By Aditya Sinha, the author writes on macroeconomic and geopolitical issues
In 1959, Justice Narayan Rajagopala Ayyangar submitted a report on the revision of the Patents Act. One of the recommendations on pharmaceuticals was to grant process and not product patents for medicines. This meant an Indian company could manufacture a drug by a different process without infringing on a foreign patent of the molecule itself. The logic was unimpeachable for a country where most medicines were imported at prices ordinary people couldn’t afford.
The 1970 Patents Act followed his advice. It is not too much to say that this single legislative choice is why India is today the largest supplier of generic medicines by volume, roughly a fifth of all generics consumed globally, serving over 200 countries.
But to graduate to the next level—where new molecules come out of India—we have to address a few regulatory concerns.
The Drugs (Prices Control) Order of 2013 is the third major modern DPCO India has issued, after 1979 and 1995.
Each iteration has progressively reshaped the state’s role in pharmaceutical pricing. The 1979 order controlled 347 bulk drugs. The 1995 order reduced this to 74, widely interpreted as a phase of liberalisation. The 2013 order marked a structural shift. There was a movement away from bulk drugs to formulations, with ceiling prices based on the simple average of brands with at least 1% market share. Today, over 900 formulations are under price control. The National List of Essential Medicines (NLEM), 2022, which includes 384 medicines, serves as the gateway.
Once a drug is included and notified by the National Pharmaceutical Pricing Authority (NPPA), it becomes subject to DPCO ceilings. Paragraph 19 of the DPCO 2013 further empowers the NPPA to cap prices of even non-scheduled drugs in public interest, a power that’s been used in select cases.
This is where it gets interesting. A complex modified-release generic formulation targeting both the domestic market and the US requires roughly $25-30 million in development costs. These are costs for bioequivalence studies, stability testing, and regulatory dossiers for both the Central Drugs Standard Control Organisation and the US Food and Drug Administration.
However, returns are modest—initial annual cash flows of perhaps $7-8 million, growing over a commercial window of roughly seven years before competitive erosion takes hold. I ran a real options valuation on those numbers, one that properly accounts for stochastic development costs, cash flow uncertainty, technical failure, and optimal project abandonment.
The mean project value at initiation is approximately $9.4 million, but the median is negative at minus $1.8 million. The distribution is highly right-skewed. Expected returns are concentrated in a thin upper tail. Only around 0.8% of simulated development paths cross what one might call a blockbuster threshold of $100 million. Roughly half of all initiated programmes fail outright before commercial launch.
Now introduce a 25% cash flow reduction through DPCO notification, with a 40% probability of it occurring over that seven-year window, broadly consistent with the NPPA’s historical rate of NLEM expansion, and mean project value falls by roughly 20%. The break-even development cost threshold drops from $36 million to $29 million, barely above the current estimate of $30 million. In effect, under a moderate-probability DPCO scenario, the current economics of a representative Indian generic programme sit at the edge of viability. The downside barely moves (losses on failed projects are unchanged) but the upside, which is what justifies the investment ex ante, contracts sharply.
The non-linearity here is critical and is not well understood in policy circles. Project value is strongly convex in the length of the effective commercial window. Shorten that window by two years, through a compulsory licence, a Section 3(d) patent invalidation, or an accelerated mandatory substitution policy, and the loss is disproportionate, because the final years of the commercial period are precisely when cumulative revenues approach their peak and the development investment is finally amortised.
An iso-value analysis of the Indian case shows that offsetting a two-year market period reduction would require a 40% increase in cash flows. That is mathematically necessary but commercially impossible in a price-controlled environment. When DPCO probability rises to 50%, probability-weighted project value crosses the zero boundary entirely. No NLEM revision assessment currently models this.
There is a structural irony here. India’s stated ambition is no longer simply to manufacture generics efficiently. All the messaging by the government gesture towards the same horizon—new chemical entities and a biopharmaceutical industry that creates rather than copies. That aspiration requires capital. Capital for early-stage innovation at Indian pharma companies comes predominantly from the profitability of the generics business.
The NPPA’s efforts to make medicines more affordable are reducing the cash flows that fund the next generation of domestic pharma innovation. Using a revenue-to-R&D elasticity calibrated for the Indian market, the valuation losses under a 40% DPCO probability scenario imply a long-run contraction in generic drug R&D investment of somewhere between 10% and 26%.
The Ayyangar logic was to restrict foreign monopolies so domestic industry can grow. The unintended consequence of aggressive DPCO expansion is to restrict domestic margins so that the domestic industry cannot invest. The two propositions are mirror images of each other. The pharmacy of the world cannot afford to become the patient of its own prescription.