New pharma policy misses the larger picture

Some months ago, the new National Pharmaceutical Policy was put out on the web for comments by the department of chemicals and petrochemicals. The need for this document arose out of a Supreme Court decision in 2003 that had, inter-alia, suggested the government should look at availability and affordability of drugs for the common man. Price controls on drugs, last introduced in 1995, had gradually been done away with over the years. Only 72 bulk drugs and their formulations, covering just over 20% of all drugs consumed, are now under price control.

The new policy suggests that an additional 354 drugs should be brought under price control, that marketing approvals for new patented drugs be granted only after price negotiations, and that prices be regulated through a mix of measures, such as reference based pricing, cost plus pricing, calculation of profit margins etc.

At the outset, there were murmurs of discontent from the drug multinationals, but increasingly, more indigenous voices are joining in.

The peculiar cost structure of the pharmaceutical industry, with high upfront research expenditure and low marginal costs of manufacturing and distribution, makes it an attractive target for price control intervention. The long time-lag between incurring of costs and recouping the same through sales ensures that anyone in a position to control prices can easily ignore true costs. Further, information about the chemical constitutes the value of the drug, and once revealed, it is easy to duplicate. Capping costs of drugs therefore, would neither halt supply nor destroy the supply of knowledge of their use.

India has benefited from the large generics industry and the ?process patented? drugs that have used new processes to make available low cost drugs. This has been possible since there was no protection for product patents until 2005. Amendments to the Patents Act have now introduced the product patent regime in this country?with an opportunity for R&D and drug discovery. The new policy would have an impact on R&D investments, as well as the future of drug companies in India.

The first of the concerns over the new policy is that drug price control by itself will not improve health care delivery. Public health expenditure has been around 3% of Plan expenditure from the first plan period, and though the present government has promised a doubling, this has yet to occur. As a percentage of GDP, it has remained around 1% for the last 50 years. Public health care is a comprehensive package of infrastructure, equipment, personnel, access and drug delivery. A World Bank survey in 2002 on the impact of the Indian pharmaceutical policy on the health sector found considerable variations in the availability, affordability and quality of drugs across states. The policy focuses on a narrower, price control view rather than a larger, health care view.

Second, in countries that have a price regulation mechanism, such as the National Health Service in the UK, the prices determined are those required to be paid by public hospitals and reimbursement agencies. However, the policy proposal in India?s case is to fix open market prices, that is, pharmacy level prices. Local industries are concerned this would affect availability of genuine drugs and promote spurious ones.

Third, there are concerns about the mechanism of price regulation. Indian industry has expressed the view that certain features of the policy, such as the proposed setting up of a ?gold standard,? would benefit only the few large manufacturers, and would act against the interests of the large number of small manufacturers. Over 20,000 such units would be severely disadvantaged. They do not buy the argument that the policy will promote R&D and are worried that R&D expenditures and FDI would come down.

In the developed countries, price determination is based on the cost-effectiveness of drugs. This calls for a large data bank of clinical information that is lacking here. Hence, the concern that cost-effectiveness analysis would be replaced by cost analysis.

Finally, there is no clear indication how patented drugs would be handled, and there may be hesitation on the part of patent holders to supply drugs to this market. The policy, in short, is likely to create market distortions, higher prices in the medium to long term, lower commitment to R&D and lower availability of genuine drugs. Surely, the intention of the policymakers is just the opposite!

An alternative, less market distortionary model is available in the country. Tamil Nadu and a few other states have set up strong pharmaceutical systems.

Drugs intended for the public delivery system are purchased by the government from the manufacturers after price negotiations. These products are labeled distinctly, and even the strips/containers are distinctive enough to prevent misuse. A close supervision and monitoring system, which includes manufacturers, checks misuse. The same products are available in the market, with manufacturers? labeling, at market prices.

Any government-labeled drug sold in a pharmacy invites punitive action.

This mechanism provides for cheaper drugs in public health, without distorting the market. Such an approach has been effective in controlling spread of spurious drugs.

It is equally important to ensure safe and effective drug delivery. The sale of prescription drugs across the counter, together with the wide range of quality of drugs available in the market, is not only exploitative of the consumer, but also dangerous. A dual pricing system, coupled with some effective supervision under the Drugs and Cosmetics

Act, would perhaps yield better results than a bureaucratic, cost plus, price determination system.

?The writer is a former finance secretary and economic advisor to the Prime Minister