The cost-based price control has a long-term burden on Indian citizens as it stifles Indian innovation. The cost-based price control policy of 1995 was flawed for a critical reason. The price of a drug is not just the price of manufacturing with a small profit margin. It is unlike making widgets, cars or computers as drugs impact the human system and need to be tested for safety, toxicity and efficacy. It is the price of a manufactured chemical, in addition to the clinical research cost.
In a billion dollar cost of a final drug, the share of toxicity and safety studies and clinical research may be greater than 70%. Before India passed the patent law, Indian companies could duplicate the method of manufacture and use the clinical research data of innovator companies to launch new drugs. While this resulted in generic drugs from India at the lowest cost in the world, India paid a price too. Indian drug companies did not invest in drug discovery research, and no new drugs came from India. In the long term, this was an extraordinary burden on Indian patients, as new drugs came first to the West, and then to India, leading to high price of drugsfor example, for biologic cancer drugs. Indian scientists could not try to find new drugs for Indian diseases such as malaria, dengue, TB, HIV (with Indian subtypes) or diabetes for lack of investment in innovation and drug discovery research. Today, we are heavily dependent on western research.
After the Patent Act was passed, Indian companies began to invest in research. However, Indian authorities demand full toxicology and safety dossiers, which cost more than a million dollars (Indian requirements are more than those required by western regulators). Indian regulators also demand all three phases of clinical trials to be submitted, which are estimated to cost R100 crore each. Hence, the cost-based price mechanism will become obsolete, as India begins a realisation by its own regulators, that cost is manufacturing cost plus the cost of research. If drugs form only 5% of the total healthcare cost, the savings of price control will be very small compared to the effect that innovative and affordable drugs can have on the citizen.
Indian companies had begun to use part of the proceeds of their revenue to fund discovery research. The R&D expenditure of Indian pharma companies went up by 19% in the last financial year. Among all Indian companies, the pharmaceutical industry invested 10 times the money in research as compared to the auto or IT industries. The science is also changing as new biologics, molecular diagnostics, biomaterials, nanodrugs and phytopharmaceuticals and personalised medicine will move away from chemical-based drugs for which a cost-based formula was adequate but will not encompass new technologies.
Competition will not allow costs to go up because an analysis of the IMS data shows that the top 50 National List of Essential Medicines formulations under price control, accounting for around 74% of the NLEM formulations by value, have about 85 players on average. This level of competition in the market is a strong reassurance against any potential scope of cartelisation. The market competitiveness has resulted in limited price increases over the last 7 years. The negligible (for many years it is even below the cost of annual inflation) increase in drug prices over the last 7 years illustrates the intense competition in the Indian pharmaceutical market. In comparison, prices of other essential items, including food items, have increased steeply. Between 2004 and 2012, price rise of drugs was a fraction of all commodities, and half of that of manufactured products.
The cost-based mechanism under DPCO 1995 has not impacted access, moved intermediate bulk drug manufacturing to China and resulted in low investment in drug discovery which takes almost 10-12 years and is very risky.
The cost-based policy has a negative impact on both patients and manufacturers. It affects not only the availability of the medicines, but also the viability of industry. The policy severely strained profit margins of the industry and, as a result, the production of many bulk drugs shifted from India to China. Manufacturing of bulk drugs for 25 of the 74 molecules under DPCO 1995 has moved from India to China, as pharmaceutical companies did not find it economical to manufacture bulk drugs in India, once they were under cost-based price control.
Currently, the Indian pharmaceutical exports are worth R42,000 crore. As a consequence of cost-based pricing, Indian manufacturers who contribute close to 81% of the total pharmaceutical exports, which accounts for roughly 50% of their revenues, will be severely impacted. This is because any abnormal price reduction in medicines in the country would have a direct impact on the pharmaceutical export realisation, since many countries follow reference-pricing system, which will result in comparing Indian domestic prices with those for exports.
Drug price control has not led to improved access. Today, more than 70% of Indian women and children have iron deficiency anaemia, which can be prevented by iron tablets that are under price control, and cost less than a rupee. Price control has failed to improve access. In fact, for diseases of national importance, price control should be liberalised ensuring greater competition and awareness building and early diagnosis of disease.
Drug discovery has takes 10-12 years and is risky where one out of a hundred drugs fail. Yet the explosion of genomics knowledge is leading to some of the most influential scientific discoveries in history. Will we miss the boat of progress in medicine because our mindset is still that low-cost copies will really help the Indian population Can Indian scientists make affordable drugs not just for India but also for the rest of the world The new policy must bet on Indian science and innovation.
The author is vice-chairperson, Piramal Healthcare