The government said this is just a pilot, indicating that it may extend trade margin rationalization to other drugs as well.
The government’s recent decision to cap trade margins of 463 non-scheduled anti-cancer drug brands, has brought to fore trade margin rationalisation as a major policy tool to rein in prices of medicines in the country.
Trade margin rationalisation backed by government's policy thinktank NITI Aayog is in works for some time.
Even as the effectiveness of the trade margin rationalisation is still under debate, the Indian drug price regulator – the National Pharmaceutical Pricing Authority (NPPA) on February 28 invoked paragraph 19 of Drug Price Control Order (DPCO), 2013, to fix trade margins at 30 percent for 42 non-scheduled anti-cancer medicines, which were sold under 463 different brands covering majority of the anti-cancer prescriptions.
So far the government fixed retail prices and trade margins of scheduled drugs or drugs part of National List of Essential Medicines (NLEM), whereas it gave companies the liberty to decide the margin of non-scheduled formulations.
The government caps the trade margin of scheduled drugs at 16 percent.
A trade margin is a difference between the price at which the manufacturers sell the drugs to stockist or distributors and the final price to patients or maximum retail price (MRP).
“We have to live with both,” Umang Vohra, Global Chief Executive Officer and Managing Director of Cipla, referring to trade margin controls over both scheduled and non-scheduled formulations.
NPPA said its latest move reduced the cancer drug prices by up to 87 percent in certain cases and overall saved patients approximately Rs 800 crore.
The government said this is just a pilot, indicating it may extend trade margin rationalisation to other drugs as well.
Despite NPPA claim, there wasn't any meaningful reduction of MRPs in 70 percent of the brands, but the move may definitely rattle pharmaceutical companies and hospitals that distort trade.
Distorted trade margins
Moneycontrol found a huge price variation of same cancer drug formulation sold under different brand names pointing towards huge mark-ups in the trade.
For instance, the breast cancer drug Lapatinib 250 milligram marketed by Natco under brand name Herduo 250 is Rs 6,000 for 30 tablets, while the same formulation sold by Abbott under brand name Abnib was priced at Rs 12,990.
With a 30 percent cap, Abbott’s Abnib price was reduced by 35 percent to Rs 8403.76, whereas Natco’s price remained unchanged at Rs 6,000.
The margin cap may not impact companies operating well within the limits prescribed by the government but could hit the ones who have artificially inflated prices, to give cuts to retailers. Hospitals are the biggest beneficiaries in this case, who sell these drugs to patients through their pharmacies.
“What is happening right now is hospital buys drugs at around 50 percent discount (below MRP), passes on 10 percent of it to the patient, and still ends making 40 percent margin,” said Nilesh Gupta, Managing Director of Lupin.
“I think it benefits the patients,” Vohra of Cipla said.
“Hospitals will face the squeeze, I think some of that squeeze will come back to pharmaceutical companies because hospitals will say my margins got impacted, you got to do something,” Vohra added.
Cipla anti-cancer business is around Rs 400-500 crore and is said to be growing at a healthy pace.
An executive of a leading private hospital, who didn’t want to be named said it’s unfair to take out only hospitals, as pharmaceutical companies also are responsible for unhealthy trade practices to increase sales.
“Who asked them to jack up MRPs, hospitals never told them, we are for transparent pricing,” the executive shot back.
Healthcare activists say trade margin cap may curb hospitals indulging in profiteering by taking massive cuts, but is still short of making cancer drugs affordable.
"Trade margin capping will lead to no reduction of MRP in a majority of the cases (more than 70 percent) or only marginal reductions in the case of other drugs," said All India Drug Action Network (AIDAN).
AIDAN represents a network of healthcare NGOs and activists, says 30 percent margin is actually equivalent to a 43 percent markup on the price to stockist.
"This methodology is a shocking departure from methods to curb prices in the DPCO and provides excessively high margins," AIDAN said.
AIDAN says trade margin rationalisation in isolation will not work to correct the market distortions in cancer drugs."Margin capping will be effective in bringing down prices only when combined with price ceilings," it added.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.