Drug Price Control:

Introduction:
Drugs and formulations have been subjected to price control for more than three decades
now. The economic reforms initiated by the Government of India in July 1991, trickled down
to the Pharmaceutical Industry only in 1994 and that too partially. Price control in a large
number of industries has already been abolished.

The main objectives of the Drug Policy after the modifications in the Policy of 1986
announced in September 1994 are to ensure availability, at reasonable prices of essential and
life saving and prophylactic medicines of good quality; strengthening the system of quality
control over drug production and promoting the rational use of drugs in the country; creating
an environment conducive to channelizing new investment into the pharmaceutical industry
to encourage cost-effective production with economic sizes and introducing new technologies
and new drugs; and strengthening the indigenous capability for production of drugs.

The Drugs Price Control Order (DPCO), 1995 is an order issued by the Government of India
under Section 3 of the Essential Commodities Act, 1955 to regulate the prices of drugs. The
Order inter alia provides the list of price controlled drugs, procedures for fixation of prices of
drugs, method of implementation of prices fixed by Government and penalties for
contravention of provisions among other things. For the purpose of implementing provisions
of DPCO, powers of the Government have been vested in the National Pharmaceutical
Pricing Authority (NPPA). Drugs are essential for health of the society. Drugs have been
declared as essential and accordingly put under the Essential Commodities Act. Only 74 out
of 500 commonly used bulk drugs are kept under statutory price control. All formulations
containing these bulk drugs either in a single or combination form fall under the price control
category. However, the prices of other drugs can be regulated, if warranted in public interest.

The NPPA was established on 29th August 1997 as an independent body of experts following
the Cabinet Committee’s decision in September 1994 while reviewing the Drug Policy. The
Authority, inter alia, has been entrusted with the task of fixation/revision of prices of
pharmaceutical products (bulk drugs and formulations), enforcement of provisions of the
Drugs (Prices Control) Order and monitoring the prices of controlled and decontrolled drugs
in the country.

DRUG PRICE CONTROL IS A GLOBAL PHENOMENON

It is important to underline that drug prices are controlled by differing mechanisms all over
the world, including in developed capitalist countries. In Australia since 1993, new drugs
with no advantage over existing products are offered at the same price. Where clinical trials
show superiority, incremental cost effectiveness is assessed to determine whether a product
represents value for money at the price sought. In Britain, there exists the pharmaceutical
price regulation scheme - a voluntary agreement between Britain’s Department of Health and
the Association of the British Pharmaceutical Industry in which companies negotiate profit
rates from sales of drugs to the National Health Scheme.

Globally, Drug Companies are being forced to reduce the cost of medicines. Pressure is
being mounted by Health Insurance Cos, Health Management Organisations (HMOs) and
governments (in countries like UK and Canada where the State provides Health Insurance
cover) all over Europe and North America. These pressures have become stronger in
recent years with the realisation that spiralling Drug costs are making Health insurance
cover (whether state funded or privately managed) unsustainable. In all these countries
there is a major move to insist on generic prescription in most cases, thus opening up a huge
generics market. Large TNCs are forced to compete on more or less equal terms which a
large number of lesser known Cos, and also sell drugs at relatively cheaper rates. In the US,
for example, from 1995 through 1997, generic (i.e. drugs without brand names that are
produced by small companies and are cheaper) drug prices showed a double-digit rate of
decrease. This shift was facilitated by the Hatch-Waxman Act, which made the approval
process of generic drugs much easier. Since 1984 this has resulted in a dramatic increase in
competition from generic drugs, leading to an estimated saving of 8-10 billion dollars in 1994
alone.

The fact that drug prices are controlled all over the world flows from the global experience
that market mechanisms cannot be expected to stabilise prices. Various other interventions
are needed to manipulate the market, in order to guard against monopolies emerging. Unlike
in the case of consumer goods, there is no direct relation between the market and consumers
in the case of drugs. Drugs are purchased by consumers on the advice of doctors or chemists.

Consequently, the marketing strategies of drug companies target doctors or chemists. Doctors
are not known to take decisions based on price of contending brands. Similarly chemists have
no interest in selling cheaper brands. So, if we believe that drug prices will be kept low by
market competition, it is a belief that is not borne out by the past experience, in India or
elsewhere.

Here, it is necessary to nail another lie. There is a prevailing myth that drug prices in India
are the lowest in the world. This is at best a partial truth. Drugs, which are still Patent
Protected, are much cheaper in India due to India’s earlier Patent Act. It should be obvious
that we will lose this advantage after amendment of the Indian Patent Act of 1970. But off-
Patent Drugs (which anyway account for 80-85 per cent of current sales in the country) are
not necessarily cheaper in India. In fact, generally, Drug prices for these Drugs are higher in
India than those in Sri Lanka and Bangladesh. In fact prices of some top selling drugs are
higher in India than those in Canada and the UK. Thus, clearly, the benefits of the advantage
that the Indian Drug Industry enjoys over all other Third World nations, in terms of the
availability of indigenous technology and a large domestic market, have not been passed on
to the consumers.
The reasons and rationale behind India’s flawed and unfair drug pricing
policies:

India’s public health is in crisis and has deepened with the widespread occurrence of HIV.
People do not have access to affordable health services while the affluent sing hosannas for
India’s drug companies as their share prices ride the boom in the market.

Administrative pricing systems for drugs were initiated in 1962, in the wake of the Chinese
aggression and the declaration of emergency in 1962. The Defence of India Act was invoked
to curb the spiraling prices of medicines. The Drugs (Display of Prices) Order 1962 and the
Drugs (Control of Prices) Order 1963 were promulgated. These orders, at least, had the effect
of freezing prices of drugs as of April 1st 1963. Drug prices have been unaffordable even
before the onset of TRIPs from 2005, thanks to the climate of deregulation and loosening of
controls. And drug costs form more than half the treatment costs. India’s drug situation is one
of poverty amidst adequacy and plenty: people do not have access to affordable health
services and medicines even as the share prices of drug companies is booming and Indian
drug companies are praised abroad. This makes a thorough overhaul of the drug control and
pricing system in India imperative. (See box below.)

A Disaster Foretold

India’s public health crisis is a disaster waiting to explode. The crisis has deepened since the
last revision of the Drug Price Control Order (DPCO) with widespread occurrence of the HIV
epidemic, increasing prevalence of hypertension, diabetes mellitus, ischemic heart disease,
cancer and increasing drug resistance in infections such as tuberculosis, malaria, typhoid, and
other bacterial infections1. Moreover, post-2005, the possibility of India’s pharmaceutical
industry reverse engineering newer drugs, has diminished unless the government issues a
Compulsory License and new drugs patented by foreign companies will be subject to price
control. This is easier said than done because it needs an exercise of political and moral will,
against the financial clout of the big pharma.

Drugs need price control because:

• Drugs are overpriced and unaffordable

• Drugs constitute 50 to 80 percent of health care costs in India.
• Health care is the second-most leading cause of rural indebtedness, after dowry.
• There is no consumer choice of product, price and quality in medicines; only in
whether you take the prescribed drug or not, a decision always made in distress,
mostly at the threat of death.
• There is no universal health insurance in India; even if there were, regulation of prices
can result in considerable savings.

The Doha Agreement has clarified TRIPS flexibilities, including a country’s public health
needs for primacy. Unfortunately, this interpretation has not been used either in the
provisions of the recent April 2005 Amendments of India’s Patents Act regarding more
liberal grounds for compulsory license (“…each member has the right to grant compulsory
licenses and the freedom to determine the grounds upon which such licenses are granted…”)
or for defining what drugs can and cannot be patented. Clearly the amendments to the 1970
Act could have said that drugs of a certain therapeutic class important for certain crucial
disease situations prevalent in India are outside the purview of the patent regime. There is
also no statement in the amendments whether newly patented drugs will be subject to price
control.

Failure of the Market

Free market and deregulation views are now prevalent in India’s policy circles: the message
being that the market and competition will take care of high prices and any other distortions.
The reality, however, is that competition does not work2 in the Indian pharma industry. More
players in an uncontrolled market have meant only a wider range of prices for the same
drugs.3 You have the same drug being sold by different companies (and sometimes by the
same company) at vastly different prices.
Roy and Rewari4 surveyed the variation in prices of 84 formulations used in the management
of cardiovascular diseases in the Indian market and concluded that variation in prices ranged
from 2.8 percent to 3406 percent. Most importantly, the most-selling brand is seldom the
lowest priced. The product leader is often the price leader too. Insisting on marginal revenue
being equal to marginal cost, the criteria for perfect competition, is laughable.
Most readers would not believe this of India’s drug market: retail market prices are often one
to three percent of government tender prices!5 This shows if anything the tremendous
overpricing without precedent in any other industry in the world. Also this percentage
differential in pricing for the public sector and private retail sector is probably true of no
other industry in India. Would the booming computer industry sell in the market a laptop at
Rs 100,000 and to the government tender for Rs 2000/- to Rs 3000/-? Would a truck
manufacturer sell trucks for Rs 5 lakhs in the market and to the government tender for Rs
20,000 even if he had an order of 100,000 trucks at a time?

Pricing Policies

The price control policy as we know today started with the DPCO of 1979, based on the Drug
Policy (1978), itself an outcome of the path-breaking Hathi Committee Report (1975) on
pharmaceuticals. The objectives over the years have been to make drugs abundant and
affordable, but the ground situation is one of poverty and unaffordability amidst this
adequacy.
Partly because of drug industry pressure and partly because of changing nature of dominant
economic paradigms in India, the number of drugs under price control has come down over
the years: 347 in 1979 and 74 at present. If the Pharmaceutical Policy (PP) 2002 were
implemented it would have come down to around 30. The PP 2002, itself is a subject of
litigation.
Briefly, PP 2002 and all previous policies (except possibly the first one in 1978) have some
common problems: the criteria chosen to keep drugs in and out of price control are
themselves faulty and leads to anomalies:
Most essential and useful drugs are kept out of price control. Non-essential and harmful drugs
like analgin, phenylbutazone, Vitamin E, sulphadimidine, mebhydrolin, diosmine panthonate
and panthenols, bacampicilin, etc is under price control.
Drugs for HIV /AIDS, cancer, hypertension, coronary artery disease, multidrug resistant
tuberculosis, diabetes, iron deficiency anemia, ORS, tetanus, filariasis, vaccines (new) for
rabies, hepatitis B, sera for use in tetanus, diphtheria, Rh isoimmunisation, anticonvulsants
and ant epileptics, diphtheria, snake bite, suspected rabid dog bite/rabies, etc. fall outside
price control
Price control, since it is based on market share criteria, produces only partial regulation.
Chloroquine for malaria would be under price control but not equally important other anti-
malarials. True also leprosy drugs and analgesics.
Of the 300 top selling brands, only 36 (that is only 12 percent) were price controlled. The rest
that is 88 percent were not.
Due to limitations of space we have not mentioned other contributory factors that make the
drug market of India ‘unique’: namely, the prevalence of irrational, unscientific and harmful
drugs leading to “therapeutic chaos and nihilism” in the Indian market and among medical
professionals; the easy availability of medicines across the counter; the poor infrastructure for
quality control; weak and poorly staffed regulatory administration; poor regulation of the
medical profession, of the retail pharmacists, of the pharmacy profession, and poor drug
control; lack of serious prosecution of those selling substandard, sub therapeutic and spurious
drugs; prescriptions influenced by aggressive promotion of drug companies leading to
over/under prescribing9 ; inaccurate diagnosis, lack of up-to-date knowledge, unethical
practices like receiving commissions for prescribing certain drugs and sponsorship by drug
companies of individual doctor’s expenses as well as of medical conferences, etc.
One upshot is that demand is supplier induced. The health market creates and promotes
wants. Doctors also set themselves as gatekeepers, with societal sanction, to certify various
physical states of being including starvation, birth and death.
These trends have to be viewed in conjunction with the burgeoning crisis in non-
communicable diseases in India (see box below). We also briefly discuss in the
accompanying box why drugs for non-communicable diseases have to be placed under price
control.

What about R & D?

One of the reasons given for high price of drugs is the high R&D and innovation cost in
pharma. But this is wrong. Does any other sector say that we have to price a product high
because we are doing/have done R&D for future/present products? Do manufacturers of
computers or microprocessors or cars do so?
Secondly, the cost of doing clinical trials is about $300 million per drug. About 80 percent
(Rs 1000 crores) of this has to be done in the West if it has to be accepted there. This is apart
from the western pharma industry’s figures where the cost of discovering a new molecule is
stated as $ 800 million per drug, which includes $400 million as opportunity costs of not
doing R&D! Using purchase-parity, this is Rs 700 crores for a single drug. It is not possible
at present sales and projected sales of Indian companies. Indian companies together spent Rs
660 crores on R& D in 2003-04. No drug has been discovered, tested and marketed by Indian
companies in last 20 years, despite promise of exemption from price control for 15 years.
Prices of drugs never increase in the West. If R&D costs are recovered in the first year or so
(first few weeks in many cases), only legitimate profits need recovery thereafter. Following
some such logic, in Japan it is mandatory that all prices of all new drugs come down by five
percent every year! In our case, royalty percent needs to be fixed which is not done in the
Patents Amendments (usually, not more than five percent).
So is pharma R&D risky? No, it does not appear to be any more than any other technology
based industry.
Despite all the rhetoric to the contrary, this is not a high-risk industry. As one indication, the
law provides tax credits equal to 50 percent of the cost of testing orphan drugs and extends
the credits to other drugs if “there is no reasonable expectation that the cost of developing and
making available in the United States a drug will be recovered from sales in the United
States”. In other words, if you can’t make a profit, the government will help you out.
Risky businesses have variable returns, but the pharmaceutical industry has been, year after
year, the most profitable in the United States. What these companies are, in fact, claiming is
an entitlement not only to recoup anything they wish to spend on R&D but to make an
exorbitant profit margin as well. The R&D costs, no matter what they are, have little to do
with drug pricing. Mr. Gilmartin, President and CEO of Merck, referring to the $802 million
per drug estimate, remarked, “The price of medicines is not determined by their research
costs. Instead, it is determined by their value in preventing and treating disease, … it is the
doctor, the patient, and those paying for our medicines that will determine its true value.”
More relevantly, most R&D even in the West is public funded, even when the pharma
companies reap the profits. For example, Taxol (anti-cancer drug) was supported by the
National Institutes of Health (NIH). Drugs like Gleevec, Epoeitin, Zidovudine (AZT) were
discovered in public funded university departments. And during 1998-2002, of 415 US FDA
applications, only 14 percent were innovations, the rest were me-too drugs. And as far as
R&D relevant to tropical countries, only 13 out of 1223 new chemical entities discovered
between 1975-1997 related to tropical diseases. Therefore, we need different strategies for
supporting R&D for diseases of national importance.