Penny wise pound foolish?

Penny wise pound foolish?

The Drug Price Control Order (DPCO) has raised quite a few eyebrows in the industry circles. Associations, analysts and companies themselves are assessing its impact on their billion Dollar businesses, if the Ministry of Chemicals and Fertilizers has its way. Nandini Patwardhan does a status check

There are multiple roads to the same destination. However, if the path is not chosen wisely, it might not serve the purpose for which it as selected—to reach you to your destination on time and efficiently. That, more often than not, seems to be the case with the policy drafting mechanism in India. The drug price control order (DPCO), for instance, which came into existence with a noble cause of making medicines affordable to the common man.

This policy has stirred a storm in the industry and today, no public conference or an interview is complete without the mention of the erstwhile order. The popular opinions however that are the move will not be beneficial for long term interest for the industry particularly in terms of funding R&D. S R Vaidya, Co-Chairman, SME Committee and Executive Committee Member, Indian Drug Manufacturers’ Association (IDMA) opines that one can safely name the order Desperately Politically Centralised Ordinance. “Frankly, one does not need a price control mechanisms only for this industry. There seems to be an obsession in the Ministry and bureaucrats with no tangible results except hurdles on progress,” he adds.

Over the years, the order was revised several times, yet the basic structure has not changed. According to the recently released Yes Bank report on the Indian pharmaceutical industry, Prescription for Growth, the DPCO, was enacted under the Essential Commodities Act to control the prices of drugs in India. For the purpose of implementing the provisions of DPCO, the powers of the government have been vested with the National Pharmaceutical Pricing Authority (NPPA). Drugs which are considered to be essential come under the purview of the order. But they keyword here is The point to ponder over here is how do you define the term essential?

“Such controls (DPCO) lower price
realisations and in turn stall all hopes of a higher R & D levels”

– Utkarsh Palnitkar Partner, Transaction Advisory Services

Ernst & Young

“Totally free the industry from price
control for the next three years and watch the developments. You will get surprises”

– S R Vaidya Co-Chairman

SME Committee and Executive Committee Member, IDMA

“If some small company in China which is not as per GMP standards sells it at Rs 50 although everyone is selling at Rs 100, will the price be Rs 50?”

– Suresh Kare Chairman and Managing Director

Indoco Remedies

“The present stance of the government is against the logic of market economy and growth imperatives of pharma industry”

– R B Smarta Managing Director

Interlink Marketing Consultancy

Wrong turn

“Is there anything that is non-essential?” asks Suresh Kare, Chairman and Managing Director of the Mumbai-based Indoco Remedies. “If you have a headache, you take an aspirin. Is it non-essential? No, it is essential. And so they are making a National list of Essential Medicines (NLEM),” he adds. He also said that Supreme Court asked the government to review essential and life saving drugs and to formulate criteria to ensure that they do not escape from the price control net, by May 02, 2003. But the Ministry of Chemicals and Fertilizers could not do so. They in turn asked the Health Ministry to do the needful and even when the Health Ministry failed to classify drugs as essential and non-essential, it dug out a list of 354 items that it purchases for its hospitals and called it the NLEM. “This list amongst other things includes anesthetics, antiseptics, vaccines and oxygen,” says Kare. Another issue is price. How do you calculate price? Is it just the ingredients and the labour charge? There are so many other efforts that go in too. Are they accounted for? For instance, a good manufacturing plant today costs crores of rupees as it is not like any other plant. Hence there is the cost of quality, which is many times more than the cost of labour. The industry is very concerned about the manner in which the prices are determined. “They get data from various companies and take data of the cost approved companies some whom might not have GMP and they fix the price. Our prices are one tenth or one fifteenth of the rest of the world. So why are you talking about price every time?” declares Kare.

Many opine that the order, if implemented will put the industry on a road which does not lead to growth. Some others feel that cost-control will hamper production of certain drugs and in the end, the country will suffer. And then, there are those who believe that controls of any kind breed corruption. “If the costs are not neutralised, manufacturers will refrain from production and the drugs will go out of production,” expresses Dr R B Smarta, Managing Director, Interlink Marketing Consultancy. “This has happened in a few cases. This system is based on norms and actual costs are not many a time neutralised in pricing,” he adds.

It has so happened in the past that companies have lost interest and have stopped manufacturing of certain drugs with non-existent margins. Even medical representatives (MR) are not interested in pushing a drug with margins that are close 18 paise, for which one cannot procure even peanuts. In such a scenario, companies come up with fourth and fifth generation medicines, which get prescribed for simple ailments. This can be a backlash for the patient community. “One big and glaring loophole in the order on the negative front is that when a manufacturer does not get the right margins for marketing the products, he intends to stop the production leading to shortage of essential medicines. If the ROI is not adequate, you do not see any passion in production and then you witness shortages,” elucidates Vaidya.

Another problem which is a direct result of any kind of control is that of corruption. You know the biggest problem of our country is corruption. “When controls are there, corruption follows. It goes hand in hand,” says Kare.

If implemented, the order could have certain side-effects making the DPCO a harmful pill. The following are some outcomes that could happen in the future:

  • Many companies which find this order unviable could stop operations
  • Manufacturers could go into other FDC’s which fetch them returns
  • Newer entrepreneurs with a lot of finance would shun this industry
  • The business would become unprofitable with huge investments and the longer breakeven periods

India is waiting

The Indian Pharmaceutical Alliance (IPA) estimates that the pharmaceutical industry today reckons a four-fold growth in its exports to Rs 90,000 crore by 2010. This would translate into new investment of Rs 20,000 crore in the manufacturing sector creating thousands of jobs for educated and unemployed. In such times, if controls have to be effected through a pharma policy, then besides slowing down these investments, it could also drive the investment and related employment out to the neighbouring countries. “When one does not find a proper basic investment climate, strategic planning gets a beating. R&D, for instance, requires a lot of time and finance and one has to be sure and secure about the future of the company through existing norms, changed accordingly to suit the company,” says Vaidya. “What if tomorrow a company comes up with a path breaking molecule and the government intervenes saying that the medicine so researched, is essential and imposes a price control on it? Controls do not encourage anybody in the free economic society to innovate and prosper,” he adds.

Hence, it is imperative for the government to evaluate the impact of their ordinances and norms on the domestic industry (its ability to sustain increasing investment in R&D, its growth, exports and employment potential) and the consumer (availability and prices of medicines in the long run). “The industry has now matured and is poised to play a leading role in globally competitive markets. “To balance growth imperative of the industry with social sensitivity of policy makers price monitoring should substitute price control,” elucidates Smarta.

Excessive control will only restrict the growth of any industry and its ability to compete globally. Many pharma companies are now globalising their operations. They require resources and need government support. Hence, regulations should be such that they encourage growth and expansion.

Reaching an equilibrium

It is not that the industry is against controls altogether. However, having controls for the sake of having them is not acceptable. “The domestic pharmaceutical industry has been arguing that an industry hobbled by price controls will not be able to face competition in the open economy. Such controls lower price realisations and in turn stall all hopes of higher R&D levels,” explains Utkarsh Palnitkar, Partner, Transaction Advisory Services, Leader – Business Advisory Services, Ernst & Young.

Also, there has to be a shift in the government thinking from control to monitoring. “The government can look at phasing the prices for one year, then allowing a price increase by certain percent per year. This will help in keeping everything under a check and at the same time will allow the industry to grow,” recommends Kare.

In addition to price monitoring, the industry can also look at a model that is based on the private-public partnership model wherein the industry can provide discounted medicines for specific segments of the population. “In return the government guarantees on infrastructure enhancement in rural areas, market forces based price determination for the economically well-off could come into place,” states Palnitkar.

It is interesting to note that there are many in the country, who do not have access to even basic healthcare facilities. In such a scenario, it is a greater need to put in place the basic infrastructure that can facilitate access to primary healthcare (atleast) and thereby medicines. The cost of medicines in the entire healthcare chain is very low and further controlling the costs will prove to be suffocating for the industry and will not serve the greater good. If the government invests instead in developing the infrastructure and taps the insurance industry, things will be different.

The insurance industry in India is not exploited to the fullest. The levels of insurance penetration is also very low. If one looks at the US market its just the opposite. There, the treatment is medical insurance funded. India too can look a fully insured or co-payment kind of a model like in other countries and leverage insurance to trigger development of healthcare. Additionally, the government can look at various awareness programmes to increase knowledge, acceptability and accessibility to medicines.