Giving incentives on the basis of scale is a good idea, but DPCO is a huge reason for the big decline of Indian API.
Last month, China’s Covid-19 crisis and the consequent wide lockdown in the country caused India’s Active Pharmaceutical Ingredients (API) import pipeline to thin rapidly—80% of the APIs used for drugs made in India are imported from China—and local retail prices of even a common analgesic like paracetamol surged by as much as 40%. The government, therefore, did well to realise that continued import-dependence keeps the country hostage to supply-side disruptions, with a significant fallout for affordable healthcare, and announce on Saturday a Rs 10,000 crore package to encourage domestic manufacture of key starting materials (KSM), drug intermediates, and APIs.
The Centre has earmarked Rs 3,000 crore for the development of three bulk drug parks over the next five years in partnership with the states where these will be located—a maximum of Rs 1,000 crore will be given as grant-in-aid to the state—with common facilities such as solvent recovery plant, distillation plant, power & steam units, effluent treatment plant, etc, for manufacturers. States looking to attract manufacturers should arrange for low-cost land and crucial utilities, such as water and electricity, at cheap rates. A further Rs 6,940 crore will be allocated over the next eight years to a Production-Linked Incentive (PLI) scheme, under which financial incentive will be given to eligible manufacturers of 53 critical bulk drugs on incremental sales over a FY20 base for a period of six years—fermentation-based bulk drugs will get a 20% incentive while chemical synthesis-based bulk drugs will get a 10% incentive.
Given the scheme looks at a base year of FY20 for incentives on the basis of incremental sales, it would likely attract big pharma players. But, that is only if the government does away with its price-capping policy; the scope of the Drug Pricing Control Order has been increasing over time, despite India having one of the cheapest drug prices in the world. This has forced drugmakers to cut costs, and favour cheap Chinese API over locally-made ones. Interestingly, the governemnt’s 2017 draft pharmaceutical policy seemed to acknowledge this when it said, “the Drug Price (Display & Control) Order 1966 put 18 APIs (raw materials) under price control…(and) from 1996… imported APIs and intermediates started becoming hugely lucrative as a price cap on drugs forced the manufacturers … to obtain the cheapest raw material with the basic minimum efficacy/quality”. The draft policy never spoke of the drugs themselves but, over time, suppliers prefer to produce more of the drugs that are not under price control. And yet, after discussing the impact of price controls on hurting the API industry, the draft policy batted for price controls! It is this thinking that the government will have to give up if it wants API production in the country to take off again—as long as pharma margins keep getting pushed down by price-capping, drug-makers will keep looking for cheaper imports. Pharma price-capping flies in the face of reason—the latest Economic Survey points out that the prices of drugs that came under DPCO 2013 increased, on an average, by `71 per mg of the API versus `13 per API-mg for drugs that remained outside the order, making it clear that price controls don’t really help. So, while the API-package is indeed timely intervention, the government still must swallow the bitter pill of junking the DPCO and the National List of Essential Medicines—or curtail them sharply—if the policy is going to help in the long run.