Just what the doctor ordered

Nalinakanthi V | Updated on July 25, 2014

Pricing blues Theres a medicine for it Alexander Raths / shutterstock.com

The Government is right in imposing curbs on unreasonably priced medicines. Both, producers and consumers will benefit

It is an open secret that patients suffering from chronic diseases have to spend a large portion of their incomes on medication. The recent move by the National Pharma Pricing Authority (NPPA) to restrict the price of 108 anti-diabetes and cardiovascular drugs will come as a huge relief to consumers. Patients are made to buy expensive drugs manufactured by multinational and select Indian companies, despite cheaper versions of the drug being available in the market.

The pharma industry is incensed by this move since it cannot charge more than 125 per cent of the simple average price of all the brands in these drug categories. However, the price cap will only have a negligible immediate impact on profits, barring few multinationals.

The profit impact for Indian majors such as Sun Pharma, Lupin, Cipla, Ranbaxy, Cadila, Dr Reddys and Torrent Pharma is expected to be less than 1 per cent.

However, multinationals that had priced their products at a sky-high premium to the market are likely to see significant reduction in profits. Multinationals — Serdia (Indian subsidiary of French multinational Servier Labs), Astrazeneca India and Sanofi India — may see their profits fall by 8-9 per cent on account of this.

What’s worrying the industry

Despite a negligible impact on the industry’s revenues and profits, it is viewed as the beginning of a concerted drive by the Government to address the anomalies in pricing across all therapies.

The fear is that the maiden move by the NPPA to cap the prices of drugs outside the national list of essential medicines (NLEM) will now open the floodgates for imposing controls on the sale price of any drug.

In the first phase, the Government envisages imposing restrictions on the retail price of single ingredient formulations catering to eight therapeutic groups, namely, anti-cancer, HIV/AIDS, anti-TB, anti-malaria, cardiovascular, anti-diabetics, anti-asthmatic, and immunological (sera/vaccines).

Even as the industry has expressed deep concern over this, the Government’s initiative to clamp down on the huge price differential between various brands of the same molecule may be justified for two reasons.

Justifying the clampdown

First, India being a branded generic market and drug sales being prescription driven, it is the doctors who make brand choices on behalf of their patients. The patients in most cases are ignorant about the availability of a cheaper alternative brand and are thus left with no choice but to consume the expensive brands prescribed by their doctors.

Also, though cheaper brands exist, it is the expensive ones that are seemingly more widely prescribed by the doctors. This is evident from the market share data of leading drug brands.

For instance, consider anti-diabetes drug gliclazide. The innovator Serdia Pharma’s Diamicron brand and Dr Reddy’s Reclide brand which are priced at the upper end of the pricing band account for about 39 per cent of the market. In contrast the cheaper Glycor brand by USV has a negligible share of less than 0.5 per cent.

Hence, given that there is the little room for consumer discretion and the essentiality of these medicines, government intervention may be necessary to rectify such market imbalances.

Second, the incredibly high premium pricing strategy cannot be justified by the industry, given the same underlying molecule and lack of discernible difference in quality.

Take, for instance, the cholesterol lowering drug rosuvastatin. The innovator Astrazenca’s brand Crestor costs six times more than the cheapest brand. Likewise, in the case of the blood pressure lowering drug losartan, the innovator Boehringer Ingelheim’s Micardis brand is priced almost 14 times higher than the cheapest brand.

Sanofi’s anti-diabetes drug brand Amaryl (Glimepiride) is yet another classic example. A pack of 10 Amaryl (2 mg) tablets costs ₹133 while the cheapest generic version of the same molecule sells for just ₹17.

Long-term positives

Though curbing pricing freedom will impact the revenues and profits of Indian drug-makers in the near-term, it may be positive in the long-term.

A fall in drug prices will not only make them more affordable, it can also improve dosage compliance. This can translate into higher volume growth for drug-makers.

Patients in the low income group undergoing treatment for chronic diseases such as diabetes, hypertension and cardiovascular problems may tend to skip dosages due to their inability to afford expensive brands. But, if the same medicine is available cheap, patients may take the required dosage in full. This will boost volume growth for pharma companies. Thus higher volumes can compensate for revenue loss due to fall in realisation.

Second, a tight regulatory framework can make pharma companies more efficient. A cap on selling prices can motivate drug manufacturers to prune expenses and keep the cost structure lean in order to maintain profitability. Pharma being a branded business in India, companies spend significant money on promotion and marketing. Rationalisation of promotional spend will help them retain operating profit margins.

Likewise, efficiency improvement on the manufacturing side will not only help them maintain profitability but also make Indian drug suppliers competitive in the global market. A stringent regulatory framework for pricing generic drugs could well encourage Indian companies to look beyond generics and focus on unmet medical needs by investing more in innovation.

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Published on July 25, 2014
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