The magic pill for the pharma sector

There is a time and a place for government interference in private business. Even the most stringent advocates for the free market admit that there are scenarios in which the government should act as a regulator for industry. And in some cases, they even say it might be alright for the government to become a part of setting prices.

Take the pharmaceutical industry for example. If a private company invents a miracle drug that can solve a major health epidemic, but they price it exorbitantly, is that when the government should step in? The involvement of the government in the free market is a delicate balance. The problem is that in Pakistan the government’s role is often that of a very incompetent micromanager.

Just look at the recent decision of the caretaker government to deregulate the prices of medicine for non-essential drugs. Up until this point, medicine prices in Pakistan had been strictly regulated. While this might seem like a good idea, it has often led to shortages on the supply end of the equation. The proposal of the caretaker government based on the recommendation made by the Ministry of National Health allowed companies to adjust the prices of medicines which are deemed as being non-essential. This allows the pharmaceutical industry to set the prices which were regulated under the Drugs Act of 1976 and the Drug Pricing Policy of 2018.

Under the Drug Pricing Policy of 2018, the prices of pharmaceutical products could only be linked to the Consumer Price Index and companies had to give a 30 days’ notice to the Drug Regulatory Authority of Pakistan (DRAP) which would lag the increase in prices. Just how monumental was this decision? Suffice to say, it was the much needed change that was being asked for by the pharmaceutical sector. The drug companies were happy and it seemed a step (albeit a small one) in the direction of deregulation. 

Despite the seemingly logical nature of this step, the deregulation has faced harsh criticism in the media. The matter became enough of an issue that the Lahore High Court stayed the deregulation from coming into effect on the 22nd of February 2024 seeking clarification from the Federal Government on why the deregulation was put into place. 

The policies of the past saw many foreign investors and companies enter and leave the market seeing that their voice was not being heard. Even as recently as 2023, the government had to give a dispensation to manufacturers and importers to carry out a one time increase in their prices in order to make their business model sustainable. 

The last two years have seen imports being curtailed, rupee devaluing, high levels of inflation and an across the board increase in cost of raw materials. This led to the companies facing severe pressure in terms of their margins and profits and some of this pressure had to be alleviated.

In normal circumstances, companies would have been allowed to change their prices in order to maintain their margins and profits but due to the regulations being in place, this option was not available. Now with deregulation being carried out, it can be expected that the companies will be able to have a say in their own pricing. So now the question arises, who will end up paying the cost of this change in policy? Profit debates the merits of the policies of the past and the impact of deregulation.

A history of regulation

The drug policies that were put into place in the past revolved around the fact that as the product being provided by the industry was in the interest of the people, the government should have an overarching control over the pricing based decisions. This meant that from the licensing to the manufacturing and pricing of the drugs, all aspects were heavily regulated and supervised by the government.

Drugs Act 1976:

There have been three key regulations that have been promulgated categorized as the Drugs Act of 1976, the DRAP Act of 2012 and Drug Pricing Policy of 2018. The Drugs Act of 1976 was brought in under Zulfiqar Ali Bhutto and the goal was to make sure that the medicines were affordable and maintained a quality standard. The Act specifically gave the government the power to fix the maximum price that could be placed and mandated that a portion of the profits be put away for research by the company. In many aspects, this legislation is still applicable to the pharmaceutical industry.

One of the biggest drawbacks of this legislation was that no provision had been made in terms of developing a formula to be used by the government in setting the prices and the prices were fixed rather than have any allowance for inflation. The aftershocks of this policy were that there was a price freeze that was placed on the industry which meant many of them had to struggle to earn a profit as costs increased and margin diminished. 

Due to this policy, there was an exodus that was seen in the last two decades where the number of multinational pharmaceutical companies in the country went from 48 to 22. As the companies had no control over their own prices, the rising production costs made operations unsustainable. Companies like Merck Sharp & Dohme, Bristol Myers Squibb, ICI, Roche Pakistan, Merck Group, Eli Lilly and Johnson & Johnson are some of the marquee companies which have divested their interest and left the country.

DRAP Act 2012:

After the passing of the 18th Amendment, there was increasing pressure from the pharmaceutical industry to look into the regulation of the industry. This led to passing of the DRAP Act 2012 which allowed the establishment of DRAP which would oversee the industry in terms of licensing, approval and pricing. Even though the distribution and sales of the sector came under the purview of the provinces, DRAP still maintained control over many of the key aspects. 

One of the functions of DRAP was to constitute a Drug Pricing Committee (DPC) which will formulate the drug pricing strategy and it was tasked with recommending a price which would be approved by the Federal Cabinet. One of the positive aspects of this committee was that there were representatives from the pharmaceutical industry and consumer rights on the board which meant that all stakeholders had representation in the pricing policy being proposed.

Drug Pricing Policy 2018:

The last policy that has been made in regards to drug pricing is the Drug Pricing Policy of 2018. The policy looked to divide drugs as National Essential Medicines List and others. Under the new policy, DRAP sets the maximum retail price (MRP) for all drugs based on the average price for the same drug in the region.

The policy also allowed manufacturers and importers to increase the price of their drug based on certain conditions. For essential drugs, prices could be raised up to 70% of the increase in CPI provided that it does not exceed 7% of the original price. For other drugs, firms could increase price by the amount equivalent to the change in CPI as long as it is not more than 10% of the original price. Regardless of the price increase, it had to be approved by DRAP before being implemented.

The policy is a nutshell

The recent example of Panadol shortage is the whole drug pricing policy in a nutshell. On 21st of October 2022, GlaxoSmithKline Consumer Healthcare (GSKCH) announced that it would be suspending the manufacturing of Panadol which is a generic drug used for alleviation of pain and fever. This generic pill is used extensively for the cure of dengue as well.

Even before production had been shut down, the market had seen long periods of shortage as GSKCH had asked for the price of the drug to be increased only for their demands to be rejected. As the company was already seeing a rise in cost, they wanted to make sure they were not making a loss on a product. The company had asked DRAP and its Drug Pricing Committee to consider increasing the price as early as January of 2022 and this was rejected. Then in August, the company asked for an increase in its price in line with the change in CPI which it did but the increase was not equal to the cost of production which had increased by a greater amount.

In 2022, it was expected that the PTI-led government was going to allow the company to increase its price further but after the Vote of No Confidence, the increase was scrapped. The company has a capacity to produce more than 400 million tablets of the drug in a month but as its costs were increasing, they decided to cut their production by a third.

This coincided with the onset of dengue and massive floods in the country after the Monsoon season which led to an extraordinary spike in the consumption of the drug. As production had been cut, the market started to see shortages take place. In the face of the shortage crisis, the Federal Government stated that they would not look to increase prices and that there was abundant supply of Panadol in the market. There were whispers in the corridors of power that GSKCH was trying to blackmail the government to increase their prices.

The government even raided a warehouse in Sindh which was owned by Connect which is a subsidiary of GSKCH tasked with distribution. The government was able to seize 48 million tablets and stated that the company was using hoarding tactics in order to reduce supply in the market. The company responded by saying that it was following standard operating procedures and it was holding 30 day safety stock at its warehouse.

The matter was solved on 26th of October after the company was allowed to increase its price to Rs 2.35 per tablet from Rs. 1.87 per tablet which is only half of the price hike that they had asked for. The company had originally asked for the price to be set at Rs. 2.67 per tablet.

This whole episode shows that companies have no option but to cut down their production when faced with rising prices. As the government has set the prices and does little to change them, the production halt leads to a shortage in the market. Rather than having to bear the burden of a small increase in price, patients are not able to have access to the drug and end up paying a higher price regardless as the drug is in short supply. This suffering is only alleviated once the company sees a hike in price and the supply goes back to normal.

Populism in policy

Like many of the policies that have been placed in the country, the drug pricing policy is also rooted in populism. Just like the country is reeling from the after effects of low priced energy being provided to the country in the form of circular debt, the pharmaceutical sector has also suffered based on the same rationale. Elected governments have tried to amend and change policies at different points of time in the past only to face backlash and then reverse its course.

The latest round of these changes saw public outcry over price increases taking place in January 2019 when prices had to be revised. When the price increase was announced, the government was attacked by the media and led to the ouster of the then Federal health minister for being complicit in the price increases. When the new minister, Dr Zafar Mirza, was appointed; he was tasked with reversing the prices within 72 hours. 

Even in 2013, the Nawaz Sharif government faced the same reaction when it tried to increase prices as well. Any move to allow for prices to be left on the devices of the industry have been seen as detrimental to the health and wellbeing of the people. It is feared that allowing prices to be free would leave the people on the mercy of the manufacturers and importers. 

Due to the vulnerability of the masses to such a move, it is seen as political suicide and government tries to make sure no such room is given to the industry. The deregulation law has been passed by the caretaker setup and would have little to no political consequence, however, the reaction of the next government would show how the people have been impacted by such a move. Even when the merits of the deregulation are being debated, the Lahore High Court has already stepped in and stopped any implementation of this law.

Reaction of the industry

Many of the manufacturers have tried to circumvent the measures that are put into place by the government. Initially, when manufacturers start producing in such an environment, they set very high initial margins in terms of their prices as they are aware that over time, the government will put in controls which will chip away at these profits. This means that they are able to extract higher profits in the beginning and as the costs rise to the level of the prices, the company has been able to extract a large chunk of its profits.

Another ploy that is used in the industry is that as medicines become more expensive to manufacture, the company stops production of those drugs and starts using lower quality raw materials which leads to a considerable deterioration of the product. In the last few years, as inflation has risen to unprecedented levels and cost of manufacturing has increased as well, manufacturers have been left with little choice than to either stop manufacturing or demand an ease in price control.

The impact on people

It is evident that even though the policy is consumer oriented, the effects of the policy have been mixed to say the least. Yes, people do benefit when prices are controlled and monitored by the government but there is little assurity that the drugs people are getting will be of high quality and that the company will keep manufacturing them even when the cost of production keeps getting higher.

In a speech made by the caretaker Prime Minister Kakar admitted that hoarding and smuggling of drugs was being carried out and people were paying three to five times for drugs which were not available in the country. As the manufacturers have to make a choice between manufacturing at a loss or not manufacturing at all, they choose not to do so which creates a shortage of drugs in the country. With life saving drugs being in short supply, people have no option but to turn towards smuggled drugs at a higher price.

The impact of the price controls falls solely on the consumers who either have to turn towards a lower quality product or no medicine at all and have to suffer worse health effects. Patients can see complications in their medical conditions or longer treatment times due to the lack of potency of the medicines in the first place.

Will it be free for all?

Now that the prices are being deregulated, will it mean that the drug prices will be expected to skyrocket? Will the examples of the United States be seen in the country where medicine prices are allowed to be whatever the manufacturer wants them to be? Will there be a Martin Shkreli school of thought prevailing?

Well not exactly. It does not need to be one extreme or the other. The country cannot go from all controls to no controls at all. There needs to be a balance that needs to be put into place. The goal of any drug policy has to be three pronged. First of all, drugs need to be priced at affordable rates based on the fact that patients are able to get them. Secondly, drugs have to maintain a certain standard and lastly the drugs need to be available all across the country. 

The policy that was being followed before meant that even though prices were guaranteed, there was no assurity that drugs would be readily available and that they would be of good quality. With deregulation for prices, it can be expected that DRAP can now make sure all three aspects of a good policy are maintained. 

If tomorrow Panadol is being sold for Rs.100 a tablet rather than Rs. 3 per tablet, DRAP can send a notice to GlaxoSmithKline Pakistan asking them for a rationale for the sudden price increase. This will make sure that the price increase is justified and if the company is trying to game the price, they can be penalized and punished. Similarly, now that the price is under the purview of the company, DRAP can mandate that the quality of the product is maintained and that there is ample supply of the drug all over the country.

This way DRAP can make sure that the drug is available in the market at a low price and the company is maintaining quality. In case a price increase does take place, the burden will fall on the company to prove that the price hike is justified. The new policy will also incentivize the companies to continue production and to maintain a high quality product as they can rationalize it with a price hike and they will have a profit motive to pursue while serving its patients. The sense of populism needs to be eradicated from the drug pricing policy and DRAP needs to be mandated to look out for customer interest while allowing drug manufacturers to have control over their own prices.