The draft National Pharmaceuticals Pricing Policy, 2011 that was put up for discussion is expected to see the light of day, as against what had happened in the case of its two predecessors. The draft introduced in 2002 landed in the Karnataka High Court over concerns regarding the price of critical and life-saving medicines, and the draft policy of 2006 never came out at all. The recently-released draft National Pharmaceuticals Pricing Policy, 2011 attempts to address the twin concerns of keeping medicines affordable, and simultaneously, taking up the broad industry concerns as well. However, this draft policy still has a long way to go, as it winds its way through stakeholders’ comments and standing committee clearances before it becomes a law.

Will this policy finally become a law? Well, only time will tell. Meanwhile, here are some features of the proposed policy and their implications on the Indian formulations business.

To begin with, the control over drug prices in India started in the year 1962-63, and was followed by several revisions thereafter. A series of price controls were notified through various orders in 1966, 1970 (issued under the Essential Commodities Act, 1955), 1978, 1979 and 1987. The presently enforced drug policy of 1994, implemented through the Drug Price (Control) Order, or DPCO, 1995, encompasses a list of 74 bulk drugs and formulations based on these drugs. According to estimates, the 74 bulk drugs address around 1600 formulations sold in the country.

Now, the government has laid out a draft National Pharmaceuticals Pricing Policy (NPPP), 2011. The proposed policy brings under its ambit 348 medicines, the prices of which are to be regulated. According to the Indian domestic formulations industry, the value of these medicines stands close to Rs 29000 crore, or 60 per cent of the total domestic market. This is considerably higher than the current DPCO 1995, which has around 20 per cent of the market under its purview.

The actual impact that the new policy is likely to have on the prices of drugs is estimated to be significantly lower. Intense price competition will ensure that most brands stay priced below the derived ceiling price proposed under the new policy. The NPPP is certainly a step backwards, seeking to increase the span of control, but it does bring in a more realistic and practical approach to the pricing mechanism. By involving market-based pricing and doing away with the cost‐based approach of the DPCO, the policy aims to usher in a transparent pricing mechanism. The proposed linkage to the WPI is an added positive, though it may not immediately translate into higher pricing power for the manufacturers.

What Is Ceiling Price?
The NPPP‐proposed price control would be through the mechanism of a ‘ceiling price’ (CP). Manufacturers would be free to price their products at or below the CP. The CP would be fixed on a dosage basis, such as per tablet/capsule/injection, and not on a pack basis.

•    The CP would be fixed on readily available market data, as per IMS Health. As IMS publishes the stockist-level prices for the computation of CP, a 16 per cent margin to the retailer would be added in order to arrive at a reasonable CP chargeable to customers.
•    The CP would be fixed at the weighted average price (WAP) of the top three brands by value on a single ingredient formulation drug, on the basis of per standard dosage.
•    The NPPP 2011 also has a series of provisions for the pricing of non‐standard dosage forms, combination drugs and drugs with less than three competing brands.
•    The CP would be allowed to be revised annually up to the limit of the change in the Wholesale Price Index (WPI) of manufactured goods. In case of a decline in the WPI, a corresponding reduction in the CP would be obligatory.
•    The linkage to the WPI is a positive for the industry, though it may not have a proportionate impact on prices. The highly competitive nature of the industry has ensured that the average price rise in the pharma market has by and large trailed the change in the WPI. Price revisions will probably stay low, most likely below the permissible CP.
•    The CP captures the WAP of the top three brands on a Moving Annual Turnover  (MAT) basis. However, the NPPP proposes that there would be no annual revision of the CP on the basis of MAT; the revision of the CP on the basis of MAT would be carried out only once in five years.
•    Drugs with a weighted average price of less than or equal to Rs 3 per unit, even though a part of the National List of Essential Medicines (NLEM) 2011, would be exempt from price control. Any such drug sold at a price higher than Rs 3 per unit will have to have its price reduced to Rs 3 per unit.

Need For New NLEM, 2011
Currently, only 74 drugs are under price control as per the DPCO, 1995, more than half of which are not being manufactured by pharma companies any more. At the same time, more than 500 new drugs have been approved for marketing in the country by the Drug Controller General of India (DCGI) after the notification of the DPCO in 1995. All these drugs are outside price control, and many of them are under patent. The patent protection and the absence of price control on most drugs have been helping the pharmaceutical companies, especially MNCs, to sell them at very high prices with the support of medical practitioners. So far, there has been no serious attempt by the chemicals ministry to include any of them under the DPCO.

The new list contains a total of 348 medicines, categorising them by therapeutic area, thereby increasing the scope of price control from what it currently is.

The Other Dimension
For drugs that do not fall under price control regulations, the current National Pharmaceutical Pricing Authority (NPPA) allows for an increase of up to 10 per cent per annum. Under the new policy, it is proposed that the prices of such drugs be monitored on a regular basis. Where the price increase is at or over 15 per cent per annum or the increase in the WPI, whichever is higher, the NPPA would be empowered to have the prices of these drugs lowered. The mechanism to ‘lower’ the prices is, however, unclear.

A status quo is sought to be maintained on the provisions for the pricing and formulations of bulk drugs for two years, and changes would be allowed only on the basis of the WPI. This is similar to what the NLEM 2011 seeks to implement. After two years, drugs that are a part of the NLEM 2011 will come under the price control regime, as stipulated in the NPPP. The remaining drugs will come under price monitoring, as per the new policy stated above. Of the current 74 drugs under the DPCO, 1995, 34 find a place in the NLEM 2011.

Impact On Patented Drugs
Under the proposed NPPP, there will be no separate determination of CP for imported drugs falling under the span of the policy. Further, the NPPP does not address the issue of pricing patented drugs. The government, through an order dated December 21, 2006, had constituted a separate committee for finalising the pricing of patented drugs. The government’s stance on pricing (or price regulation) of patented drugs will play a key role in the willingness of the MNCs to launch innovator products in the domestic market.

Impact On Sectoral Players
The effect of the NPPP 2011 on the industry might be negative, but in no way does this mean the end of the world for the sector. It could actually end up impacting less than 60 per cent of the market when it becomes a law. The intensely competitive market will ensure that most brands stay below the proposed CP.

The domestic formulations sector finds itself facing a series of headwinds. Cost pressures, both on direct manufacturing as well as selling and distribution, have put margins at risk. The recently-proposed FDI norms may well create layers of bureaucracy for inbound mergers and acquisitions, even as the role of the Competition Commission of India (CCI) is getting defined.

The NPPP touches upon the Jan Aushadhi programme, though it lacks clarity on implementation and targets. Encouraging non‐branded generics could lend a heavy blow to the industry. The issue of price governance of patented drugs remains unanswered.

The sector’s valuations are likely to reflect the ongoing changes, and may risk drifting low going forward. A list of the top pharmaceutical companies with their share of revenue contribution from domestic formulations is furnished with this report for ready reference.