Impact of the Drug Price Control Order on the pharma industry

By Avishek Majumder & Abhinash on April 8, 2019
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The Drug Price Control Order (DPCO) was enacted by the Government of India in 1955. The latest amendments to the policy and regulations were made in 2013 and termed as DCPO-2013 (National Pharmaceutical Pricing Authority, 2018). This regulation ensures the availability of essential drugs to the public at a reasonable and controlled price (Kumar, Gupta, and Kumar, 2014). The Drug Price Control Order identifies drugs as an essential commodity. The Drug Price Control Order poses a check on manufacturers and prevents them to sell their drugs at an exorbitant price (The Economic Times, 2017). No pharma company is authorized to sell any drug to a consumer at a price exceeding the tagged price by National Pharmaceutical Pricing Authority (NPPA) under DPCO-2013.

However, the act also motivates the research and development due to which the pricing of new drugs are exempted for 5 years. The Economic Times, (2017) reported that 42 anti-cancer drugs were put under controlled prices through trade margin rationalization in 2017.

How is the controlled drug pricing calculated?

The lists of drugs that come under price control are provided by the Government of India (National Pharmaceutical Pricing Authority, 2018). The pricing of the drugs is fixed as per the market pricing. It calculates the ceiling price of drugs by taking into account of prices of the drugs from different brands. The ceiling price is the maximum price of the drug as fixed by the NPPA (Ahmed, et. al., 2014). DPCO puts an upper limit on the margins of wholesalers and retailers to 8% and 16% respectively.

The drug manufacturers selling the medicines above the limit posed by the Drug Price Control Order were made to slash the prices to meet the criteria of DPCO (Ahmed, et. al., 2014). However, the companies selling their drugs below the margins set by DPCO are not allowed to raise the prices. There is a margin for the annual increase in retail pricing of drugs in accordance with the wholesale price index.

Calculations used by DPCO

The NPPA schedules and calculates the ceiling prices of;

  • New drug,
  • Scheduled drug formulation,
  • and Non-scheduled drug formulations.

The NPPA follows two-step method of calculating the ceiling price of scheduled drug formulations. First the Average Price to Retailer of the scheduled formulation termed as P(s), then the ceiling value is calculated P(c).

Step 1: P(s) = (Sum of all prices to the retailer with a market share of >= 1%) / (Total number of brands and generics)
Step 2: P(c) = P(s)*(1+M/100)
Where M is the % Margin to the retailer (16% always).

Again, the ceiling price of a scheduled formulation in case of no reduction in price due to the absence of competition is calculated in another way.

Step 1: P(s) = Pm{1-(Pi1+Pi2+…)/(N*100)} 
Where Pm is Price to Retailer of highest priced scheduled formulation under consideration. Pi is % reduction in Average Price to Retailer. N is the number or frequency of dosage forms.
Step 2: P(c) = P(s)*(1+M/100)
Where M = 16%.

This formula is used in another three cases (National Pharmaceutical Pricing Authority, 2018):

  1. When no reduction in average price to the retailer with respect to the prices to the retailer of the schedule formulation.
  2. In case the other forms of the scheduled formulation that are not available in the list of controlled drug prices.
  3. In the event of the scheduled formulation is available in the list of controlled price drugs.

Impact of DPCO on small scale pharma industry

DPCO proved as a boon to a small scale domestic pharmacy industries. As these companies already provide essential drugs at a reasonable price against large scale pharma companies. The NPPA has put a total of 348 drugs and 652 formulations under pricing control (National Pharmaceutical Pricing Authority, 2018). These drugs remain classified as life-saving drugs. In this regard, the small domestic pharma companies with reasonable prices of drugs have benefitted as they produce generic drugs which remain significantly cheaper their bigger brand counterparts (Biospectrum, 2017). The new drug regulation slashed down the profitability of big market players in the pharma industr. The drug pricing act poses competition among multinational pharmaceutical companies to provide drugs at cheaper rates. The prices of the drugs sold by small scale rather increased leading them to profitability (The Economic Times, 2017).

Impact of the Drug Price Control Order on large scale pharma industry

On the other hand, according to a report by Indian Pharmaceutical Alliance (IPA), pharma companies such as Lupin, Novartis, and SUN Pharma were made to slash the prices of their drugs by 50 to 80% (Biospectrum, 2017). The slashed profitability is causing to repel the big multinational pharma companies to invest in the market of essential drugs. The lowering of ceiling prices has been formulated for more than 84% of the medicines found in India, out of which 70% of the drugs are manufactured by medium and large scale pharma companies. Many companies, mainly tail-end brands have discontinued popular drug brands. In addition, the larger scale comaonies were also impacted by poor employment generation, export growth, R&D development and expenditure, lack of new formulations and lack of investors (Biospectrum, 2017).

Excessive price control has repealed the attention of the pharmaceutical industry and slowed down the growth of respective companies (Sahay and Jaikumar, 2016). Implementation of DPCO led to heavy losses to profit-making companies such as Roche, Bayer, Novartis, and Glenmark which lost the market due to heavy competition with generic drug suppliers and low-cost drug manufacturers like Aurobindo and Lupin. Strict regulation of drug prices made drug manufacturers to shut down their R&D centres. This posed an adverse effect on the drug that lead Sanofi India to shift its R&D facility from India to China in 2015 (Biospectrum, 2017).

Statistical significance of the impact of DPCO 2013

For instance, take Jubilant Life Sciences, which come under medium and small scale pharma companies in India, has shown improved sales of its products. The graph clearly indicates that, since the implementation of DCPO in 2013, the sales of drugs both domestic and export has increased for branded and generic drugs. Although in recent years the sales of generics have lowered pertaining to the regulations of USFDA. The sales of both generic and branded drugs increased by 20% and 10% respectively in 2014. On the other hand, branded drugs such as mainly speciality pharmaceuticals like radiopharmaceuticals, CMO of sterile injectables, and allergy therapy products has seen increased sales both in the domestic and export market. The sales value presented are in Indian Rupees Millions.

Trend line of sales of generic and branded drugs by Jubilant Lifesciences (Source: Compiled by authors)
Trend line of sales of generic and branded drugs by Jubilant Lifesciences (Source: Compiled by authors)

The graph presented below indicates the comparative growth of Novartis and Aurobindo Pharma post-2013. The trend line clearly indicates that after DPCO 2013, the sales of generic low-cost drugs and other drugs increased by 20% in 2014 for Aurobindo, whereas, the same declined by 40% for Novartis. This is imperative from the fact that Novartis is more focused on profit-making from the domestic sales of generic drugs. However, Aurobindo’s domestic sales of low-cost generic drugs escalated over the years as DPCO acted as a catalyst to its sales. The sales values presented are in Indian Rupees Millions.

Comparative trend line of generic drug sales between Novartis India and Aurobindo Pharma (Source: Compiled by authors)
Comparative trend line of generic drug sales between Novartis India and Aurobindo Pharma (Source: Compiled by authors)

Strategies adopted by pharma companies to mitigate the impact of DPCO

To mitigate the impact of DPCO, large scale pharma companies in India incepted many prominent strategies. They shifted their focus to specific drugs rather than a whole range of drugs to mitigate the pressure of pricing and patent cliffs (Biospectrum, 2017). Sanofi India stopped the manufacturing of paracetamols and focused more on molecular drugs. Shutting down the non-operative units, shifting focus from R&D to search and development were some of the other strategies that were adopted. Costs to companies remain reduced by trimming down the internal R&D staff members (Bhaskarabhatla, et. al., 2016).

Changes in dosage and formulation of drugs so as to escape from pricing cap enable the drug manufacturers to maintain their profitability. The low profitability and competition with domestic drug suppliers repelled the large scale drug manufactures in taking up patent-related actions and manufacturing of low-cost drugs. In addition, companies started to introduce sales and prices of out-of-patent drugs (Bhaskarabhatla, et. al., 2016). Many companies increased the price of the regulated formulations in the period before DPCO, which led to a higher ceiling price of various drugs.

Mitigation case of Glivec

Novartis invented and introduced ‘Glivec’ that was used to treat gastrointestinal cancers and leukaemia. The company filed a plea for patent protection against the generic anticancer drug that remain sold by domestic drug suppliers in India (Gabble and Kohler, 2014). Glivec costs Rs 1.2 lakhs while the one month dose of its generic drug costs Rs 8000 only. Novartis lost the case but did not stop investing in the Indian market. The company even introduced it’s patient’s access programme for Glivec to give away the drug for free to around 17000 patients. The company also introduced its diabetes drug Galvus at a lower cost in India.