Thursday, February 14, 2008

Drug Pricing Strategies in India

1. Cost-based pricing:

The Indian cabinet ministry proposed to control the prices of 354 essential medicines by taking into account their cost of production. Today 1/4th of Rs. 23,000 crores domestic pharma market is controlled. The ministry has not accepted the industry’s offer to lower the current prices of essential drugs by 5-10%, because the revised policy will prevent companies escaping price control by adding new ingredients to drugs and going out of the essential drugs list. Without such measures, drug makers may add vitamins and other unnecessary components, leading to risky irrational combinations besides defeating the purpose of price control.

The essential therapeutic drugs constitute the painkillers, antibiotics, psychotic drugs, cancer and HIV drugs. The companies making essential drugs are given 150% margin of production cost, whereas price controlled drugs are given 100% margin for the post manufacturing expenses.

2. Value-based pricing:

Biotech industry has been accused of the excessive prices that have been emphasized on the cost of R & D, years of lab and clinical trials, innumerable failures for each successful product and imperative to reward investor’s high risks with commensurately high rewards.

Cost-based justification of high biotech drug prices is based on 2 nontrivial problems. 1) Biotech companies do not base prices on the cost. 2) The industry is beginning to realize that it does not want public to think that the prices are based on the cost.

The price for new product must cover the incremental expenditures on manufacturing and marketing but there is no logic to quantify past expenditures on R & D. Rather, prices are based on what the market will bear. These prices may or may not reimburse past efforts and investments, but their social purpose is to encourage future efforts and future investments. The prices for today’s products finance research for tomorrow’s products either directly through the retained earnings of biotech firms or indirectly by enriching investors who remain attached to the sector rather than moving their money elsewhere.

So, biotech companies now promote the language of ‘value-based pricing’ for their products; which offers the virtue of honesty. With this, we need face these questions: How to define value in healthcare, how do we measure it? Or is it only about value and not cost.

The link between innovation and market-based pricing: Innovation in the biotech industry is created and driven by multiple factors: the existing market-based pricing, size of the biopharma companies’ R & D budget, level of venture capital investment and level of government intervention in market. The recent history has shown that threat of price control drives investors out and dries up the resources those researchers must have to develop tomorrow’s medical miracles.

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