An effective pricing policy?

14 Nov 2016

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The latest drug pricing policy, announced on July 27 by the Drug Regulatory Authority of Pakistan, has based the increase in drug prices on the consumer price index.

In the fiscal year 2015-16, the rate of increase — approved by the Economic Coordination Committee — is 2.86pc and translates the price increase of drugs as follows:

Price of life-saving or scheduled drugs is set at 50pc of the Index (CPI) i.e 1.43pc; other drugs or non-scheduled drugs at 70pc i.e 2.002pc; lower price ‘threshold’ drugs (priced less than Rs1/tablet) the price increase is 100pc of CPI i.e 2.86pc.


The ultimate goal of a well-formulated drug pricing policy should simply be quality and time-tested drugs, available at an affordable price


This increase in prices is in direct conflict with the guidelines of the Drug Act. The Index measures changes in the price level of consumables and services for households on a monthly or annual basis. The Drugs Act 1976 rests the ‘Power to fix the maximum price of drugs’ solely with the DRAP and requires obtaining relevant information by the manufacturer and stakeholders and so regulates their availability.

The authority can register a drug for manufacture and sale only on the basis of evidence of its safety, efficacy and quality and the most important criteria for registration is setting affordable prices at which drugs are to be sold.

At present more than 50,000 drugs are stated to be registered by the DRAP, all of which are claimed to be life saving drugs. The new policy has categorised life saving drugs as non-scheduled drugs. This could have serious implications on the availability, pricing and abuse of these medicines, just like the violation of the drug regulatory act is having on the current pharmaceuticals market.

‘Transfer pricing’ — the price of the raw materials used, both active and non-active additives, directly impacts a drug’s price.

An analysis of import prices of raw materials by different manufacturers show great variations in spite of the fact that manufacturers claim to comply with legal quality control specifications as approved by the government.

Many firms are found indulging in over-invoicing of their transfer pricing, although the import policy order states, ‘No import should be made except at the most competitive rates’.

A personal study in 1999 revealed that $6.73m were remitted through transfer pricing in case of only nine essential imported drugs thereby directly influencing prices of finished drugs. The prices are supposed to go down after the expiration of their patent rights. These ‘rights’ have expired in most of the cases of imported raw materials, but the rates have remained unchanged.

It is ironic to note that the health minister claims his government as the first to formulate a pricing policy of drugs, yet how the new policy justifies variations in prices of drugs manufactured from the same imported raw materials has not been probed. Neither is there a clue of the criterion employed by the pricing committee to fix these prices.

The pharmaceutical industry on the other hand is agitating against the drug price freeze by the government, demanding it withdraw unnecessary control on drug prices and let market competition determine them, insisting that this practice will automatically lower the overall drug prices.

The ultimate goal of a well formulated drug pricing policy should simply be quality and time-tested drugs, available at an affordable price.

The Essential Drug Scheme should be implemented and a list of registered drugs should be thoroughly revised, removing non-essential and obsolete drugs, as recommended in the National Drug Policy.

The ministry of health and the pharmaceutical industry should make an agreement to introduce a self- regulating mechanism of price calculation and fixation according to the Drug Act. A well worked out formula already exists for calculating the maximum retail price (MRP) of a drug as under:

MRP=Prime cost (prices of raw material + packaging material + direct labour) +75pc markup at the prime cost.

The interference of trans-national companies should be stopped in transfer pricing. Packaging must be regulated, and firms made to adhere to cheap but safe standard packaging according to the specifications of different types of formulations.

Mark-ups on different categories of labour should be standardised to 75pc mark up of locally manufactured and 40pc of imported drugs, and enforced. Mark-up details should be used as incentives for strengthening the local industry.

Automatic annual indexation from 1.5-2pc may be allowed in case of registered drugs to cover the inflation and rupee devaluation on a case by case basis, if justified.

High profit yields of the drug companies needs to be closely monitored with a close scrutiny and analysis of their costing data and audit reports and a comparison between the prices fixed by the government and the drugs’ actual market price is extremely necessary.

The Drug Act specifies 1pc of the profit for the purpose of research. Utilisation and outcomes of this fund need to be investigated by the authority.

The Act also dictates that no company should spend more than 5pc of the return/turnover on advertisements, sampling and other promotional activities including salaries of medical representatives, seminars, public relations activities, etc. Typical spending on such activities is exponentially more than the set limit and factored in the end price.

It is high time the government takes some effective and concrete measures to make healthcare accessible to all and one of the key measure they can take in this regard would be to regulate and control the prices of basic medicines and make them more affordable to the common man.

The writer is a former drug controller and chairman QCA, Ministry of Health, Islamabad.

Published in Dawn, Business & Finance weekly, November 14th, 2016