Home >Industry >Manufacturing >Drug industry fears profit erosion if FM sticks to cost-based pricing

Mumbai: India’s 1 trillion drug industry fears a significant erosion of profit margins if finance minister P. Chidambaram supports a cost-based pricing system for medicines at the final meeting on Wednesday of a group of ministers (GoM) deliberating on the matter.

Chidambaram is of the view that the government should control the prices of almost all the 348 bulk drugs in the country and their formulations and combinations.

The finance minister is most likely to stick to the objections his ministry had raised when the recommendations of the panel of ministers were circulated for cabinet approval earlier, an industry expert familiar with the matter said, requesting anonymity.

“The finance ministry, which was not a part of the group, had sent a note to the Prime Minister’s office and the cabinet secretariat raising objections to its views, as it wanted all drugs and its entire formulations to be subjected to price control and that, too, on the cost-linked manner," said a government official, who, too, declined to be named.

The GoM, headed by farm minister Sharad Pawar, was formed to finalize the policy on the pricing of essential medicines.

In September, this group recommended a market-based average pricing system to fix the final prices of about 652 commonly used drug formulations made out of the 348 active drugs named in the 2011 national list of essential medicines.

In this system, the price of each medicine will be capped at the weighted average of the prices of all brands in a particular therapeutic category having at least a 1% market share.

This was actually a shift from the traditionally followed cost-based pricing, derived by taking the actual cost of the industry, including production, marketing and promotion, and the margin. But the group recommended the change because of wide discrepancies in the cost structures of various classes of drug manufacturers, according to industry executives familiar with the matter, who did not want to be named.

Also, the costs submitted by the drug companies and the data collected by the National Pharmaceutical Pricing Authority varied widely in terms of ingredients, other manufacturing components, investments in quality standards, and other aspects.

“A cost-based system to fix drug prices in today’s industry and regulatory environment will create major discrepancies, and also will not serve the real purpose of controlling drug prices for the benefit of the patients," said Dilip G. Shah, secretary general of the Indian Pharmaceutical Alliance (IPA), a lobby that represents top, local drug makers. “It will rather kill the interest of quality drug makers as the continued investment for maintaining the updated standards in products and manufacturing process may not get recognized adequately, as the cost structure of the inferior quality manufacturers will remain low," he added.

Though the ministries of health and pharmaceuticals agreed with the GoM’s recommendation for a market-based pricing mechanism, as this was seen as one of the most practical approaches to rationalize prices in a changed market and industry, the finance ministry is against it. The finance ministry is of the view that drug price control should remain based on the traditionally followed cost-based system, and that it should apply to all the 348 bulk drugs and their formulations and combinations with other bulk drugs—which will include almost 1,550 drugs and about 7,000 formulations.

“This will cover about 75% of the products sold in the domestic pharmaceutical market, and will erode almost 83% of the margin that the drug companies are allowed to make now," said a top executive with a leading drug maker, declining to be identified. “Though the market-based system, too, takes away about 16% of the margin that the industry gets now, it will keep the companies in the business and will allow them to continue to invest."

The industry is already facing the impact of newly introduced taxes for export-oriented units and the expiry of tax holidays in many special industry zones, said the chief financial officer of a large Mumbai-based drug maker.

“If the increased span of price control comes with a cost-based approach, it will make sense to shift focus from the domestic market and to concentrate in the export market, which is already giving 80% of our profit," he said.

Implementing a new pharma pricing policy, last updated in 1995, gained priority after a no-profit health group, the All India Drug Action Network, moved a public interest litigation (PIL) in the Supreme Court early this year seeking an early implementation of the policy.

The GoM was formed to speed up notification of the policy as there was no consensus between the stakeholders that include various ministries, the industry, and health and patient groups. The apex court, which is hearing the PIL, in October asked the government to announce the policy in a month. The government promised it would notify the policy by 25 November.

The Wednesday meeting of the GoM was called with an emergency agenda to iron out differences between the GoM and the finance ministry.

“Unless the government practically ensures a uniform quality standard of manufacturing plants and ingredients, it can never adopt a uniform standard to arrive at a single cost structure for the purpose of pricing," said Shah of the drug manufacturers’ lobby.

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