Legal & Regulatory > India > How Beneficial Is The Recent Price Control Exemption For Innovative Drugs In India?

Anay Shukla leads the pharmaceutical, life sciences, med-tech and healthcare practice at Nishith Desai Associates, a leading Indian law firm. In this article, he examines the benefit of the recent policy changes to price controls for innovative drugs in India. 

Unlike many other countries, India controls prices of all drugs sold in India.

Last month, India announced two key policy changes: First, that all patented new drugs would be exempt from all forms of price control that exist in India for a period of five years from the start of the drug’s commercial marketing. Second, that all orphan drugs would also be exempt from all forms of price control that exist in India, irrespective of their patent status or new drug status, subject to certification of the Health Ministry.

As expected, the decision was welcomed by both the local and multi-national pharma companies in India.

It is not difficult to see why. Unlike many other countries, India controls prices of all drugs sold in India. Some drugs, which the Government identifies periodically as ‘essential’ and is included within ‘National List of Essential Medicines’ (NLEM), are prescribed a ‘price ceiling’. All importers, marketers and manufacturers (for convenience, together referred to as the ‘Marketers’) of these drugs are required to sell their products at a price that is equal to, or less than, the price ceiling. Once a price ceiling is fixed, a Marketer loses the right to vary the price of its own drug and is only allowed to increase the price by a percentage that is pegged to the inflation experienced by the Indian economy in general. The inflation numbers released by the government are generic, and usually, do not reflect the increase in the cost of drug raw material and skilled human resources over time. This causes the effective price of the drug to reduce over time. In other words, Marketers of these drugs make less money from the drug in any given year than they did in the previous year. And on top of it all, even if the Marketer wants to withdraw an essential drug from the market, it is not permitted to withdraw it for a (maximum) period of eighteen months, unless the Marketer is able to convince the regulator of the substitutability of the drug, from a public health point of view. Furthermore, until the permission to withdraw is received, the Marketer is also required to maintain a steady supply of the drug to the market. This results in a ‘Hotel California’  kind of a situation, where the Marketer wants to get out, but can’t.

For drugs other than essential drugs, the government gives the discretion to the Marketers to fix their own prices. However, once fixed, a Marketer is not allowed to increase its prices by more than 10% in between any 12 month period, even if there is an increase in the import/manufacturing duty and other taxes during the period.

Broadly speaking, a drug remains ‘new’ in India only for a period of four years from the date of its marketing approval (except for biotech products such as vaccines that remain ‘new’ until notified otherwise).

Interestingly, the fact that a drug is not part of NLEM (i.e. it is not an essential drug) does not guarantee that its prices will not be fixed. In 2014, the regulator fixed prices of 108 diabetic and cardiovascular drugs that were not part of NLEM in public interest. In 2017, the government fixed prices of knee implant systems which was not part of NLEM in public interest. What is worse, in case of knee implants, the regulator went overboard and made it mandatory for knee implant Marketers to subsidize the cost of bone cement used in surgery as well, even though the law does not explicitly give it the power to do so.

To date, not many patented drugs have found a place in the list of essential drugs (notable inclusion being Sofosbuvir, popularly known as Sovaldi). However, there is no bar against such inclusion, and a populist government could do so before election time — low hanging fruit to win some new votes. The federal elections take place every five years and are in fact due to take place in a couple of months.

Therefore, a provision for blanket price control exemption for innovative drugs appears to be exactly what the doctor would have ordered (pun not intended) to lift the price-control-beaten spirits of the industry. It is also expected to make the Indian market attractive to foreign manufacturers. If done right, it should protect innovator companies against any price related uncertainty at least for a limited time of five years.

Unfortunately, the fine print of the language of the exemption brings forth certain limitations associated with claiming of the exemptions that are not immediately obvious.

To begin with, the exemption is specific to a drug that qualifies as both – a patented drug and a new drug. Broadly speaking, a drug remains ‘new’ in India only for a period of four years from the date of its marketing approval (except for biotech products such as vaccines that remain ‘new’ until notified otherwise). So, to claim the benefit of the exemption, a Marketer must launch its drug within four years of its marketing approval.

On a similar note, it is important for Marketers to understand that the exemption is not an automatic exemption, but needs to be claimed by satisfying the regulator of the Marketer’s eligibility to claim the exemption. The claim process takes a minimum of four months, and therefore, the five-year exemption window is effectively reduced by such time the regulator takes to allow the exemption, which could be as much as six months.

It is unlikely that current exemption covers innovative drugs that are developed through R&D undertaken outside India and that are protected by process patents.

There is also some ambiguity with respect to whether innovator drugs that are developed through R&D undertaken outside India, and are covered by process patent, are eligible for price exemption or not. As background, the current exemption is only an extension of an earlier exemption given to domestic manufacturers who were producing and selling drugs developed through indigenous R&D exclusively in India. The language of the earlier exemption clarified that the exemption was applicable to drugs covered by product patent only. However, this clarificatory language was omitted at the time of extension of the scope of the exemption. This led to speculation that the benefit of exemption should extend to new drugs covered by both product and process patents. However, such an interpretation ignores the fact that there is another exemption that is already available for drugs that are developed through indigenous R&D and covered by process patents. The speculative interpretation will make this pre-existing exemption redundant, and if that was the intention of the government, it would have omitted the pre-existing exemption like it omitted the clarificatory language for product patent. Therefore, it is unlikely that current exemption covers innovative drugs that are developed through R&D undertaken outside India and that are protected by process patents. Such drugs may not be eligible for a price exemption at all.

Lastly, it is quite likely that the price exemption for orphan drugs will exist only on paper for purely political reasons. A few weeks before the exemption for orphan drugs was announced, the Health Ministry had reportedly written to the Pharmaceutical Department requesting it to give serious consideration to a proposal to fix the price for orphan drugs sold in India. This inter-governmental communication was a logical outcome of a National Policy for Treatment of Rare Diseases 2017 (now suspended) published by the Health Ministry that had recommended the Pharmaceutical Department to “work towards affordability of drugs for rare diseases”. However, the Pharmaceutical Department did a complete U-turn on the Health Ministry’s recommendation and instead announced that orphan drugs would be eligible for price exemption, subject to certification by the Health Ministry of the ‘orphan drug’ status of the drug. The Pharmaceutical Department’s announcement reportedly caused significant embarrassment to the Health Ministry. So, given this background, it is obvious that availing the price exemption by Marketers of orphan drugs would not be easy, to say the least.

To sum it up, while the price control exemption for patented new drugs and orphan drugs announced recently by the Indian government brings much-needed price-relief to innovator companies that are doing or looking to do business in India, it contains some inherent limitations that could restrict the ability of such companies to make full use of the exemption. If any innovator company intends to utilize the exemption, then knowledge of these limitations should help it in arriving at a realistic estimation of monetary returns that may be expected after obtaining the exemption.