The Group of Ministers (GoM) finalised its recommendations on India’s pharmaceutical pricing policy on September 27, 2012; which proposes that all 348 drugs under the National List of Essential Medicines (NLEM) will come under price control. These proposal will now be sent to the union cabinet for a final approval.
The GoM, who were given the task to decide on the modalities of drug price control, is recommending a ‘market based’ mechanism. As per the GoM’s recommendation, the price cap for these drugs will be calculated as the weighted average price (WAP) of all the brands having market share of more than one per cent. Players selling any of these drugs at prices higher than WAP will have to lower their prices and the combinations will be kept out of price controls.
The Supreme Court does not think this mechanism will keep prices in check and has therefore issued a directive to the Government not to change the existing mechanism, ie. to stick to the cost-based method, while including all essential drugs so that the prices of medicines can become affordable. The Supreme Court had responded to a PIL filed by the All India Drug Action Network (AIDAN) which argued that drug prices in India are a major cause for catastrophic medical expenses and that they need to be brought under control. The PIL argued that keeping only 74 bulk drugs and their formulations under the span of price control of the Drugs Prices Control Order, 1995 (DPCO’95) did not really serve the purpose of making medicines affordable as many many essential medicines were actually out of price control.
Even though the GoM has expanded the span of control from 74 to all the 348 drugs in the NLEM, patient activists groups and NGOs are not satisfied. Dr Amit Sengupta, co-convenor of Jan Swasthya Abhiyan (JSA) raises his concerns on the WAP being used as the method, saying, “In such a system the present prices of existing brands and their respective share in the entire market of a particular drug will be taken into account to compute the ceiling price. Such a method is entirely skewed, as the ceiling price fixed would largely reflect the price of the brand leaders. Generally two to three top selling brands – usually the most expensive or some of the more expensive brands – control a bulk of the market. So price control will do nothing to bring down drug prices, and in fact will encourage cheaper brands to start charging more and approach the high ceiling price.”
As the table shows, if WAP is calculated by discounting the price of the most expensive brand(s), WAP would be lower, but still significantly higher than the lowest price at which the particular drug is already available in the market.
The JSA analysis shows that if the ceiling price is calculated by the cost plus formula, it would tend to be similar to the minimum price as stated in the table (as the drugs mentioned in the table also make a profit). So the differential between WAP and the minimum price is a rough indicator of how much more expensive the ceiling price would be using WAP over a cost plus formula.
This situation has arisen because medicine prices in India have no relation to the actual cost of production, packaging and marketing. A study commissioned by the National Commission on Macroeconomics and Health showed that there is a very wide variation in the prices of drugs sold in retail and those sold in bulk through tenders to institutions. The price differences ranged from around 100 per cent to 5600 per cent. There is also a wide variance in prices of the same medicine sold under different brands by different companies. Moreover, the more expensive brands sell much more than the less expensive ones because big companies are able to promote their expensive brands by offering incentives to prescribers and chemists.
Industry relieved …
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Industry, on the other hand, seems to have accepted the GoM’s recommendations. Ranjit Shahani, Vice Chairman and Managing Director, Novartis India comments, “We acknowledge the rights of the Government to make essential medicines available to the most vulnerable sections of society at affordable prices. The new proposal will have an impact on industry as the span of price controls will now increase to cover around 30 per cent of the pharma market. Still a market-based policy is a balanced formula and will help improve the availability of essential medicines for patients.”
 “The proposal will have adverse impact on the industry, as the span of price control will now cover around 30 per cent of the Indian pharma market.” Tapan J Ray Director General, Organisation of Pharmaceutical Producers of India |
Tapan J Ray, Director General, Organisation of Pharmaceutical Producers of India (OPPI) disagrees with his industry colleague and avers, “The new proposal will have adverse impact on the industry, as the span of price control will now cover around 30 per cent of the Indian pharma market with further squeeze in the margin.”
Doing a detailed analysis, D G Shah, Secretary General, Indian Pharmaceutical Alliance (IPA) opines, “All formulations (654) of 348 bulk drugs specified in the NLEM 2011 are brought under price control. This will constitute about 30 per cent of the total pharma market. Currently, about 18 per cent of the market is under price control. The prices of these formulations will be fixed by taking weighted average price (WAP) of all brands having at least one per cent or more market share (MS) by volume. This will impact about 62 per cent of the NLEM market by value. In other words, prices will be reduced for almost two-thirds of the sales value of NLEM medicines. The average price reduction will be about 11 per cent. However, price reduction of some medicines for many large companies, both domestic and foreign, will be as high as up to 75 per cent. A study shows that prices of 60 per cent of NLEM medicines will be reduced by more than 20 per cent. The average revenue loss to the industry is estimated at about 15 per cent to 17 per cent.”
 “The policy comes as a relief for the industry. The consumers are benefited because, the NLEM list has been increased from current 74 to 348.”Dr Ajay Kumar Sharma Asso. Director – Pharma and Biotech, Healthcare Practice, Frost & Sullivan, South Asia & Middle East |
Dr Ajay Kumar Sharma, Associate Director – Pharma and Biotech, Healthcare Practice, Frost & Sullivan, South Asia & Middle East thinks the WAP methodology preferred by the GoM over the current cost of production plus the mark up policy will bring relief to the industry, saying, “The policy comes as a relief for the industry. The use of weighted average prices for all the drugs which have market share beyond one per cent preferred by the GoM as compared to few other methods proposed. Specifically being pursued for the 74 bulk drugs under NLEM comes as a big relief for the industry.“
He continues, “The consumers will benefit because, the NLEM list has been increased from current 74 to 348 (approx includes 750 formulations) which will reduce the prices for these drugs up to 20 per cent. The grey area here is that, the specific drugs for specific strengths are only included in the current NLEM list. Hence, it would be interesting to see how the industry looks at by-passing this regulation. On an overall basis this can be seen as a win-win situation for all.”
 “The prices of these formulations will be fixed by taking weighted average price (WAP) of all brands having at least one per cent or more market share (MS) by volume.”D G Shah Secretary General, Indian Pharmaceutical Alliance |
According to Rahul Sharma and Nishith Sanghvi, analysts at Karvy Stock Broking, “The companies which are in the premium pricing band would be impacted the most. MNCs, in particular which have a pure domestic play like GSK Pharma and Sanofi India, would be impacted the most, with contraction in EBDITA margins for the business as a whole. Indian companies not having very huge exposure to the domestic play would be insulated to some extent, but what we would be seeing is contraction in EDBITA margins for the domestic segment as a whole and hence impacting the profitability. Companies such as Dr Reddy’s, Sun Pharma, Lupin, Ranbaxy Labs and Cipla would be lesser impacted due to their presence in the exports space.”
Looking ahead, the analysts from Karvy believe the policy would take a minimum of six months to implement as problems would crop up on the inventory in the system, as it would need inventory recall once the policy is implemented, as the GoM will forward it to the Cabinet which would then pass it onto the Supreme Court. Delving deeper, the Karvy analysts say, “The stocks would face reprinting /repacking issues. The other problem impacting the companies would be implementing the pricing on MRP regime, the price which both the AIOCD/IMS is capturing is based on the wholesale price to the retailer and it does not include the excise duty element, retailer margins and VAT. We spoke to a couple of pharma companies who were slightly disappointed as majority of them were expecting market share in excess of five per cent as the criteria. The inclusion of market share in excess of one per cent would cover a higher spectrum of companies which would have a lower price band.”
| Comparison of Prices – Weighted Average Price vs. Maximum and Minimum Price in the market today | ||||||
| Drug | Therapeutic category | No. of Brands | Max price | Min price | WAP (total) | Times Costlier (WAP vs. min. price) |
| ATORVASTATIN 10 mg. | Cardiovascular | 75 | 7.50 | 0.92 | 4.92 | 5.35 |
| AMLODIPINE 5 mg. | Cardiovascular | 61 | 6.40 | 0.15 | 1.84 | 12.27 |
| LOSARTAN 50 mg. | Cardiovascular | 39 | 5.58 | 0.93 | 3.76 | 4.04 |
| CLOPIDOGREL 75 mg. | Cardiovascular | 33 | 15.00 | 1.37 | 3.99 | 2.91 |
| ATENOLOL 50 mg. | Cardiovascular | 47 | 2.78 | 0.21 | 1.87 | 8.90 |
| HUMAN INSULINS 40 IU vial | Anti-diabetic | 49 | 151.20 | 95.40 | 127.3 | 1.33 |
| METFORMIN 500 mg. | Anti-diabetic | 78 | 3.10 | 0.37 | 1.41 | 3.81 |
| GLIBENCLAMIDE 5 mg. | Anti-diabetic | 13 | 0.84 | 0.20 | 0.76 | 3.80 |
| CEFIXIME 200 mg. | Antibiotic | 46 | 24.08 | 4.38 | 8.44 | 1.93 |
| AZITHROMYCIN | Antibiotic | 92 | 29.97 | 8.00 | 17.79 | 2.22 |
| CIPROFLOXACIN 500 mg. | Antibiotic | 76 | 7.65 | 1.80 | 4.93 | 2.74 |
| AMOXY. & CLAV 500 mg+ 125 mg. | Antibiotic | 64 | 15.49 | 4.48 | 7.72 | 1.72 |
| ORS Satchet | Gastrointestinal | 8 | 10.96 | 3.16 | 10.91 | 3.45 |
| OMEPRAZOLE 20 mg. | Gastrointestinal | 27 | 4.36 | 0.44 | 3.02 | 6.86 |
| PANTOPRAZOLE 40 mg. | Gastrointestinal | 108 | 17.55 | 0.87 | 4.25 | 4.89 |
| ALPRAZOLAM 0.25 mg. | Sedative | 106 | 1.22 | 0.23 | 0.71 | 3.09 |
| PHENYTOIN 100 mg. | Anti-Convulsant | 6 | 1.60 | 0.76 | 1.51 | 1.99 |
| Source: Calculated from IMS, Health 2011, courtesy: Jan Swasthya Abhiyan | ||||||
… but also impacted
The actual policy document is still not available but based on overall details, Rikesh Vinod Parikh, Vice-President Equities, Motilal Oswal Financial Services believes that “MNC players will have to take the maximum hit due to their premium pricing policy. Among Indian players, companies with high exposure to anti-infectives may get adversely impacted since such medicines account for 17 per cent of NLEM. In our coverage universe of Indian companies, Cipla, Cadila and Ranbaxy have high exposure to anti-infective segment. For the remaining companies, the impact is likely to be relatively moderate-to-low. Actual impact on these companies may vary depending on their positioning/pricing policy for each drug.”
Parikh agrees, “The proposed policy is relatively better than general expectations since combination drugs have been kept outside the purview of price control. Then the span of price control will be about 30-40 per cent rather than 60 per cent.” The GoM has resisted pressure to finalise a cost-based pricing policy which is also incrementally positive as, for the first time, the policy will make drug prices market-determined. But this is being opposed by organisations like the JSA and the Supreme Court itself.
Parikh comments that the lower revenues for the industry will partially be set off by lower margins for the trade/retail channels due to lower prices. Preliminary estimates indicate that the hit to the overall industry will be approximately Rs 60-80 billion i.e. approximately one year of growth. This is higher than the impact under the proposed National Pharma Pricing Policy (NPPP) of October 2011, which was estimated at Rs 25-30 billion.
Once cleared by the Cabinet, prices of 60 per cent of essential medicines (NLEM) will be reduced by over 20 per cent, while in certain cases the prices may come down by even 70 per cent. This implies that under the new proposals, the overall impact on the industry will be about two-three times of that proposed under the NPPP. The stage seems set for a tug of war, with the Supreme Court and JSA advocating a cost-based pricing mechanism, while the GoM, applauded by the industry, pushing for a market-based system. It remains to be seen what the final policy will look like.
