My article on the aftermath of India recognising product patents in pharma industry - published in Wealth Insight last month
Consumers should prepare for a price hike as foreign ownership increases & competition decreases
The recent elections in the US could almost have been about a single issue - the cost of healthcare. In his first term, President Barack Obama made some radical changes in the US health care system - amongst the largest and costliest in the world. He brought in a policy (popularly called “Obamacare”) which made it possible for a large number of previously uninsured Americans to get some basic health care at a relatively affordable price. It can be argued that this was one of the key reasons for his re-election.
Healthcare in India – return of the multinational
The policy framework for health care in India has undergone substantive change in recent years. Before India abolished product patents in pharmaceutical products in 1972, the Indian pharma industry was small, and dominated by multinationals. Medicines were largely imported and expensive. Post 1972, domestic industry grew rapidly – to become the third largest in the world in terms of volume. India today has some of the most sophisticated manufacturing facilities (more US FDA approved facilities anywhere in the world outside the US). Foreign dominance dramatically reduced. In 2005, the Manmohan Singh government signed the TRIPS agreement – which re-introduced product patents. Since then the market share of foreign companies - which was in the early teens, has more than doubled. This has happened through a series of takeovers – Ranbaxy, Piramal, Dabur Pharma; and several marketing alliances – Orchid, Dr. Reddy’s. In addition, foreign ownership was allowed to the extent of 100 per cent. Foreign companies have increased holdings in their Indian subsidiaries – Pfizer now has a 100 per cent subsidiary in India, Novartis increased shareholding from ~51 per cent in 2005 to ~76 per cent by 2010, Aventis from 50 per cent to 60 per cent in 2010.
Foreign investment benefits?
When demanding greater market access, lobbyists are prone to offer a few arguments:
* Foreign investment allows access to new technology
* Foreign investment creates jobs
* Foreign investment increases consumer choice and affordability
These arguments were heard in recent times with respect to foreign investment in retail segment. Given that 100 per cent foreign ownership was allowed in the pharma sector almost a decade ago, it may be worthwhile to see what has transpired since. It may also be a pointer of the shape of things to come if the policy of FDI in retail were to stay.
Hoax 1: where is the investment?
Pharma is not a very capital intensive industry. Despite this, investment in manufacturing by the foreign companies decreased from 70 per cent of the investment made (1995) to less than 5 per cent of the investments made in the industry over a period of 15 years. Without investments in manufacturing, it is clear that multinational sales were largely driven by imports (see graph: Formulation trade) shows that while exports have stagnated of late (as foreign ownership increases) imports continue to grow at an annual growth rate of over 20 per cent. Without investment in physical infrastructure, it is debatable if any technology transfer would have taken place, or significant number of jobs been created.
Hoax 2: consumer choice and affordability
With Indian companies being prevented from manufacturing drugs which have been patented post 2005, foreign monopolies will increase in India. Consumer choice will be limited, not enhanced.
The impact of the 2005 policy is currently muted since many drugs where patents were granted post 2005, were already manufactured in India, and therefore continue to be produced. As time elapses, product pipelines will dry up – leaving monopoly producers to charge what they deem fit. Already, anti-cancer drugs cost up to Rs 20 lakh per person per year, while chronic diseases like rheumatoid arthritis have a single does costing between Rs 15,000 to Rs 40,000.
The impact of re-introduction of product patents, and increased foreign ownership is in fact extremely detrimental to consumers and their health – both of body and wealth!
Market Leaders are price leaders
Another defining feature of the pharma industry is that consumers do not determine the choice of medicine – it is decided by either the doctor or the chemist. In such a case, companies that have large marketing budgets, and can offer foreign trips for “educational seminars” for doctors, say, are more likely to find their products prescribed despite the existence of cheaper alternatives. Price of the most expensive brand of the same product can be higher by a factor of 50 times compared to the least expensive (see table: Price swings).
A new pricing policy
In November 2012, the union cabinet approved a new policy for pricing medicines in India. Set a time limit by the Supreme Court, the new policy has changed the basis of calculating price of drugs under price control. While earlier, drug prices were fixed on the basis of cost plus mark-up, the new policy posits average market price of a particular drug as the basis of fixing selling price. Ostensibly, this will lower prices of “essential” drugs (as defined under the ‘National list of essential medicines in India’ (NLEM)) – but will it?
As argued earlier, over the next decade or so, the number of drugs where monopoly pricing will prevail will only increase. With greater foreign ownership, dependence on imports too will go up – further reducing the ability of the government to correctly gauge the actual cost of drug production. As competition reduces, so will the effect of “averaging” the market price – in effect allow collusion among few players to hike up prices to unjustifiable levels.
Near term, expect to see the new pricing policy to reduce industry revenues by 2-3 per cent. However, even in the next couple of years, that is more than likely to be made up by galloping prices. Be prepared for higher health insurance premiums.
Did I hear someone say that the process patent regime was better after all? All “globalisation” is not a good thing necessarily.
Consumers should prepare for a price hike as foreign ownership increases & competition decreases
By Anand Tandon | Jan 5, 2013
The recent elections in the US could almost have been about a single issue - the cost of healthcare. In his first term, President Barack Obama made some radical changes in the US health care system - amongst the largest and costliest in the world. He brought in a policy (popularly called “Obamacare”) which made it possible for a large number of previously uninsured Americans to get some basic health care at a relatively affordable price. It can be argued that this was one of the key reasons for his re-election.
Healthcare in India – return of the multinational
The policy framework for health care in India has undergone substantive change in recent years. Before India abolished product patents in pharmaceutical products in 1972, the Indian pharma industry was small, and dominated by multinationals. Medicines were largely imported and expensive. Post 1972, domestic industry grew rapidly – to become the third largest in the world in terms of volume. India today has some of the most sophisticated manufacturing facilities (more US FDA approved facilities anywhere in the world outside the US). Foreign dominance dramatically reduced. In 2005, the Manmohan Singh government signed the TRIPS agreement – which re-introduced product patents. Since then the market share of foreign companies - which was in the early teens, has more than doubled. This has happened through a series of takeovers – Ranbaxy, Piramal, Dabur Pharma; and several marketing alliances – Orchid, Dr. Reddy’s. In addition, foreign ownership was allowed to the extent of 100 per cent. Foreign companies have increased holdings in their Indian subsidiaries – Pfizer now has a 100 per cent subsidiary in India, Novartis increased shareholding from ~51 per cent in 2005 to ~76 per cent by 2010, Aventis from 50 per cent to 60 per cent in 2010.
Foreign investment benefits?
When demanding greater market access, lobbyists are prone to offer a few arguments:
* Foreign investment allows access to new technology
* Foreign investment creates jobs
* Foreign investment increases consumer choice and affordability
These arguments were heard in recent times with respect to foreign investment in retail segment. Given that 100 per cent foreign ownership was allowed in the pharma sector almost a decade ago, it may be worthwhile to see what has transpired since. It may also be a pointer of the shape of things to come if the policy of FDI in retail were to stay.
Hoax 1: where is the investment?
Pharma is not a very capital intensive industry. Despite this, investment in manufacturing by the foreign companies decreased from 70 per cent of the investment made (1995) to less than 5 per cent of the investments made in the industry over a period of 15 years. Without investments in manufacturing, it is clear that multinational sales were largely driven by imports (see graph: Formulation trade) shows that while exports have stagnated of late (as foreign ownership increases) imports continue to grow at an annual growth rate of over 20 per cent. Without investment in physical infrastructure, it is debatable if any technology transfer would have taken place, or significant number of jobs been created.
Hoax 2: consumer choice and affordability
With Indian companies being prevented from manufacturing drugs which have been patented post 2005, foreign monopolies will increase in India. Consumer choice will be limited, not enhanced.
The impact of the 2005 policy is currently muted since many drugs where patents were granted post 2005, were already manufactured in India, and therefore continue to be produced. As time elapses, product pipelines will dry up – leaving monopoly producers to charge what they deem fit. Already, anti-cancer drugs cost up to Rs 20 lakh per person per year, while chronic diseases like rheumatoid arthritis have a single does costing between Rs 15,000 to Rs 40,000.
The impact of re-introduction of product patents, and increased foreign ownership is in fact extremely detrimental to consumers and their health – both of body and wealth!
Market Leaders are price leaders
Another defining feature of the pharma industry is that consumers do not determine the choice of medicine – it is decided by either the doctor or the chemist. In such a case, companies that have large marketing budgets, and can offer foreign trips for “educational seminars” for doctors, say, are more likely to find their products prescribed despite the existence of cheaper alternatives. Price of the most expensive brand of the same product can be higher by a factor of 50 times compared to the least expensive (see table: Price swings).
A new pricing policy
In November 2012, the union cabinet approved a new policy for pricing medicines in India. Set a time limit by the Supreme Court, the new policy has changed the basis of calculating price of drugs under price control. While earlier, drug prices were fixed on the basis of cost plus mark-up, the new policy posits average market price of a particular drug as the basis of fixing selling price. Ostensibly, this will lower prices of “essential” drugs (as defined under the ‘National list of essential medicines in India’ (NLEM)) – but will it?
As argued earlier, over the next decade or so, the number of drugs where monopoly pricing will prevail will only increase. With greater foreign ownership, dependence on imports too will go up – further reducing the ability of the government to correctly gauge the actual cost of drug production. As competition reduces, so will the effect of “averaging” the market price – in effect allow collusion among few players to hike up prices to unjustifiable levels.
Near term, expect to see the new pricing policy to reduce industry revenues by 2-3 per cent. However, even in the next couple of years, that is more than likely to be made up by galloping prices. Be prepared for higher health insurance premiums.
Did I hear someone say that the process patent regime was better after all? All “globalisation” is not a good thing necessarily.
