Decontrol of Drug Prices

THE wolves are baying at the door, once again calling for further decontrol in the prices of drugs. Since comprehensive price controls were imposed on drugs in 1979, drug companies have continuously clamoured for their removal. It is a measure of the clout that these companies exercise, that over the years they have regularly managed to extract their pound of flesh from the government. Thus successive price control orders of the government have whittled down both the span of price control and the limits on profitability.

Thus, in 1979, a total of 343 drugs—accounting for 85 per cent of drugs in the market—were placed under price control. Profitability allowed on price controlled drugs ranged from 40 per cent to 75 per cent. In 1987 the number of controlled drugs were reduced to 166 — covering 60 per cent of drugs in the market, and profitability allowed was increased to a range of 75-100 per cent.

In 1995 the number was further reduced to 74 — covering 35 per cent of the market, and profitability allowed was hiked up to 15 per cent. At each point when price control has been reduced, there has been an immediate spiralling effect on the prices of drugs. And each time this has been preceded by loud wails from the Pharma industry about declining profitability—a claim however that has never been borne out by the health of the balance sheets of the pharma sector.

This time around, the tone for further price decontrol was set a couple of years back by the then Finance Secretary Sri Vijay Kelkar, who publicly held forth on the need to free the industry of all price controls.

The recent announcement by Sri Yashwant Sinha in his Budget speech of further price decontrol of drugs, hence, was on expected lines. It is expected that only a handful of drugs will now remain under price control, and this is bound to fuel rise in drug prices. This time, though, the plea of poor profitability for drug companies has not been used. Possibly because, given that all major news channels these days discuss share prices at great lengths, it would have been difficult to conceal the fact that Pharma shares have remained the most profitable even when there have been dizzy gyrations in the stock market.

Instead the rationale now being used to justify price control is two pronged—one that market forces are best suited to stabilise drug prices, and two that the industry must be made more profitable in order for it to increase investment on R&D and be globally competitive. Both these arguments are seriously flawed, and are being used to justify the unjustifiable. Let us examine both these arguments.


It is important to underline that drug prices are controlled by differing mechanisms all over the world, including in developed capitalist countries. In Australia since 1993, new drugs with no advantage over existing products are offered at the same price. Where clinical trials show superiority, incremental cost effectiveness is assessed to determine whether a product represents value for money at the price sought. In Britain, there exists the pharmaceutical price regulation scheme – a voluntary agreement between Britain’s Department of Health and the Association of the British Pharmaceutical Industry in which companies negotiate profit rates from sales of drugs to the National Health Scheme.

Globally, Drug Companies are being forced to reduce the cost of medicines. Pressure is being mounted by Health Insurance Cos, Health Management Organisations (HMOs) and governments (in countries like UK and Canada where the State provides Health Insurance cover) all over Europe and North America. These pressures have become stronger in recent years with the realisation that spiralling Drug costs are making Health insurance cover (whether state funded or privately managed) unsustainable. In all these countries there is a major move to insist on generic prescription in most cases, thus opening up a huge generics market. Large TNCs are forced to compete on more or less equal terms which a large number of lesser known Cos, and also sell drugs at relatively cheaper rates. In the US, for example, from 1995 through 1997, generic (i.e. drugs without brand names that are produced by small companies and are cheaper) drug prices showed a double-digit rate of decrease. This shift was facilitated by the Hatch-Waxman Act, which made the approval process of generic drugs much easier. Since 1984 this has resulted in a dramatic increase in competition from generic drugs, leading to an estimated saving of 8-10 billion dollars in 1994 alone.

The fact that drug prices are controlled all over the world flows from the global experience that market mechanisms cannot be expected to stabilise prices. Various other interventions are needed to manipulate the market, in order to guard against monopolies emerging. Unlike in the case of consumer goods, there is no direct relation between the market and consumers in the case of drugs. Drugs are purchased by consumers on the advice of doctors or chemists.

Consequently, the marketing strategies of drug companies target doctors or chemists. Doctors are not known to take decisions based on price of contending brands. Similarly chemists have no interest in selling cheaper brands. So, if we believe that drug prices will be kept low by market competition, it is a belief that is not borne out by the past experience, in India or elsewhere.

Here, it is necessary to nail another lie. There is a prevailing myth that drug prices in India are the lowest in the world. This is at best a partial truth. Drugs, which are still Patent Protected, are much cheaper in India due to India’s earlier Patent Act. It should be obvious that we will lose this advantage after amendment of the Indian Patent Act of 1970. But off-Patent Drugs (which anyway account for 80-85 per cent of current sales in the country) are not necessarily cheaper in India. In fact, generally, Drug prices for these Drugs are higher in India than those in Sri Lanka and Bangladesh. In fact prices of some top selling drugs are higher in India than those in Canada and the UK. Thus, clearly, the benefits of the advantage that the Indian Drug Industry enjoys over all other Third World nations, in terms of the availability of indigenous technology and a large domestic market, have not been passed on to the consumers.


Let us now turn to the argument that price decontrol is necessary to spur R&D activities in the drug industry. When legitimate concerns were raised that amendment of the Indian Patents Act would result in rise in Drug Prices, the Ministry of Chemicals and Fertilisers had consistently claimed that any rise in prices would be kept in check through mechanisms in the Drug Price Control Order. It is extremely surprising that now that amendments are being made in the Indian Patents Act, we should be simultaneously talking of diluting Price Controls. Any further dilution would mean virtual abandonment of Price Controls. If the government is to consider this, under the garb of encouraging R&D, it will only substantiate earlier fears that a change in the Patents Act can only lead to a spiralling rise in prices of drugs.

Present investments on R&D in the Drug Industry is less than 2 per cent of sales. The dubious logic that price controls have led to this situation has been put forward. In the past two decades the span of price controls has come down from in excess of 85 per cent of the Industry’s turnover to around 35 per cent. If reduction in price controls is to spur R&D activity, why has there been no rise in R&D expenditure in the past decade. It may be recalled that the 1995 policy had a provision for keeping all drugs developed by indigenous R&D outside price controls for ten years. This too does not seem to have spurred any significant R&D activity in the Industry. The issue of Price Controls has nothing to do with infrastructure development for R&D, and the two issues need to be dealt separately. It appears as though the issue of R&D has been used as a “red herring” by drug companies to lobby for price decontrol and thereby licence to profiteer.

A major constraint for the Drug Industry in India is the relatively small domestic market (compared to our population). The solution to this constraint cannot be sought within the industry, as it has to do with the extremely low purchasing power of over 80 per cent of our population. The belief that it is possible to extract significantly larger amounts of “surplus” as profits from the domestic industry, that can be channelled for R&D, is thus fallacious.


Finally, we need to understand that drugs are a commodity that are required most crucially by those who are least likely to be able to pay for them. Unlike commodities like cars or washing machines, the whole logic for the existence of the Industry lies in its ability to provide its products to the people who are economically deprived. If the Industry fails in this fundamental endeavour, the very reason for its existence is open to question. We already have a situation where a majority of our population does not have access to drugs, because they cannot afford to pay for them. In such a situation rise in drug prices can only “cost out” larger sections of the population. It can then legitimately be asked, if those who require drugs the most are going to be unable to afford drugs, why have a drug industry at all? The industry argues that adequate competition, even in the absence of price controls, can peg down drug prices. If that is so, why are they afraid of price controls?