Draft National Pharmaceuticals Pricing Policy (NPPP-2011) & response

The Draft National Pharmaceuticals Pricing Policy (NPPP-2011) has been released. View it here.

A brief comment on the NPPP-2011 was written by AIDAN member Srinivasan S. and published in The Hindu Business Line, November 8, 2011

Pharma industry gets away lightly

The draft National Pharmaceuticals Pricing Policy (NPPP-2011) declares that all 348 essential medicines (as per the new National List of Essential Medicines, NLEM 2011) will be under price regulation. The shift in focus from market share to whether medicines are essential is to be welcomed. However, the policy still leaves scope for non-essential and irrational medicines to be made. It also has made calculating ceiling prices of the many medicines not in NLEM a tedious, if not impossible, exercise.

In addition to the NLEM 2011, top selling 300 medicines of the IMS could have been covered. The draft policy delinks the ceiling prices of formulations from the price of bulk medicines. Indeed, the arguments given in the draft policy for removing price control of bulk medicines do not make sense. The government should have kept the option of price control on bulk medicines in the event of cartelisation or abnormal increases in price of bulk medicines.

The latter may result in the scarcity of a particular essential medicine formulation unless it is already overpriced relative to the cost of the bulk medicine used. Worse, this may result in the bulk medicine or the formulation not being made within the country.

Secondly, using the WPI (Wholesale Price Index) to revise prices is not a good idea. It adds an inflationary element to the ceiling price automatically every year. The WPI (100 for base year 2004-05) for 2010-11 is 143.3. Most medicine prices have not really increased 43 per cent during the period. It would have made sense to have the ceiling price of a medicine formulation tied directly to the related bulk medicine price increase during the year.

RELIANCE ON MARKET

The arguments for totally relying on market-based pricing (MBP) of formulations apparently do not recognise the fact that there exists a wide range of prices in the market of the same formulation and that prescribers, and therefore patients, tend to place more value on the costlier brands of the same formulation. In medicines, unlike say soaps or cars, the brand leader is also the price leader. The proposals of market-based pricing, therefore, legitimise higher prices. The key para in the draft policy is para 4.7: “The Ceiling Price would be fixed on the basis of Weighted Average Price (WAP) of the top three brands by value (MAT value) of a single ingredient formulation medicine from the NLEM on per standard dosage basis.”

The WAP idea means that it will end up legitimising high prices, especially if the top three brands are overpriced: top selling brands — with a few exceptions — would be the costliest.

That is the norm of the medicines sector, thanks to asymmetry between consumer and prescriber/manufacturer. It means that that regardless of overpricing and profiteering, if the market “accepts” it, the price is ok. Never mind if the patient may get poorer in the process. It also legitimises the mistaken notion that higher priced medicines are of better quality. In our case, for example, albendazole selling above Rs 12-13 per tablet (price of current market leaders) would seem fine.

A comparision of medicine prices

A comparision of medicine prices

Ceiling prices need to have a clear relationship with the cost of the raw material at least. The WAP formula has, in effect, no relation with the cost of raw material, let alone the cost of other inputs. The MRP to raw material ratio is about 3000-5000 per cent in quite a few essential medicines. Should a government legitimise such super profits? Most retail pharmacies do not keep cheaper versions because of lesser margins; eventually all lower-priced brands will move towards the higher ceiling price even as ‘premium’ prices, including that of overpriced imported medicines such as Novartis’ Glivec, will take a hit with the WAP formula.

MEDICINES OUTSIDE NLEM

The draft policy gives a formula to discourage non-standard dosages. The same thinking could have been applied to discourage irrational and unscientific medicines outside the NLEM. One can discourage irrational combinations, and attempts to circumvent the ceiling price, by taking the cue from the Pronab Sen Task force Report — from which many of the recommendations have been taken anyway — which says, “For formulations containing a combination of a medicine in the NLEM and any other medicine, the ceiling price applicable to the essential medicine would be made applicable.” Sales tax and excise duty could be higher for medicines outside NLEM 2011 and zero for NLEM medicines. The draft policy could also take another recommendation from the Pronab Sen Committee: debrand, that is remove brand names, to ensure true competition among generics.

The draft policy lists certain exemptions which, again, are inexplicable: all medicines costing less than Rs 3 per unit are to be exempt. This again legitimises overpricing of medicines which cost 10-20 paise, and begs them to be priced near Rs 3. An example is cetrizine, which costs less than 15 paise per tablet to make, but the brand leaders are available near Rs 3. Why should this be condoned? Should much-needed iron plus folic acid tablets, which cost less than 10 paise per tablet to produce, be given leeway to sell at or near Rs 3? Most retailers will give only a strip of 10, even when one needs a couple of tablets only.

THE ALTERNATIVE

So, what is a better pricing policy? That will be one that brings down the prices of overpriced medicines; that has some linkage to the actual cost of production, and therefore to the cost of the raw material; and does not legitimise overpricing of medicines. Nominally reducing the price of the top-selling brand is tokenism.

A good starting point would be to take as reference price the prices of well-run public procurement systems and take a multiple, say 4 to 6, of the reference price as the ceiling price. The present WAP procedure will make the ceiling price 20 to 70 times the public procurement price — which is a little rich.

The draft policy gives the impression of a policy cobbled to satisfy perfunctorily the Supreme Court Orders of March 2003 and October 2011, one that will leave major players mostly unaffected. A policy with some bark and a little bite.

(The author is associated with the All-India Drug Action Network and LOCOST, Vadodara. blfeedback@thehindu.co.in)

(This article was published on November 8, 2011)

One response to “Draft National Pharmaceuticals Pricing Policy (NPPP-2011) & response

  1. Pills, patents & profits

    C.P.CHANDRASEKHAR

    Frontline, Volume 28 – Issue 24 :: Nov. 19-Dec. 02, 2011

    The draft National Pharmaceuticals Pricing Policy, 2011, seeks to create a situation in which the gains of the post-Independence policy regime will be lost.

    HEARD often is a rumour that India is a country that has been cautious in liberalising its economic policy. As a consequence, it is argued, the country has been saved from the many difficulties and crises that have afflicted many other nations, developed and developing. However, for those who are closely following the evolution of Indian economic policy since 1991, the basis for these rumours is unclear. Liberalisation in India has indeed been slow on occasion because of the fortunately messy complexity of a democratic polity. It has also been slackened by the loss of popular support and social sanction for the country’s still dominant, “centrist” formation, the Congress. But these have not held back the ideologues and advocates of the so-called “reform”. Over the last decade, if there is a common element in policy, that has been the near continuous pursuit of liberalisation, despite the restraints that the country’s history and polity and the poverty and deprivation of its population set on the process.

    The net result has been the liberalisation of policy across the board, ranging from restraints on trade and foreign investment to controls on investment, production and prices. India today is among the more liberal of developing economies, despite the presence of a plethora of toothless or ignored instruments of control. And, the process still continues.

    Among the more recent instances of liberalisation, being pursued even when controls have served the country well, are policies on patents, foreign investment and pricing in India’s pharmaceutical industry. It is widely accepted that regulation and control in the pharmaceutical sector had resulted in a situation where the country had managed to ensure access to cheap medicines for its population, with no damaging shortfalls in the availability of life-saving and other crucial drugs.

    REGIME OF INTERVENTION

    Besides the normal controls that had characterised India’s regime of intervention aimed at reining in markets and directing development, three sets of measures were particularly important in the pharmaceutical sector. The first was India’s decision to require leading foreign firms operating in its markets to dilute their foreign shareholding to 40 per cent of total equity. Though these transnationals dragged their feet in complying with this requirement and finally did so only by creating a wide shareholding structure that allowed the retention of their control, the measure did restrain their power and enhance the transparency of their operations.

    Second, India’s earlier position on patents, which recognised process patents and not product patents, had a salutary effect on drug availability and pricing. Indian scientists and engineers had the capability not just to de-synthesise patented drugs to identify their chemical composition but also to find alternative process routes to manufacture them. This ensured that the production of medicines with important therapeutic qualities could not be monopolised by foreign patent holders. Drugs were available not only in adequate quantities but at reasonable prices. In the event, the foreign firms, rather than lose out on India’s large market, chose to stay on and market their own versions, even if at prices much lower than those they commanded in markets abroad.

    Finally, starting from 1963, the government through its drug price control policy, set ceilings on the prices that could be charged on different drugs. Those ceilings were cost-plus prices, accounting for costs of production and adding on a margin, with the focus of control being the “essentiality” of a bulk drug or a formulation. The control on prices formalised the government’s policy of keeping essential and life-saving drugs affordable, even while seeking to provide a “reasonable” return to producers, both foreign and domestic. India’s success in implementing these policies was helped by the large size of its market, even if a substantial share of that market was supported by the “out-of-pocket” expenditure of individual consumers and not by state expenditures on provision of health services. A large market made aggregate profits significant even when profit margins were capped.

    This was not to say that the powerful transnational firms did not fight back and seek ways of circumventing controls. They delayed equity dilution, attempted to stall drug replication through alternative routes, spent huge sums trying to win over doctors who made the consumption decisions for patients, and used mechanisms such as “transfer pricing” to escalate costs in order to conceal and transfer profits abroad. Transfer pricing involved the parent company or its third-country subsidiary selling intermediates and bulk drugs at inflated prices (when compared with available substitutes) to its Indian arm.

    Since margins under the price control regime had to be added on to “cost”, final product prices too were inflated through this process, with those prices including profits that were concealed as costs and transferred to some segment of the global operations of transnational firms. These strategies notwithstanding, India’s regulatory regime in this sector was a great success.

    Given this history, one would expect that a cautious policy of “liberalisation” would leave untouched policies with regard to the pharmaceutical industry. Why tamper with a regime that has not created problems such as shortages, has prevented exploitative pricing and has, in fact, been recognised as a resounding success? Yet, liberalisation has been pursued here too. The first casualty in such liberalisation was, of course, the patent regime. The argument in favour was that India did not have an option. To be a member of the world’s multilateral trading regime and the World Trade Organisation (WTO), it had to sign on to the Uruguay Round agreement and the intellectual property regime it embodied. This required, among other things, the acceptance of product patents.

    There is, however, no evidence that India led the fight to limit the damage to developing countries on this count, or demanded suitable exceptions in an area impinging on the people’s health. The net result was that the flexibility domestic manufacturers had earlier – that is, the flexibility of looking for an alternative process to replicate old and new patented drugs for the domestic market – no more exists. As a result, the danger of drug price inflation due to monopoly was now real and already visible in the case of patented drugs.

    There are, however, two other ways in which the indigenous drug industry can continue to play a positive role in ensuring the availability of reasonably priced medicines. The first is by entering the production of drugs that go off patent protection because of their having crossed the period for which patent protection is valid. Domestic firms can create generic versions of these drugs that can compete with branded products to bring down prices. A large number of drugs, which are estimated to constitute a significant share of domestic drug consumption, are slated to go off patent over the coming years. So even this limited flexibility could make a significant difference.

    But here, it is feared that one aspect of the liberalised policy of the government could prove to be an impediment. In 2000, the policy with regard to foreign direct investment (FDI) in the pharmaceutical industry was liberalised. Under the new policy, FDI in the sector was brought under the “automatic route”, and the ceiling on foreign shareholding was removed allowing for foreign ownership of up to 100 per cent.

    The net result has been a spate of acquisitions of leading drug firms by foreign producers. Among the recent acquisitions by transnational firms have been the takeovers of Matrix Lab by Mylan, of Dabur Pharma by Fresenius Kabi, of Ranbaxy by Daiichi Sankyo, of Shanta Biotech by Sanofi Aventis, of Orchid Chemicals by Hospira and of Piramal Healthcare by Abbott. An overwhelming proportion of recent FDI inflows into pharmaceuticals production has been in such acquisitions rather than in greenfield projects.

    What this does is that it places domestic capacities and capabilities that could have served as competitors to foreign producers in foreign hands. Besides the fact that this would influence pricing, given the oligopolistic position and the global strategy of these firms, it could lead to a decline in the production of generics. Firms with patents for new formulations targeted at diseases that can also be treated by off-patent generics may choose, after acquisition, to hold back on the production of such generics or raise their prices to protect branded products.

    The implication of this is that with the liberalisation of FDI policy, the effort to keep medicines affordable has become even more dependent on price control.

    It is in this context that the recently released draft National Pharmaceuticals Pricing Policy, 2011, gives cause for concern. Ever since 1994, market criteria have been introduced into the drug price control policy. As of then, commodities chosen for price control were identified on the basis of the total turnover of the drug concerned in the domestic market and the share of leading producers in that market.

    So it was not “essentiality” – as defined by the nature of the disease for which the drug was relevant and the characteristics of the population predominantly afflicted by that disease – that rendered a drug eligible for price control. Rather it was the size in value of the market for a drug and the degree to which its production and sale was concentrated that mattered. This did mean that medicines that the rich need and could afford could be included under price control, whereas some medicines important for the poor may be excluded. The dilution did push up prices in the case of quite a few drugs. However, where imposed, the ceiling price was determined by the cost of production plus a margin for post-production expenses and profit.

    MARKET-BASED PRICING

    But now, on the grounds of expanding the drug price control list, the government is choosing to dilute price control even further. The draft policy claims to be concerned with reverting to the essentiality criterion (defined as the inclusion by experts in the National List of Essential Medicines) as opposed to the economic criterion or market share principle. In the process, drugs constituting a much higher 60 per cent of the domestic market are reportedly to be brought under price control. However, according to the All-India Drug Action Network, the list of the top-selling 300 medicines prepared in October 2003 by ORG-Nielsen accounted for more than Rs.35,000 crore of sales, which amounts to almost 90 per cent of the retail market. Yet, at least 60 per cent of these top-selling 300 medicines are not in the National List of Essential Medicines (NLEM).

    Moreover, on the grounds of the complexities involved in regulating the prices in such a large section of the industry, the draft policy recommends a shift away from cost-based pricing to market-based pricing. According to the latter, the ceiling price for a drug would be fixed on the basis of the Weighted Average Price (WAP) of the top three brands by value. So the price charged by leading producers when the policy comes into operation would provide the benchmark for fixing the ceiling. These prices tend to be higher than that of low-ranked competitors, because of the market power of the dominant firms.

    Thus, the shift from what the regulator considers “reasonable” to what the market leaders consider “appropriate” amounts to a substantial dilution of price control, with even subsequent changes in the ceiling being linked to changes in the wholesale price index for manufactures. What is more, the prices of patented drugs are to be determined separately by a special committee constituted for the purpose, with no clear guidelines enunciated.

    As of now the policy appears complex and its effects uncertain. But in principle what it does is to take one more step away from regulation, creating an environment in which all the gains of a well-crafted and highly successful post-Independence drug policy will be lost. Liberalisation is indeed thriving in India, even in areas where it can be least justified.

    Source: http://www.flonnet.com/stories/20111202282411900.htm

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