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The need to cut pharma super-profits

The draft National Pharmaceuticals Pricing Policy 2011 brings 348 essential drugs under price control, but what about non-essential drugs, which are the bulk of those sold and which can be priced several times higher than their manufacturing cost, asks S Srinivasan

Pharmaceuticals pricing policy 2011

Cancer can kill. Treating cancer can bankrupt. This is also true of malaria, tuberculosis, diabetes... If the high cost of healthcare can force poor and even middle class Indians to sell assets to pay for medical expenses, the bulk of these expenses is for medicines.  This is dramatically illustrated in the price of cancer drugs. A five-year course of letrozole by Novartis costs Rs 3.26 lakh. A single 500 ml vial of Roche’s Rituximab for late-stage cancer or severe rheumatic arthritis costs Rs 1.04 lakh. And a vial of Roche’s Herceptin for breast cancer costs Rs 1.35 lakh and is to be taken for at least nine months, maybe more. In fact, when it comes to such drugs, the sky is the limit.  

The government can change this state of affairs to some extent by setting limits on how much companies can charge for essential drugs.  However, the current drug pricing policy doesn’t do this. Even as we write, there are reports in the media that “the government has identified 40 drugs used to treat cancer whose prices will be regulated under the new drug pricing policy. But it plans to include some of these in the list of drugs whose prices are already fixed by government, instead of waiting for the new pricing policy to be finalised”. (http://articles.economictimes.indiatimes.com/2011-12-06/news/30481818_1_price-control-cancer-drugs-nlem)

In November 2011, a new drug pricing policy was announced – the draft National Pharmaceuticals Pricing Policy – to supersede the Drug Policy 1994. This is at the urging of various orders of the Supreme Court, the most recent being in October 2011.

The draft policy’s most important change is in the criterion for bringing a drug under price control. In the Drug Policy 1994, the decision to include a particular drug in the price control basket was determined by its share of the market, not its public health importance. As a result of this disconnect, most essential drugs remain outside price control -- there are just 74 drugs under price control at present, whereas the new National List of Essential Medicines (NLEM) 2011 contains 348 drugs.  Curiously, many non-essential drugs are in the price control basket if you follow the market share criteria.

Welcome move, but with reservations

The new policy declares that all 348 essential drugs will be under price regulation. The shift from market share to essentiality as criterion for inclusion in the list is to be welcomed.   

However, the NPPP does not regulate prices of non-essential formulations – a necessary task since a large proportion of drug expenditure is on such formulations. The policy does say that they will apply the market-based pricing mechanism “to control also drugs with strengths and dosages not listed in the NLEM 2011 (nonstandard dosages); formulations containing combination of drugs under NLEM 2011 with other drugs listed in the NLEM 2011; and formulations containing combination of drugs under NLEM 2011 with drugs not listed in the NLEM 2011.” In practice, using this methodology of WAP (weighted average prices) and market-based pricing mechanism, the task of calculating ceiling (maximum) prices of non-essential drugs or formulations (or combinations of essential and non-essential drugs), will be a tedious, if not impossible, exercise considering the range of formulations available in the market. It may be a good idea to ensure that all formulations -- in addition to those on the NLEM 2011 -- which are in the top-selling 500 drugs of the IMS (a provider of health and pharma information services) and their equivalents are in the price regulation basket, thus covering more than 80% of retail sales.

Second, the draft policy delinks the ceiling prices of formulations from the price of bulk drugs (the raw material used to make drug formulations), completely removing price control on bulk drugs, which does not make sense. The government should have kept the option to control the price of bulk drugs. Under the draft policy, if bulk drug prices shoot up abnormally, and for genuine reasons at that, there is no option for an increase in the ceiling price of the related formulation, especially if it is currently a controlled drug – prices of currently controlled drugs are going to be frozen for two years. This may result in scarcity of a particular essential drug formulation unless it is already overpriced relative to the cost of the bulk drug used. Worse, this may result in the bulk drug not being made within the country because of scarcity of demand.  

Third, the draft policy uses the wholesale price index (WPI) to revise prices, adding an inflationary element to the ceiling price automatically every year. The WPI (100 for base year 2004-05) for 2010-11 is 143.3. However, most drug prices have not really increased by 43% during the period; some have decreased and others have increased by more than 43%, even by 80%.  It would have made sense to have the ceiling price of a drug formulation tied directly to the related bulk drug price increase over the year.

Legitimising super-profits

Another concern is the draft policy’s complete reliance on market-based pricing of formulations: setting the ceiling price on the basis of the weighted average of the top three brands. This does not recognise the fact that there is a wide range of prices in the market for the same formulation. Also, 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. This phenomenon is a result of anti-competitive forces; indeed, it signifies a market failure of sorts. The proposal for market-based pricing does not tackle these but in fact buttresses them by legitimising higher prices.

The use of the WAP (weighted average price) will end up legitimising high prices especially if the top three brands are overpriced. Top-selling brands – with a few exceptions – will be  the costliest brands. That is the norm of the medicines sector, thanks to the asymmetry between consumer and prescriber, between consumer and manufacturer, and between prescriber and manufacturer.  What this measure of ceiling price says is that regardless of overpricing and profiteering, if the market ‘accepts’ it, it is a legitimate price. And it is a legitimate price irrespective of the consequences, of whether the price can impoverish the buyer. It also legitimises the mistaken notion that higher-priced drugs are of better quality.  There is a great variation in prices of different brands of the same drug. The table below gives an idea of the profit margins of several commonly used drugs, comparing the retail price and the prices in two public procurement systems. In our case, for example, albendazole selling at above Rs 12-13 per tablet (price of current market leaders) would become par for the course.

The Tamil Nadu Medical Services Corporation (TNMSC) prices are of what is considered a well-run and efficient public procurement system. They are very low, selling at profit margins of 0.01%, and therefore probably very near to the cost of the manufacture (the cost of the drug before profits are added). The prices of drugs in the Chittorgarh procurement system – now being supplemented by the Rajasthan Medical Services Corporation – are of so-called well-known companies and about three to four times higher than the TNMSC prices, and hence have better margins for the manufacturer, but these are still low by retail market standards.

A comparison of medicine prices
(prices in rupees)

Generic name of drug (1)

Unit (2)

Chittorgarh tender rate(3)

MRP printed on pack/strip(4)

TNMSC prices (5)     

(Column 4/ Column 5)
(6)

Albendazole tablets 400 mg

10 tablets

11.00

250.00

4.55

54.94

Alprazolam tablets IP 0.5 mg

10 tablets

1.40

14.00

0.51

27.45

Amlodipine tablets 2.5 mg

10 tablets

2.30

23.00

0.41   

56.01

Atorvastatin tablets 10 mg

10 tablets

9.90

65.00

2.10  

30.95

Cetrizine 10 mg

10 tablets

1.20

35.00

0.49

71.42

Diazepam tablets 5 mg

10 tablets

1.40

18.00

0.55

32.72

The TNMSC prices are from its website, http://www.tnmsc.com/tnmsc/notification/Drugs232.pdf, for the year 2011-12.  The Chittorgarh prices are of well-known companies and are at http://chittorgarh.nic.in/Generic_new/generic.htm  Column 6 gives an idea of how many times the retail market MRP is in comparison to the TNMSC procurement price – the latter being almost near the cost of production.

Ceiling prices need to have a clear relationship with the cost of the raw material. The WAP formula has in effect no relation to the cost of raw material, let alone the cost of other inputs.  We have shown elsewhere that the MRP to raw material ratio is between 3,000% and 5,000% in quite a few essential drugs (as also evident from column 6 in the table). Should a government legitimise such super-profits? Moreover, even now it is difficult to get, in most retail pharmacies, cheaper versions of the same formulations, as there is little incentive for retailers to keep formulations with lower margins; in this scenario, it is clear that all lower priced brands will, over a period of time,  move towards  the higher ceiling price.

Inexplicable exemptions

The draft policy lists certain exemptions which are inexplicable: all drugs costing less than say Rs 3 per unit are to be exempt. This legitimises overpricing of drugs which actually cost around 10-20 paise and begs for 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 at or near Rs 3. Why should this be condoned? Should companies manufacturing much-needed iron plus folic acid tablets, which cost less than 10 paise per tablet to produce, be given leeway to sell them at or near Rs 3? Please also remember, most retailers will give only a strip of 10 even when I need just a couple of tablets. It also exempts drugs for hospital supply from price control – a move calculated to increase corruption in procurement prices.
 
A good pricing policy is one that brings down the prices of overpriced drugs, has some linkage to the actual cost of production and therefore to the cost of the raw material, and does not legitimise overpricing of drugs. Nominally reducing the price of the top-selling brand is not enough. A good starting point would be to take as a 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 (see table above) will make the ceiling price 20 to 70 times the public procurement price – which is a bit rich.

The draft National Pharmaceuticals Pricing Policy apparently tries to make serious moves on the price control front, but one that will leave the major players in the industry mostly unaffected. The policy is therefore not a price control policy but a price decontrol policy -- especially if you take into account the legitimisation of high prices and the exemptions.

This essay develops ideas earlier discussed in a comment for the Hindu Businessline.

The author is associated with the All-India Drug Action Network and LOCOST, Vadodara.  The draft policy is available at: http://pharmaceuticals.gov.in/mshT2810/FTY2.pdf AIDAN’s detailed critique of the draft policy will be available at the AIDAN website after January 2012. 

Infochange News & Features, January 2012