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Profiteering in the pharmaceutical sector

By Anant Phadke

The Crocin you buy from your local drugstore at 80-90 paise per tablet costs just 15 paise to make. Dr Anant Phadke delves into the various forms of profiteering in the pharmaceutical sector and suggests ways to oppose it

There are a number of reasons why the prices of drugs in India , indeed all over the world, are so high. One of them is the business of branding. Most drugs come with a brand name attached. Paracetamol, for example, is the physical name, or generic name, for a painkiller. It is available under more than 20 brand names -- Crocin, Calpol, Metacin, Pyrin -- all of which are paracetamols. The consumer, however, is not aware of this. He may swear that one particular drug is more effective than the other, although this cannot be so as they all contain the same ingredient.

Thus by branding a drug and advertising it, the drug company plays on a consumer's psyche and brings about an increase in the price of the drug. For example, it costs around 15 paise to produce one tablet of paracetamol. LOCOST (Low Cost Standard Therapeutics), a non-profit charitable trust registered in Baroda , India , manufactures the drug at 15 paise per tablet and sells it at 20-25 paise per tablet. Pharmaceutical companies sell the same drug for around 80-90 paise under the brand name Crocin.

So a tablet that you can easily buy for 20-25 paise is available to you for 80-90 paise because it comes with the brand name Crocin. That branded drug is sold to consumers through advertisements; companies spend huge amounts of money on television advertisements and other kinds of marketing techniques. Brands compete with each other in the market and the cost is passed on to the consumer. This is the reason why drugs are so expensive.

The pharmaceutical sector thus earns profits at the cost of the poor and ignorant consumer. The creation of brand names, leading invariably to high prices, monopolies by big companies and the vulnerability of consumers, are all aspects related to profiteering in the pharmaceutical sector.

A simple solution to this problem which organisations like LOCOST have been suggesting to the government for over 20 years, is to abolish all brand names and allow drugs to be sold only under their generic name.

When a new drug is discovered or invented it is given a complicated chemical name. The innovators, group of technicians, sometimes even the government authority, give it a shorter name -- the generic name. All international trade in drugs is done using generic names. International expert committee lists too are available under generic names. The World Health Organisation (WHO) list of essential drugs -- drugs that must be available in a country all the time and in all places -- also uses generic names. All pharmaceutical exchanges and scientific research methods use generic names.

Organisations and activists lobbying for the use of generic names suggest that the government abolish brand names and instead introduce the system of using the drug's generic name along with the name of the company that manufactures the drug. Example: paracetamol (Crocin), paracetamol (Alembic, Pfizer, Mettur, etc). This way the doctor knows that a particular strip of paracetamol has been manufactured by Pfizer or Alembic, allowing both doctor and patient to choose which medicine they want to prescribe/buy.

So far the government has not agreed to this, as drug companies constitute a very strong lobby, offering money and concessions to bureaucrats. And so the practice of branding continues to earn them a lot of money.

Brand names also cause confusion among doctors, trainees and patients, as every drug has at least 20 to 100 brand names. Many look similar, sound similar and contain almost the same ingredients.

Drugs Today lists the names of all drugs available in the country. Listed alphabetically, using each drug's brand names, the book runs into something like 600 pages. Experts believe that if only the drugs' generic names had been used the list would have been only 1,500 names long, easily wrapped up in 50 pages! The reason for this huge difference is that over the past 100 years, only 1,500-2,000 effective, safe generic drugs have been developed.

Monopolies in the drug industry

A look at the growing list of branded drugs also emphasises monopolies in the market. Take the case of Ciproflaxacin -- an antibiotic used to fight typhoid. Almost half the Ciproflaxacin sold in the market comes from one company; effectively this drug is the brand leader as well as the price leader.

Being a brand leader, a company, whether it be Cipla, Alembic or Glaxo, is able to control the market using various marketing strategies and offering huge margins to retailers and doctors. This way, even if prices are kept high, people will continue to buy the drug. T his monopolisation of the market by the drugs industry is one of the main reasons why drugs are so costly.

It is important to remember that consumers of pharmaceutical products are extremely vulnerable. They are in no position to reject or postpone buying medicines, even if the medicines are expensive. If a doctor prescribes a particular drug, the patient has to buy it. Drug companies exploit this vulnerability, especially in India where drug consumers are fragmented and unrepresented, unlike in the West.

In the West, people either get themselves insured or are insured by their employers. The insurance company buys the patient's medicines. Consumers stand to gain from being part of a larger chain of insurers, as the insurance companies together decide what price they are prepared to pay for a particular drug. They are able to negotiate price with the drug manufacturer. In India , people have to fend for themselves and often end up paying much more for their medicines.

TNMSC model for procuring drugs

To combat the problem of market monopolisation and steep prices, the Tamil Nadu government floated a public sector corporation called the Tamil Nadu Medical Services Corporation (TNMSC) to provide necessary services to government hospitals. One of the corporation's main objectives is to organise an efficient, centralised drug procurement and distribution system involving an open tender system that leads to stiff competition among manufacturers. The system serves as a benchmark for the lowest possible price, as companies, in order to clinch the deal, quote very near the drug's actual production cost. This also helps the TNMSC bargain with drug manufacturers for essential drugs at minimum prices.

A comparison of the purchase price of drugs procured by the Tamil Nadu government with the prices of drugs available in the retail market shows that the Tamil Nadu government is able to buy drugs at around 3-10% of its price in the retail market. This means that drug companies are able to sell drugs to a government agency at 5-20% of the retail price. Albendazole (Zentel), a drug used to treat ringworm in children, is available under several brand names for Rs 8-12 in the retail market. One company, however, was able to offer the same tablet to the TNMSC at 22 paise per tablet.

In order to assure people of the quality of drugs available at low prices, the Tamil Nadu government conducts mandatory in-house quality control checks.

Role of medical practitioners

Medical practitioners too do their own share of profiteering in the drug industry. Major drug companies like Cipla and Alembic have begun selling drugs to medical practitioners at half, or one-fourth the price sold to consumers in the retail market. There is therefore a huge margin of profit between what patients buy in the open market and what doctors procure as bulk buyers.

One reason why bigger drug companies are willing to sell drugs to doctors at such cut rates is that earlier, doctors bought their medicines from small manufacturing units instead of from large companies. These small drug-manufacturing units ( in Mumbai) often comprised a small flat with a tableting machine costing around Rs 100,000. The unit would buy medicinal powders in bulk from the market and produce tablets that it would then sell cheap to doctors.

In the old days doctors dispensed medicines from their own dispensaries, so they would invariably try to make a little profit by sourcing cheap drugs from small pharmacies and selling them to their patients at higher prices. They were able to buy drugs at 20%-50% of the market price and so keep a margin of profit for themselves.

In the last 10 years, big drug companies like Cipla, Alembic, Glaxo and Reddy's have come to realise that they are losing out because doctors are approaching smaller companies. So in an attempt to capture the 'branded generic market', large companies have started producing the same drug under various brand names and selling them at different rates to capture different market segments.

For example, Cipla would market Ciprofloxacin under, say, Ciplacin and Ciprofloxacin 500 mg. Ciplacin, introduced in the retail market, would be expensive while Ciprofloxacin 500 mg, supplied in bulk to doctors and retailers, would be cheaper. Thus, pharmaceutical distributors and retailers are also able to make use of the huge trade margins offered by large drug companies.

Other issues in profiteering

Another aspect to keep in mind is that many large manufacturing units do not necessarily manufacture the medicines they sell in bulk. For example, of the 50 drugs Glaxo sells, it probably bulk-manufactures only around five or 10. For the rest of the drugs, like LOCOST, it buys powders from bulk sellers and manufactures tablets in-house using a simple tableting machine. So, when you buy a drug from a reputed company, don't always assume that the company manufactures the drug in bulk. It could very well have bought it from somebody else; there is no assurance of the product's quality. Most companies, however, are careful about quality control.

The sale of banned drugs -- drugs that are considered hazardous -- is another concern in India . Right now, 85 types of drugs, considered hazardous and banned in the West, are being sold in India . The All India Drug Action Network (AIDAN) -- a network of civil society organisations -- has been campaigning for a rational drug policy for the last two decades. India 's new liberalisation policy has led to the slow withdrawal of the government from the regulatory mechanism. So, while in 1979 there were 347 drugs under price control, in 2004 the number dropped to 74, leading to exorbitant price rises. The network is currently pressing the government for a price regime.

(Dr Anand Phadke is with CEHAT-- the Centre for Enquiry into Health and Allied Themes, Pune. This article is based on his recent talk at Open Space, Pune, an initiative of the Centre for Communication and Development Studies)

InfoChange News & Features, July 2005