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BW Businessworld

Win Some, Lose Some

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Pain now, gain later. At least that’s how the pharmaceutical industry perceives the government’s recent decision to implement the National Pharmaceutical Pricing Policy 2012 (NPPP), which has brought 348 drugs under price control.
As per the estimates of the Indian Pharmaceutical Alliance, a lobby of leading domestic drug makers, the application of the new price fixation methodology on a completely new set of medicines may see the Rs 100,000-crore industry losing about Rs 2,500 crore in revenues in the near term.
On the flip side, though, the policy will allow drug makers to get rid of a persistent condition: the age-old official practice of calculating the exact production cost for fixing medicine prices. Introduced in the pre-liberalisation period with the objective of exercising complete control over the production and supply of medicines, it has been a pain point for drug manufacturers for decades.
Market intelligence firm AIOCD-AWACS estimates that the new price control system may hit the domestic revenues of majors Ranbaxy and Cipla by 6.2 and 5.8 per cent, respectively. Among others whose domestic revenues will be significantly impacted are Zydus Cadila, Dr Reddys, Micro Labs and Alembic. 
2,500 crore rupees is what the industry stands to lose in the short term
The fallout, however, will be temporary as drugs in the National List of Essential Medicines (NLEM) constitute only 30 per cent of the domestic pharmaceutical market. The prices of the rest will be decided by market forces. LIMITED LIABILITY: Price control will apply to only 30 per cent of drugs
The new price control mechanism, introduced in the NPPP 2012, considers the average market price of medicines as the acceptable ceiling, irrespective of the profit margins or the actual production cost involved. The policy also replaces the old list of price controlled drugs with the NLEM for price regulation. 
“Though the new policy will make an immediate and significantly adverse financial impact on the industry, market-based pricing is directionally prudent for India in the longer term,” Tapan J. Ray, director general, Organisation of Pharmaceutical Producers of India (OPPI), says, adding: “However, treating imported products that have a totally different cost structure on a par with indigenously manufactured formulations is rather disappointing.” OPPI members are largely Indian arms of global pharma corporations. 
Incidentally, the Indian subsidiary of UK-based drug major GlaxoSmithKline (GSK) is expected to be the biggest loser once the new ceiling price comes into force. With many of GSK’s top selling brands falling under the NLEM, as much as 10 per cent of the company’s domestic revenues may get impacted, industry experts say. 
According to health activist Amit Sengupta, the decision to opt for a market-based pricing mechanism “legitimised” the very high prices of many drugs in the market. “Given the ability of companies to influence prescription practices, the real impact of the new price control structure on the common man needs to be closely watched,” says Sengupta. 
Already, a PIL challenging the policy has been filed in the Supreme Court by civil society groups, introducing an element of uncertainty for the parties concerned. While the court has deferred discussion until January 15, what’s certain is that its views will decide the future course of Indian pharma.

(This story was published in Businessworld Issue Dated 24-12-2012)