How do pharmaceutical companies price drugs?

Last Updated at: May 12, 2020
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How do pharmaceutical companies price drugs

There’s now a lot of debate around the world regarding the surge in prices of biopharmaceuticals. A lot of experts are sure that the list price of drugs is not what manufacturers make on the drug. Also, the pricing of drugs has little to do with how much a patient can afford or what is the best price to make it available. So, how do pharmaceutical companies decide to price their drugs? Here’s a quick look at the various factors and strategies that pharma companies use to price drugs.

  1. Price of Drugs in India

  2. How are drug prices regulated?

  3. How do the authorities price drugs?

  4. Consequences of Drug Pricing

  5. Major Player Who Influence Drug Prices

  6. Pharmaceutical Industry Economics

Price of Drugs in India

The price of medicines is an essential factor in our country, as over 55 million people live in poverty annually, being unable to pay for healthcare. When it comes to their spending on healthcare, almost 50% of their money goes into buying drugs. Therefore, the affordability of medicines is an essential factor for most of the people living in India, and especially for the poor. The Indian government relies on its price control measures to make medicines more affordable. Also, India’s pharmaceutical industry is worth over INR 1.36 trillion, making it the third-largest in the world. 

How are drug prices regulated?

Every couple of years, the Central Government ends up making a list of essentials, known as the National List of Essential Medicines, through the Health Ministry. As they are seen as the most essential medicines, they directly come under price control, via the Drug Price Control Order. In the NLEM list of 2015, over 376 drugs and 857 formulations have found a place, helping make them a little more affordable. Furthermore, as per Indian laws, the government has the right to bring drugs under the NLEM and regulate their price as and when needed. The government uses this clause to make stents and knee implants more affordable to the public. These price control measures are enforced by an independent authority known as the National Pharmaceutical Pricing Authority, which works under the Ministry of Chemicals and Fertilizers.

How do the authorities price drugs?

As per Indian laws, the Drug Price Control Order controls drug prices by using a market-based pricing system. They evaluate the maximum amount by taking the average price of brands with over 1% market share of the drug, along with a 16% retailer margin. Every year, they allow a small increment of the ceiling prices as per the calculated Wholesale Price Index. This is handled by the Department of Industrial Policy and Promotion. Non-scheduled medicines have no ceiling price and the increment is restricted to 10% annually. Before 2013, the DPCO used a cost-based mechanism that focused on manufacturing costs and profit margins. Several experts feel that the new scheme increases the prices rather than making it affordable. The new system has placed a cap on essential medicines stents, knee implants, and several cancer drugs. The government has also given NITI Aayog the right to recommend medications for price control.

Consequences of Drug Pricing

Experts believe that the current policy of drug pricing brings forth several consequences, which have adverse effects on the economy. For instance, it prompts pharmaceutical companies to stop production as it lowers their profit margins. Such closing or shutting of production leads to several spurious manufacturers dominating the market. Furthermore, the lack of strict quality control makes it easier for such fraudulent manufacturers to consolidate market share. As per reports by the United States Trade Representative, almost 20% of drugs sold in India are fake. Also, the decrease in profit margins has led to pharmaceutical companies opting to forego spending in research, which also deters investments in R&D.

Also, these regulations push manufacturers into producing non-essential drugs, as they have less pricing regulations. Therefore, we can see a fall in the sale of capped medicines, with an increase in the sale of uncapped drugs, as companies promote those more. Also, since the list does not include several life-saving medications like those for HIV and certain cancers, a lot of people still struggle to buy essential drugs. Furthermore, to improve profit margins, pharmaceutical companies promote drugs that are not part of any list, such as FDCs and non-standard dosages. This has also led to an increase in the number of frivolous patents as the list rarely contains patented drugs. The policy also makes it okay to import active ingredients and bulk drugs from China, and this makes things difficult for India’s drug manufacturers.

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Major Player Who Influence Drug Prices

  1. Pharmaceutical companies

They need to cover the cost for their R&D, but rarely explain why their drugs cost as much as they do. Individual companies even buy expired drug patents, spend nothing on R&D, and sell the drugs at higher prices.

2. Pharmacy benefit managers

They work on behalf of insurance companies and negotiate discounts on drug prices with pharmaceutical companies. Being a kept a secret, the discount reaching the customers is not aware of.

3. Health insurance companies 

They approve treatment methodologies and settle prices with PBMs to maximize profits.

Pharmaceutical Industry Economics

Patent protection is one of the most critical factors that determine pharmaceutical industry economics. Drug production has high initial costs, as research is costly. However, in most cases, manufacturing does not take many resources. Therefore, without patents, other companies could start making your drugs inexpensively, making it difficult for the initial innovators. Hence, in such cases, patents give incentives to pharmaceutical companies to invest in R&D. Therefore, pharmaceutical pricing is based on the balance between patent-protected brands and generic drugs. Patent-protected brands have controlled manufacturing process. However, others manufacture generic drugs at a lower cost.

Several experts feel that the government should try to implement other methods rather than try price control. For instance, many people believe that promoting healthy competition among manufacturers and strictly regulating drug quality can all do more good for people here. Also, increasing the spending on healthcare and improving transparency by tackling misinformation can help India’s poor get the right access to drugs that can save their lives.

 

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How do pharmaceutical companies price drugs?

103

There’s now a lot of debate around the world regarding the surge in prices of biopharmaceuticals. A lot of experts are sure that the list price of drugs is not what manufacturers make on the drug. Also, the pricing of drugs has little to do with how much a patient can afford or what is the best price to make it available. So, how do pharmaceutical companies decide to price their drugs? Here’s a quick look at the various factors and strategies that pharma companies use to price drugs.

  1. Price of Drugs in India

  2. How are drug prices regulated?

  3. How do the authorities price drugs?

  4. Consequences of Drug Pricing

  5. Major Player Who Influence Drug Prices

  6. Pharmaceutical Industry Economics

Price of Drugs in India

The price of medicines is an essential factor in our country, as over 55 million people live in poverty annually, being unable to pay for healthcare. When it comes to their spending on healthcare, almost 50% of their money goes into buying drugs. Therefore, the affordability of medicines is an essential factor for most of the people living in India, and especially for the poor. The Indian government relies on its price control measures to make medicines more affordable. Also, India’s pharmaceutical industry is worth over INR 1.36 trillion, making it the third-largest in the world. 

How are drug prices regulated?

Every couple of years, the Central Government ends up making a list of essentials, known as the National List of Essential Medicines, through the Health Ministry. As they are seen as the most essential medicines, they directly come under price control, via the Drug Price Control Order. In the NLEM list of 2015, over 376 drugs and 857 formulations have found a place, helping make them a little more affordable. Furthermore, as per Indian laws, the government has the right to bring drugs under the NLEM and regulate their price as and when needed. The government uses this clause to make stents and knee implants more affordable to the public. These price control measures are enforced by an independent authority known as the National Pharmaceutical Pricing Authority, which works under the Ministry of Chemicals and Fertilizers.

How do the authorities price drugs?

As per Indian laws, the Drug Price Control Order controls drug prices by using a market-based pricing system. They evaluate the maximum amount by taking the average price of brands with over 1% market share of the drug, along with a 16% retailer margin. Every year, they allow a small increment of the ceiling prices as per the calculated Wholesale Price Index. This is handled by the Department of Industrial Policy and Promotion. Non-scheduled medicines have no ceiling price and the increment is restricted to 10% annually. Before 2013, the DPCO used a cost-based mechanism that focused on manufacturing costs and profit margins. Several experts feel that the new scheme increases the prices rather than making it affordable. The new system has placed a cap on essential medicines stents, knee implants, and several cancer drugs. The government has also given NITI Aayog the right to recommend medications for price control.

Consequences of Drug Pricing

Experts believe that the current policy of drug pricing brings forth several consequences, which have adverse effects on the economy. For instance, it prompts pharmaceutical companies to stop production as it lowers their profit margins. Such closing or shutting of production leads to several spurious manufacturers dominating the market. Furthermore, the lack of strict quality control makes it easier for such fraudulent manufacturers to consolidate market share. As per reports by the United States Trade Representative, almost 20% of drugs sold in India are fake. Also, the decrease in profit margins has led to pharmaceutical companies opting to forego spending in research, which also deters investments in R&D.

Also, these regulations push manufacturers into producing non-essential drugs, as they have less pricing regulations. Therefore, we can see a fall in the sale of capped medicines, with an increase in the sale of uncapped drugs, as companies promote those more. Also, since the list does not include several life-saving medications like those for HIV and certain cancers, a lot of people still struggle to buy essential drugs. Furthermore, to improve profit margins, pharmaceutical companies promote drugs that are not part of any list, such as FDCs and non-standard dosages. This has also led to an increase in the number of frivolous patents as the list rarely contains patented drugs. The policy also makes it okay to import active ingredients and bulk drugs from China, and this makes things difficult for India’s drug manufacturers.

Start Your Pharmacy Business

Major Player Who Influence Drug Prices

  1. Pharmaceutical companies

They need to cover the cost for their R&D, but rarely explain why their drugs cost as much as they do. Individual companies even buy expired drug patents, spend nothing on R&D, and sell the drugs at higher prices.

2. Pharmacy benefit managers

They work on behalf of insurance companies and negotiate discounts on drug prices with pharmaceutical companies. Being a kept a secret, the discount reaching the customers is not aware of.

3. Health insurance companies 

They approve treatment methodologies and settle prices with PBMs to maximize profits.

Pharmaceutical Industry Economics

Patent protection is one of the most critical factors that determine pharmaceutical industry economics. Drug production has high initial costs, as research is costly. However, in most cases, manufacturing does not take many resources. Therefore, without patents, other companies could start making your drugs inexpensively, making it difficult for the initial innovators. Hence, in such cases, patents give incentives to pharmaceutical companies to invest in R&D. Therefore, pharmaceutical pricing is based on the balance between patent-protected brands and generic drugs. Patent-protected brands have controlled manufacturing process. However, others manufacture generic drugs at a lower cost.

Several experts feel that the government should try to implement other methods rather than try price control. For instance, many people believe that promoting healthy competition among manufacturers and strictly regulating drug quality can all do more good for people here. Also, increasing the spending on healthcare and improving transparency by tackling misinformation can help India’s poor get the right access to drugs that can save their lives.

 

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