Will the Indian government’s decision to offer free generic medicines in government facilities pose a threat to drug companies that sell branded generics? It does look like the government’s decision to subsidize primary healthcare services will be a game-changer for the sector.

Large pharmaceutical companies charge hefty prices for their medicines, justifying them based on the research and development expenses required to discover new medicines. Their cash-heavy balance sheets are proof that this was a good business, till their new drug pipeline began to dry up.

Generic drug companies follow a different business model. They copy drugs made by innovators—either because the patent has expired or because regulation (or the lack of it) allows them to do so—and sell them cheaper than the original drugs. They earn healthy profits. They can sell these drugs as plain generics or brand them, leading to the term branded generics.

The Indian government has decided that government-run facilities will prescribe plain generics instead of branded generics. These will be issued free to patients. Needless to say, manufacturers of branded generics will be hit.

But the more important story here is that the government has decided to distribute free medicines. Whether they are branded or generic is not as relevant.

The government has talked earlier about its desire to hike spending on healthcare from under 1% of the gross domestic product to 2-3% in the 12th Five-Year Plan (2012-17). It wants to lower the burden on the poor of financing their healthcare.

It remains to be seen if the proposed scheme will succeed and whether the central government will fund it adequately. The reason why private healthcare has made big inroads is because of the poor public health infrastructure and not enough doctors to man them. Providing free medicines doesn’t address this problem.

Given the current state of affairs in government healthcare, it is doubtful if those who can afford private healthcare will switch sides, unless there is a dramatic improvement in quality. In the lower-income segment, there could be a shift, and what could have more significance is that more people can access basic healthcare services free of cost.

While this means there will be some shift from branded to plain generics, it also means the overall market for pharmaceuticals will increase due to higher patient coverage. The government is likely to procure drugs through tenders, so price erosion is a risk, especially in commonly used drugs. Speciality drugs may still see limited competition.

The real threat, however, is if the move makes plain generics more popular among the general population. Nothing stops patients visiting private clinics from demanding a plain generic prescription from doctors, especially if these medicines gain credibility as safe and cheap alternatives. Now, that could be a game-changer for the healthcare sector.

Graphic by Ahmed Raza Khan/Mint