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December 12, 2012

India to introduce limits on drugs to rein in health care costs

By Adi Narayan
Bloomberg News

MUMBAI —  India's government announced details of a policy aimed to make drugs more affordable, measures that may cut profitability of drugmakers such as GlaxoSmithKline.

Prices of 348 medicines deemed essential, including antibiotics, blood pressure drugs, and cancer medicines will be capped at the average price of all brands that have a market share exceeding 1 percent, the department of pharmaceuticals said in a document posted on its website. The Supreme Court is expected to discuss the policy in a hearing Wednesday.

GlaxoSmithKline, Pfizer and Abbott Laboratories may be the biggest losers from the price cap as their products are the most expensive, according to a Nov. 22 report by IMS Health Inc. The price caps will probably lower prices as about 90 percent of all prescriptions in India are generics or branded generics, which their manufacturers often seek to differentiate with unique names.

"There will be a short-term impact on drugmakers whose products have commanded premium prices," Hitesh Mahida, an analyst at Fortune Equity Brokers, said by phone. "However, companies are likely to increase prices of other products or introduce new combinations and dosages of drugs that are not under price control."

The policy would shrink the size of India's pharmaceutical market by about 2 percent, according to the IMS report. After implementation, about 30 percent of the nation's drug market would be under price control, the report said.

India's 17-year-old drug price control regime allows drugmakers to charge a predefined margin above their manufacturing cost. The government chose to switch to a so- called "market-based" price cap system, as it was difficult to get accurate data on manufacturing costs from hundreds of drugmakers, according to the government.

"Market based pricing is directionally prudent for India in the longterm," even though drugmakers are likely to lose some revenue in the coming months, Tapan Ray, director general of the Organisation of Pharmaceutical Producers of India, said by e-mail. "It is expected to help improving both affordability and availability of the medicines."

When prescribing medication, Indian doctors typically refer to brands rather than chemical names. Pharmacists are prohibited from substituting one generic for another, even if it's cheaper, so drugmakers try to persuade physicians to think of their brands first.

The announcement comes about three months after a group of ministers approved the pricing plan in time to meet a deadline set by the Supreme Court. The nation's top court weighed into the issue following a petition filed by four patients rights groups including the All India Drug Action Network, which said the government was delaying legislation to make medicines more affordable.

The two-judge panel hearing the case questioned the new price cap formula, and asked the government to instead continue the existing system which based on manufacturing costs, the Economic Times reported Oct. 5.

The list used by the government specifies the exact dosages for each drug, and drugmakers are likely to introduce other dosages to evade price control, Mira Shiva, founder of the New Delhi-based All India Drug Action Network said Tuesday.

"More than 80 percent of the country's population pay for medicines out-of-pocket, and they will not benefit because of this," Shiva said in a phone interview. Price caps "have to have some link to what it costs to produce the drugs."

The notification doesn't place price caps on patented drugs, and grants five-year exemptions to medicines that were produced with research done in the country.