The figures just don't add up for Nathu Ram, a daily-wage earner, who supports a family of five. Eking out a meagre existence on Rs 200 a day, he finds himself in an inescapable predicament: either to feed the family or foot the medical bills of his wife, diagnosed with breast cancer recently. He does try to balance it out, but even concessional treatment and medicines remain out of bounds.

Nathu Ram is not an isolated case. Millions of people in India don't have access to essential medicines. Just making drugs cheaper doesn't help their case. Nor does rhetoric! It's time we understood why the well-drafted National Pharmaceutical Pricing Policy (NPPP) 2011 might not meet its avowed objectives.

Directed by the Supreme Court, the Department of Pharmaceuticals (DoP) set the tone for the NPPP 2011 with a focus on improving access to essential medicines and encouraging industry competition through a market-based pricing policy. But since then, there has been a series of flip-flops on its position, the latest move being to stick to the cost-based pricing mechanism. This policy play has baffled experts and leaves little to the imagination on what lies ahead for the industry.

It has also given rise to fears of the kind of ‘licence raj' that encouraged companies to adopt unethical means to inflate cost of production and thus increase profitability.

Objective defeated

Apart from being cumbersome and non-transparent, the cost-based model ensured there was no incentive for cutting costs, efficient manufacturing and wide distribution, completely defeating the Government's avowed objective of making essential medicines affordable to all.

Mindful of the central objective of promulgating the principles for pricing of essential drugs, as laid down in the National List of Essential Medicines (NLEM) 2011, the NPPP 2011 proposes to strike a balance between enabling industry growth and ensuring affordable and reasonably-priced medicines to patients, particularly the poor. The key principles of the NPPP 2011 include essentiality of drugs, market-based pricing and affordability. In fact, the market-based pricing mechanism has been well received by the industry and supported by the WHO.

Even a cursory look at the prevailing cost-based policy reveals its significant limitations and adverse impact on the industry and consumers. For one, it has shifted bulk-drug production out of India (to countries such as China), escalated prices for select medicines, reduced the number of industry players, weakened innovation in cost control and limited new introductions. Above all, it has failed to help patients in the rural areas access medicines.

Inefficient mechanism

Further, the cost-based policy has created an inefficient mechanism of price calculation not aligned with India's needs. In fact, the WHO welcomed the intent to move away from cost-based pricing as it has been abandoned elsewhere. Given these severe handicaps, a market-based pricing policy can bring about improved access and encourage competition.

In fact, the DoP can build on the good work of the draft NPPP 2011 (and its comments), and make the policy more robust by considering the following important and necessary changes.

The Government should limit the scope of the policy to all dosage forms of drugs listed in NLEM 2011. Non-essential combinations and strengths of single molecules not specifically listed in NLEM 2011 should not be included. The NLEM was prepared by a core committee comprising 87 experts from different disciplines and from such reputed organisations as AIIMS, DoP, Ministry of Health and WHO.

The Government should adopt a new, patient-sensitised pricing formula, making it stronger and more representative by using the average of all brands versus the average of top three brands. This will further improve pricing and access for patients by driving industry prices down. Actually, the average of all brands (having a market share of 1 per cent or more by volume) is most representative and fair as it covers approximately 95 per cent of the pharmaceutical market by value under price control.

Further, the ‘average-of-all-brands' formula could be combined with a price increase cap for all brands, priced below the ceiling price. This would allay concerns of an across-the-board price increase of brands below the ceiling price.

The co-existence of DPCO and NPPP 2011 does not add up because implementing a price freeze on drugs under the existing DPCO for two years in conjunction with the new policy would be irrational and create confusion.

Ceasing to regulate the prices of bulk drugs (or active pharmaceutical ingredients - APIs) could result in cartelisation. In fact, if bulk drug prices increase significantly, formulation ceiling prices will be unviable and, therefore, could result in some formulations going out of the market. This is because there will be a time lag between increase in cost of bulk drugs/APIs used as inputs for finished formulations and the price neutralisation of input costs, which can only be taken up at the end of the financial year based on the price index.

Lack of clarity

There is a lack of clarity on trade margin caps on essential medicines. NPPP 2011 just suggests a 16 per cent retail margin without explaining the same and there is no further mention of distributor/wholesaler margin.

The draft policy does not propose removal or reduction in tariffs and taxes such as sales tax, including value-added tax (VAT), mark-ups and other charges which impact the price of medicines, and therefore the poor, more severely.

The proposed methodology of increasing stockist prices by a representative 16 per cent retail margin to arrive at the MRP would be inaccurate given that the representative retail margin is a percentage of the MRP and not the stockist price.

Given the different cost structure of imported drugs, subjecting them to the same price structure as local formulations could result in non-availability of imported drugs in the Indian market.

The proposed reference formula for pricing new dosages/strengths does not account for the relatively higher cost of production and R&D, which may be incurred in some cases, thereby restricting innovation. Some stakeholders feel this will discourage the launch of higher doses or sustained releases and other delivery systems highly beneficial to patients.

Last but not the least, the success of the NPPP 2011 will depend on how the Government implements steps to increase awareness and create infrastructure for effective healthcare delivery.

(Rajiv Kumar is Secretary-General, FICCI, and Arnab Hazra is Director, Life Sciences, FICCI.)