In an otherwise open, liberalised market economy, is there a need for a regulatory regime in the drug industry? The current regulatory landscape in India covers new drug introduction approvals, limits imposed on investment, manufacturing licences issued at the state levels, regulation of fixed dose combinations (FDCs) and, more importantly, price ceilings imposed on essential medicines. Media reports suggest that the government may dilute the current regulatory structure and free up controls on the pharmaceutical industry, to boost investment and growth.
Drug companies often argue that drug prices must be left to the market, and that price ceilings distort incentive structures and are detrimental to the growth of the industry. Why do governments around the world regulate the prices of drugs? The design, scope and extent of price regulation may vary from one country to another depending on the state of development of the industry.
More From This Section
India has had progressive drug price control mechanisms since 1979, but over the years there has been some policy dilution - 12-15 per cent of the market was price-controlled in 2013, as against 90 per cent in 1979. Following a directive from the Supreme Court, the UPA government brought all essential medicines under the price ceiling in 2013. While heeding the apex court's directive, however, the then government enforced the DPCO 2013 (Drug Price Control Order), which continued the status quo, in terms of impact. The scope and magnitude of price reduction has remained more or less similar to the pre-DPCO 2013 scenario.
Currently, about 15 per cent of the Indian pharmaceutical market is price-regulated, while price reduction in formulations is far less significant. The scope of the price ceiling was limited because the operative provisions of the DPCO entailed a narrower interpretation of the National List of Essential Medicines (NLEM 2011 and now NLEM 2015). The price ceiling currently applies to medicines, as per the dosage and strength of formulations defined in the NLEM. The primary objective of NLEM is to identify essential drugs that need to be procured and dispensed in public health care facilities. When NLEM identifies medicines, the strength and dosages are clearly defined, based on evidence from clinical trials that they are safe and efficacious.
However, in the retail segment, where people buy medicines, drugs are available in different dosages and strengths, other than what is defined in NLEM. The Indian pharmaceutical industry has mastered the act of producing and promoting dosages and strengths that are considered irrational, apart from manufacturing and pushing enormous numbers of irrational combinations (the FDCs) in the market. Such non-essentials and irrational combinations have implications for the safety and efficacy of medicines prescribed and dispensed by medical professionals.
According to our own study, nearly half of the entire Indian pharmaceutical market is awash with FDCs, and a large share of it is either considered non-essential or irrational. While the scope of drug price control is grossly limited by the narrower interpretation of the DPCO, the magnitude of price reduction was restricted due to a move away from the cost-plus-based (CPB) pricing strategy during the pre-DPCO 2013 era to the current market-based pricing (MBP) mechanism. The MBP allows medicine prices to be determined by the average prices of all brands in a particular formulation whose market share is one per cent and above.
Market mechanisms work when there is competition. Although India has over 7,000 drug manufacturers producing over 40,000 brands, half of the pharmaceuticals market is highly concentrated (oligopolistic in nature), and about one-fourth is moderately concentrated, leaving only about one-fourth of the market highly competitive in nature. In a highly concentrated market, market principles only distort price structures and price ceilings based on average price in such markets tend to be skewed towards the top end of the price segment. While CPB would have given the consumer an affordable price, enforcement of MBP puts a large number of people out of reach of essential medicines.
The pharma industry often complains that price ceilings and other regulatory measures are counterproductive, and may hinder further investment, both domestic and foreign. The spectacular growth of the Indian pharmaceutical industry during the last four and half decades is largely domestically driven. The domestic pharmaceutical industry grew rapidly and impressively during the height of a robust regulatory regime. In 2015-16, the domestic industry attracted investments of Rs 27,099 crore.
On the other hand, the flow of FDI in the pharmaceutical industry between 2000 and 2012 was $9,173 billion (Rs 45,980 crore), which constituted a little over five per cent of total FDI. However, a sizeable chunk of the FDI was of the brownfield rather than the greenfield variety. Brownfield investments included big-ticket acquisitions of Indian domestic drug companies by multinational corporations, notably the take-over of Piramal Healthcare, Shantha Biotech, Matrix Laboratories, Dabur Pharma and Paras Pharmaceuticals.
Although 100 per cent FDI in greenfield investments has been allowed through the automatic route since 2005, brownfield investments require FIPB approval. Despite a liberal investment regime in the past few years, foreign investment has been less than spectacular, and a larger share of it has gone into the unproductive brownfield category, for simply buying domestic generic companies at supernormal valuations. Investment in R&D by foreign firms is even more lacklustre.
Transnational drug corporations use the investment route essentially to strengthen both their domestic and global networks, and more specifically to take advantage of monopoly situations. This has serious implications for the structure of the industry, and eventually undermines competition and social welfare. Isn't it time for us as a responsible society to provide health security to its population? Access to affordable medicines must take precedence over rent-seeking and business greed.