Pricing uncertainty in the Indian markets

Although the Indian pharmaceutical market appears to be doing well, there is a degree of uncertainty over the pricing of drugs. With the majority of Indians having no health insurance cover, this is an emotive issue

The Indian pharmaceutical sector has registered a compound annual growth rate of 17% over the last 12 years (see table 1). In recent years, government policy has been directed towards promoting the growth of the industry and helping it to achieve a broad base in terms of product range and the technologies needed to produce drugs from the raw materials.

The result has been very encouraging. The Indian pharmaceutical industry produces a complete range of drugs – otcs as well as some 350 bulk drugs – and is now one of the largest and most advanced among the developing countries. It manufactures bulk drugs belonging to several therapeutic groups (table 2), requiring various manufacturing processes, and has developed excellent facilities for production of all dosage forms like tablets, capsules, liquids, orals and injectables. This achievement is underpinned by a strong product quality assurance, something that Indian consumers do not normally take for granted.

However, there is a fly in the ointment. Drug prices in India have been moving up ever since the government reduced the controlled price regime on most of the otcs. The Indian government claims that prices are not rising as fast as in the other liberalised countries; however, a manufacturer is required to follow the price fixed by the government.

In other words, if the government notifies a ceiling price, it has to be followed by all manufacturers. Prices of non-scheduled formulations are fixed by the manufacturers themselves.

The current drug policy is directed towards trying to ensure the availability of quality drugs at reasonable prices. Prices of 74 bulk drugs listed in the first schedule of the Drugs (Prices Control) Order – 1995, and their formulations are fixed or revised by this order. Trade margins to retailers on scheduled formulations are prescribed as 16% of the maximum retail price (MRP), exclusive of excise duty.

A long-awaited pharmaceutical policy is expected to cut government price controls. While pharmaceutical prices in India are among the lowest in the world due to the tight government controls, any change to the pricing structure is an emotive issue in a nation of more than a billion people with little medical insurance or social security cover.

An analysis of the prices of 206 otc medicines for the period from December 1999 to December 2000 showed that while the price of 18 formulations went down, and those of 86 remained unchanged, the prices of 102 formulations went up. Of these, 43 rose by less than 5%, 31 formulations increased by 5-10%, 20 formulations went up by 20%, and the remaining eight by 20-50%. As usual, drug multinationals are expected to benefit most from a liberalised policy because they derive a large proportion of their turnover from price-controlled drugs.

The National Pharmaceutical Pricing Authority (NPPA), the body that fixes drug prices in India, presented three tentative lists of drugs to be kept under controls. It recommended that drugs with an annual turnover of Rs25 crore per year (US$5.2m) and a market share in excess of 50% remain controlled.

In addition, the NPPA recommended that otcs with an annual turnover of Rs10-15 crore (US$2-3m) and a 90% market share should also be controlled. 'We broadly favour the maximum amount of reduction in price control,' said NPPA chairman B S Baswan. 'We have to keep in mind the need to replace official discretion with the monitoring of prices in the long run.'

production

The production of bulk drugs and formulations has risen from Rs3,840 crore (US$814m) in 1990-91 to an estimated Rs15,750 crore (US$3.342bn) in 1998/99. The government hopes to increase direct foreign investments, involving the setting up of new, or the expansion of existing, units. Following the delicensing of the pharmaceutical industry to encourage overseas investment, a number of industrial entrepreneurial memoranda (IEM) for the manufacture of various bulk drugs/drug intermediates/formulations have been established.

Up to October 2000, 54 IEMs were filed by the pharmaceutical companies for various bulk drugs, formulations and intermediates. These are estimated to generate employment for approximately 7,000 people with an investment of approximately Rs700 crore (US$148m). During the same period, foreign direct investment proposals worth approximately Rs490 crore (US$103m) were approved.

exports and imports

From a meagre Rs46 crore (US$10m) worth of pharmaceuticals exports in 1980-81, exports have risen to approximately Rs6,631 crore (US$1.407bn) in 1999/2000 (table 3). Exports in 1999/2000 were 6% higher than in 1998-99.

Imports of drugs and pharmaceuticals were Rs1,502 crore (US$318m) in 1999/2000 (table 4). They are imported from China, the US, Germany, the UK, France, Switzerland, Belgium, Republic of Korea, Netherlands, Italy, Japan, Denmark, Sweden, Russia and Ireland. The exports from India are mainly to the US, Russia, Germany, Hong Kong, the UK, Nigeria, Singapore, Netherlands, Iran, Brazil, Vietnam and China. During the period January 1998 to October 2000, foreign direct investment (FDI) in the pharmaceutical sector amounted to Rs367 crore (US$78m). This followed a relaxation of the rules by the government.

The government's proposed tariffs for 2001-2002 are listed in table 5, compared with previous years.

The customs duty reduction on formulations may not have a wide impact on the domestic manufacturers, as there is a significant price difference between domestic and patented formulations in the international market.

However, Indian drug manufacturers will benefit from the extension of weighted deduction benefits given to r&d expenditure by the government. This benefit has been extended to expenditure on biotechnology research, clinical trials and regulatory approvals. Major domestic players such as Ranbaxy, Dr Reddy's Laboratories, Cipla, Nicholas Piramal and Wockhardt are investing aggressively in r&d. Dr Reddy's Labs and Ranbaxy have already borne fruit and are in clinical trials using nces discovered in their labs.

Future

The government has also set up a task force on pharmaceuticals and knowledge-based industries with the objective of evaluating the status of the industry in India and to identify the strategy required for each of the pharmaceutical sectors to become a world leader.

Investment in the pharmaceutical industry has been substantially and steadily sustained over the years (figure1). Post-1991, following the introduction of increasingly liberal issue of licences to set up new capacities and a dismantling of all entry barriers, domestic companies and multinationals have entered into marketing arrangements to increase market penetration and further strengthen positions in therapeutic segments. Ranbaxy has tied up with Cipla, Glaxo and Hoechst-Marion for products in specific therapeutic segments. Similarly, Hoechst-Marion also has ties with Nicholas Piramal.

consolidation

Most of the top pharmaceutical companies are consolidating their position in the domestic market either through product rationalisation, brand acquisition or company acquisition. Hoechst, Glaxo, Wockhardt and Ranbaxy have revamped their product portfolio in order to be more focused. On the other hand, Sun Pharma, Nicholas Piramal and Dr Reddy's Laboratories have opted for brand/company acquisition to increase therapeutic reach and market penetration.

The Indian pharmaceutical industry is witnessing a tilt towards high-margin, high value-added, third generation therapeutic segments like cardiovascular, non-steroidal anti-inflammatory drugs (NSAIDS), psychiatric and anti-diabetes drugs. Total investment is estimated to be Rs2,800 crore (US$594m) by 2002, the terminal year of the ninth 5-year plan.