Pharmaceuticals is one of those rare industries where the interests of producers and those of consumers are seen to be at odds with one another. In India, low purchasing power of the average consumer exaggerates the apparent conflict between the producer striving for profit and consumers wanting low-priced medicines. What is generally not appreciated is that it is a battle for survival on both sides, not just the consumer. So, when the government plays referee and points to the logic of democracy to justify the need for drug price controls, it cannot be unmindful of pharma?s economic structure. Like most other interventionist policies, price controls are distortionary. While lowering the prices of drugs, they squeeze the industry?s profits. This leaves firms with less to invest in R&D, which is the type of investment Indian players need to undertake urgently, and in large amounts, given the global patent regime post-2005, and the inherent limitations of continuing as producers of only generic drugs. Extensive price controls may not always be in the interest of consumers either?it is well established that big MNCs are reluctant to introduce their latest drugs in markets with price controls, because they want to prevent any erosion in the value of their new formulations. Add to these the fact that the Indian pharmaceuticals industry has always been very competitive in structure in almost all therapeutic and market segments, which has meant lower prices for consumers and lower margins for producers even in the absence of price controls.
The government must, therefore, think carefully about extending price controls to 354 drugs from the 74 bulk drugs that are already under supervision. The latest policy proposal to grant Gold Standard certificates to firms with an R&D focus and with internationally recognised production facilities is welcome. This certificate will allow some of the larger firms to charge higher prices for certain drugs. In addition to this, the government must consider presiding over a large R&D fund for the pharmaceuticals industry, and encourage collaboration between universities and government-run laboratories on the one hand, and pharmaceutical companies on the other. These may be important props for the industry, especially since prices are likely to remain capped.
