|
Heard often is a rumour that India is a country that
has been cautious in liberalising its economic policy.
As a consequence, it is argued, the country has been
saved from the many difficulties and crises that have
afflicted many other nations, developed and developing.
However, for those closely following the evolution of
Indian economic policy since 1991 the basis for these
rumours is unclear. Liberalisation in India has indeed
been slow on occasion because of the fortunately messy
complexity of a democratic polity. It has also been
slackened by the loss of popular support and social
sanction for the country's still dominant, ''centrist''
formation, the Congress. But these have not held back
the ideologues and advocates of so-called ''reform''.
Over the last decade, if there is a common element in
policy, that has been the near continuous pursuit of
liberalisation, despite the restraints that the country's
history and polity and the poverty and deprivation of
its population set on the process.
The net result has been the liberalisation of policy
across the board, ranging from restraints on trade and
foreign investment to controls on investment, production
and prices. India today is among the more liberal of
developing economies, despite the presence of a plethora
of toothless or ignored instruments of control. And,
the process still continues.
Among the more recent instances of liberalisation being
pursued even when controls have served the country well,
are policies on patents, foreign investment and pricing
in India's pharmaceutical industry. It is widely accepted
that regulation and control in India's pharmaceutical
sector had resulted in a situation where the country
had managed to ensure access to cheap medicines for
its population, with no damaging shortfalls in the domestic
availability of life-saving and other crucial drugs.
Besides the normal controls that had characterised India's
regime of intervention aimed at reigning in markets
and directing development, there were three sets of
measures that were particularly important in the pharmaceutical
sector. The first was India's decision to require leading
foreign firms operating in its markets to dilute their
foreign shareholding to 40 per cent of total equity.
Though these transnationals dragged their feet when
complying with this requirement and finally did so only
by creating a wide shareholding structure that allowed
the retention of foreign control, the measure did restrain
their power and enhance the transparency of their operations.
Second, India's early position on patents, that recognised
process patents and not product patents, had a salutary
effect on drug availability and pricing. Indian scientists
and engineers had the capability not just to de-synthesize
patented drugs to identify their chemical composition,
but also to find alternative process routes to manufacture
them. This ensured that the production of medicines
with important therapeutic qualities could not be monopolised
and that monopoly exploited by foreign patent holders.
Drugs were not just available in adequate quantities,
but at reasonable prices too. In the event, the foreign
firms, rather than lose out on India's large market
chose to stay on and market their own versions, even
if at prices much lower than those they commanded in
markets abroad.
Finally, starting from 1963, the government through
its drug price control policy, set ceilings on the prices
that could be charged on different drugs. Those ceilings
were cost-plus prices, accounting for costs of production
and adding on a margin, with the focus of control being
the ''essentiality'' of a bulk drug or a formulation.
The control on prices formalised the government's policy
of keeping essential and life-saving drugs affordable,
even while seeking to provide a ''reasonable'' return
to producers, both foreign and domestic. India's success
in implementing these policies was helped by the large
size of its market, even if a substantial share of that
market was supported by the ''out-of-pocket'' expenditure
of individual consumers, as opposed to state expenditures
on provision of health services. A large market made
aggregate profits significant even when profit margins
were capped.
This was not to say that the powerful transnational
firms did not fight back and seek ways of circumventing
controls. They delayed equity dilution, they attempted
to stall drug replication through alternative routes,
they spent huge sums trying to win over doctors who
made the consumption decisions for patients, and they
used mechanisms such as ''transfer pricing'' to escalate
costs in order to conceal and transfer profits abroad.
Transfer pricing involved the sale at inflated prices
(when compared with available substitutes) of intermediates
and bulk drugs, by the parent company or its third-country
subsidiary, to the Indian-arm of the parent. Since margins
under the price control regime had to be added on to
''cost'', final product prices too were inflated through
this process, with those prices including profits that
were concealed as costs and transferred to some segment
of the global operations of transnational firms. These
strategies notwithstanding, India's regulatory regime
in this sector was a great success.
Given this history, one would expect that a cautious
policy of ''liberalisation'' would leave untouched policies
with regard to the pharmaceutical industry. Why tamper
with a regime that has not created problems such as
shortages, has prevented exploitative pricing and has,
in fact, been recognised as a resounding success? Yet,
liberalisation has been pursued here too. The first
casualty in such liberalisation was, of course, the
patent regime. The argument in favour was that India
did not have an option. To be a member of the world's
multilateral trading regime and the World Trade Organisation,
it had to sign on to the Uruguay Round agreement and
the intellectual property regime it embodied. This required,
among other things, the acceptance of product patents.
There is, however, no evidence that India led the fight
to limit the damage to developing countries on this
count, or demanded suitable exceptions in an area impinging
on the people's health. The net result was that the
earlier flexibility domestic manufacturers had, to look
for an alternative process to replicate old and new
patented drugs for the domestic market, no more exists.
As a result, the danger of drug price inflation due
to monopoly was now real and already visible in the
case of patented drugs.
There are, however, two other ways in which the indigenous
drug industry can continue to play a positive role in
ensuring the availability of reasonably-priced medicines.
The first is by entering the production of drugs that
go off patent protection because of having crossed the
period for which patent protection is valid. Domestic
firms can create generic versions of these drugs that
can compete with branded products to bring down prices.
There are a large number of drugs, estimated to constitute
a significant share of domestic drug consumption, that
are slated to go off patent over the coming years. So
even this limited flexibility could make a significant
difference.
But here, fears are being expressed that one aspect
of the liberalised policy of the government could prove
an impediment. In 2000, the policy with regard to foreign
direct investment (FDI) in the pharmaceutical industry
was liberalised. Under the new policy, FDI in the sector
was brought under the ''automatic route'', and the ceiling
on foreign shareholding was removed allowing for foreign
ownership of up to 100 per cent. The net result has
been a spate of acquisitions of leading drug firms by
foreign producers. Among the recent acquisitions by
transnational firms have been the takeovers of Matrix
Lab by Mylan, of Dabur Pharma by Fresenius Kabi, of
Ranbaxy by Daiichi Sankyo, of Shanta Biotech by Sanofi
Aventis, of Orchid Chemicals by Hospira and of Piramal
Healthcare by Abbott. An overwhelming proportion of
recent FDI inflows into pharmaceuticals production has
been in such acquisitions rather than in greenfield
projects.
What this does is that it places domestic capacities
and capabilities that could have served as competitors
to foreign producers in foreign hands. Besides the fact
that this would influence pricing, given the oligopolistic
position and the global strategy of these firms, it
could lead to a decline in the production of generics.
Firms with patents for new formulations targeted at
diseases that can also be treated by off-patent generics
may choose after acquisition to hold back on the production
of such generics or raise their prices to protect branded
products.
The implication of this is that with the liberalisation
of FDI policy, the effort to keep medicines affordable
has become even more dependent on price control. It
is in this context that the recently released draft
National Pharmaceuticals Pricing Policy , 2011 gives
cause for concern. Ever since 1994, market criteria
have been introduced into the drug price control policy.
As of then, commodities chosen for price control were
identified on the basis of the total turnover of the
drug concerned in the domestic market and the share
of leading producers in that market. So it was not so
much ''essentiality'' as defined by the nature of the
disease for which the drug was relevant and the characteristics
of the population predominantly afflicted by that disease
that rendered it eligible for price control. Rather
it was the size in value of the market for a drug and
the degree to which its production and sale was concentrated
that mattered. This did mean that medicines for the
rich that were expensive but could be afforded by them
could be included under price control, whereas some
medicines important for the poor may be excluded. The
dilution did push up prices in the case of quite a few
drugs. However, where imposed, the ceiling price was
determined by the cost of production plus a margin for
post-production expenses and profit.
But now, on the grounds of expanding the drug price
control list, the government is choosing to dilute price
control even further. The draft policy claims to be
concerned with reverting to the essentiality criterion
(defined as the inclusion by experts in the National
List of Essential Medicines) as opposed to the economic
criterion or market share principle. In the process,
drugs constituting a much higher 60 per cent of the
domestic market are reportedly to be brought under price
control. However, according to the All-India Drug Action
network, the list of the top-selling 300 medicines prepared
in October 2003 by ORG-Nielsen accounted for more than
Rs.35,000 crore of sales, which amounts to almost 90
per cent of the retail market. Yet, at least 60 per
cent of these top-selling 300 medicines are not in the
National List of Essential Medicines (NLEM).
Moreover, on the grounds of the complexities involved
in regulating the prices in such a large section of
the industry, the draft policy recommends a shift away
from cost-based pricing to market-based pricing. According
to the latter, the ceiling price for a drug would be
fixed on the basis of the Weighted Average Price (WAP)
of the top three brands by value. So the price charged
by leading producers when the policy comes into operation
would provide the benchmark for fixing the ceiling.
These prices tend to be higher than that of low-ranked
competitors, because of the market power of the dominant
firms. Thus, the shift from what the regulator considers
''reasonable'' to what the market leaders consider ''appropriate''
amounts to a substantial dilution of price control,
with even subsequent changes in the ceiling being linked
to changes in the wholesale price index for manufactures.
What is more the prices of patented drugs are to be
determined separately by a special committee constituted
for the purpose, with no clear guidelines enunciated.
As of now the policy appears complex and its effects
uncertain. But in principle what it does is to take
one more step away from regulation, creating an environment
in which all the gains of a well crafted and highly
successful post-Independence drug policy will be lost.
Liberalisation is indeed thriving in India, even in
areas where it can be least justified.
*
This article was originally published in the Frontline,
Volume 28, Issue 24, November 19-December 02, 2011. |
