The Cabinet has done the right thing by approving a shift away from a cost-plus price control method to one determined by market-based pricing. However, the last minute change in the formula to one determined by an arithmetical average with more than 1 per cent market share will severely impact profitability and compromise availability.

The basic objective is to provide an abundance of medicines at the lowest possible prices. It also aims at reducing dependence on MNCs for new drugs by promoting efforts to discover new drugs. The difficult part is to achieve a trade-off that ensures both availability and low prices. Even with low prices, a section of the society will not be able to afford medicines. The solution, therefore, lies not in further price reductions, which may impact availability, but in the government providing medicines to poorer sections.

The cost-plus or ‘normative’ pricing introduced under DPCO 1979 pertains to a period of industrial licensing and import controls. Both these determined what and how much a company could produce and sell. It did not leave the choice of product-mix to a manufacturer. That has since changed. Now, a company can change its product-mix.

In the late 70s, the domestic pharmaceutical industry was at a nascent stage (e.g. Ranbaxy and Cadila were SSI Units). The domestic industry was homogenous then — it is heterogenous now. Now, we have a few state-of-the-art world class plants and processes. But there are also hundreds of plants with primitive facilities struggling to comply with minimum good manufacturing practices and quality standards of Schedule M and zero spending on R&D. Normative costing cannot provide a level playing field to all. Either it is unfair or too liberal. Wherever it is unfair, the companies find it difficult to sustain production. This leads to undesirable aberrations, including tweaking of compositions to escape price control, curtailing supply, or suspending production. Wherever it is liberal, it has led to distortions in trade margins.

The ‘normative’ costing system lacks transparency. Its discretionary powers are prone to manipulation. It discourages innovation and efficiency as the benefits cannot be retained by the manufacturer.

Normative costing does not recognise costs incurred for R&D and export market development. The uniform Maximum Allowable Post-manufacturing Expenses discriminates against those engaged in these activities. The continuation of the current system of ‘normative’ cost-based pricing favours importers and could drive the investment out of the country. The importer gets a significantly higher price than the local manufacturer, as landed cost cannot be probed, whereas production cost is probed to the last paise! Thus, normative pricing will encourage companies, including domestic companies, to import rather than manufacture in the country.

(The author is Secretary-General, Indian Pharmaceutical Alliance.)

(This article was published on November 23, 2012)
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