Not again

With over 15,000 registered and unregistered producers of medicines, and with more than 100 important drugs like the antibiotic ciprofloxacin, the Indian pharmaceuticals industry may just have pulled off the impossible. If Chemicals and Fertiliser Minister Ram Vilas Paswan is to be believed, the industry is cartelising and ripping off customers in a brazen manner, and that is why he wants to impose price controls, even profit margin ceilings, on the industry. Apart from the fact that cartelisation in such a diverse industry is improbable, imposing more controls by extending the list of medicines covered by the Drug Pricing Control Order (DPCO) is a bad idea because it has not worked well in the past in terms of overall results, because the industry is notoriously difficult to regulate, because the effort is not commensurate with the results, and because price controls end up affecting supply. At a time when India has adopted the product patent regime, which prohibits the earlier practice of reverse-engineering an existing drug, the industry needs to step up its R&D dramatically, and for that free pricing is essential. Put the price too low, and it is certain that the international drug firms will not bring in their latest drugs, and Indian firms will not invest in R&D for new drugs, either.

Part of the problem is that there is disagreement with regard to the facts on the ground. While Mr Paswan speaks of spiralling prices, and even as anecdotal evidence suggests that prices have in fact been going up, the industry cites figures to show stagnant prices over the past three years. Then, according to the Confederation of Indian Industry, Indians spend only 0.16 per cent of GDP on medicines, as opposed to 0.20 per cent in Bangladesh, 0.34 per cent in Pakistan and 0.19 per cent in China. And while Mr Paswan cites the allowing of a 100 per cent margin under the DPCO as evidence of the enormous profits the industry is making in even the controlled sector (he's willing to raise this to 150 per cent for companies with large R&D budgets), it is a fallacy to equate margins with profits. For, if a drug costs the industry Rs 100 to produce, the DPCO usually allows only 80-85 per cent of the cost. Add the100 per cent margin, and the drug can retail at Rs 170. Of this, around Rs 55 is passed on by way of trade margins, after which there is octroi and marketing/distribution expenses. While there could still be a difference of opinion about whether what is left as profit is sufficient, it is difficult to quarrel with audited profit figures that show, for the industry as a whole, profit margins in the 10-11 per cent range""and that's after taking into account the higher profits from exports, which today comprise around half the industry's turnover.

Even if one assumes that the government is unmoved by the industry's pleas, and decides to increase the scope of price control through the DPCO, the danger is that this will affect drug availability. In the last decade, the production of DPCO drugs actually fell by around 1 per cent per annum while the production of non-DPCO drugs rose by 9 per cent. With profits in the DPCO segment severely squeezed, the industry either stops production or adds some new ingredients to the drug to take it out of the purview of price control. After all, at a time when most industries are being freed from the inspector raj, why would a pharmaceutical unit want inspectors to verify its costs and decide which should be allowed, and to what extent?