Price control debate: Is the pharma sector crying 'wolf'?

The government has capped the prices of more than 100 drugs used to treat diseases ranging from diabetes to HIV, a move likely to hit the profit margins of drug firms such as Sanofi SA, Abbott Laboratories and Ranbaxy Laboratories .

The drug pricing regulator's decision, aimed at improving affordability, was slammed by the drugmakers in India, where prices of generic drugs sold are already low compared with international markets.

Also Read: See more drug price caps; max impact on Sanofi: Expert

CNBC-TV18's Shereen Bhan spoke to Kiran Mazumdar Shaw, CMD of Biocon and Mr CM Gulati, Researcher at IMS Health India to get their perspective on how the government's new move is likely to impact the pharma industry.

Below is a verbatim transcript of the discussion

Shereen: You have made a fairly controversial statement saying that what the government has done amounts to nationalisation of the pharmaceutical sector. Why do you say that and are these concerns exaggerated or legitimate? The Supreme Court (SC) in its order told the government to formulate appropriate criteria for ensuring essential and lifesaving drugs do not fall out of the purview of price control. We have had a system of price control; this is not a new system of price control but only the list has now been expanded. Are these legitimate fears that you are voicing?

Shaw: These are very legitimate for the simple reason that the pharmaceutical sector is a helpless victim of very unilateral policies that are being taken without any stakeholder consultations.

Shereen: But wasn't this process on for almost two years before we arrived at this point?

Shaw: No, there has been a list of essential drugs which have been price controlled and now these are an additional list of non essential drugs which are also now being brought under the purview of price control and there is a move now to bring in an even larger list under the price control.

Now the industry needs to have an opportunity to create a viable sector. We believe that India already offers the lowest cost generics the world over. Today we have enough market mechanisms to realise a fair price. For instance today for every generic drug that you talk about there are at least 50-60 brands available in the market and these brands range from, say for example Paracetamol you might get a tablet costing 10 paise or a tablet costing 1 rupee.

Shereen: But the choice in this matter is not left with the consumer. The argument that the consumer can make the choice and pick up a paracetamol which costs 10 paise versus a paracetamol that costs Rs 10 is not valid because you don't decide what the doctor decides to put on the prescription.

Shaw: Law does permit that you can go to a pharmacy and demand a lower priced drug and secondly if you can't afford a very high priced brand a doctor is actually supposed to give you a lower priced product. The problem today is that there is a huge difference between an unbranded product and a branded product and many of these are legitimate. For instance you cannot compare a drug manufactured by a small company that has barely any infrastructure or any kind of R&D investments to a company that has made huge investments in infrastructure, R&D and now as you know can you compare a company that is exporting to the US to a company that is just selling locally? No, the costs are different.

Shereen: Let's take these arguments one-by-one. The costs are different is Kiran Mazumdar's argument. In fact, the National Pharmaceutical Pricing Authority (NPPA) changed the price control methodology to say that it should not be cost-based but it should be market-based pricing that will prevail. I know you have issues with that system as well, but be that as it may, let us take the point that Kiran is making that companies have R&D costs, companies have promotional costs, sale costs. Some companies are serving to the US markets, not just the domestic markets, and hence, if a branded formulation or a branded product costs more, (then) what is the problem?

Gulati: Let me now specifically answer the last part. We have published a list, which we publish every month, of the different prices of different brand. It is not of a small company versus a big company but between big companies. Cipla is not a small company by any means. It is bigger than Hansen, incidentally not in India and yet it sells a product. Cipla sells the product for Rs 708 and Hansen sells it for Rs 1,250. You have another one where Blue Cross, a medium sized company, sells it for Rs 15 and Torrent sells it for Rs 30. Both are Indian companies and there is a whole list.

Shereen: But can the brand differentiation argument for the exact same drug be used in the pharma business?

Gulati: How can it be?

Shaw: In any business, a company has a right to create a brand premium if it can command it, it is up to the market the market to decide whether it should pay that premium or not.

Gulati: Where is the market? It is well known that the customers of the drug manufacturers are doctors not patients. There is no company to my knowledge, which goes to patient to promote its products; they always go to the doctors.

Shereen: That's a legitimate argument. If I decide to buy a car, I have the choice. I can go into the market place and say I decide to buy Maruti because its cheaper or I decide to buy Hyundai because that gives me better mileage but in this situation I don't have the choice. But, why should there be 30-40-50-100 percent difference.

Shaw: The reason is because today as per law a patient has the right to go to a pharmacy and seek substitution. As per law you can do this.

So, if the doctor has prescribed an expensive drug, I can legitimately go to the pharmacy and say do you have a cheaper version of this and I can actually ask for that because these are generics, you can ask the pharmacy to substitute it.

Shereen: So you are saying that there is no need for price control in this country?

Shaw: No, because there are enough competitive forces at play.

There is a thing called brand differentiation. Today, even if all cars are same, you know that each car charges a different price; I am not talking whether you have a choice or no choice but the fact is each car does have a difference in the same category to its competitor that is called brand differentiation, marketing, this is what happens.

Shereen: Mr Gulati, take that point forward that this is at the end of the day a brand read strategy for a company and so be it.

Shaw: Can I also add, today there are enough other mechanisms to get your price discounted drugs through tenders. For instance, bulk purchasing of drugs, through government tenders.

Shereen: That's a separate matter.

Shaw: But the point is you can buy these drugs at a huge discount to their retail price.