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Drugs and formulations have been subjected to price control for more than three decades now. The economic reforms initiated by the Government of India in July 1991, trickled down to the Pharmaceutical Industry only in 1994 and that too partially. Price control in a large number of industries has already been abolished. The main objectives of the Drug Policy after the modifications in the Policy of 1986 announced in September 1994 are to ensure availability, at reasonable prices of essential and life saving and prophylactic medicines of good quality; strengthening the system of quality control over drug production and promoting the rational use of drugs in the country; creating an environment conducive to channelizing new investment into the pharmaceutical industry to encourage cost-effective production with economic sizes and introducing new technologies and new drugs; and strengthening the indigenous capability for production of drugs. The Drugs Price Control Order (DPCO), 1995 is an order issued by the Government of India under Section 3 of the Essential Commodities Act, 1955 to regulate the prices of drugs. The Order inter alia provides the list of price controlled drugs, procedures for fixation of prices of drugs, method of implementation of prices fixed by Government and penalties for contravention of provisions among other things. For the purpose of implementing provisions of DPCO, powers of the Government have been vested in the National Pharmaceutical Pricing Authority (NPPA). Drugs are essential for health of the society. Drugs have been declared as essential and accordingly put under the Essential Commodities Act. Only 74 out of 500 commonly used bulk drugs are kept under statutory price control. All formulations containing these bulk drugs either in a single or combination form fall under the price control category. However, the prices of other drugs can be regulated, if warranted in public interest. The NPPA was established on 29th August 1997 as an independent body of experts following the Cabinet Committee’s decision in September 1994 while reviewing the Drug Policy. The Authority, inter alia, has been entrusted with the task of fixation/revision of prices of pharmaceutical products (bulk drugs and formulations), enforcement of provisions of the Drugs (Prices Control) Order and monitoring the prices of controlled and decontrolled drugs in the country.
DRUG PRICE CONTROL IS A GLOBAL PHENOMENON It is important to underline that drug prices are controlled by differing mechanisms all over the world, including in developed capitalist countries. In Australia since 1993, new drugs with no advantage over existing products are offered at the same price. Where clinical trials
show superiority, incremental cost effectiveness is assessed to determine whether a product represents value for money at the price sought. In Britain, there exists the pharmaceutical price regulation scheme - a voluntary agreement between Britain’s Department of Health and the Association of the British Pharmaceutical Industry in which companies negotiate profit rates from sales of drugs to the National Health Scheme.
Globally, Drug Companies are being forced to reduce the cost of medicines. Pressure is being mounted by Health Insurance Cos, Health Management Organisations (HMOs) and governments (in countries like UK and Canada where the State provides Health Insurance cover) all over Europe and North America. These pressures have become stronger in recent years with the realisation that spiralling Drug costs are making Health insurance cover (whether state funded or privately managed) unsustainable. In all these countries there is a major move to insist on generic prescription in most cases, thus opening up a huge generics market. Large TNCs are forced to compete on more or less equal terms which a large number of lesser known Cos, and also sell drugs at relatively cheaper rates. In the US, for example, from 1995 through 1997, generic (i.e. drugs without brand names that are produced by small companies and are cheaper) drug prices showed a double-digit rate of decrease. This shift was facilitated by the Hatch-Waxman Act, which made the approval process of generic drugs much easier. Since 1984 this has resulted in a dramatic increase in competition from generic drugs, leading to an estimated saving of 8-10 billion dollars in 1994 alone. The fact that drug prices are controlled all over the world flows from the global experience that market mechanisms cannot be expected to stabilise prices. Various other interventions are needed to manipulate the market, in order to guard against monopolies emerging. Unlike in the case of consumer goods, there is no direct relation between the market and consumers in the case of drugs. Drugs are purchased by consumers on the advice of doctors or chemists. Consequently, the marketing strategies of drug companies target doctors or chemists. Doctors are not known to take decisions based on price of contending brands. Similarly chemists have no interest in selling cheaper brands. So, if we believe that drug prices will be kept low by market competition, it is a belief that is not borne out by the past experience, in India or elsewhere. Here, it is necessary to nail another lie. There is a prevailing myth that drug prices in India are the lowest in the world. This is at best a partial truth. Drugs, which are still Patent Protected, are much cheaper in India due to India’s earlier Patent Act. It should be obvious that we will lose this advantage after amendment of the Indian Patent Act of 1970. But offPatent Drugs (which anyway account for 80-85 per cent of current sales in the country) are not necessarily cheaper in India. In fact, generally, Drug prices for these Drugs are higher in India than those in Sri Lanka and Bangladesh. In fact prices of some top selling drugs are higher in India than those in Canada and the UK. Thus, clearly, the benefits of the advantage that the Indian Drug Industry enjoys over all other Third World nations, in terms of the availability of indigenous technology and a large domestic market, have not been passed on to the consumers.
The reasons and rationale behind India’s flawed and unfair drug pricing policies:
India’s public health is in crisis and has deepened with the widespread occurrence of HIV. People do not have access to affordable health services while the affluent sing hosannas for India’s drug companies as their share prices ride the boom in the market. Administrative pricing systems for drugs were initiated in 1962, in the wake of the Chinese aggression and the declaration of emergency in 1962. The Defence of India Act was invoked to curb the spiraling prices of medicines. The Drugs (Display of Prices) Order 1962 and the Drugs (Control of Prices) Order 1963 were promulgated. These orders, at least, had the effect of freezing prices of drugs as of April 1st 1963. Drug prices have been unaffordable even before the onset of TRIPs from 2005, thanks to the climate of deregulation and loosening of controls. And drug costs form more than half the treatment costs. India’s drug situation is one of poverty amidst adequacy and plenty: people do not have access to affordable health services and medicines even as the share prices of drug companies is booming and Indian drug companies are praised abroad. This makes a thorough overhaul of the drug control and pricing system in India imperative. (See box below.) A Disaster Foretold India’s public health crisis is a disaster waiting to explode. The crisis has deepened since the last revision of the Drug Price Control Order (DPCO) with widespread occurrence of the HIV epidemic, increasing prevalence of hypertension, diabetes mellitus, ischemic heart disease, cancer and increasing drug resistance in infections such as tuberculosis, malaria, typhoid, and other bacterial infections1. Moreover, post-2005, the possibility of India’s pharmaceutical industry reverse engineering newer drugs, has diminished unless the government issues a Compulsory License and new drugs patented by foreign companies will be subject to price control. This is easier said than done because it needs an exercise of political and moral will, against the financial clout of the big pharma. Drugs need price control because:
• • • •
Drugs are overpriced and unaffordable Drugs constitute 50 to 80 percent of health care costs in India. Health care is the second-most leading cause of rural indebtedness, after dowry. There is no consumer choice of product, price and quality in medicines; only in whether you take the prescribed drug or not, a decision always made in distress, mostly at the threat of death. There is no universal health insurance in India; even if there were, regulation of prices can result in considerable savings.
The Doha Agreement has clarified TRIPS flexibilities, including a country’s public health needs for primacy. Unfortunately, this interpretation has not been used either in the provisions of the recent April 2005 Amendments of India’s Patents Act regarding more liberal grounds for compulsory license (“…each member has the right to grant compulsory licenses and the freedom to determine the grounds upon which such licenses are granted…”) or for defining what drugs can and cannot be patented. Clearly the amendments to the 1970 Act could have said that drugs of a certain therapeutic class important for certain crucial
disease situations prevalent in India are outside the purview of the patent regime. There is also no statement in the amendments whether newly patented drugs will be subject to price control. Failure of the Market Free market and deregulation views are now prevalent in India’s policy circles: the message being that the market and competition will take care of high prices and any other distortions. The reality, however, is that competition does not work2 in the Indian pharma industry. More players in an uncontrolled market have meant only a wider range of prices for the same drugs.3 You have the same drug being sold by different companies (and sometimes by the same company) at vastly different prices. Roy and Rewari4 surveyed the variation in prices of 84 formulations used in the management of cardiovascular diseases in the Indian market and concluded that variation in prices ranged from 2.8 percent to 3406 percent. Most importantly, the most-selling brand is seldom the lowest priced. The product leader is often the price leader too. Insisting on marginal revenue being equal to marginal cost, the criteria for perfect competition, is laughable. Most readers would not believe this of India’s drug market: retail market prices are often one to three percent of government tender prices!5 This shows if anything the tremendous overpricing without precedent in any other industry in the world. Also this percentage differential in pricing for the public sector and private retail sector is probably true of no other industry in India. Would the booming computer industry sell in the market a laptop at Rs 100,000 and to the government tender for Rs 2000/- to Rs 3000/-? Would a truck manufacturer sell trucks for Rs 5 lakhs in the market and to the government tender for Rs 20,000 even if he had an order of 100,000 trucks at a time? Pricing Policies The price control policy as we know today started with the DPCO of 1979, based on the Drug Policy (1978), itself an outcome of the path-breaking Hathi Committee Report (1975) on pharmaceuticals. The objectives over the years have been to make drugs abundant and affordable, but the ground situation is one of poverty and unaffordability amidst this adequacy. Partly because of drug industry pressure and partly because of changing nature of dominant economic paradigms in India, the number of drugs under price control has come down over the years: 347 in 1979 and 74 at present. If the Pharmaceutical Policy (PP) 2002 were implemented it would have come down to around 30. The PP 2002, itself is a subject of litigation. Briefly, PP 2002 and all previous policies (except possibly the first one in 1978) have some common problems: the criteria chosen to keep drugs in and out of price control are themselves faulty and leads to anomalies: Most essential and useful drugs are kept out of price control. Non-essential and harmful drugs like analgin, phenylbutazone, Vitamin E, sulphadimidine, mebhydrolin, diosmine panthonate and panthenols, bacampicilin, etc is under price control. Drugs for HIV /AIDS, cancer, hypertension, coronary artery disease, multidrug resistant tuberculosis, diabetes, iron deficiency anemia, ORS, tetanus, filariasis, vaccines (new) for rabies, hepatitis B, sera for use in tetanus, diphtheria, Rh isoimmunisation, anticonvulsants and ant epileptics, diphtheria, snake bite, suspected rabid dog bite/rabies, etc. fall outside price control Price control, since it is based on market share criteria, produces only partial regulation.
Chloroquine for malaria would be under price control but not equally important other antimalarials. True also leprosy drugs and analgesics. Of the 300 top selling brands, only 36 (that is only 12 percent) were price controlled. The rest that is 88 percent were not. Due to limitations of space we have not mentioned other contributory factors that make the drug market of India ‘unique’: namely, the prevalence of irrational, unscientific and harmful drugs leading to “therapeutic chaos and nihilism” in the Indian market and among medical professionals; the easy availability of medicines across the counter; the poor infrastructure for quality control; weak and poorly staffed regulatory administration; poor regulation of the medical profession, of the retail pharmacists, of the pharmacy profession, and poor drug control; lack of serious prosecution of those selling substandard, sub therapeutic and spurious drugs; prescriptions influenced by aggressive promotion of drug companies leading to over/under prescribing9 ; inaccurate diagnosis, lack of up-to-date knowledge, unethical practices like receiving commissions for prescribing certain drugs and sponsorship by drug companies of individual doctor’s expenses as well as of medical conferences, etc. One upshot is that demand is supplier induced. The health market creates and promotes wants. Doctors also set themselves as gatekeepers, with societal sanction, to certify various physical states of being including starvation, birth and death. These trends have to be viewed in conjunction with the burgeoning crisis in noncommunicable diseases in India (see box below). We also briefly discuss in the accompanying box why drugs for non-communicable diseases have to be placed under price control. What about R & D? One of the reasons given for high price of drugs is the high R&D and innovation cost in pharma. But this is wrong. Does any other sector say that we have to price a product high because we are doing/have done R&D for future/present products? Do manufacturers of computers or microprocessors or cars do so? Secondly, the cost of doing clinical trials is about $300 million per drug. About 80 percent (Rs 1000 crores) of this has to be done in the West if it has to be accepted there. This is apart from the western pharma industry’s figures where the cost of discovering a new molecule is stated as $ 800 million per drug, which includes $400 million as opportunity costs of not doing R&D! Using purchase-parity, this is Rs 700 crores for a single drug. It is not possible at present sales and projected sales of Indian companies. Indian companies together spent Rs 660 crores on R& D in 2003-04. No drug has been discovered, tested and marketed by Indian companies in last 20 years, despite promise of exemption from price control for 15 years. Prices of drugs never increase in the West. If R&D costs are recovered in the first year or so (first few weeks in many cases), only legitimate profits need recovery thereafter. Following some such logic, in Japan it is mandatory that all prices of all new drugs come down by five percent every year! In our case, royalty percent needs to be fixed which is not done in the Patents Amendments (usually, not more than five percent). So is pharma R&D risky? No, it does not appear to be any more than any other technology based industry. Despite all the rhetoric to the contrary, this is not a high-risk industry. As one indication, the law provides tax credits equal to 50 percent of the cost of testing orphan drugs and extends the credits to other drugs if “there is no reasonable expectation that the cost of developing and making available in the United States a drug will be recovered from sales in the United States”. In other words, if you can’t make a profit, the government will help you out. Risky businesses have variable returns, but the pharmaceutical industry has been, year after
year, the most profitable in the United States. What these companies are, in fact, claiming is an entitlement not only to recoup anything they wish to spend on R&D but to make an exorbitant profit margin as well. The R&D costs, no matter what they are, have little to do with drug pricing. Mr. Gilmartin, President and CEO of Merck, referring to the $802 million per drug estimate, remarked, “The price of medicines is not determined by their research costs. Instead, it is determined by their value in preventing and treating disease, … it is the doctor, the patient, and those paying for our medicines that will determine its true value.” More relevantly, most R&D even in the West is public funded, even when the pharma companies reap the profits. For example, Taxol (anti-cancer drug) was supported by the National Institutes of Health (NIH). Drugs like Gleevec, Epoeitin, Zidovudine (AZT) were discovered in public funded university departments. And during 1998-2002, of 415 US FDA applications, only 14 percent were innovations, the rest were me-too drugs. And as far as R&D relevant to tropical countries, only 13 out of 1223 new chemical entities discovered between 1975-1997 related to tropical diseases. Therefore, we need different strategies for supporting R&D for diseases of national importance.
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