Consisting of a team of experts in the field of pharmaceuticals, economics and cost accountancy, National Pharmaceutical Pricing Authority (NPPA) attempts to streamline and simplify the procedures with regard to drug price monitoring and bring about a greater degree of transparency as well as objectivity to the whole exercise. Fixation and notification of drug prices, both of bulk drugs as well as formulations, is thus the most important function of the authority. The criteria for calculating the fair price are drawn from the Drugs (Prices Control) Order, legislation under the Essential Commodities Act.
Set up in 1997, the authority has been enforcing the provisions of the Drugs (Prices Control) Order, dealing with all legal matters arising out of its decisions, undertaking and/or sponsoring relevant studies in respect of pricing of drugs/pharmaceuticals and rendering advice to the central government on changes/ revisions in the drug policy over the years.
It is also the authority's responsibility to monitor the availability of drugs, identify shortages, if any, and to take remedial steps. It collects data on production, exports and imports, market share of individual companies, profitability of companies etc, for bulk drugs and formulations on an ongoing basis.
NPPA is currently fixing prices on the basis of Drugs Price Control Order (DPCO) 1995, which has separate methodology / procedure for price fixation / revision of bulk drugs and formulations.
Following steps are involved in fixation/revision of bulk drug prices :-
Step 1 : Identification of bulk drugs :
Bulk Drugs are taken up for study on following basis :-
Whose validity period is due to expire.
Request from the concerned manufacturer/company.
Drug produced in the country for which no price has been notified under DPCO, 1995.
Step 2 : Collection of data :
Data is collected by issuing questionnaire/Form I of DPCO, 1995/cost-audit report etc. and verification by plant visits, if required.
Step 3 : Preparation of actual cost statement :
Actual cost for the year for which data is submitted is prepared based on data submitted / collected & verified during plant visit.
Step 4 : Preparation of Technical Parameters :
Technical parameters are prepared based on data submitted, collected and verified during plant visits. Plant capacity is assessed considering 330 working days for normal operation of plant leaving 35 days for scheduled maintenance of plant. The achievable production level is considered at 90% utilisation of assessed capacity allowing 10% production loss on account of unforseen break down and non-scheduled maintenance.
Step 5 : Preparation of Estimated Cost :
The estimated cost for the pricing period are then prepared based on actual cost & the technical parameters. While projecting the future cost, an increment is recognised at 5% per annum in respect of salaries & wages. Wage agreement, if any, which has been finalised and signed is also recognised while preparing the estimates. In respect of other overheads of fixed/semi variable nature, increase at 2.5% per annum is made to cover the normal incremental effects. The customs duty and other taxes as per the current budget are considered.
Step 6 : Calculation of Fair price of bulk drug :
Fair price is calculated by providing returns as specified in sub para (2), para 3 of DPCO, 1995.
While fixing the maximum sale price of the bulk drug, a post tax return of 14% on networth or a return of 22% of capital employed or in respect of a new plant an internal rate of return of 12% based on long term marginal costing is considered depending upon the option exercised by the manufacturer of the bulk drug. In case, the production is from basic stage, additional 4% return is considered on net worth/ capital employed.
Step 7 : Fixation of maximum sale price of the drug :
When the number of manufacturers of the said drug is more than one, the maximum sale price is fixed at 2/3rd cut off level or weighted average price, depending upon the situation.
Step 8 : Notification of bulk drug price in official Gazette.
Note : The fair price may be further revised, if asked for by the manufacturers, based on escalation formula for change in major raw materials and utilities rates.
Similarly, prices of formulations based on scheduled bulk drugs are fixed either on the basis of applications from the manufacturers or on suo-motu basis. As per DPCO 1995, a manufacturer using scheduled bulk drug in his formulation is required to apply for fixation of price of formulation within 30 days of fixation of price of such bulk drug (s). Applications received in NPPA from manufacturers and importers are considered for price fixation. The time frame for granting price approval on formulation is 2 months from the date of receipt of the complete information from the company.
Procedure :
o Examination of Technical Parameters: Checking the Quantity of Bulk Drug as per label claim. The overage claim is allowed as per batch production record or norms fixed by Govt.
o Examination of Prices of Bulk Drug : When notified price of bulk drug exists, the notified price or actual price is considered. In the case of imported bulk drug used in the formulation, weighted average import price is considered vis-à-vis the price submitted by the applicant. For non-scheduled bulk drug used, the available information on prices are applied.
o Examination of Excipient claims : Excipient claims given in the application are examined and allowed after referring to information available in NPPA.
o Examination of PL, CC, PC and PM cost : The process loss (PL), conversion cost (CC) and packing charges (PC) are considered as per the norms notified in the Gazette. The packaging material cost (PM) cost is allowed as per the actual claim supported by invoices and after referring to information available with NPPA.
o Application of MAPE : Maximum allowable post manufacturing expenses (MAPE) is given at 100% on the ex-factory cost for indigenous formulation, while MAPE upto 50% of the landed cost is allowed for imported formulation.
o Working out the retail price : The retail price of formulations are worked out as per the formula given in para 7 of DPCO, 1995 viz. "R.P. = [M.C. +C.C.+P.M.+P.C.]x [1+MAPE/ 100] +E.D.", where - .P., M.C., E.D. respectively denote retail price, material cost, excise duty and the other symbols as denoted earlier.
o Treatment of Taxes : For bulk drugs used in formulation, all the statutory taxes are considered at the actuals and net of MODVAT. Allowance upto 8% on the notified price of scheduled bulk drugs is considered on this account. The excise duty element is worked out in NPPA based on companies claim. Allowance is made for 16% margin on price to retailer (as per DPCO, 1995) and 8% margin to wholesaler as per practice, both on the ex-factory price, which is the assessable value. The prevailing excise duty rate is applied to the said assessable value. For ceiling packs, notified prices are exclusive of excise duty. Manufacturers are required to work out the excise duty.
o Suo - Motu Cases : If the manufacturers or companies do not apply for revision of formulation prices as required under Para 8(2) of DPCO, 1995 within a period of 30 days of price reduction of bulk drug or fall in other statutory levies, steps are taken for suo-motu revision. Broadly the procedure given above is followed.
o Notification of ceiling prices in the Gazette of India : Ceiling prices are fixed or revised under Para 9 of DPCO, 1995 for commonly marketed standard pack sizes of price control formulations. It is obligatory for all, including small scale units, to follow the ceiling prices which are notified in the Gazette of India (Extraordinary). The ceiling prices are usually notified as exclusive of excise duty, local tax etc. but maximum retail price (MRP) printed includes excise duty.