ISSUE VI : Change needed in drug pricing regulation of non-scheduled formulation

Change needed in drug pricing regulation of non-scheduled formulation

Introduction

India, being a welfare state as per its Constitution, casts an obligation upon the executive arm of the state to ensure that the interests of the general public are protected. Accordingly, the Essential Commodities Act, 1955 regulates prices of commodities that are deemed to be essential for the common man, in order to ensure availability and affordability of the said essential commodity. The regulation of prices of drugs and formulations, which are also considered as essential commodities, is carried out under the Drug Price Control Order, 1995 (“DPCO”) which is administered by the central government, and which has further sub-delegated substantial powers under the DPCO to the National Pharmaceutical Pricing Authority (“NPPA”).1 The NPPA administers the pricing of essential drugs and formulations throughout India and conducts surveys and studies to constantly monitor drug prices and to ascertain if new drugs should be brought under the purview of the price regulation.

The present bulletin briefly discusses the procedure under the DPCO for determining the price of any formulation, scheduled or non-scheduled, the lacunae in the DPCO and the recent activities of the NPPA which have exposed the loophole in the mode of determination of price even further to the detriment of the industry.

1.Powers to fix price under the DPCO

Under the DPCO, formulations are categorized into scheduled and non-scheduled formulations, scheduled formulations being those which contain scheduled bulk drugs,2 and likewise, non-scheduled formulations are those that contain non-scheduled bulk drugs. The NPPA is empowered to fix the retail price of a scheduled formulation under Clause 8, and the ceiling price under Clause 9. The power to fix the retail price of a non-scheduled formulation is provided under Clause 10, which is a non-obstante clause, provides that the NPPA can, if it deems necessary in public interest, by an order fix the price of a non- scheduled formulation. A plain reading of Clause 10 indicates that the NPPA has the discretionary power to fix the retail price of any non-scheduled formulation “after obtaining such information as may be considered necessary” and “if it considers necessary so to do.”

Further, Clause 10 has three clauses under which the NPPA has the option to either

(a) fix the price in accordance with the maximum allowable pre-tax return on the sales turnover as specified under the Third Schedule, (b) fix a price as it deems fit or (c) apply the pricing mechanism under Clause 7.

2. Provisions governing price calculation of non-scheduled formulations

Under the DPCO, Clause 7 prescribes the guidelines to be followed by the NPPA for ascertaining the price of a non-scheduled formulation. The provision mandates that the NPPA shall take into consideration the material cost, conversion cost, cost of packaging, packing charges, excise duty and maximum allowable post-manufacturing expenses which cannot exceed 100% of the cost of production of the formulation, in case of indigenously manufactured scheduled formulation. In case of an imported non-scheduled formulation, the price to be fixed by the NPPA must consider the landed cost3 of the formulation along with the margin covering sales and distribution. The above prescribed components form the complete price of scheduled formulation as well, and it is necessary for considering the same in case the NPPA decides to exercise its power under Clause 8,4 95 or 106 to fix the retail of ceiling price of a non-scheduled formulation, so as to allow profitable production and manufacture of the same.

The DPCO also provides an alternate consideration for ascertaining the price of a non-scheduled formulation.7 The Third Schedule prescribes the maximum pre-tax return on sales turnover, i.e. profit percentage, according to the scale of the manufacturers’ total annual turnover. This method allows the manufacturer to recover the cost of production and limits only the profit percentage recovered by it. The percentage of profit is inversely proportional to the annual sales turnover of the manufacturer.

It is pertinent to note that under the DPCO, there is no obligation cast upon a manufacturer of non-scheduled formulation to inform or notify the NPPA of the price at which the non-scheduled formulation is sold. The legislative intent is apparent from this omission under the DPCO, i.e. the manufacture and sale of non-scheduled formulations is not to be governed by the DPCO, unless the price is ascertained by the NPPA in line with the parameters above. The lacuna apparent is the existence of two set of principles to be applied by the NPPA where it decides to fix the price of a non-scheduled formulation.

3. Recent events exposing lacunae

The NPPA has recently notified the prices of several drugs and formulations which were not covered by the DPCO earlier. This has led to ambiguity and has caused manufacturers to challenge the decision of the NPPA on several grounds. In case of non- scheduled formulations, the ambiguity in deciding which method for ascertaining the price has formed the bone of contention of the manufacturers. Manufacturers are aggrieved by the fact that the NPPA firstly determines the prices based on age-old information contained in the IMS-ORG database which the NPPA relies on for calculating sales figures. Secondly, while the NPPA is citing grounds of public interest, if the price fixed by the NPPA prevails,
it will cause most of the manufacturers to cease production of the relevant non-scheduled formulation, thereby affecting public interest even more.

The NPPA presumably continues to apply Clause 10(b) which provides that the NPPA may at its discretion, fix or revise the price of any formulation as it deems fit. It is pertinent to note that the powers under Clause 10 are “notwithstanding anything contained” in the DPCO, which includes Clause 7, and further, sub-clause (b) does not require the NPPA to apply either Clause 7 or the Third Schedule. The prices fixed by the NPPA at its discretion under clause 10(b) are not in line with the legislative intent of Clause 7 or the Third Schedule and becomes a matter for interpretation by the courts. As Clause 10 begins with a non-obstante clause, it may cause courts to lean in favor of the NPPA, particularly considering the rationale of public interest. While there is no existing jurisprudence on this aspect, there are several cases by and against the NPPA bending before various courts in India.

Conclusion

The DPCO is a significant legislation bearing in mind the need for easy and cheap availability of drugs and formulations. However, in order to meet its intended goal of serving public interest, the DPCO has to bring in clarity on numerous vis-à-vis the process to be followed for affixing the price of a non-scheduled formulation. Furthermore, the components of the price fixing process must be relevant to industry practices and must allow the manufacturer to keep its business profitable. Any determination which does not consider the business viability will eventually lead to scarcity of drugs, which can be catastrophic for the common man.

At present, there are three modes available to the NPPA for ascertaining the price, under Clause 7, the Third Schedule or at its discretion under Clause 10(b). In order to streamline and make the process of ascertaining the price of a non-scheduled formulation more transparent, the power under Clause 10(b) must be removed and specific instances must be provided for the applicability of either Clause 7 or alternatively the Third Schedule.

Authored by:
Ashutosh Chandola

1 Under S.O. 637(E) dated September 4, 1997 by the Ministry of Chemicals and Fertilizers.
2 Scheduled bulk drugs are notified under the First Schedule of the DPCO.
3 Landed cost has been explained under Clause 7 as the cost of import of the formulation inclusive of customs duty and clearing charges.
4 Power to fix retail price of scheduled formulation.
5 Power to fix ceiling price of scheduled formulation.
6 Blanket power to fix price of any formulation.
7 This is applied where the NPPA decides to fix the price under Clause 10(c) of the DPCO.

 

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