Price Control in Medicines.

This is the third article in the series, ‘Understanding the Pharma Industry’.

Article 1: Patents in the Pharmaceutical Industry.

Article 2: Generic Medicines.

Article 3: Price control in Medicines.

Article 4: How Pharma Companies make profits after patent expiry.

Article 5: Changing scenario in Pharma Companies.

6 out of the top 10 pharmaceutical companies belong to the USA. Most of the pharma companies around the world prefer to launch their drug in the USA first. The reason is simple. The USA allows pharma companies to decide the prices of their drugs, more like free pricing. Government intervention is minimal. This proves both advantageous and disadvantageous. On one hand, people of the USA get access to new drugs of Cancer, HIV/AIDS, Tuberculosis earlier than most of the countries but on the other hand, they have to pay the huge price for that.

Turing Pharmaceuticals acquired American marketing rights to Daraprim. The drug is used to treat parasitic infection, malaria, and is often used by AIDS patients. The drug is also listed in the WHO’s list of essential medicines. After purchasing the rights, Turing increased the price from $13.50 per tablet to $750 per tablet, which is a 5000% price rise¹. Developing and low-income countries simply cannot allow such type of stunts by pharma companies to price their drug according to their wish. It will result in the exploitation of the people by the pharma companies. So the government imposes regulations and price control on the essential medicines from time to time. TRIPS agreement has a provision for compulsory licensing in case public requirements have not been satisfied by the patent owner or the patented product is not available at a reasonable price. Compulsory licensing is the allowance given by the government to a third party to manufacture, sell the patented product without the permission of the patent owner. The third party has to pay the patent owner in return.

When the company notices that it is impossible or not profitable to launch the drug at the price decided by the government, they delay or suspend the launch in that country. Patients have to suffer from this. There are many life-saving cancer medicines available in the US and Europe but not in India or other developing nations because the number of patients is so low that the company does not see any profit in bringing the drug to the market at the available price regulations. In 2008, 270 new drugs were approved for sale in India, which reduced to 35 in 2013. The only reason is the stricter policy measures².

In developing countries like India and South Africa, about 70% of the expenditure on medicines is done out of pocket by the patients due to the unavailability of any national insurance system. Out of Pocket means, directly by the consumer and not by the third parties. When the country has a majority of people living in poverty, price control on life-saving drugs becomes mandatory on the government’s part.

Price control leads to a huge loss in revenue to the big pharma companies leading to less research and development. Companies will prefer getting a compulsory license to a generic drug rather than invest in innovation. As more and more generic companies rise, the big pharma companies have to further reduce their price to remain standing in the market.

Here comes the problem for the government. The government has to strike a balance between affordability and innovation. For deciding the price of a drug, the government generally takes the averages of the price of the same drug manufactured by different companies or look at the prices offered in other different countries by the company. Sometimes, the government just fixes the profit margins for the wholesalers and retailers on the cost price of the drugs.

It is observed that stricter price control also give rise to black marketing like smuggling of drugs. Sometimes, to enter into the market, the company brings the substandard or low-quality product into the market.

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