Decoding the national pharma pricing policy

Written by Soma Das | Updated: Nov 22 2012, 07:18am hrs
The countrys search for the right formula to fix the prices of essential drugs is still on. Public health groups and pharma industry are sparring over whether a market-based formula or the existing cost-based methodology would be more appropriate for price fixation. While the stand-off between the group of ministers led by Sharad Pawar and the finance ministry seems to have eased off for now, all eyes would be on the action on November 27, when the Supreme Court hears the case.

Where does the new pharma pricing policy stand today

Efforts are on to rescue the NPPP, which was caught in a gridlock between the GoM, led by the agriculture minister, and the finance ministry. While the former has proposed a market-based pricing policy to fix prices of essential drugs, the latter wanted the present cost-based policy to continue. The GoM, on the Prime Ministers instruction, met the finance minister on Wednesday to clear the stand-off so that the disagreement doesnt reach the Cabinet. It is understood that differences have been resolved on key points and the finance minister has agreed on a market-based approach but not without recommending some changes in the main formula. It is also understood that the finance minister has agreed to restricting the span of price control to drugs in the National List of Essential Medicines, without including combination drugs and strengths not mentioned in the list.

How are our drugs regulated today and what is the NLEM

At present, 74 bulk drugs and any formulationsingle ingredient or combinationflowing from them are regulated under the Drug Price Control Order, 1995, by the National Pharma Pricing Authority. It uses a cost-based mechanism, which factors in prices of raw materials (bulk drugs, excipients, etc) on a standard basis, cost of converting them into drugs and packaging charges, and provides for a mark-up. Considering that both the list of drugs and the method are two-decades old, a need was felt to revisit the matter. In 2011, the health ministry and experts finalised a list of 348 drugs that comprise the National List of Essential Drugs.

What did the GoM recommend How far did it deviate from the original policy finalised by the department of pharma

After extensive deliberations spanning over a year, the GoM decided in favour of a market-based pricing policy for essential drugs. It suggested taking the weighted average price of all brands in a segment with more than 1% of market share by volume to determine the ceiling price of a particular drug. In doing so, it heavily drew from a formula mooted by commerce and industry minister Anand Sharma, which proposed that the weighted average price of all drug brands that have more than 5% market share in a particular therapeutic segment should be fixed as the ceiling price of that particular drug. The GoMs final call on the matter buried for good the original methodology suggested by DoP wherein the retail prices of essential medicines should be capped at the average price of the 3 top-selling brands. But on a conceptual plane, the GoM agreed with DoPs idea of shifting to a market-based mechanism from the existing cost-based method to fix prices of essential drugs. Additionally, on the span of price control, the GoM decided to spare combination drugs that use one or more constituents of 348 essential drugs that comprise the NLEM, and strengths not mentioned in the list. This marked the second major deviation from the original proposal of DoP, which had suggested that (along with the drugs listed in the NLEM) dosages and other combination drugs that consist of NLEM drugs should also be brought under the price net.

What were the other choices before the GoM

Besides the original draft prepared by the DoP and the one floated by the commerce ministry, the GoM was flooded with a barrage of possible options, mainly from different industry bodies representing multinational interests, top domestic pharma companies, medium and small drug-makers, activists, public health groups and MPs. While the industry lobbies rallied behind the original DoP formula, public health groups insisted on a continuation of the cost-based mechanism. Another complex formula was suggested by the PMs Economic Advisory Council, which divided the market into two categories: one with sufficient competition and the other with insufficient competition. Those with insufficient competition were defined as drug-formulations with an annual turnover of over R4 crore and a market share of over 40%, or with an annual turnover of less than R1 crore with over 90% market share, or therapies which have less than 10 companies marketing the drug. For areas with inadequate competition, PMEAC suggested a cost-based mechanism. For areas with adequate competition, PMEAC suggested two options: 1.25 times the median of the therapy segment or the price which 80% of consumers are paying. The figure can be arrived at by plotting the ranks of drug-formulations in each therapy by price and by plotting volume share against each one.

How will the implementation of the GoM formula impact the industry and the market

According to various estimates by independent marketing research firms such as IMS Health and Aiocd Awacs, the implementation of the GoM formula will wipe off somewhere close to 2.3-5% of the R68,000 crore domestic drug market, by bringing close to one-fifths of the drug market under the price net. According to an industry analysis, the average price reduction will be about 11% and prices of 60% of NLEM medicines will be reduced by more than 20%.

Who has raised objections to the GoM formula What is the basis of such opposition

To start with, public health groups are vehemently against a shift to the market-based formula, which they assert would push prices of drugs northwards; they are protesting against the exclusion of combination drugs and strengths not mentioned in NLEM. They fear that while producers marketing drugs above the ceiling prices may migrate to irrational combinations, other strengths and non-essential drugs, many others who are marketing today at below-ceiling prices may be encouraged to raise prices. Pharma players contest this argument by claiming that those who are marketing drugs at lower prices today are doing so because of competition and would continue to do so. Public health groups found a surprise supporter in the Supreme Court, which in October indicated its preference towards a continuation of the cost-based method while expanding the scope of drugs in the NLEM list. Finally, just when the proposal was to be taken up by the Cabinet, the finance ministry raked up a series of objections almost on the same lines as the public health groups.

What are the objections raised by the finance ministry

It is adamant about the continuation of the cost-based method to fix essential drug prices and thus bringing bulk drugs under price control, and increasing the span of control to include combination drugs using the NLEM ingredients and all strengths not mentioned in the list.

Why is the pharma industry so averse to the cost-based method

Taking a sample of 10 commonly used drugs, the industry association IPA has put forth an analysis showing that in the case of a select sample, the market would shrink by 83%, massively eroding sales and profits if the cost-based method is applied on NLEM plus all strengths of combination drugs, taking the span of control to 75% of the domestic market from the current 18%. But losses are just one part of the story. The industrys gripe is that the normative costing system lacks transparency, and bestows too much discretionary power in the hands of officials, which when used unscrupulously is prone to manipulation and red-tapism. It also leaves no incentive intact for drug firms to use world-class technologies in manufacturing, the industry protests. Industry also complains that a flawed and obsolete Drug Prices Control Order (DPCO) 1995 has resulted in a scenario wherein only 47 of the 74 drugs under price control are getting manufactured, as produces migrate to manufacturing drugs with better returns. Industry contends that the existing cost-based policy has shifted bulk drug production out of India to countries like China, escalated prices for select medicines, reduced the number of industry players, reduced innovation in cost-control medicines and limited new introductions, and above all failed to help medicines reach patients located in rural areas. Forcing industry to stay under a cost-based regime, they say, would push them to focus more on the exports markets, which will mean compromising domestic availability in the short term.

How did DoP finetune the GoM formula

It built further checks into the GoM-recommended policy by formulating an adjunct policy, which stipulated that once a drug firm decides to stop or reduce manufacturing of any essential drug on the NLEM, it must inform the government and give the reasons that prompted such a call. Further, the companies must report annual production levels of their essential drugs to the NPPA. The whole exercise will be monitored by DoP. This adjunct policy is being prepared to plug a loophole in the existing drug policy. Although 74 bulk drugs and their formulations fall under the price net today as per DPCO, only 47 are being manufactured. An indication of this change in the drug policy, which is otherwise in the works, finds a brief mention in the Cabinet note on drug pricing policy that the DoP moved.

Why is the government in such a tearing hurry to take this matter to conclusion

The government is racing against a deadline in this case. The Centre has promised the Supreme Court that it would notify its decision on the NPPP by November 25 and would inform the apex court about this in its next hearing scheduled on November 27. The Supreme Court has repeatedly warned that in case the government fails to do its duty this time, the apex court would intervene and pass an order that would effectively mean the judiciary taking over the role of executive.