Increase in Drug Prices Will Hit People Hard – Need for Re-orienting Drug Pricing and Production Policy

As per the recent National Pharmaceutical Pricing Authority (NPPA) notice, the ceiling price of all essential drugs has increased by about 10.8%. This is operational with effect from April 01, 2022, due to the rise in the Wholesale Price Index (WPI).

This rise is likely to hit the people hard as, in India, nearly 70% of the out-of-pocket expenditure is due to expenditure on medicines. This rise in prices of basic essential drugs such as paracetamol and metformin includes some life-saving drugs.

For instance, the ceiling price for an injection of Trastuzumab (440mg/50ml), a life-saving cancer treatment, is now Rs 66,790 – up from Rs 60,298 last year. Similarly, for each Drug-Eluting Stent, the ceiling price has increased from Rs 30,811 to Rs 34,128 over just one year.

This order affects nearly 872 scheduled formulations that are part of the National List of Essential Medicines (NLEM) and are under price control, accounting for around 18% of the total pharma market in India.

This time the price of essential scheduled drugs has increased by more than the price of the non-scheduled drugs. The manufacturers of non-scheduled drugs are allowed to raise the prices by 10% annually.

Moreover, this price increase of 10.8% comes when the rise in prices of medicines has already been affecting people badly during the pandemic, having crossed the general inflation (price rise) rate.

Medicine Prices Higher than General Prices

If we compare the trend of price rise (inflation) for Medicines (Allopathic) with the general price rise, we see that during the pandemic, the price rise for medicines was higher than the general price rise throughout 2021. The graph tracks the movement of the rate of inflation of Medicines (Allopathic) and General prices (all commodities).

As traced in the graph, the inflation for medicine started rising in August 2020 and crossed the general price rise in September 2020. Remaining higher throughout the peak pandemic period, the rate of inflation remained above the general inflation. Only in September 2021, it reduced a little to hit the same level as the general inflation in December 2021. With people bearing the brunt of such a high rate of inflation already, this 10.8% rise will worsen their situation.

From Cost-based to Market-based Pricing

The experts argue that the changes in the policy over the past several decades have led to a situation where people as patients and consumers are bearing the brunt, and India has also lost its erstwhile position as the “Pharmacy of the World”.

Activists and experts have spoken against the average prices-based pricing formula and the linkage to the Wholesale Price Index (WPI) introduced in 2013, and they continue to oppose this.

The Drug Price Control Order (DPCO) 2013 introduced far-reaching changes in the drug pricing policy:

• One, the ceiling price of a scheduled formulation of specified strengths and dosages was fixed according to the average price of the scheduled formulation with a 16% margin. For calculating this average price, prices to retailers of all brands and generic versions of the medicine having a market share more than or equal to 1% of the total market turnover are taken.

• Two, it stipulated that the government shall revise the ceiling prices of scheduled formulations every year as per the annual wholesale price index (WPI) for the preceding year.

• The policy also allowed an increase of 10% in non-scheduled drugs every year.

Earlier, as outlined in DPCO 1979, the retail prices of formulations were decided by applying the concept of MAPE (Maximum Allowable Post manufacturing Expenses). It was a mark-up on ex-factory costs, provided to cover selling and distribution costs, including retail and wholesale trade margins.

These drugs were segregated into different categories, having different MAPE. The most important drugs, including life-saving drugs, were put in the category which had the least MAPE.

“As per the DPCO 1979, life-saving drugs were protected from price rise. There was a strong public sector producing quality, low-cost essential drugs. The public sector was neglected and is now on the verge of closing down. The result is that we have lost our self-reliance in producing bulk drugs and have to depend on imports for the APIs,” explains Dr Ekbal Bappukunju, a public health activist and currently the Chairperson, COVID Expert Committee, Government of Kerala.

Low-Cost Small Manufacturers Suffering

The pharma companies have also been lobbying for an increase in drug prices. They have been complaining that the cost of raw materials or Active Pharmaceutical Ingredients (APIs) has increased. A large quantity, nearly 70%, of the APIs is imported from China, and reportedly, the cost has increased manifolds in some cases.

Such developments have adversely affected the small low-cost producers much more than the big ones. As Chinu Srinivasan, All India Drug Action Network, explains – “Many of the APIs of scheduled formulations whose cost price happens to be near the ceiling price, become unviable when API increases by 50-80%. But the WPI does not reflect it.”

The big producers with diversified portfolio tend to carry on their businesses and thrive while the small producer gets pushed out. The bigger producers, with more than 1% market share and who enjoy economies of scale, can produce at lower rates and thus sell at quite high margins and earn substantial profits.

Srinivasan also points out that “manufacturers use available escape hatches by shifting to strengths not specified in the NLEM. Or making more non-scheduled drugs per se.” Thus, in the present scenario, where only about 18% of the pharma market is regulated, the effectiveness of price regulation becomes questionable.

Weakening of Public Sector which Produced Bulk Drugs

Over the years, the policy changes in India led to the weakening of the domestic pharmaceutical prowess that India had acquired. From a position where India had become self-reliant in the manufacture of bulk drugs or the APIs, it has come to a situation where it has to depend on imports for the APIs.

What led to such a scenario?

The bulk drugs were earlier under the industrial licensing policy, and many were reserved for the public sector. The Drug Policy 1978 envisaged the goals of developing self-reliance in drug technology, reducing dependence on imports, providing a leadership role to the public sector and making drugs available at reasonable prices.

DPCO 1979 had introduced important changes in this direction. Along with introducing a cost-based pricing policy based on MAPE and keeping lower margins on life-saving and essential medicines, it emphasised indigenously produced bulk drugs. It made it mandatory for firms producing formulations to produce the required bulk drugs from the basic stage. A ratio parameter stipulated linking the production of formulations to indigenous production of bulk drugs. This helped companies acquire the technology that boosted the indigenous production of bulk drugs and increased domestic production.

However, with liberalisation and market-oriented reforms in the pharma sector, opening up for imports, and reduction in trade margins, as part of the sweeping policy changes, the policy of such a ratio parameter was also abolished. The reservation policy for the manufacture of certain bulk drugs and formulations for the public sector was also gradually abolished. The result is that India became dependent on imports for more than 70% of its raw material requirements. In the case of certain drugs, this dependence is more than 90%.

Explaining the reason behind the erosion of domestic pharma capacity and dependence on China for APIs, Reji K. Joseph, Institute for Studies in Industrial Development, elaborates - “One major factor is policy-induced, on account of our policy initiatives, such as import liberalisation, delinking, etc. But simultaneously, China was building capabilities in APIs, especially the fermentation-based APIs. China provided massive state funding for the development of new technologies. They wanted to develop the biotechnology sector as they saw a lot of prospects in it. The Indian companies did not invest in innovating new technologies.”

A robust public sector in pharmaceuticals is crucial to reduce dependence on imports and reduce susceptibility to vagaries of international markets for drugs.

Public health activists have opposed the rise in prices. Praja Arogya Vedica, Andhra Pradesh, issued a statement saying, “Actually the prices of medicines are being increased regularly during these years. Now the steep rise in prices of anti-inflammatory drugs, antibiotics, fits, and medicines for anaemia have been increased, which will hurt the people. This move will only facilitate more and more profits for the private corporate pharma companies.”

Experts say that the government has been promoting multinational companies producing branded and patented drugs. Patented drugs are outside the price control purview. Demanding a roll-back at the increased prices of the essential drugs, Dr Ekbal says that the Central government can easily put in funds and stall the rising drug prices. For long term solutions, he has a few pointed suggestions - One, a drug price control order in line with the DPCO 1979, protecting essential and life-saving drugs from the price increase, should be implemented; Two, the earlier policy of permitting the manufacture of bulk drugs (APIs) should be reintroduced; Three, the public sector drug companies, both under the national and state governments, should be strengthened. Production of drugs should be enhanced through public sector companies and distributed through fair price shops.

Given the situation where an overall price rise in the economy – petrol, diesel, cooking gas, essential commodities – is hitting the people hard, the government needs to intervene immediately. And from this perspective of long-term, the government, learning from the pandemic experience, must pay heed to the demands of the activists and strengthen the public sector pharma units.