Report from India

The Indian government has announced plans to exercise stricter control over drug pricing in its domestic pharmaceutical market. Based on the proposed policy, at least 400 essential drugs will come under the fold of the National List of Essential Medicines (NLEM), thereby increasing the government's current control of 20% to approximately 70%. The new pricing method is meant to replace the current Drug Price Policy Control (DPCO) 95, which stipulates that drugs recording company turnover of Rs1 Cr to Rs4 Cr (1 Crore = 10,000,000 million rupees), under various criteria, and products that held market share above a 50% in the category, are brought under price control.

Under the system, 74 bulk drugs and 1577 of their formulations have come under government purview as a result. Industry players and bodies such as the World Health Organization (WHO) are not in favor of the proposed drug policy. WHO representatives commented in a statement that the government's proposed method of drawing drug data has failed to "take into account of discounts, rebates and bundling deals." The data collection has also failed to provide pricing transparency and led to national abnormalities whereby high volume drugs are priced higher in India compared with neighboring countries, such as Sri Lanka.

INTI ST. CLAIR/PHOTODISC/GETTY IMAGES

WHO has also questioned the government's plan to base ceiling prices for products within individual therapeutic groups on the group's biggest seller. Initially, the Department of Pharmaceuticals released a draft policy to control pricing using market-based pricing of formulations. The ceiling price is to be determined on the basis of the weighted average price of the top three brands by value of a single ingredient formulation from the NLEM on a per standard dosage basis. However, this was considered ineffective to control NLEM drug prices. In turn, the country's Ministry of Health has recommended that the ceiling price on formulations be determined based on the weighted average price of the bottom three brands.

According to various sources, the government is likely to face several challenges when it comes to the new policy's implementation. For example, price control may affect the manufacturing and supply of certain drugs. Ajay Kumar Sharma, practice head, pharma, healthcare practice for South Asia and Middle East of Frost and Sullivan, explains, "Some companies may stop production and some may exit certain markets. Such a shortage will lead to the mushrooming of spurious drug manufacturers in the concerned areas."

The government may also have to battle with the challenge of capturing complete market information to confirm the final list of essential drugs. Tejas Arur, senior sales manager of IMS India says, "The current information sources used in government report covers over 80% of all drugs in the market only. Moreover, many therapy areas untracked contain less than three brands, thus rendering the exercise with little relevance. There is also the issue of institutional sales and tender-based supply of drugs that the government may have to source directly from each institution."

A cost-based pricing methodology may be implemented because of to the lack of robust data covering all 348 drugs in terms of size and price. This step may also lead to controlling prices in certain therapies or molecules where the government believes pricing is higher than what it should be due to insufficient competition, Arur says.

Although large companies such as Pfizer welcome the idea of the government's initiative to link price control to a national list based on market demand, the challenge remains as to how the list can act as a basis for price control overall because the list consists mainly of single molecules with specific dosage forms. Kewal Handa, managing director of Pfizer Limited, cautions that the new drug price control may result in a semi-recession for India's pharmaceutical industry. The industry is already experiencing slow growth of 13% compared with the 20% growth of April-May 2011. "A high level of control over drug pricing may result in the decline of quality and innovation," he adds.

Handa believes that the government should focus on putting in place non-price control initiatives to address the issue of accessibility. "High drug prices will limit or result in non-availability of affordable healthcare. Making healthcare available to all is not possible by reducing drug prices with no drastic changes to improve infrastructure and government's central procurement system of drugs backed by a new and effective distribution model," he says.

The emphasis should also be put on encouraging foreign investments and enhancing the market position of domestic players, says Handa. According to Handa, growth opportunities in areas such as research and development, manufacturing and business processing contribute significantly to the domestic industry as they are valued at $70 billion.

Already, domestic players are feeling the heat of the proposed price-control policy. Some local firms are moving out of the nonprofitable lines or low margin business to regroup and refocus on stronger margin areas. For example, Dr. Reddy's Laboratories has stopped producing salbutamol syrup for pediatric use.

—Jane Wan is a freelance writer based in Singapore