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Part V – Pricing

5.1 Basic Approach
The Hathi Committee was of the view that more selectivity in the system of price regulation with a view to ensuring fair prices of drugs and formulations would be desirable. In the case of formulations (other than generic), selectivity could be in terms of (a) size of the units; (b) selection of items, and (c) controlling the prices only of market leaders, in particular, of products for which price control is contemplated. An appropriate combination of these criteria is also feasible. The new pricing regulation – would be in conformity with the principle of selectivity commended by the Hathi Committee.

5.2 Coverage
It is decided to rationalize the present categorization of bulk drugs and formulations keeping in view the following objectives:

To stimulate production of drugs and formulations which are essential to the needs of large majority of the people of the country;
To make the price control system less cumbersome but more effective, by reducing the span of control;
To ensure a reasonable return to the producers of essential drugs, while at the same time restricting undue increase in their price.
Keeping this objective in view, it is now decided to have 2 categories of formulations and bulk drugs required in place of 3 categories which exist at present. Category 1 would consist of drugs required for the National Health Programme and the MAPE (maximum allowable post manufacturing expense incurred from the stage of manufacturing to retailing and manufacturers’ margin) allowed for drugs in this category would be 75%; category II would consist of drugs other than those in category I but which are also considered essential for the health needs and a MAPE of 100% for formulations would be allowed while fixing the prices for this category of drugs.

The list of drugs in Category II on the basis of these guidelines would be drawn up within 3 months, by a committee consisting of representatives of Department of Chemicals & Petro-chemicals, Ministry of Health, Bureau of Industrial Costs and Prices and some State Governments. Till such time as this is finalized the existing Drug Price Control Order will continue to be in operation. In the proposed Drugs (Price Control) Order which would be announced after the list of drugs in each category is finalized, there would be a stipulation to the effect that Government will have the right to bring within the ambit to control any drug in the de-controlled category at any point of time should it be considered necessary to do so.

With a view to encourage production of drugs which are more essential to the needs of the country, incentives, other than the MAPE, would also be considered. Government would at the same time strictly monitor the prices of drugs of de-controlled category and for this purpose an effective monitoring mechanism shall be developed.

5.3 Norms of Pricing
It is decided to have a uniform norm for all bulk drugs falling in the controlled category I and II and the manufacturers will be given the following three options

14% post tax return on net worth; or
22% return on capital employed; or
Long term marginal costing with 12% internal rate of return in the case of new plants.
The maximum retail price of domestically produced items excluding excise duty and local taxes, if any, would not be higher than ex-factory cost by more than 75% in the case of category 1 formulations and by more than 100% in the case of category II formulations. This is to say, MAPE would be 75% and 100% respectively for category I and II formulations, of the ex-factory cost.

In respect of imported formulations, selling and distribution expenses, including interest and importers’ margin, shall not exceed 50% of the landed cost.

5.4 Drug Price Equalization Account (DPEA)
The DPEA was set up essentially to encourage domestic production of bulk drugs through a system of retention pricing. However, in actual practice the operation of DPEA is giving rise to intractable administrative problems, with anticipated accruals to the DPEA being thwarted by disputes and claims on the DPEA put forth promptly. It is, therefore, decided to discontinue the system of retention and pooled pricing. Protection for indigenous production of bulk drugs, wherever necessary, would be provided through the tariff mechanism. However, provision would be made in the new Drug Price Control Order to ensure that amounts which have already accrued to the DPEA and those which are likely to accrue as a result of action in the past, are protected and used for the purpose stipulated in the existing DPCO.