Competition Policy for the Pharmaceuticals Sector in India

Nitya Nanda
CUTS, Jaipur &

Amirullah Khan
IDF, Gurgaon

The Industry

A View

Almost non-existent before 1970, a prominent producer of healthcare products, meeting 95% of the countrys needs now Indian production constitutes about 1.3% of the world market in value terms and 8% in volume terms Likely to grow from about US$5.5bn in 2000 to US$25bn in 2020 Global attention during TRIPs and Public Health debate great promise Doubts if the industry can provide affordable medicines even to the people in India

The global Scenario

Stage of development Industrial
Sophisticated pharmaceutical industry with a significant research base Innovative capabilities 10

Number of countries Developing

Nil

Total
10

12

Those producing both therapeutic ingredients and finished products Those producing finished products only No pharmaceutical industry Total

6 (Argentina, Brazil, China, India, Korea and Mexico) 7

18

13

2 1 31

87 59 159

89 60 190

Nature of the Industry

Four primary medical sciences: Allopathy, Ayurveda, Unani and Homeopathy Allopathic medicines - most important and are subject to price regulation Market is broadly divided into bulk drugs (20%) and formulations (80%) The organized sector - 70% in terms of value. The top ten companies - 30% of total sales The individual market shares of companies are small several products and several relevant markets within the industry Roughly, different therapeutic segments and some of them are highly concentrated

Different Therapeutic Segments

Product category Patent Coverage Analgesics & Anti- Most are off-patent. pyretics Players Major players are Burroughs Wellcome, SmithKline Beecham Hoechst and Wockhardt. A large number of local players Antacids and Anti- High High Antacids: Knoll and Parke Davis. ulcerants Anti-ulcerants: Glaxo, Cadila, Ranbaxy, Dr Reddys Labs etc. Antibiotics Old generation - off-patent. The latest Glaxo, Ranbaxy, Cipla, Hoechst, Alembic, Burrough Newer generation - High generation drugs Wellcome, Ambalal Sarabhai etc. Anti-tuberculosis Low products Anti-parasitic & Low Anti-fungal products Cardiac Therapy New drugs are many. Popularly used in India: Low. Corticosteroids All popularly used are offpatent. NSAIDs, Anti- Low rheumatic products Respiratory System Very low. ailments Only Rifampicin Relatively low Lupin (dominant), Hind. Ciba., Cadila, Glaxo and Hoechst Anti-protozoal: Nicholas Piramal, SmithKline Beecham Pharma, Ranbaxy, and Cipla. Anti-fungal: Bayer, Fulford, Glaxo etc. Sun Pharma, Torrent, Cadila, ICI etc. DPCO Coverage High

Low

Key drugs Glaxo, Crosslands, Wyeth, Fulford, Merind. etc. Betamethasone and Dexamethasone High Knoll, Roussel, Hind Ciba, Pfizer etc. Very low. Anti-cough: Pfizer, Parke Davis, Nicholas Piramal. Anti-cold: Burroughs, Alembic etc. Anti-asthmatics: Cipla (dominant) E-Merck, Pfizer, Glaxo, Abbott etc.

Vitamins

Off-patent

Very high

Pharmaceuticals Regulation
Consumption patterns are not affected by prices - a unique example of market failure In many countries, government bears most or all of the costs of medicines - As a monopsonist, the government may be able to control drug prices In developing countries, people are covered neither by public nor private insurance The doctors and the pharmacists companies influence them Bypassing doctors - fall prey to company advertisements or to local pharmacists, even in the US

Pharmaceuticals Regulation (Contd.)

Practically all countries in the world have mechanisms to regulate also a significant move to insist on generic prescription
  

Regulating Prescribing Doctors Regulating Pharmacists Regulating Prices

 International benchmarking  Control on the evolution of prices over time  Control of prices relative to cost

Pharmaceuticals Regulation in India

In the early fifties, introduction of compulsory manufacturing of finished products and later, of raw materials of new drugs In the 60s, two public sector companies, Hindustan Antibiotics Ltd (HAL) and Indian Drugs and Pharmaceuticals Ltd (IDPL) Till 1962, no price control In 1962, control imposed under the Defence of India Act, 1915 - The Drugs (Display of Prices) Order, 1962 and the Drugs (Control of Prices) Order, 1963

Pharmaceuticals Regulation in India

During 1970, the Indian Patents Act (IPA) and the Drug Prices Control Order (DPCO) issued under the Essential Commodities Act, 1955 DPCO revised in 1979, 1987 and 1995 DPCO 1970 was a direct control on the profitability and an indirect control on the prices DPCO, 1979 stipulated ceiling prices and put 370 drugs under price control Retail Price = (MC+CC+PM+PC) x (1+MAPE/100) + excise duty
(MC = material cost including cost of bulk drugs/excipients: CC = conversion cost; PM = cost of packing material; PC = packaging charge; MAPE = Maximum Allowable Post-manufacturing Expenses)

Pharmaceuticals Regulation in India

DPCO, 1987, dugs under price control reduced from 370 to 142 and higher MAPE provided The New Drug Policy 1994 liberalised the criteria for selecting drugs for price control DPCO 1995 - a uniform MAPE of 100% was granted DPCO 1995 drugs under price control from 142 to just 76 The New Pharmaceutical Policy, 2002, number of drugs under price control to just 38

Market Shares of Drugs under DPCO

Year
1979 1987 1995 2004

Number of drugs

Approximate market share (%)

347 142 74 38

80 60 40 20

Decontrol and Prices

Price control and patent regime prices among the lowest in the world Prices started rising as soon as controls were removed - brand leader is usually one of the most expensive Drugs under patent much cheaper in India but off-patent drugs (80-85% of current sales) are not necessarily cheaper Prices of some top selling drugs are higher than those in Canada and the UK

Decontrol and Prices - International Cost Comparison of Select Drugs

Drug Amoxycillin Ampicillin Erythromycin Cephalexin Propanolol Atenolol Prednisolone Paracetamol Haloperidol Phenobarbitone Dose 250 mg 250 mg 250 mg 250 mg 40 mg 50 mg 10 mg 500 mg 0.25 mg 30 mg Canada 1.75 1.75 1.25 3.00 1.25 -1.50 1.25 0.13 0.25 UK 2.59 2.42 2.87 7.74 0.25 2.65 1.09 0.32 1.60 0.28 India 2.89 3.18 3.28 - 4.17 4.46 1.39 1.29 1.32 0.49 0.55 0.50

Decontrol and Prices

The price difference - no direct interaction between the consumer and the drug market Pharmacists in developed countries - little influence over the volume of prescriptiondrug sales - marketing push usually targets doctors Pharmacy owners banded together to form a huge cartel - All India Organization of Chemists and Druggists (AIOCD) AIOCD forced some drug companies to sign "memorandums of understanding" to increase profit margins to pharmacies

Competition Issues: Collusions

No knowledge of domestic cartel. Vitamins cartel alone cost India about $25mn in the 1990s Collusive behaviour of the pharmacies in India is a matter of grave concern Market becomes smaller due to high margin - harmful for the long run growth of the industry December, 2004 the Ministry of Fertilisers & Chemicals tried to bring in curbs on trade margins by amending the DPCO Competition Act 2002 - only trade unions are allowed collective bargaining

Competition Issues: M&As

Industry is highly fragmented, intense consolidation activities expected Top global pharmaceutical companies are consolidating impacting in India Large Indian companies are also expanding their reach overseas through acquisitions The deals will require complex analysis - the impact on different therapeutic segments For example, Glaxo-Wellcome-SmithKline Beecham was allowed to merge conditionally in EU, divested product categories with competition concerns

Competition Issues: Abuse of Dominance

Patents Act, 1970 has significant implications for abuse of dominance Absence of product patent - difficult to sustain monopoly WTO TRIPS - product patent from 2005 The art of dealing with abuse of dominance (no experience) Canada - Patented Medicine Prices Review Board (PMPRB) Competition Act 2002 provisions not strong enough

In Lieu of Conclusion
Manufacturers demanding more decontrol arguing, competition will improve availability and affordability of essential drugs UPA government's NCMP has promised to "take all steps to ensure the availability of life-saving drugs at reasonable prices" Supreme Court order in the K.S. Gopinath case, March 10, 2003, directing the government to ensure that essential and life-saving drugs do not fall out of price control"

In Lieu of Conclusion
Regulatory regime - hard on the manufacturers but soft on the doctors and the pharmacists Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations 2002 not effective Bangladesh example? Bulk drugs buyers are informed producers different approach? Import competition - Few specified life saving products at zero duty but for most others, the effective duty rate more than 56 percent For scheduled (regulated) drugs, the MAPE is 100 percent for domestic and 50 percent for imported drugs