Faulty formula

New drug pricing policy proposes bringing all essential medicines under price control, but makes them expensive

By Ankur Paliwal
Published: Wednesday 30 November 2011

Faulty formula


After years of dilly-dallying and several Supreme Court reminders, the Centre has proposed to bring all essential drugs under price control. But the policy is nothing but hogwash. Its pricing mechanism would make essential medicines out of reach for most people. Public health experts have termed the draft National Pharmaceutical Pricing Policy of 2011 a hurried and slipshod job. The pharma industry, too, has expressed reservations.

The Union Ministry of Chemicals and Fertilisers put up the draft policy on its website for public comments just two weeks after the Supreme Court asked the Centre to file an affidavit detailing when it will bring essential drugs under price control. The draft policy aims to replace the existing Drug Policy of 1994.

The main principle on the basis of which the policy caps the price of a drug is its essentiality. It thus intends to bring under its ambit all the 348 drugs listed in the National List of Essential Medicines, such as drugs for malaria and TB. Currently, 74, or 20 per cent drugs sold in the country, are under price control. The draft policy covers 60 per cent drugs. Pharma companies will have to sell these drugs at a rate equal to or less than the price fixed by the government.

While this should benefit the consumer, the reality is otherwise. The problem lies in the mechanism proposed by the draft policy to decide the ceiling price for a drug. It proposes to do away with the current pricing mechanism based on the cost of production and introduces market-based pricing. As per the proposed mechanism, the government would calculate the weighted average price (WAP) of three top-selling brands of an essential medicine and set the figure as the ceiling (see ‘How to calculate ceiling price’ on facing page). The draft policy claims the existing cost-based pricing is more prone to corruption. The market-based pricing would bring in transparency, while reducing the cost of 52 per cent of the high-priced essential drugs by up to five per cent, it says.

“The mechanism legitimises high prices because top-selling brands are usually high-priced,” says S Srinivasan, managing trustee of LOCOST, a company in Vadodara, Gujarat, that makes affordable essential medicines. For example, GSK’s Augmentin (amoxicillin clavulanate) is the top-selling antibiotic as well as the most expensive. It costs Rs 240 for a strip of six 625 mg tablets. Even though brands like Mankind Pharma’s Moxikind offers the same drug formulation at Rs 72, WAP of top-selling medicines would fix the ceiling price at a higher scale. As per a rough calculation, WAP of three top-selling brands of paracetamol would be Rs 12 for 10 tablets, while its generic versions are available at around Rs 2. Once the ceiling price is fixed at a higher rate, this would only scale up the drug prices as companies selling drugs at a cheaper rate would also sell their products at a rate close to or equal to the ceiling price.

“This defeats the whole purpose of access to essential medicines,” says Amit Sengupta, member of All India Peoples Science Network. “It will be a total sellout of the public health to the pharmaceutical industry,” he warns.

In a turnaround solution, C M Gulhati, editor of Monthly Index of Medical Specialities says, “Why not take the average price of the three cheapest brands as the ceiling price?” Certain drugs sell more because they are prescribed by doctors, and the prescriptions are driven by incentives offered by pharma companies, he adds.

The pharma industry defends the mechanism. “It ensures both quality and price control,” says D G Shah of the Indian Pharmaceutical Alliance. It requires companies selling drugs at an exorbitant rate to bring down their price. At the same time, it allows them to recover their research, development and manufacturing costs. Taking WAP of low-selling drugs could be a compromise on the quality of drugs as small manufacturers may not follow good manufacturing practices. Such low ceiling price would also dissuade companies from investing in India, he explains.

The pricing would hit companies who make top-selling drugs and have a high domestic market share. An analysis of eight pharma giants by PINC Money, a market research firm in Mumbai, shows GSK would be the hardest hit because its domestic market share is more than 93 per cent. Besides, most drug formulations in the country are generic and offer high profit margins. Shah says profits of pharma companies would be affected by 20 to 50 per cent, depending on their domestic market share.

Irrational price control

For drugs that are not under proposed price control, the policy allows manufacturers to increase price up to 15 per cent annually. The current limit is 10 per cent. “This is irrational. The companies already sell drugs at a very high rate. Allowing them to further increase the price, that too annually, is like offering them bonus,” says Gulhati. The government should have capped their profit to prevent them from setting irrational prices, he adds.

The policy also seeks to put bulk drugs (the main ingredient of a drug) out of the ambit of price control. The draft reasons that manufacturers gradually stopped making bulk drugs notified under price control and that this can have a cascading effect on the production of drug formulations. Of 74 bulk drugs, pharma companies manufacture only 47, it states. Public health experts do not buy the argument. The production of some bulk drugs was stopped because government did not revise their prices,” says Srinivasan.


Putting bulk drugs out of price control may lead to cartelisation if there are less manufacturers of a particular bulk drug, he warns. Consider rifampicin. This bulk drug for anti-TB therapy is manufactured by a few, including Lupin and Themis. What if they join hands and decide to set a high price? Currently, rifampicin is under price control and a strip of 10 capsules of 150 mg costs Rs 19.88. “This may result in scarcity of drug formulations or result in high pricing of the drug,” says Srinivasan.

The policy draft also seeks to bring combination drugs under price control. Their ceiling price would also be set using the WAP method. “The policy should have a strategy to discourage unnecessary combinations,” Srinivasan says. The government can still do this by fixing the ceiling price of the overall combination at the ceiling price of essential drugs, he suggests.

The draft policy fails to address techniques used by companies to circumvent ceiling price. One such measure is tweaking the basic molecule and producing identical drugs that do not come under price control. For example, Enalapril, an anti-hypertensive drug, listed essential, belong to class of ace-inhibitor drugs. “It is not enough to bring Enalapril under price control. All ace-inhibitors must be under the policy,” says Anant Phadke of Sathi, a Pune non-profit. Or else, companies will push doctors to prescribe ace-inhibitors, not under price control, he adds.

In case of violation, the draft policy says, National Pharmaceuticals Pricing Authority can take appropriate action but does not elaborate it.

The draft exempts itself from the pricing of patented drugs and medicines whose WAP is less than or equal to Rs 3. This would mean several essential drugs like anti-diabetics, anti-hypertensives, anti-asthmatic and anti-acidity would be out of price-control. Then it would be misleading to say that all essential medicines are under price-control.

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