Market-based pricing method
Under the Drugs (Prices Control) Order (DPCO), 2013, the National Pharmaceutical Pricing Authority (NPPA) fixes a ceiling price for each scheduled formulation using a market-based methodology. It calculates the simple average price-to-retailer of all brands holding a market share of 1% or more, then adds a fixed 16% retailer margin to arrive at the ceiling price. Ceilings are revised every April 1 based on the wholesale price index (WPI). The benefit? It reflects market realities, avoids opaque cost calculations, and allows innovation and competition. But averaging penalises efficient manufacturers, ignores genuine cost spikes in active pharmaceutical ingredients (APIs) or currency, and can render production unviable.
The NPPA’s latest notification invoked paragraph 19 of the DPCO, which grants the regulator and the government extraordinary powers to fix or revise the ceiling or drug retail prices in public interest under exceptional circumstances. A committee constituted under Paragraph 19 examined applications based on API price trends from FY22 to FY26. An extraordinary circumstance typically involves threats to availability — shortages, supply disruptions, or financial unviability of essential drugs.
What convinced NPPA to hike price of two cancer drugs?
The NPPA found the prices of APIs for two drugs, Cisplatin and Carboplatin, had risen substantially, threatening the viability of their production and supply. Oncologists, hospitals, and manufacturers had flagged shortages and supply disruptions of these first-line oncology formulations. The NPPA warned that non-availability could disrupt cancer treatment and force patients to choose costlier alternatives. For the vaccines, the Department of Pharmaceuticals agreed they are of critical public health importance, have shown stable prices, impose minimal financial burden, and are supplied by a single manufacturer at relatively low costs. The revised prices will be reviewed after six months, or earlier if raw material prices fluctuate. Public health continuity outweighed strict adherence to the ceiling formula. The June 12 revisions resulted from shortages of the two drugs — caused by a steep rise in prices of imported platinum, the key raw material, due to higher import duty and rupee depreciation
Impact of NLEM expansion on pharma industry
The impact is meaningful but contained. The 2013 DPCO raised the National List of Essential Medicines (NLEM) from 74 to 348 drugs; over 900 scheduled formulations are now under price control. Yet coverage stays limited — price-controlled drugs account for around 20% of the domestic market by value, leaving the bulk outside direct regulation. Crucially, the market-based methodology preserves pricing flexibility: ceilings are derived from prevailing brand prices rather than imposed cost formulae, and scheduled drugs receive annual WPI-linked revisions. Brands priced below the ceiling continue freely, while non-scheduled products can obtain 10% yearly hikes.
So, while the DPCO expansion compresses margins on essential lines and narrows branded-generic differentiation, it neither dominates revenues nor eliminates commercial headroom for manufacturers.
Differences in formulations and monitoring
The Indian system creates a two-tiered control mechanism distinguishing “essential” drugs from all other formulations. Scheduled formulations are those listed in Schedule-I (NLEM) and carry an NPPA-fixed ceiling price. Non-scheduled drugs fall outside direct control. Their prices are merely monitored, with an annual MRP increase of up to 10% permitted. The NPPA actively monitors market data, and if it detects increases beyond the 10% cap or unreasonable pricing, it can intervene and fix a ceiling in public interest. New drugs are tracked for approval-linked pricing. Enforcement runs through the NPPA, state drug controllers and district drug inspectors, supported by price monitoring and resource units set up in states and Union Territories.
Evolution of drug pricing framework
India notified the DPCO, 2013, covering 680 formulations, effective May 2014 and replacing the 1995 order that regulated 74 bulk drugs. The key shift was abandoning the cost-plus model — where ceilings were built from production costs — for a market-based approach. The new method averages prices of brands holding 1% or more market share and adds a retailer margin, with annual WPI-linked revisions. Essentiality was chosen as the basis under the 2012 pricing policy because controlling every drug was administratively unworkable and stifled innovation; instead, regulation was targeted at medicines meeting the priority healthcare needs of the majority, ensuring affordability where it matters the most while leaving the rest to competition. Accordingly, all NLEM drugs were brought under control.
(The writer is managing director – healthcare and lifesciences, Alvarez & Marsal India)