Pharmaceutical Industry in India

&
its Pricing Strategies

By
Muthupalaniappan. T
Mohan Kumar PS
 Indian Healthcare Sector

India’s development cannot be complete until it develops its social and

healthcare sector.

For this a strong regulatory mechanism is required to monitor prices and

availability of essential medicines.

It also needs to ensure quality service in the healthcare sector especially so

when 40% of India’s population are illiterate and 30% living below the
poverty line.

Unfortunately in India the health care deliveries are not only inadequate but
also antagonistic to patient.
 Indian Pharmaceutical Industry

Indian pharmaceutical industry today is one of the largest and most

advanced industries among the developing countries.

The Indian Pharma Industry is estimated to be worth $ 4.5 billion, growing

at about 8 to 9 percent annually.

It ranks 3rd in the world, in terms of technology, quality and range of

medicines manufactured.

Its highly fragmented with more than 20,000 registered drug manufacturers
in India who sold $9 billion worth of formulations and bulk drugs in
previous year.
 Indian Pharmaceutical Industry

The leading 250 pharmaceutical companies control 70% of the market with
market leader holding nearly 7% of the market share.

85% of these formulations were sold in India while over 60% of the bulk
drugs were exported, mostly to the United States and Russia.

Because of regulations of Patent Act, 1970 multinationals represent only 35%

of the market, down from 70% thirty years ago.

In terms of the global market, India currently holds a modest 1-2% share,
but it has been growing at approximately 10% per year.

It meets around 70% of the country's demand for bulk drugs, drug
intermediates, pharmaceutical formulations, chemicals, tablets, capsules,
orals and injectibles.
 Challenges in Indian Pharmaceutical Industry

1. Low investment on R&D:

Market leaders such as Ranbaxy and Dr. Reddy’s Laboratories spent

only 5-10% of their revenues on R&D, lagging behind Western
pharmaceuticals like Pfizer, whose research budget last year was
greater than the combined revenues of the entire Indian
pharmaceutical industry.

2. Taxes and Duties:

The companies now have to pay a 16% tax on the maximum retail
price (MRP) of their products.
Control of Drug Prices

Before Uncontrolled
1970

1970 -1997 DPCO Under

Govt of India

1997 - Present NPPA

 DPCO

The Drugs Prices Control Order, 1995 is an order issued by the Government
of India under Section 3 of the Essential Commodities Act, 1955 to regulate
the prices of drugs.

DPCO controlled the domestic prices of major bulk drugs and their
formulations with an aim to provide patients with medicines at affordable
prices.
 NPPA
National Pharmaceutical Pricing Authority (NPPA) is an organization of
the Government of India which was established in 29th August 1997 to fix/
revise the prices of controlled bulk drugs and formulations and to enforce
prices and availability of the medicines in the country, under the Drugs
(Prices Control) Order, 1995.

The main functions of NPPA are to:

1. Monitor the availability of drugs, identify shortages, if any, and to take

remedial steps;
2. Undertake and/or sponsor relevant studies in respect of pricing of
drugs/ pharmaceuticals;
3. Render advice to the Central Government on changes/ revisions in the
drug policy; and
4. Render assistance to the Central Government in the parliamentary
matters relating to the drug pricing.
 Reasons for rise in medicine prices

Rise in the price of bulk drugs;

Rise in the cost of excipients used in the production of medicines like

Lactose, Starch, sugar, glycerine, solvent, gelatine capsules etc.;

Rise in the cost of transport, freight rates;

Rise in the cost of utilities like fuel, power, diesel, etc.;

For imported medicines, rise in the c.i.f. price and depreciation of the
Rupee;

changes in taxes and duties.

Top 10 Pharmaceuticals in India (2008)
Rank Company Revenue Share

1 Ranbaxy 4461

2 Dr.Reddy’s Lab 1933

3 Cipla 1842

4 Ashwin Dalvi India 1387

5 Aurobindo Pharma 1260

6 GlaxoSmithKline 1228

7 Lupin Lab 1180

8 Cadila Healthcare 1091

9 Allergan 980

10 Aventis 980
 Terms used in explaining the pricing in Pharmaceutical Industry

"bulk drug"
means any pharmaceutical, chemical, biological or plant product
including its salts, esters, stereo-isomers and derivatives, conforming to
pharmacopoeial or other standards specified in the Second Schedule to
the Drugs and Cosmetics Act, 1940 (23 of 1940), and which is used as
such or as an ingredient in any formulation.

"formulation"
means a medicine processed out of, or containing without the use of any
one or more bulk drug or drugs with or pharmaceutical aids, for internal
or external use for or in the diagnosis, treatment, mitigation or
prevention of disease in human beings
 Terms used in explaining the pricing in Pharmaceutical Industry

"Scheduled bulk drug"

means a bulk drug specified in the Schedule of Classified drugs.

"Scheduled formulation"
means a formulation containing any bulk drug specified in the Schedule
either individually or in combination with other drugs, including one or
more than one drug or drugs not specified in the Schedule

"non-Scheduled bulk drug"

means a bulk drug not specified in the Schedule;

"non-Scheduled formulation"
means a formulation not containing any bulk drug specified in the
Schedule
 Calculation of Retail Price of Formulation
R.P. = (M.C. + C.C. + P.M. + P.C.) x (1 + MAPE/100) + ED

Where,

RP - retail price
MC - material cost
CC - conversion cost
PM - cost of the packing material used in the packing
PC - packing charges

MAPE (Maximum Allowable Post-manufacturing Expenses) means all

costs incurred by a manufacturer from the stage of ex-factory cost to
retailing and includes trade margin and margin for the manufacturer and it
shall not exceed one hundred per cent
ED - excise duty
 An Example
An example of pricing of a locally manufactured scheduled drug is provided
below (assuming the actual costs are lower than or equal to the Government
norms):

* Material cost Rs.3.25

* Conversion cost Rs.0.75
* Packing material Rs.1.53
* Packing cost Rs.0.12

* Total Rs.5.65
* Post manufacturing expense 100% above cost Rs.5.65
(to cover other costs plus profit)

* Total: Rs.11.30
 An Example
Total: Rs.11.30

* Add: excise duty 16% of sale price Rs.1.59 to wholesaler (9.96 as below)
* Retail price: Rs.12.89 + local taxes
* Price to retailer (84% of 12.89 above) Rs.10.83 + local taxes
* Price to wholesaler (92% of 10.83 above) Rs.9.96 + local taxes
* Less: manufacturing costs: Rs.5.65
excise duty 1.59
7.24

* Balance for marketing, transport, etc. and profit of manufacturer Rs.2.72

(27% of sales price)
 Methodology / Procedure for Price Fixation of Bulk drugs
Prices of scheduled bulk drugs are fixed by the NPPA to make them available
at a fair price from different manufacturers.

Step 1 : Identification of bulk drugs :

Bulk Drugs are taken up for study on following basis :-

• Whose validity period is due to expire.
• Request from the concerned manufacturer/company.
• Drug produced in the country for which no price has been notified
under DPCO, 1995.

Step 2 : Collection of data :

Data is collected by issuing questionnaire/Form I of DPCO, 1995/cost-

audit report etc. and verification by plant visits, if required.
 Methodology / Procedure for Price Fixation of Bulk drugs
Step 3 : Preparation of actual cost statement :

Actual cost for the year for which data is submitted is prepared based on
data submitted / collected & verified during plant visit.

Step 4 : Preparation of Technical Parameters :

Technical parameters are prepared based on data submitted, collected

and verified during plant visits. Plant capacity is assessed considering
330 working days for normal operation of plant leaving 35 days for
scheduled maintenance of plant. The achievable production level is
considered at 90% utilisation of assessed capacity allowing 10%
production loss on account of unforeseen break down and non-
scheduled maintenance.
 Methodology / Procedure for Price Fixation of Bulk drugs
Step 5 : Preparation of Estimated Cost :

The estimated cost for the pricing period are then prepared based on
actual cost & the technical parameters. While projecting the future cost,
an increment is recognised at 5% per annum in respect of salaries &
wages. Wage agreement, if any, which has been finalised and signed is
also recognised while preparing the estimates.

Step 6 : Calculation of Fair price of bulk drug :

While fixing the maximum sale price of the bulk drug, a post tax return
of 14% on net worth or a return of 22% of capital employed or in respect
of a new plant an internal rate of return of 12% based on long term
marginal costing is considered depending upon the option exercised by
the manufacturer of the bulk drug. In case, the production is from basic
stage, additional 4% return is considered on net worth/capital
employed.
 Methodology / Procedure for Price Fixation of Bulk drugs
Step 7 : Fixation of maximum sale price of the drug :

When the number of manufacturers of the said drug is more than one,
the maximum sale price is fixed at 2/3rd cut off level or weighted average
price, depending upon the situation.

Step 8 : Notification of bulk drug price in official Gazette.

Note : The fair price may be further revised, if asked for by the

manufacturers, based on escalation formula for change in major raw
materials and utilities rates
 Methodology / Procedure for Price of Formulations
Step 1:Examination of Technical Parameters : 
Checking the Quantity of Bulk Drug as per label claim. The overage
claim is allowed as per batch production record or norms fixed by Govt.

Step 2:Examination of Prices of Bulk Drug : 

When notified price of bulk drug exists, the notified price or actual price
is considered. In the case of imported bulk drug used in the
formulation, weighted average import price is considered vis-à-vis the
price submitted by the applicant. For non-scheduled bulk drug used,
the available information on prices are applied.

Step3: Examination of Excipient claims : 

Excipient claims given in the application are examined and allowed after
referring to information available in NPPA.
 Methodology / Procedure for Price of Formulations
Step4: Examination of PL, CC, PC and PM cost : 
The process loss (PL), conversion cost (CC) and packing charges (PC)
are considered . The packaging material cost (PM) cost is allowed as per
the actual claim supported by invoices and after referring to information
available with NPPA.

Step5:Application of MAPE : 
Maximum allowable post manufacturing expenses (MAPE) is given at
100% on the ex-factory cost for indigenous formulation, while MAPE
upto 50% of the landed cost is allowed for imported formulation.

Step6:Working out the retail price : 

The retail price of formulations are worked out as per the formula given
 Methodology / Procedure for Price of Formulations
Step9:Treatment of Taxes : 
For bulk drugs used in formulation, all the statutory taxes are
considered at the actuals and net of MODVAT. Allowance upto 8% on
the notified price of scheduled bulk drugs is considered on this account.
The excise duty element is worked out in NPPA based on companies
claim. Allowance is made for 16% margin on price to retailer (as per
DPCO, 1995) and 8% margin to wholesaler as per practice, both on the
ex-factory price, which is the assessable value.

Step10:Suo - Motu Cases : 

If the manufacturers or companies do not apply for revision of
formulation prices as required under Para 8(2) of DPCO, 1995 within a
period of 30 days of price reduction of bulk drug or fall in other
statutory levies, steps are taken for suo-motu revision. Broadly the
procedure given above is followed.
 Methodology / Procedure for Price of Formulations
Step11: Notification of ceiling prices in the Gazette of India : 
Ceiling prices are fixed or revised under Para 9 of DPCO, 1995 for
commonly marketed standard pack sizes of price control formulations.
It is obligatory for all, including small scale units, to follow the ceiling
prices which are notified in the Gazette of India (Extraordinary). The
ceiling prices are usually notified as exclusive of excise duty, local tax
etc. but maximum retail price (MRP) printed includes excise duty.

Step12 Pro-rata price : 

NPPA has issued notification no. S.O.83 (E) on 27.01.98.on pro-rata
pricing. As per this notification, the manufactures of all the scheduled
formulation pack sizes different from the notified pack sizes under sub-
paragraph (1) and (2) of the paragraph 9 of the DPCO, 1995, shall have to
work out the price for such pack sizes, in respect of tablets and capsules
of the same strength or composition packed in different strips or
blisters, on pro-rata basis of the latest ceiling price fixed for such
formulations.
 Methodology / Procedure for Price of Formulations
Step13:Non-ceiling Price Order : 

Non-ceiling Prices are fixed under Para 8 (1), (2) and (4) and Para 11 of
the DPCO, 1995. They are specific to particular pack size and dosage
form of scheduled formulation of a particular company. Hence they are
pack specific and company specific. The prices fixed for non-ceiling
packs are communicated to the respective firms by issuing office orders.
In such order, usually excise duty element is shown separately. However,
local taxes are not included in Non-ceiling price