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PHARMACEUTICAL - QUALITY DRUGS A DREAM OF COMMON MAN UNDER BETTER PRICING FORMULA.

Byline: KANWAL SALEEM

The much awaited pricing policy as finalized by the government is a mixture of industry's recommendations while none of those are fully incorporated making the policy too complicated and error prone.

Pharma industry experts said downside of the policy is reduction of price of a research product by 30% in three years time after four years or when three generics of that product are available in the country. This again is an unprecedented recommendation as in countries where ERP is being practiced the period allowed for the initially fixed price is five years and thereafter the prices are reduced after a transparent process of negotiations and not an arbitrary percentage is fixed for such reduction.

Mr. Nadeem Alamgir pharma industry expert said that the prices of new chemical entities are proposed to be fixed by External Reference Pricing (ERP) but only two countries India and Bangladesh are kept in the basket of countries. This naturally reduces the rational pricing of new research drugs. It would have been better that at least 10 countries from Asia and Africa should have been included in the basket to provide a better option for price negotiations.

In addition to increasing number of countries a transparent mechanism for negotiations with manufacturer or importer of new research product should be devised like other countries. It is pertinent to note that in past many new research products could not be marketed because the prices allowed by the authorities were not feasible for the companies to market. Thus the patients remain devoid of the benefits of the new research. This also discouraged further investment in the country.

Other than that it is a case of double jeopardy as the price of product is proposed to be fixed at the lowest and then a penalty of 30% reduction is being imposed and that too after 4 years only.

Adopting the proposed formula of arbitrary price reduction will have negative consequences for patients and the industry. The practice of ERP which was adopted by the defunct Ministry of Health was very successful as companies got reasonable prices and the Ministry was able to do rational price fixation for the benefit of patients.

The new policy also proposes formulae to increase prices on the basis of hardship that is certainly a good initiative except the formula of Landed Cost+35% mark-up. This formula proposed in the policy need to be reviewed on the following grounds.

IMPORTED DRUGS

The formula given in the policy is "Landed Cost + 35%" markup and the breakup for the 35% markup is also given in the policy which apparently has some mistakes that can be explained as below;

###POLICY###ACTUAL

###DESCRIPTION###(TAKEN AS PERCENTAGE

###(AS PERCENTAGE OF T.P)

###OF LANDED COST)

Marketing Assessment Travelling on Business Finding Agreement

###-###03

Preparation

Product Expiry###02###02

Warehouse and Cold Chain###02###02

Salesman Salaries and Travel###10###15

###05

Sales Promotion###02

###As per Law

Samples###-###03

General Administration###02###04

Financial Charges###02###03

WPPF and CRF###01###01

Income tax###-###-

Distribution Expenses and Discount###10###16

Profit###05###15

###TOTAL###35%###69%

The above costing was done by the government without taking into account the ground realities business dynamics norms and practices due to a misperception that the imported drugs are being imported by individual importers. This perception is not correct as almost all big national and multinational companies are importing life saving drugs from external sources and are putting in the same kind of efforts in promotion of these life saving products that include sales promotion activities that are allowed to be done with maximum of 5% expenses specially in case of new research molecules the expenses are always on a higher side. Further to that all large companies are participating in Provident Fund and are contributing as per law. Distribution expenses are the same in this case as well and they deserve 15% profit at par with manufacturers being manufacturers themselves.

Interestingly the discounts allowed are given on trade price and not on the landed cost. As per formula of Landed Cost+35% mark-up proposed by DRAP and assuming the landed cost equal to Rs100/- the T.P would be Rs135/- and distributor discount will be Rs13.5/-(10% of T.P) which is in actual will be 13.5% of the landed cost not 10%. This proves that the margins need to be reworked to arrive at a rational formula. The actual cost given above make it even more important to revise the mechanism of price increase in hardship cases or where "Cost Plus formula" is to be used.

LOCALLY MANUFACTURED PRODUCTS

DESCRIPTION###POLICY###ACTUAL

###(TAKEN AS PERCENTAGE OF LANDED COST)###(AS PERCENTAGE OF T.P)

Product Development and Stability Studies###03###03

Product Expiry###02###02

Warehouse and Cold Chain###02###02

Salesman Salaries and Travel###10###15

Sales Promotion###03###05

Samples###03###03

General Administration###04###04

Financial Charges###03###03

WPPF and CRF###01###02

Income tax###08###08

Distribution Expenses and Discount###16###16

Profit###15###15

###TOTAL###70%###78%

Further to that salaries and traveling expenses of salesmen/medical representative are nothing less than 15% due to increased cost of living; therefore 10% is not sufficient to cover the expenses.

Interestingly again the distributor discount when calculated on trade price as per formula (Manufacturing cost + 70% markup) will be 27.2% and not 16% as mentioned in the Proposed Pricing Policy. Thus the manufacturer cannot meet all the other expenses allowed to him in the policy.

If the proposed policy is implemented in its present form then the likelihood of availability and continued supply of new research and quality drugs will be a dream for people of Pakistan and the lobbies who are interested in giving an MFN status to India will be achieving their objective as the substandard and low quality medicines will be imported from India.

Further to that all efforts being put in by worthy Prime Minister of Pakistan for increasing FDI in Pakistan will be severely jeopardized as although the healthcare industry is not a very large contributor in any economy but by virtue of its impact on fundamental right of citizens of any country the noise of withdrawal of multinational companies from the country is always very loud. It is therefore imperative that worthy Prime Minister should look into this issue as its implications are too severe.
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Publication:Pakistan & Gulf Economist
Date:Mar 15, 2015
Words:1068
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