The New Drug Policy of India enters into the final lap of a Marathon Run

Final working out and thereafter announcement of much awaited and long overdue the new ‘Drug Policy’ of India has now entered into a very interesting stage. This is mainly because of the unique combination of the following three key reasons:

1. 2002 Drug Policy was challenged in the Karnataka High Court, which by its order dated November 12, 2002 issued stay on the implementation of the Policy. This order was challenged by the Government in the Supreme Court, which vacated the stay vide its order dated March 10, 2003 but ordered as follows: “We suspend the operation of the order to the extent it directs that the Policy dated 15.2.2002 shall not be implemented. However we direct that the petitioner shall consider and formulate appropriate criteria for ensuring essential and lifesaving drugs not to fall out of the price control and further directed to review drugs, which are essential and lifesaving in nature till 2nd May, 2003”.

2. A live court case on the new draft ‘Drug Policy’ with the ‘essentiality criteria’ for price control is pending before the Supreme Court of India with its next hearing scheduled in the last week of July 2012. In this court case an independent network of several ‘Non-Government Organizations (NGOs)’ known as ‘All India Drug Action Network (AIDAN)’ is arguing against the ‘flawed’ draft ‘National Pharmaceutical Pricing Policy 2011 (NPPP 2011)’, mainly on the following grounds:

  • ‘Market Based Pricing (MBP)’ methodology calculated on the ‘Weighted Average Price (WAP)’ of top three brands, as specified in the ‘Draft NPPP 2011’ would not only lead to increase in the prices of medicines, but also legitimize higher drug prices.
  • To keep the drug prices under check effectively, the ‘Ceiling Prices (CP)’ of Medicines should be based on ‘Cost based Pricing (CBP)’ model rather than MBP.
  • Adequate control mechanism is lacking in the NPPP 2011 to prevent the manufacturer from avoiding price control by tweaking with the formulations featuring in the National list of Essential Medicine 2011 (NLEM 2011).

3. In this scenario, a Group of Ministers (GoM) of the Union Cabinet has started deliberating on this issue since April 25, 2012 taking all key stakeholders on board to give its recommendations to the Union Cabinet on the scope, form, structure and the basic content of the new Drug Policy.

The bone of contentions:

The methodology and the span of price control of the draft NPPP 2011 have still remained the key bone of contentions for the new ‘Drug Policy’ of India. Suggested three key methodologies: From the responses received on the draft NPPP 2011, it appears that following three are the  suggested key methodologies to arrive at the CP of price controlled NLEM 2011 formulations:

  • Cost Based Pricing
  • Market based pricing

-  WAP of top 3 brands             -  WAP of bottom 3 brands

  • The formula suggested by the Economic Advisory Council of the Prime Minister of lesser of (i) the price paid by the median consumer + 25% and (ii) price paid by the 80th percentile consumer.

ARGUMENTS IN FAVOR AND AGAINST OF EACH: A. Cost based Pricing: Besides AIDAN, other reported key supporters of the CBP are the Ministry of Health and All India Chemists Associations. ARGUMENTS IN FAVOR: The current drug price control regime (DPCO 1995) is based on cost-plus pricing model, where Maximum Retail Prices (MRPs) of price controlled formulations are worked out as per the formula given in ‘para 7’ of DPCO, 1995 as follows: R.P. = [M.C. +C.C. +P.M. +P.C.] x [1+MAPE/100] +E.D. Where,

  • R.P:  Retail price
  • M.C:  Material cost, including process loss
  • C. C.: Conversion cost
  • P.M: Packing material
  • P.C: Packing Charges
  • MAPE : Maximum Allowable Post manufacturing Expenses of 100 percent
  • E.D.: Excise duty

The proponents of CBP believe that it is:

  • Transparent
  • Most beneficial to the patients
  • Fair, with a decent profit margin allocation for the manufacturers

ARGUMENTS AGAINST: Many others do not believe in CBP. They argue that price-inflation of non-price controlled drugs is much less than the price-controlled ones, which clearly vindicates that market competition works better than price control of drugs and thus is more beneficial to the patients. The following table shows the trend of general inflation against the drug price inflation from 1992 to 2011 period, as follows:

Type of Inflation

Inflation (in Index)

1. General Inflation


2. Price-controlled molecules


3. Non Price-Controlled Molecules


(Source: IMS data, RBI CPI average yearly inflation) This school of thought quotes the example of discontinuation of manufacturing in India 29 out of 74 Active Pharmaceutical Ingredients (APIs) under DPCO 1995 due to financial non-viability on account of CBP. Moreover, CBP is considered by them as a process, which is:

  • Intrusive
  • Lacking in transparency
  • Discretionary
  • Discouraging for innovation, high quality & efficiency
  • Not followed by any major country in the world
  • Not supported by even WHO. It says other countries are moving away from Indian type of CBP

B. Market Based Pricing (MBP): MBP in general is considered by its proponents as a system which is:

  • Transparent
  • Non-Discretionary
  • Encourages growth & investment
  • Rewards innovation
  • Promotes efficiency

The two variants of MBP under discussion are:

- WAP of top 3 brands

- WAP of bottom 3 brands


1. WAP of top 3 brands:

  • It is a transparent system and will reduce the prices of medicines
  • With adequate checks and balances in place the method will not lead to increase in prices because of the following reasons:

- All price increases are subject to WPI              – Market competition will not permit any price increases              – Companies in low-price segments will create pressure to reduce prices further

2. WAP of bottom 3 brands: This group argues that instead of WAP of top 3 brands, if the same for the bottom three brands is considered, ceiling prices will come down very significantly, benefiting patients much more than what WAP of top three brands will do.


1. WAP of top three brands:

  • Would lead to overall increase in the prices of many medicines
  • Below ceiling price brands would raise their price upto the ceiling price level immediately
  • Would legitimize high drug prices

2. WAP of bottom 3 brands:

  • Not representative of the market, as only the brands with a low market presence will be considered for WAP calculations
  • The Bottom 3 priced brands factor in only ~17% of the market
  • Likely to have an adverse overall impact on patients as many small brands with lowest acceptable quality standards will be considered for WAP calculations, which may ultimately push high quality formulations out of the market.

C. Formula suggested by EAC of the Prime Minister: ARGUMENTS IN FAVOR:

Will ensures affordable drug prices for the patients by:

  • Encouraging and rewarding high market competition
  • Discouraging monopolistic or oligopolistic market situation


  • EAC criteria for insufficient competition are based on the 1994 Policy
  • The situation is different today as the market has grown 9 times since then
  • The number of brands tends to be low in lower volume turnover molecule segments mainly due to low disease prevalence. Thus bringing these molecules under CBP will be irrational
  • Instead of implementing CBP where lesser number of brands exists in many generic segments, EAC formula should encourage competition even in these lower value turnover molecule segments to bring the prices further down

That said, ‘Drug Price’ has always remained one of the critical factors to ensure greater access to medicines, especially in the developing economies like India, where predominantly individuals are the payors. This point has also been widely accepted by the international community, except perhaps by the diehard ‘self-serving’ vested interests. Important Points to Ponder:

A. ‘Drug Price’ control alone can not improve access to medicines significantly:

To improve access to medicines, even the Governments in countries like Germany, Spain, UK, Korea and China have recently mulled strict price control measures in their respective countries. However, it is important to note and as we have seen above, though the drug prices are indeed one of the critical factors to improve access to modern medicines, there is a need to augment other healthcare access related initiatives in tandem for a holistic approach.

In India, we have witnessed through almost the past four decades that drug price control alone  could not improve access to modern medicines for the common man very significantly, especially in the current socioeconomic and healthcare environment of the country.

B. Taming drug price inflation only has not helped improving access to medicines:

It is quite clear from the following table that food prices impact health more than medicine costs :


Pharma Price Increases

Food Inflation










Source: CMIE Exploring a practical approach: Considering pros and cons of the key methodologies of price control of formulations featuring in NLEM 2011, as I had written in this blog in April 2, 2012, I would like to reemphasize that a middle path with a win-win strategy to resolve this deadlock effectively would be in the best interest of both patients and the industry alike, in the current situation. The middle path, I reckon, may be explored as follows:

  1. Calculate ‘Weighted Average Price’ for each formulation based on prices of all brands – high, medium and low, applying some realistic exclusion criteria.
  2. When inclusion criteria for price control in the draft NPPP 2011 is ‘essentiality’ of drugs, it sounds quite logical that price control should be restricted to NLEM 2011 only.
  3. Enough non-price control checks and balances to be put in place to ensure proper availability of NLEM 2011 drugs for the common man and avoidance of any possible situation of shortages for such drugs.


Conforming to the directive of the honorable Supreme Court of India on price control of essential medicines in the country, the GoM should now help resolving the issue of putting in place a robust new National Pharmaceutical Pricing Policy, without further delay, taking the key stakeholders on board.

In any case, it has to be a win-win solution both for the patients and the industry alike, paving the way for improving access to modern medicines for the entire population of India, together with other strategic initiatives in this direction. This is absolutely essential, especially when medicines contribute around 72 percent of the total ‘Out of Pocket Expenses’ of the common man of the country.

By: Tapan J Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

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