DPCO:-

Indian Perspective

SPTM - NMIMS

Key Growth Drivers Domestic Formulations Market

Consolidation leading to better pricing power Higher growth in the chronic disease segment

Increasing penetration
Growing share of middle class and increasing per capita
income

Health Insurance

Product Patent Regime

Indian Pharmaceutical Evolution

Phase V

Phase IV
Phase III Development Phase Phase II Government Control Phase I Early Years Market share domination by foreign companies Indian Patent Act 1970 Drug prices capped Local companies begin to make an impact Process development Production infrastructure creation Export initiatives Growth Phase Rapid expansion of domestic market International market development Research orientation

Innovation and Research

New IP law product patent Discovery Research Convergence

Relative absence of organized Indian companies

1970

1980

1990

2000

2010

The Indian pharmaceutical industry is a success story providing employment for millions and ensuring that essential drugs at affordable prices are available to the vast population of this sub-continent.
-

Indian Pharmaceutical Industry in the World Pharma Industry

3 rd in VOLUME SALES 13 th in VALUE SALES

INDIAN drug prices are lowest in the world

 What is the Price ?

What can influence the Price ? Cost based Price or Value based Price ??

PRICING MODEL
Value based : Customer
Cost based : Product

 Relation between Drug Pricing & Country

GDP, Per capita income

Table I: February 2007 Price; Each product is calculated in rupee value per tablet.[1] ..

It shows the Indian prices are the lowest for all the drugs.
42,000 $ 37,023 $ 35,133 $ 34,740 $ 705 $ r

Per Capita GDP

NAME OF THE DRUG Ciprofloxacin 500 mg

USA 423.26

UK 324.77

CANADA AUSTRALIA 132.67 213.8

INDIA 6 0.38

Gliclazide 80 mg Ibuprofen 600 mg

Indomethacin 25 mg Insulin 100 IU/ml Isosorbide Mononitrate 20 mg Ofloxacin 200 mg Omeprazole 20 mg

63.7 2.2
3.63 124.18 19.82

53.77 0.43
4.87 131.05 59.87 144.63

28.39 6.76
9.25 363.93 41.55 109.8 201.97

9.15 6.67
10.85 219.53 30.51 192.15 109.15

3.5 0.9
1.5 208 3.2 4 4

0.7 0.594
0.52 -0.1 0.656

111.47

91.54

0.74

Paracetamol 500 mg
Propanolol 10 ml

12.55
61.41

4.43
32.33

2
11.61

12.98
6.49

1
2

0.59
0.67

Table II: Price per tablet in rupees weighed by per capita GDP Price/GDP)*100
Per Capita GDP NAME OF THE DRUG 42,000 $ USA 37,023 $ UK 35,133 $ CANADA 34,740 $ AUSTRALIA 705 $ INDIA

Range

Ciprofloxacin 500 mg
Gliclazide 80 mg Ibuprofen 600 mg Indomethacin 25 mg Insulin 100 IU/ml Isosorbide Mononitrate 20 mg Ofloxacin 200 mg Omeprazole 20 mg Paracetamol 500 mg Propanolol 10 ml

1.008
0.151 0.0052 0.0086 0.2956 0.0471

0.8772
0.1452 0.0146 0.013 0.353 0.1617 0.3906

0.3776
0.808 0.0192 0.0263 1.0358 0.1182 0.3125 0.5748 0.0056 0.033

0.6154
0.0263 0.194 0.0312 0.6319 0.0878 0.5531 0.3141 0.0373 0.0186

0.851
0.4964 0.1276 0.2127 29.503 0.4539 0.5673 0.5673 0.1418 0.2836

0.6304
0.4701 0.1224 0.2041 29.2074 0.4068 0.2548 0.3276 0.1362 0.265

0.2654 0.0298 0.1462

0.2472 0.0119 0.0873

10

per capita GDP of a country has at least a partial bearing on the prices of drugs
In the last column the correlation coefficient r ,
calculated between the per capita GDP of each country and its price of the drug, for every drug.

The correlation coefficient varies in the range of 0.380.740 and has an average value of 0.521.

11

KEY DRIVERS FOR PRICE FIXATION

1. Regulatory systems on prices.

2. Market structure on price.

3. Innovation and R&D spent in terms of % to prices/

revenue. Also the Level of IPR protection.

4. National income and GDP on prices.

5. Affordability / Accessibility to larger population
12

How the Price of Medicine is decided in various countries ?

13

USA

14

Prices of drugs in USA are probably the highest in the world

Government of USA does not control the prices.
The manufacturers of pharmaceuticals fixe the prices based on: What price can the market bear? How much money is spent on R & D? What is the cost of marketing and distribution? Profits expected What is the improvement in therapeutic efficiency over the products present now in the country?
15

UK

16

UK very controlled environment

The government of UK goes into a voluntary agreement with
the Association of British Pharmaceutical Industry. ..the profits of the pharmaceutical industries are controlled and the prices of drug products are reigned in. Only a few patients pay some small co-payment for their drugs. For most patients the medicines come free as the National Health Services ( NHS) pays the bill for the medicines. There are two institutions; The National Institute of Clinical Excellence ( NICE) and the Health Technology Board which assess the therapeutic effectiveness and the cost effectiveness of the drug products being made available in UK.

17

CANADA

18

Canada has a unique way of controlling its drug prices

The Federal Government regulates drug prices.. It takes into
consideration the prices of a particular patented drug product in seven countries; USA, France, Switzerland, Germany, Sweden, UK and Italy. The median price among all these prices is considered and is fixed as the price of the patented product in Canada. This procedure is known as reference pricing. Government also takes into consideration how well the new patented product is comparable to the existing drug products in the same category. Canada also follows procedures like reimbursement and price cuts for costly medicines. These policies help the government in offering its population quality medicines at low cost. 19

Australia

20

Australia
has a system called Pharmaceutical Benefit Scheme (PBS). This uses reference pricing and cost utility methods for Drug
Price Control. The Australian PBS results in some of the lowest prices for medicines in the world. Australia follows another procedure called Volume Limitation to regulate the prices of medicines. It imposes a price-volume agreement, on manufacturers of new medicines, which links a new drugs reimbursement price to a volume level. If the level is crossed, the manufacturer must provide compensation through price reduction or cash payments to the government or remove the product from the market. So the volume of production of the drugs as well as its price is 21 controlled.

Indias Healthcare Context is Unique

Countries Govt. Payment 44.3% 80% 71% 77.5% 75.1% 72% Out of pocket payment 13.7% 20% 16% 20.5% 11% 17% Insurance Others

United States Japan Australia France Germany Canada

35.8% 7% 2% 13.9% 11%

4.9% 5%

UK
Spain Italy

81%
72% 73.7%

3%
20.5% 26.3%

16%
7.5%

India : 80% out of pocket payment and 20% from others

Sources of Financing Healthcare Services in India

Proportion of Health Expenditure by Financing Source
Central Government 6% State Government 13%

Local Government 2% Firms 5% Households 72%

External Aid 2%
Source: National Health Accounts 2001-02, MoHFW, GoI

Access of Medicines to All Proves to be a Challenge

Percentage of WHO regions lacking access to essential medicines

This 350 mn. people are largely clustered around urban centres where health care facilities exist

Source: Network, November 2004

Access to Innovative Medicines

150 Mn. Formal sector 350 Mn. access to medicines 200 Mn. Largely above Poverty line

Pharma Industry role is restricted to this sector

300 Mn.
650 Mn. (no access to medicines)

Above Poverty line

Need of these patients are primarily for essential medicines

350 Mn. Below Poverty line

Formal Sector: Those employed with the Public or Private Sector

Will Patent Laws Fuel Price Increases?

Post 2005 only 2.3% of the Indian pharma market consists of drugs that have no therapeutic equivalent. 97.7% of the market will be generic or the products will have therapeutic options.

15.7%
8.3%
(1)

Empirical evidence suggests ~15% of new patented drugs are NMEs with significant therapeutic advantage.

Therapeutic Equivalents will exist.

76%

Patented Drugs

~85% of All Patented Medicines will have a Therapeutic Equivalent

(1) Includes new salt, new formulations, new combinations, new manufacturer or patents for new indications Source: Lu and Comanor (1998), OPPI, FDA, BCG Analysis

The Way Ahead Ensuring Access in Control Free Pricing Regime

Free Market Price
350 Mn. access 2-pronged to medicines Approach

Negotiated prices for Government procurement

650 Mn. (no access to medicines)

Industry to support Government efforts to provide Access

Some take away

1. Drug prices are dictated by the overall income level of the people of the country. 2. Affordability / Accessibility to larger population is critical

3. Drug prices depend on how much control the government is exercising on the pharmaceutical manufacturers. 4. How much research and development is taking place in the field of pharmaceuticals and what is the cost of this R& D. 5. How much the government and the society are concerned about protection of intellectual property rights.
28

Why market cannot decide medicine prices?

29

Why market cannot decide medicine prices?

Free Market/Invisible hand not possible
Because buyers and sellers have different
bargaining strengths Sellers and doctors decide Buyers (patients) have little or no choice Buyers have to make decision usually under distress
30

INFO ASYMMETRY
Choice by Intermediaries
Knowledge asymmetry From which flows information asymmetry

31

Competition does not reduce prices !

Many Players but prices of Drugs have not come down.
Same drug is sold at different prices by the same company
under different brands.

Lack of awareness that price is not necessarily a denominator

of quality, hence Brand Leader often also the Price Leader (Costliest Drug is most sold).

Therefore competition does not automatically bring down the

prices.

In fact more players seems to result in a range of prices.

32

Competition does not reduce prices !

Consumption patterns are not affected by prices - a
unique example of market failure

The doctors and the pharmacists - companies

influence them

Markets are distorted by unfair and unethical

marketing practices of drug companies

33

Criticality of Affordability of Medicines in India

Distribution of Expenditure on Treatment (Non-Institutional) Based on NSS, 2005) Medicines cost account for 80 % of total treatment cost
80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Medicines Other Expenditure
34

Medicines Other Expenditure

Disease Burden In India

Source: World Development Report 2006

35

Relevant Observations of the National Commission on Macro Economics & Health, August, 2005

Probability of the poor falling sick is 2.3 times more.

A Rs. 1000 increase in per capita income increases life
expectancy at Birth by 3 years.

An Estimated 3.3% of the population is getting pushed

below poverty line on account of medical treatment.

36

Economic Constraints to Access

Estimated by different sources that 50% to 80% of the
Indian population have little or no access

India is the country with largest number of people (649

million) without access to essential medicines

Given that India today is the 3rd largest producer of drugs

in the world and exports medicines to over 200 countries, local capacity is not the major constraint

37

The Poor Spend More on Medicines!

Poorer populations spend a larger proportion of health
care expenditure in buying medicines

Out-of-pocket medical costs push 3.3% of the

population below poverty line in one year

Proportion of private expenditure on Health >75% Very large proportion of drugs consumed (85%)
procured through retail sales
38

Are Medicines less important?

Telephone rates, Insurance premia,
Electricity tariff, Bank Interest rates are regulated. Drugs are recognized as an Essential commodity.

Drugs should always be available to General public at reasonable price .

SO WHY NOT MEDICINES to be regulated in public interest ?

39

Let us study the regulation of Drug Prices

!

40

DPCO - A BOON OR BANE

41

Pharmaceuticals Price Regulation in India

Prior to 1962 no price control, price
of medicines were high, domination of MNC was introduced in 1962.

First Price regulation in Medicines

In 1970, the Drug Prices Control
Order issued under the Commodities Act, 1955
(IPA) was enacted

Essential

In the same year, Indian Patents Act 42

DPCO (1962)
Published The price list of products by

o Manufacturers o Importers o Distributors o Chemists.

43

DPCO (1963)
Freezing of sales prices of drugs at the level obtained on 1st April
1963.

In 1966 the scenario was as follows:

o Manufacturers had to secure prior approval of the government

before increasing the prices of any formulations in their lists as

per the 30th June, 1966. o Prices of drugs sold in loose were regulated. o Manufacturers to stamp the retail selling prices on the containers of the drugs.
44

IMPACT OF DPCO (1963) ON PHARMACEUTICAL SECTOR

Reduction in the profitability. Troubled long term growth. Voluntary price reductions.

45

Indian Pharma scenario 1940-70

At the time of independence, the bulk drug industry in India
was in the infancy stage with a meagre investment of Rs. 10 crore and a production worth just Rs. 26 crore. Most of the bulk drugs and formulations were imported. Till 1962, the drug industry was bereft of any price control.

In 1962, there was Chinese aggression on India and

Emergency was declared.

The government feared that, as a result, drug prices might

rise.

46

Indian Pharma scenario 1940-70

Accordingly, for the first time, under the Defence of India Act
of 1915, statutory control was imposed on the prices of drugs and pharmaceuticals. The Drugs (Display of Prices) Order, 1962 and the Drugs (Control of Prices) Order, 1963 were promulgated.

Under the Drugs Prices(Display and Control) Order of 1966, it

was made obligatory for the manufacturers to obtain prior approval from the government before increasing the prices of any formulation.

47

DPCO (1970)
To reduce the high prices of essential drugs. Providing sufficient incentives to the industry to facilitate its growth. To develop research facilities and expansion in a planned manner . To promote diversification of entrepreneurship in future development
of industry thus providing better opportunity for technically qualified Indian personnel's.

Restriction on excessive profits.

Bulk Drugs were divided into Essential and Others. Profit margin were dictated.
48

DPCO 1970
In its introductory form, DPCO was a direct control on
the profitability of a pharmaceutical business, and an indirect control on the prices of pharmaceuticals. The government stipulated that a companys pre-tax profit from its pharma business should not exceed 15% of its pharma sales (net of excise duty and sales tax). In case profits exceeded this sum, the surplus was deposited with the government. So, a pharma company had the freedom to decide the prices of its products. Product-wise margins were also flexible, so long as the overall margin did not exceed the stipulated norm.
49

DPCO 1970
Since individual product prices did not require approval
from the government, bureaucratic hurdles were low. At that time, the Indian pharmaceutical industry was largely dominated by MNC affiliates and subsidiaries. These MNCs were hardly affected by the relatively mild form of DPCO and continued operating in the domestic market. However, FERA which came in mid 70s did curb the operations of MNCs. Overall, the Indian pharma industry prospered from 1970 to the next DPCO in 1979.
50

IMPACT OF DPCO (1970)

Reduction in profitability due to price control

in 1970.

Increase in prices of some of the products.

51

DPCO (1979)

The bulk drugs were grouped into three different

categories. The maximum sale prices of selective bulk drugs were fixed:
o Category 1 prices (Life saving) 14% post tax on net worth. o Category 2 prices (Essential) 14% post tax on net worth. o Category 3 (Others) prices 12% post tax on net worth.
52

DPCO 1979
The maximum sale prices of selective
Formulations were fixed based on bulk drugs prices:
o Category 1 prices (Life saving) 40 % MAPE Maximum Allowed Post Manufacturing Expenses). o Category 2 prices (Essential) 60% MAPE Maximum Allowed Post Manufacturing Expenses). o Category 3 (Others) prices 100 % MAPE Maximum Allowed Post Manufacturing Expenses).
53

IMPACT OF DPCO (1979)

Mark up for three different categories turned out to
be unrealistic:
o Mark ups for category 1 and 2 were much lower than break even level hence they had no incentives to produce.

o Considerable time taken for the revision of prices. As the cost increases remain uncompensated for some time, the profits as a results was even less. o While granting price approvals, cost accounting based on certain norms was favorable for some while penalized others.
54

IMPACT OF DPCO (1979)

In the Drug Price Control Order of 1979 which stayed
enforced till 1987, 90% of all drugs were under strict price control. With such massive regulation on the prices of most drugs and thereby on the profitability of the manufacturing companies, the production of scheduled drugs became unfeasible. For instance, no export orders were taken on controlled drugs since their supply had to be under certain parameters. As a result, the level of manufacture by the pharma industry declined.
55

Until around the1990s.....

The drug prices were strictly controlled. This stifled expenditure on R&D in more ways than one. First of all, the profit margin of the industry came down. With an inadequate profit margin, the industry never ventured out in the field of R&D. Also process patents had been granted to the industry under the Indian Patent Act of 1970 and the domestic manufacturers simply had to reverse engineer drugs made abroad. They were able to foray into various therapeutic segments and there was no need to indulge in any R&D.
56

Until around the1990s.....

Secondly, it dissuaded foreign players and MNCs from
entering the market. In fact, the share of foreign companies in the domestic drug market has continuously declined. Also, the imports and exports were meagre.

57

DPCO (1987)

Reclassification of three categories of drugs

into two categories:
a) Category 1 Drugs necessary for national health program ( 27 drugs entitled to 75% MAPE Maximum Allowed Post Manufacturing Expenses). b) Category 2 Other essential drugs ( 139 drugs entitled to 100% MAPE). Results o regulate reasonable distribution. o Increase supply of produced bulk drugs.
58

IMPACT OF DPCO -1979

No attention on increase in costs of input,

conversion and packaging while fixing prices in 1979.

59

DPCO - 1995

60

The Gazette of India - Extraordinary PART II - Section 3 - Sub-Section (ii) Ministry of Chemicals and Fertilizers Department of Chemicals and Petrochemicals New Delhi, dated the 6th January, 1995
ORDER S.O. 18 (E). : In exercise of the powers conferred by section 3 of the Essential Commodities Act, 1955 (10 of 1955), the Central Government hereby makes the following Order, namely:-

This Order may be called the Drugs (Prices Control) Order,

1995.

It shall come into force on the date of its publication in the

Official Gazette

Drugs Price Control Order (DPCO), 1995

is an order by the Government of India under Section 3 of
the Essential Commodities Act, 1955 to regulate drug prices. It provides the list of price controlled drugs, lay down the procedures for fixation of prices of drugs, method of implementation of prices fixed by Government and penalties for contravention of provisions among other things. The powers of implementing the provisions of implementing provisions of DPCO; has been vested with the National Pharmaceutical Pricing Authority (NPPA).

62

DPCO -1995
DPCO was revised in 1979, 1987 and 1995 as per pharma
policy of the Govt.

DPCO 1995 Only one category under Price control with a

uniform MAPE of 100% is granted Controlled category; rest Decontrolled category - no price control but still prices are monitored and regulated ! follows : Included Conversion cost .

Under the current DPCO 1995, the Retail Price are fixed as
MRP = (MC+CC+PM+PC) x (1+MAPE/100) + excise duty (MC = material cost including cost of bulk drugs/excipients: CC = conversion cost; PM = cost of packing material; PC = packaging charge; 63 MAPE = Maximum Allowable Post-manufacturing Expenses)

Calculation of Fair price of bulk drug

According to the provisions of the order, the central
government sets the maximum sale prices of bulk drugs. While fixing the price of a bulk drug Government may take into consideration: 1.A post tax return of 14% on net worth. 2.Return of 22% on capital employed. 3.Internal rate return of 12% based on long term marginal costing. If the production is from basic stage, the post tax return is 18% and a return of 26% on capital employed is provided. No person can sell a drug at a price higher than the one fixed for it including the local taxes.
64

Fixation of maximum sale price of the drug

When the number of manufacturers of the said drug is more than one, the maximum sale price is fixed at 2/3rd cut off level or weighted average price, depending upon the situation.

Regulation for Pricing & Availability in India DPCO, 1995

Formulation Prices as per formula 74 APIs & Its Formulations Under Price Control

For indigenous Drugs = Cost + 100% MAPE

For Imported Drugs = Landed Price + 50% margin

Cost Based Pricing of APIs

Price Control of Any Pack in Public Interest

66

Formation of NPPA
In 1997 ...

67

MINISTRY OF CHEMICAL AND FERTILIZER

DEPARTMENT OF PHARMACEUITICAL ORGANIZATION
AND STRUCTURE.

NATIONAL PHARMACEUTICAL PRICING AUTHORITY

(NPPA) ACTIVITIES AND RESPONSIBILITIES: All matters relating to NPPA including its functions of price control and monitoring. implement the provisions of the DPCO Responsible for development of infrastructure, manpower and skills for the pharmaceutical sector. Work for the promotion and coordination of basic, applied and other research in areas related to the pharmaceutical sector and for international co-operation in pharmaceutical research.

NATIONAL PHARMACEUTICAL PRICING AUTHORITY (NPPA)

The National Pharmaceutical Pricing Authority (NPPA), an
independent body of experts in the Ministry of Chemicals and Fertilizers was formed by the Govt. of India in 1997.

Resolution published in the Gazette of India No.159 dated

29.08.97.

The Resolution mentioned that the Government had been

experiencing that the present mechanism for the fixation and revision of prices of bulk drugs and formulations was cumbersome, complicated and time consuming.

NPPA
NPPA is an organization of the Government of India

to fix/ revise the prices of controlled bulk drugs and formulations and to enforce prices and availability of the medicines in the country, under the Drugs (Prices Control) Order, 1995.

NPPA- The Indian Pharma Pricing Regulator

Enforce DPCO 1995, Detect Violations, Take Action

Inputs for Govt. Policy

NPPA
Determine & Recover Overcharging
Fix & Regulate Price of Schedule APIs & its Formulation

Established in 1997, Multi-Disciplinary, DGCI, CAB, Sr. Eco. Adv. MOF in the Authority

Monitor Prices of Non-Scheduled Packs & Correct Aberrations, as per Govt. Policy
71

Functions of NPPA
(1) To implement and enforce the provisions of the Drugs (Price Control) Order (DPCO), 1995 in accordance with
the power delegated to it. To recruit/ appoint the necessary staff for efficient functioning of the Authority, as per rules and procedures lay down by the Government

(2) To undertake and/or sponsor relevant studies in respect of

pricing of drugs/formulations.

(3) To monitor the availability of drugs, identify shortages, if

any, and to take remedial steps.
72

Functions of NPPA
(4) To collect/maintain data on production, exports and
imports, market share of individual companies, profitability of companies etc. for bulk drugs and formulations

(5) To deal with all legal matters arising out of the decisions of the Authority. (6) To render advice to the Central Government of changes/revisions in the drug policy. (7) To render assistance to the Central Government in parliamentary matters relating to drug pricing.

73

NPPA ORGANIZATION
Chairman
Member Secretary

Advisor (pricing)
Director (monitoring &enforcement division)

Director (Admin. Division)

Bulk drugs

Director (Formulation division)

Director (legal division)

NPPA ORGANIZATION
Chairman Member Secretary
Advisor (Pricing) Bulk Drug Pricing Form-I,II & VI Examination Policy Matters Customs / Excise Issue Right to Information Bill

 ORGANIZATION Contd Director (Formulation Division) Formulations Pricing (Form III & IV) Availability / Shortage of bulk drugs/formulations Production & Import/Export of drugs & formulations Parliament Questions / Assurance & VIP ref. Director (Monitoring & Enforcement Division) Monitoring & Enforcement of prices of bulk drugs & formulations,
both Scheduled and non-scheduled Form-V examination Inclusion / Exclusion of drugs under DPCO,1995 R&D aspects Pharma Index

ORGANIZATION Contd
Director (Legal Division) Identified cases of overcharging on bulk drugs & formulations
and related issues. Legal matters & follow up of the pending court cases. Any other references on the above

Director (Admin Division) Establishment General Admn. Co-ordination Vigilance

PROCEDURE FOR PRICE FIXATION / REVISION OF BULK DRUGS

As per par 3 of DPCO, 1995 prices of scheduled bulk drugs are fixed by the NPPA. Following steps are involved in fixation/revision of bulk drug prices :-

Step1: Identification of bulk drugs

Drug taken up for study on the basis of:- validity period - concerned manufacturer/company - Drug produced in the country for which no price has been notified under DPCO,1995

Step 2:Collection of data

Data is collected by issuing questionnaire/Form I or II of DPCO, 1995/cost-audit report etc. and verification by plant visits, if required.

In case of scheduled drugs : in FORM I

The manufacturers of bulk drugs are required to furnish details of list of scheduled bulk drugs produced by them and the costs of each of such unit in FORM I within days of commencement of order.
After the commencement of order, the manufacturer should furnish the same details in FORM I by 30th of the September, every year.

In case of non- scheduled drugs : in FORM 2

The manufacturers of bulk drugs are required to furnish details of list of bulk drugs produced by him and the costs of each of such unit in FORM 2 within thirty days of commencement of order.

Step 3 : Preparation of actual cost statement

Prepare on basis of data submitted / collected & verified during plant visit.

Step 4 : Preparation of Technical Parameters

Technical parameters are prepared based on data submitted and collected. Plant capacity is assessed considering 330 working days for normal operation of plant leaving 35 days for scheduled maintenance of plant. The achievable production level is considered at 90% utilization of assessed capacity allowing 10% production loss on account of unforeseen break down.
80

PROCEDURE FOR PRICE FIXATION / REVISION OF BULK DRUGS

Step 5 : Preparation of Estimated Cost The estimated cost for the pricing period are then prepared based on actual cost & the technical parameters. While projecting the future cost, an increment is recognized at 5% per annum in respect of salaries & wages. The customs duty and other taxes as per the current budget are considered. Step 6 : Calculation of Fair price of bulk drug Fair price is calculated by providing returns as specified in sub para (2), para 3 of DPCO, 1995.

Step 6 : Calculation of Fair price of bulk drug

According to the provisions of the order, the central
government sets the maximum sale prices of bulk drugs. While fixing the price of a bulk drug Government may take into consideration: 1.A post tax return of 14% on net worth. 2.Return of 22% on capital employed. 3.Internal rate return of 12% based on long term marginal costing. If the production is from basic stage, the post tax return is 18% and a return of 26% on capital employed is provided. No person can sell a drug at a price higher than the one fixed for it including the local taxes.
82

Step 7 : Fixation of maximum sale price of the drug

When the number of manufacturers of the said drug is more than one, the maximum sale price is fixed at 2/3rd cut off level or weighted average price, depending upon the situation.

Step 8 : Notification of bulk drug price in official Gazette

The Government can....

The Government can direct any manufacturer of bulk
drugs to sell the same to manufacturers of formulations, keeping in mind his requirements for captive consumption and requirements of other manufacturers of formulations and the planned growth of pharmaceutical industry. Every manufacturer or importer of a bulk drug has to furnish each year, within 30 days of introduction of Finance bill, price list to the Government.

84

NATIONAL PHARMACEUTICAL POLICY- 2002[1,2]

With a view of encouraging innovation the government
of India had exempted the price control to certain specified products this include the following:

1.Any new product developed through indigenous R & D with a product patent under the provisions of Indian Patent Act, 1970 is exempted from price control for a period of 15 years from the date of commencement of the commercial production in the country.

85

NATIONAL PHARMACEUTICAL POLICY2002[1,2] contd ..

2. New product developed through indigenous R & D
process with a process patent under the provisions of Indian Patent Act, 1970 is exempted from price control till the expiry of patent from the date of commencement of the commercial production in the country.

3. Any new formulation developed through indigenous

R & D process with a process patent for the formulation involving newer delivery system; under the provisions of Indian Patent Act, 1970 is exempted from price control till the expiry of patent from the date of commencement of the commercial production in the country.
86

Procedure for Pricing of Formulations

Prices of formulations based on scheduled bulk drugs are fixed in two ways:(A) Based on applications of the manufacturers and (B) On suo-motu basis.

As per para 8 (2) of Drug (Prices Control) Order (DPCO),

1995, a manufacturer using scheduled bulk drug in his formulation is required to apply for fixation of price of formulation within 30 days of fixation of price of such bulk drug (s). 2 months from the date of receipt of the complete information from the company.

The time frame for granting price approval on formulation is

Procedure :
A.(a) Examination of Technical Parameters Checking the Quantity of Bulk Drug as per label claim. The overage claim is allowed as per batch production record or norms fixed by Govt.

(b) Examination of Prices of Bulk Drug

When notified price of bulk drug exists, the notified price or actual price is considered. In the case of imported bulk drug used in the formulation, weighted average import price is considered vis--vis the price submitted by the applicant

(c) Examination of Excipient claims (d) Examination of RM, CC, PC and PM cost Are considered as per the norms notified in the Gazette vide S.O. 578(E) dated 13.07.99. (e) Application of MAPE Maximum allowable post manufacturing expenses (MAPE) is given at 100% on the ex-factory cost for indigenous

formulation, while MAPE up to 50% of the landed cost is allowed for imported formulation.

(f) Working out the retail price

The retail price of formulations are worked out as formula given in para 7 of DPCO, 1995 "R.P. = [M.C. +C.C.+P.M.+P.C.] x [1+MAPE/100] +E.D.", (B). Suo - Motu Cases If the manufacturers or companies do not apply for revision of formulation prices as required under Para 8(2) of DPCO, 1995 within a period of 30 days of price reduction of bulk drug or fall in other statutory levies, steps are taken for suo-motu revision. Broadly the procedure given above is followed.

MECHANISM FOR PRICE REVISION AND REVIEW UNDER DPCO1995 - form III or IV.
The manufacture cannot increase the prices set by the govt. The government may fix/ revise the price of scheduled or
non- scheduled bulk drug and their corresponding formulations, and the manufacturer is not supposed to sell it at a price exceeding the price so fixed or revised.

In case the companies are not satisfied with prices fixed by

NPPA, an appellate administrative mechanism with the Govt. available under DPCO 1995

In case the manufacture is not satisfied with the price, he

may re-appeal for the revision of price by making an application in the form III or IV.
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Initiative taken by NPPA (GOVT.)

Compulsory printing of MRP of Medicines Annual Cap of price increase for non scheduled
category reduced from 20% to 10% from April 2007.

In 26 cases of non scheduled packs, NPPA fixed and

notified the prices in public interest.

60 companies voluntary reduced the price to follow

the Govt. instruction.

Efforts to revive Central Public Sector Companies with

view to increase availability and keep prices stable 92

Initiative taken by NPPA (GOVT.)

Notification on Official Website, Compendium of

Prices Online Facilities for Application and Complaints NPPA Centre for Information Facilitation and Grievance (CIFG) handling created at large numbers of places. Civil Society capacity building through NGOs, consumers

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Changing Norms of Price Fixation

IMPACT ON DRUG PRICE COMPARED TO COMMODITY PRICING, M.S., GROWTH, COMPETITION

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Changing Norms of Price Fixation

Over the last three decades, successive Drug Policies have
specified different norms : Number of drugs under Price Control From 342 in the DPCO of 1979 to 74 drugs in the DPCO of 1995 (still under operation)

Criteria used to determine the drugs to be kept

under price control in the DPCO of 1979 the criteria for choosing which drugs under price control based on how essential the drug was;

later DPCOs, rely on market criteria

MAPE allowed: Maximum Allowed Post Manufacturing Expenses : 40% to 75% in 1979; now 100%

DPCO 1987 & 1995

In the DPCO of 1987 and then in the DPCO of 1995, the
proportion of drugs under price control declined to 65% and to 40% respectively. With a large number of drugs being taken out of price control, the production of these drugs became feasible again. As a result, the manufacture of these drugs increased.

In the initial days of Indian pharmaceutical industry (till

1986), expenditure on R&D was almost stagnant and it was only in the 1990s that expenditure on this front really picked up

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POST DPCO 1995 . In 2000R&D expenditure enhanced.

First of all, profit margin for the domestic drug
manufacturers increased thereby enabling local players to provide for R&D. Secondly, foreign trade in drugs increased thereby raising the level of competition in the domestic and international market and necessitating greater R&D. However, there were factors other than the decontrol of drug prices which propelled R&D. For instance, under the TRIPS agreement, process patents were replaced with product patents. This shut the door on reverse engineering and made expenditure on R&D an inevitability for the local players.
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Post DPCO 1995

Drug Prices remain under control & slightly
higher than the all commodities price but well compared IPM remain quite competitive

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Medicines V/s. Commodity Prices (

Common headache 1.00 Common allergy 0.75 Common cold 1.50 Gas trouble (antacid) 3.00 Asthma 0.45 Diarrhoea 1.20 (return) 8.00 Amoebiasis 1.10 Diabetes 0.70 Blood pressure 1.75 Angina (chest pain) 0.55 Arthritis 1.50

Rs)

Cup of tea 5.00 Thali meal 30.00 Milk (half litre) 12.00 Egg 2.50 Banana 2.00 Suburban train ticket Bus fare (minimum) 3.00 Inland letter 2.50 Newspaper 2.00 Public telephone call 1.00
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Indian Pharma Market is Competitive

Large number of Companies in the Industry 40 or more brands in each Molecule Intense competition ensures prices are low 10,000+ listed and unlisted companies in the market Molecule Number of Brands Ciprofloxacin 101 Gatifloxacin 67 Cetrizine 83 Diclofenac 67 Rabeprazole 49 Atenelol 49 Glimeperide 40
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Drug Price Control Order (DPCO)

Since 1970, the Government has endeavoured to

regulate the prices of some drugs through successive Drug Price Control Orders (DPCO)

DPCO regulates the prices of only a fraction of the

drugs in the market

In the case of all other drugs, companies are at a

liberty to charge whatever they
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102

DPCO Impact on MS

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Market Shares of Drugs under DPCO

Year Number of Drugs 347 142 74 74 Approximate Market Share (%) 80 60 40 20
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1979 1987 1995 At Present (2008)

Impact of DPCO in Growth

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Growth in Scheduled Drugs Position as of start & 12 years of DPCO,1995

Name of Bulk Drug No. of formulators
Jan 1995 Human Insulins Ciprofloxacin Oral Solid Ranitidine Oral Solid Cefotaxime Injectables Cefadroxil Oral Solid 4 59 30 24 47 Sept. 2007 10 130 63 50 90 150 120 110 108 91

% Variance

In house data based analysis by NPPA (Source : ORG Data)

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References:
1.http://nppaindia.nic.in/index1.html Dept of Pharmaceuticals annual report 2012

www.tapanray.in Tapan ray website on health care presentation on Price scenario

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