, "Ceiling prices will now be based on approximately 91% of the pharmaceutical market by value, resulting in more than 20% price reduction in 60% of the NLEM. The prices of some drugs will fall by up to 70%." According to Ray, DPCO 2013 will "achieve the objectives of the government in ensuring essential medicines are available to those who need them most by managing prices in the retail market and balancing industry growth on a longer-term perspective."

Pharma industry players brace for challenges as India’s new drug-pricing policy kicks in full gear. (DMITRY RUKHLENKO/GETTY IMAGES)

Impact on consumers

While consumers could potentially benefit from price cuts, it may not necessarily lead to easy medicines access, which is based on patients' socioeconomic strata, Amit Backliwal, general manager of IMS Health, South Asia, told Pharmaceutical Technology. The effect will not be as pronounced for those in the upper strata who can afford the pre-2013 DPCO prices; whereas, patients who are on the other end of the spectrum will continue to be unable to afford the medicines even after the revision. Only the middle-income groups will reap maximum benefits from the changes of the new drug-pricing policy.

Impact on the industry

With the new policy in force, IMS Health estimates that the erosion in overall market revenue will be approximately $290 million on an annual basis, which is a 2.2% drop of the entire market. Inevitably, the policy will affect profit margins and sales of medicines. Sujay Shetty, executive director and India pharma life sciences leader of PricewaterhouseCoopers, comments, "As NLEM drugs account for nearly 60% of the market, value erosion of the pharmaceutical market would be anywhere between 2% to 5% of the current pharmaceutical market. However, the extent of effect will vary from company to company depending on their current product portfolio and exposure to NLEM. This short-term effect will last between 12 to 18 months. In the long term, companies will devise suitable strategies to overcome this impact."

Multinational companies (MNCs) will be greatly affected by the new pricing regime. For example, Centrum Broking, a financial-solutions provider based in India, projected that the profit margins of GlaxoSmithKline and Novartis could drop between 2% to 7% under DPCO 2013. On the other hand, Indian companies such as Sun Pharma and Dr. Reddy's Laboratories would be less affected due to their focus on export market.

Backliwal says, "The bigger pharma companies will likely take the brunt of the revenue erosion but they will also be more able to balance the drop in profits with higher volumes due to greater market reach and brand value. The major impact will be felt by mid-level pharma companies who will need to draw up new strategies and look beyond the price-differential advantage that they currently leverage to grow sales. Also, companies with brands under the older DPCO 1995 regime will be now able to take annual price increases and make up for the losses (to some extent) from their portfolio, which will fall under the newer regulation."

Shetty adds, "Companies may carefully examine their current portfolio for the exposure to NLEM and level of diversification and realign to negate the effect of the new policy. They can look at ramping up chronic portfolio to reduce their dependence on acute therapies, which have been growing at a slower pace. Enhanced focus on over-the-counter products, vaccines, and biosimilars would start gaining importance in overall business strategies. Companies will look at in-licensing initiatives, comarketing, and alliances with MNCs over the long run."

Outlook

Despite this, foreign companies are not likely to move away from India given its promising market. With a 12.5% (± 4.0%) estimated compound annual growth rate over the next few years, India is the second fastest growing country among the emerging markets, ranked only behind China.

The Indian market is driven by rising incomes, macroeconomic expansion, and increasing access to medicines, supported by a range of government policies and programs. Revenue may be eroded as a result of DPCO 2013, but Big Pharma's greater challenge is to obtain and enforce intellectual-property protection rights. Compulsory licensing, patentability, patent enforcement, regulatory approval, and data exclusivity are issues that they will need to grapple with.

The revised drug-pricing policy will encourage small- and medium-size domestic players to invest in R&D. It will also help some small players achieve price parity in certain niche segments. Locally discovered and developed drugs are eligible to avoid price control for five years. Drugs developed using indigenous R&D and granted patent under Indian law can seek exemption from price control from the commercial production date in the country.