Bhupesh Bhandari: Playing around with drugs

Unnecessary interventions bring about serious distortions in the marketplace. This is the basic principle of free markets and the efficient allocation of resources. Unfortunately, the United Progressive Alliance seems to be blissfully unaware of this. A good example of this can be seen in the drama being played out in the pharmaceutical market, thanks to the recent Drug Price Control Order, or DPCO 2013. It has fixed price caps on 348 medicines and 650 formulations. (Earlier, the government would prescribe the prices of formulations made from 78 bulk drugs. The switchover has increased the ambit of price control from 18 per cent of the market to almost 30 per cent.) In calculating the price caps for the National List of Essential Medicines, or NLEM, the National Pharmaceutical Pricing Authority has taken into account a retailer's margin of 16 per cent. So, drug makers say that is the new margin for retailers; and since wholesalers get half of retailers, their margin will be 8 per cent.

These are way below what was being offered by companies earlier - 10 per cent to the wholesalers and 20 per cent to the retailers. Enter the All India Organisation of Chemists and Druggists, or AIOCD. There are over 750,000 chemists across the country; most of them are members of this lobby group. Needless to say, it wields enormous clout. If it wants, it can bring the pharmaceutical industry to its knees. AIOCD says drug makers, hiding behind DPCO 2013, are trying to make money at their cost. One, DPCO 2013 does not explicitly say that wholesalers will be given 8 per cent margin and retailers 16 per cent; it has only used 16 per cent margin to arrive at the caps. So it is possible for drug makers to offer higher trade margins. Two, the new margins are being paid not on the MRP of the drug but on the cost to the wholesalers and retailers; this means the effective margin is still lower. So it wants the old margins of 10 per cent and 20 per cent restored. The 6 per cent reduction in the combined margins, it alleges, is being pocketed by the drug makers.

Drug makers insist on the new margins and say AIOCD has not played its part in the whole exercise to make inexpensive essential medicine available to all. They allege that AIOCD members have stopped lifting the medicine produced by big companies in order to protect their profits. This has caused a serious loss of business for them. DPCO 2013, it has been estimated by drug market researcher IMS Health India, will cost drug makers business worth around Rs 1,400 crore annually, or about 2 per cent of the market. In September, the market shrunk by 1.1 per cent. Drug makers say this is because wholesalers and retailers didn't lift their stocks during the month.

Towards the end of September, the department of pharmaceuticals in the ministry of chemicals and fertilizers got active and wrote to various states to monitor the situation and ensure that essential medicine is readily available. Under the Essential Commodity Act, the state can intervene to ensure that essential medicine is readily available at drug stores. Around the same time, some companies buckled under pressure. Cipla was amongst the first to restore the old margins - 10 per cent to retailers and 20 per cent to retailers - on all NELM products covered under DPCO 2013. Torrent and Eris Life Sciences began to offer 5 per cent discount to all its wholesalers. As a result, the shortage of essential medicines in the first half of September has been more or less met.

But many others say it is hard to match these offers. They argue that the extra margin, or discount, has to be paid out of their own pocket and will further dent their wafer-thin margins. Also, DPCO 2013 came into retrospective effect and required them to recall the batches already out in the market, put new price tags and then ship them back to the wholesalers. That too has cost them serious money. Earlier this month, GlaxosmithKline Pharmaceuticals, one of the larger suppliers of essential medicines, informed its shareholders that its products were not being accepted in various parts of the country from September 15. "Sales continue to be affected," it added. The department of pharmaceuticals has now called a meeting of AIOCD and drug makers to resolve the issue.

It is unlikely the matter will be resolved soon. The imbroglio also raises serious questions about the efficacy and desirability of price controls. Price controls are recommended only when the industry is making super-normal profits at the cost of the consumer. There is no evidence that Indian pharmaceutical companies enjoy fatter profit margins than other sectors or their counterparts in other parts of the world. Also, drug prices in India are already amongst the lowest in the world. That's because there are thousands of pharmaceutical companies in the country; every drug has dozens of brands in the market. It is also hard to imagine how all of them can collude to jack up prices and fleece patients.

But then cheap medicine is a great move in an election year. When that factor gets into play, no logic really matters - inexpensive medicine goes well with inexpensive food. It really doesn't matter if a great deal of time and energy is spent over deciding the trade margins. And why would any drug maker now spend its precious research dollars on essential medicine?