The recent price cut of 108 drugs by the National Pharmaceutical Pricing Authority (NPPA) is a bold step in expanding people's access to essential medicines after the UPA government slashed prices of 348 drugs in 2012.
The industry, as in 2012, expressed dismay and shock, but what the market regulator has done is simple and logical - whenever the price of a drug (among those which have been brought under control) exceeds the average price in the market by more than 25 percent, it's capped. What it means is that a drug manufacturer cannot price its drug at more than 25 percent of the average price of different brands.
The regulator, NPPA, has said that even among generics there is considerable price variability which indicates market failure. It's only natural that the government intervenes when the market mechanism fails in checking prices.
Last time when the the government intervened, through the Drug Price Control Order (DPCO), the prices of essential medicines reportedly fell by up to 20-25 cent on an average and in some cases up to 80 per cent. However, instead of the regulator cutting price, what the government did then was expanding the list of essential medicines to 348 and bringing them under price control.
What the pricing policy did then was replacing the earlier regime, in which prices of drugs were calculated based on the cost of manufacture, with a regime that decided the prices based on existing market prices of top selling brands. The new regime took the average of the three brands that have one percent of the market share.
Although it might have looked fair because top one percent sounded quite reasonable, in reality, brands with one percent market share are the highest selling and the price difference among them can be substantial - some times as high as 10-18 times. When one takes the average, the prices will still be high because of this difference.
The new price cap also follows a similar logic, but capping the prices not based on the cost of manufacture, but by considering the average price.
As in the case DPCO, the new step will certainly bring down the prices of some diabetic and cardio vascular drugs; but it could have done better if it had based its price cap on the manufacturing cost because the difference between the manufacturing costs and retail prices often is huge - sometimes as high as 1000 per cent.
"With the latest NPPA order, the total market of cardiac medicines under price control, including earlier ones, stands at 58 per cent, while 21 per cent of the anti-diabetic drug market faces price caps. Around Rs 5,500 crore of the drug market will be affected, with prices being reduced from 10-15 per cent to 35 per cent. The average reduction is around 12 percent. Drugs that immediately become cheaper include Gliclazide, Glimepiride, Sitagliptin, Voglibose, Amlodipine, Telmisartan and Rosuvastatin, Heparin and Ramipril," reported Business Standard.
The industry is apparently peeved at the price cap with the opinion that the "government should have restricted itself to bringing essential drugs under price control than controlling the pharma sector."
One of the criticisms of the essential drugs list of 2012 is that it still excluded many vital categories of medicines - while some for a particular disease, say hypertension, found a place in the list, some other newer medicines were omitted. Civil society activists argued then that the best form of government intervention was to bring more drugs into essential list.
The same argument is valid even now. Instead of a simple price cap, the government could have brought the 105 drugs under the essential list, which will ensure that the prices will automatically fall despite the flaw in calculating them.
Although media reports indicated widespread resentment in the pharmaceutical industry, there were lonely voices that reflected the other side of the reality. NDTV Profit quoted Arvind Bothra, an analyst at brokerage Religare Capital: "Drugs included in the price cap list are "fairly meaningful molecules," so companies would not exit the market...They will take the price cut, increase their volumes, and move on. The bigger problem for the industry is the uncertainty this ad-hoc expansion brings."
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Updated Date: Jul 16, 2014 12:20:51 IST