The Hindu Business Line : Drug prices — Competition key to control

By imposing rigid price control, wrong signals are being sent to investors; instead, a healthier option would be to encourage competition and monitor prices.

In public healthcare, one of the policy tools to make medicine more affordable and accessible to poor people has been to control prices of essential drugs. While it cannot be denied that access to essential drugs in India is inadequate — according to the World Health Organisation only 35 per cent of Indians have access to quality medicine — experience has shown that price control may not be the right prescription to achieve this.

Over the years, the number of drugs under the Drug Price Control Order has been reduced so that today, they account for just 30 per cent of the market. Continuing this momentum, the Government announced a new pharmaceutical policy in 2002 that would have reduced the number of price-controlled drugs from 74 to 30. The Supreme Court permitted the policy to be implemented but directed the Government to formulate appropriate norms to ensure that essential life-saving drugs do not fall out of price control.

Gradual price reduction

It should be noted that the gradual reduction of administered prices has played a significant role in the growth of the Indian pharmaceutical industry and in controlling drug prices. Today, the industry is the world's fourth largest in volume terms and ranks 14th in value terms. Many leading molecules have large number of brands competing for a share of market. For example,Amoxycillin has 195 brands.

Importantly, this intense competition has had a significant impact on prices. According to ORG - IMS, which is the recognised agency for pharmaceutical industry data in 2005, the industry registered volume growth of 7.2 per cent but value growth of just 1.4 per cent. Overall, pharma prices have consistently lagged inflation and over 2002, 2003 and 2004, they actually fell.

In fact, research has shown that the major pressure on drug prices has come from the high incidence of taxes and duties. In other words, taxing medicine is taxing sickness. Each drug has incidence of five different types of taxes - excise duty (16 per cent), central sales tax (4 per cent), VAT (4 per cent), octroi and entry tax (2.5 per cent), turnover tax (3 per cent) - that are considerably high at about 30 per cent. Additionally, about 30 per cent go into trade margins for retailers and wholesalers. If these were brought down, it is estimated that transaction costs on medicine would fall by as much as 75 per cent. There is also strong evidence to show that price control does not necessarily mean healthy gains for the consumer.

Cost comparison

Consider this, for instance. There are many essential drugs that enjoy a market price significantly below that fixed by the Government. The Government's fixed ceiling for 10 capsules of the anti-TB drug Rifampicin is Rs 14.74. This is more than 30 per cent the market price of the same product. Or take the comparable Government-controlled and market prices for 10 capsules of the anti-malarial drug Chloroquine Phosphate. At Rs 5.26 and Rs 4.36, that is almost a 19 per cent difference in price.

The reason for this anomaly is simple. Market-driven competition has proved a powerful price suppressant. Today, there are between 40 and 195 brands available for each molecule. Paracetamol, for instance, is available in 135 different brands and Amoxycillin, a commonly-used antibiotic, has 195 brands.

Indian drug prices lowest

Not surprisingly, Indian drug prices are among the lowest in the world - even when compared to neighbouring countries such as Pakistan. When benchmarked against items of daily needs, the expense on daily treatment for common ailments is significantly lower too. For instance, treating a common headache costs Re 1 - less than half the cost of a cup of tea.

Further, the common belief that the cost of medicine accounts for a significant proportion of a patient's healthcare expenditure basket is flawed. A study by the Indian Institute of Public Opinion in 2000 showed that medicines account for just 15 per centof total expenditure - doctor's fees, diagnostic tests and so on made up the bulk of the costs. This is corroborated by a McKinsey study that showed that the cost of core drugs in breast cancer treatment was also only about 15 per cent of the total expenditure.

The pharmaceutical industry in India is at a take-off stage and now with the product patent regime in place, is emerging as a global hub for R&D and outsourcing. By imposing rigid price controls, wrong signals are being sent to the investor community, which will affect domestic as well as foreign investment in this sunrise and knowledge-based sector.

(The author, Vice Chairman and Managing Director Novartis India Ltd, is President of Organisation of Pharmaceutical Producers of India.)