The Department of Pharmaceuticals had constituted a committee in 2007 to suggest a system of reference pricing/ price negotiation /differential pricing etc that could be applied for price negotiation of patented medicines and medical devices before their marketing approval in India. The committee was to interact with various stake- holders viz pharma industry associations, Ficci and NGOs and also a study was commissioned at the Rajiv Gandhi School of Intellectual Property Law, IIT Kharagpur to find out the mechanisms of price control of patented drugs in various other countries.

After analysis and due diligence of the interactions and data, the committee opined that the prices of the patented medicines, even after negotiation, will remain unaffordable to the majority of the population and therefore the government should expand the coverage of healthcare and insurance scheme (at least for prescription medicines) for all the citizens who are not covered under any other insurance /reimbursement scheme. As per a WHO study, nearly 21 per cent of total expenditure on medicines in India is accounted for by government or insurance and nearly 79 per cent is paid for privately (out of pocket) in contrast to the scenario in developed countries.

The Indian pharmaceutical Industry is over US$ 21 billion and the domestic turnover is around US$12 billion. As per an estimate, the total market turnover of patented medicines in India is around US$ 5 million. But the Indian market for patented medicines is expected to grow fast primarily owing to:
(i)    Appreciable upgradation of patent infrastructure in the country over the past few years to support new laws with the addition of patent examiners,
(ii)    Decentralization of patent-filing process and digitization of records and lastly;
(iii) The increase of population in highest income group from present 10 million to 25 million in next five years.

The prices of drugs in the country are fixed/ revised/monitored as per the provisions of Drug Price Control Order (DPCO), 1995 which is based on the existing Pharma Policy of 1994. The policy consider certain criteria on which price control is based. These criteria include:
(i)    Sales turnover,
(ii)    Market monopoly and
(iii)    Market competition.

As per DPCO 1995, drugs are categorized as:
(i)    Scheduled Drugs and
(ii) Non-Scheduled Drugs

Schedule Drugs: These are the drugs which satisfy the criteria under price control. The prices of Schedule Drugs are fixed on the basis of cost analysis and the formula used to fix the retail price is:

Retail Price = (M.C.+ C.C.+P.M.+P.C.)x(1+MAPE/100)+ Excise Duty Where M.C= Material Cost, CC= Conversion Cost, P.M.= Packing Material Cost and PC= packing Cost. MAPE denotes Maximum Allowable Post – Manufacturing Expenses and at present it is 100 per cent.

Imported Scheduled Drugs: For imported Scheduled Drugs, the landed cost forms the basis for fixing its price along with profit margin, to cover selling and distribution expenses including interest and importer's profit, the maximum limit of which is fifty percent of the landed cost.

Non-Scheduled Drugs: These are the drugs over which there is no control on the launch price. However, the prices of these drugs are monitored on monthly basis (based on ORG-IMS data) and actions are taken if there is increase in the price of the drug is more than 10 per cent in one year and certain criteria of turnover and market share is satisfied.

Imported Non-Scheduled Drugs: There is no control over launch price of the imported drugs and the prices are monitored in the same way as for other Non– Scheduled Drugs.

There is no price control/monitoring for Patented Drugs as per existing provisions of DPCO' 95.

Four pricing models have been proposed:
1. Reference pricing
The prices of the products are fixed based on the prices in other similarly placed countries. However, reference pricing has negative consequences for both patients and pharmaceutical innovation. What it fails to take into account is the variety of both products and patients and their paying parity.

2. Differential pricing
Prices are fixed differently based on type of purchaser, for example, Government procurement and private market. Differentials can take the form of quantity rebates, discounts to key purchasers, concessions for long-term contracts, and so on.

The first advantage of differential pricing is simply that a large no of patients would have access to essential medicines if they were cheaper. Affordability is not confined to those who can afford everything but also to those who can’t afford at higher market price. Affordability is graded and differential pricing brings access to more patients.

The second advantage of differential pricing is that the financial sacrifice is limited, whereas the benefit to recipients can be life-saving. This makes the differential pricing principle very desirable.

However, there is always an apprehension as the artificially low-priced drugs based on the said differential pricing principle migrate back into full-price commercial markets.

3. Cost – based Pricing
The prices are fixed based upon the various input costs and a prescribed trade margin. This method has advantages like easy to calculate, minimal information requirements, easy to administer, insures seller against unpredictable or unexpected costs, simplicity etc. Further price increases can be justified in terms of increase in input cost.

However, there are problems with this approach. It is not as easy to determine the cost of a product as one might imagine. Companies have fixed and variable costs. The variable costs can usually be directly attributed to each product.

However, the fixed costs are divided by the total sales to arrive at the average fixed cost for each item. If the sale increases, the average fixed costs decreases accordingly. In other words, up to a certain point, the more you make a good the less it costs you to make it. Likewise, when a company makes more than one product it has to decide which of the overheads of the company as a whole to attribute to each of the products. There are other disadvantages to cost-based pricing in terms of marketing.

4. Price negotiations
Prices are decided based on negotiations with the manufacturer. This methodology has the advantages of mutually agreeable proper decision-making by both the buyer and the seller. However, absence of the details of cost of the input raw material, R&D cost etc. and the volume of procurement to be made, it is very difficult to finalise a negotiated reasonable price.

Compulsory Licensing
DPCO 95 does not provide any provision for controlling or monitoring the price of the patented drugs. For patented products. However, in compliance with WTO’s TRIPS agreement

 (Article 31, Doha declaration and Article 6 of Paris convention, Indian patent law provides a provision which enables the Govt. to provide access of generally unaffordable expensive patented drugs to masses at large at affordable price. This issue gets addressed through compulsory licensing, whereby the Government allows third parties (other than patent holder) to produce and market a patented without the consent of the patent owner at the royalty rate decided by the Govt.

This mechanism enables timely intervention by the Government to achieve equilibrium between two objectives rewarding inventions and in case of need, making them available to the public during the term of the patent.

There are two provisions vide which compulsory licensing provision is used:

CL under Section 84 of Indian patent law
If the drug protected in India by a patent is not being made in India and the imported version is not available in a reasonably quantity at affordable price then a interested generic player is entitled to request the patent holder to agree for voluntary license (VL) at mutually agreeable terms and conditions after three years of the grant of the patent. If the patent holder refuses to grant VL within six months and the generic player can submit an application to controller General of patents for CL. After hearing both the parties’ patent office can grant CL to the generic player against the wish of the patent holder at reasonable terms and conditions. In the recent past a compulsory licensing was granted to Natco for bayer’s Naxavar.

CL under Section 92 of Indian patent law
Section 92 of Indian patent act gives power to Dept. of Industrial policy and promotion (DIPP) of Govt. of India to consider CL for drugs in the interest of state health programme. Any generic can approach Controller General Patents (CGP) for CL without prior information to patent holder and CGP has to issue the CL with suitable royalty to the patent holder decided by DIPP.