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New drug pricing policy may hit profitability of firms

Policy will lower prices of several medicines by up to 70%, and could reduce profitability by around 25%
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First Published: Tue, Dec 11 2012. 11 25 PM IST
The move is aimed at regulating the prices of 348 drugs that are considered essential, and combination medicines using them.
The move is aimed at regulating the prices of 348 drugs that are considered essential, and combination medicines using them.
Mumbai: The Rs.1 trillion Indian drug industry is coming to terms with the new pricing policy, notified by the government on Friday, which may have a serious impact on the profitability of pharmaceutical companies. The policy is aimed at regulating the prices of 348 drugs that are considered essential, and combination medicines using them.
The ceiling price of these medicines will be fixed on the basis of a simple average of the current market prices of all drug brands meant for the treatment of a particular disease. The policy will lower the prices of several medicines by 50% to 70%, and could reduce profitability of the industry by around 25%.
The new prices will come into effect by April. The government is expected to come out with the Drug Price Control Order (DPCO) 2013 by January in which the new prices will be announced, an official at the department of pharmaceuticals said on Monday.
“The drug makers will be given two months to come out with the new prices on the packing after the DPCO 2013 is announced,” said this official under condition of anonymity as he is not authorised to talk to the media.
The new price control policy, unlike the current cost-based price control mechanism, is applicable to imported medicines too, if these drugs fall in the list of essential medicines. Earlier, this was implemented on the basis of the landed cost for imported drugs, which was often much higher than that of locally made drugs.
“The method adopted by the government to control the prices of essential medicines is directionally prudent for the country, and we welcome the shift from the non-transparent, cost-based mechanism that was followed so far,” said Tapan Ray, director general of the Organisation of Pharmaceutical Producers of India, or OPPI, a lobby that mainly represents foreign drug makers operating in the local market.
He expects an immediate revenue reduction of Rs.1,800 crore to Rs.2,000 crore. “The industry will take at least two to three years to negate this impact,” Ray said.
Foreign drug makers, which focus only on the Indian market, would be more affected by the new pricing policy. “Though the average profitability of the pharmaceutical industry will be impacted badly by about 25%, the Indian Pharmaceutical Alliance (IPA) is reconciled to the new policy as it moves away from the intrusive and opaque pricing regime to a more transparent system of pricing,” said IPA secretary general D.G. Shah.
IPA is an industry lobby that represents the top Indian drug makers with a presence in both the local and overseas markets.
“The new policy also balances the need for affordable medicines with the compulsions of growth and investment in the research and development of the domestic industry,” Shah added.
“The changed price tags on the drug packing will be out by April,” he confirmed.
Since the retail prices are low and capped, increasing sales by volume is the only option left with the industry to gain revenue growth, said a pharma marketing consultant with a global advisory firm. “The industry expects the volume to go up significantly in a nation of 1.2 billion population with the increased access and affordability,” he said on condition of anonymity.
The government, currently working on a universal healthcare plan for expanding healthcare coverage, has held out an assurance of purchasing drugs worth at least Rs.15,000 crore through tenders. The drugs will be mainly used for free supply through government hospitals and dispensaries.
“This is another avenue for the industry to increase the volume,” said Ray of OPPI.
According to Shah of IPA, under the tender business, the medicines are often supplied at one-fourth of the market price, and an order valued Rs.15,000 crore is equivalent to almost the current market size in volume.
“Lower prices and more affordability will lead to expansion of the market, which is a key expectation of the industry to regain the growth,” Shah said.
The new policy, despite a significant impact on drug makers’ profitability, is seen to be prudent because of the market-based price ceiling. It is expected to help improve both affordability and availability of medicines.
“A market-based pricing policy, along with the government initiative to make essential medicines available free of cost through public hospitals and health centres, will benefit all sections of the society, giving a boost to overall consumption of medicines in India.” said Ray.
“It is good to see that to encourage pharma research and development initiatives in India, the new policy also promises price control exemption for patented drugs and products developed through indigenous research,” Ray added.
The policy document on the website of department of pharmaceuticals says all strengths and dosages specified in the National List of Essential Medicines (NLEM) 2011 will be under price control now, and the manufacturers will be free to fix any price for their products equal to or below the ceiling price. The controlled price will be revised every five years or as and when the NLEM is updated or revised. If there is a significant change in the market structure of a product, the government will revise the ceiling price even earlier.
The policy also allows an annual price increase of up to 10% for non-NLEM products, though the prices of existing price-controlled products not included in the NLEM 2011 will be frozen for one year and after one year they will be allowed increases of up to 10% a year. The department of pharmaceuticals will monitor production and availability of all NLEM products.
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First Published: Tue, Dec 11 2012. 11 25 PM IST
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