Institute of Cost Accountants of India
WIRC Bulletin-April 2018

Pricing of a scheduled Medicine under DPCO 2013 by CMA Hetal Shah

 

The prices of bulk drugs and the formulations included in the Schedules categories are being fixed by the Government of India as per the Drugs (Prices Control) Order, issued from time to time under the provisions of section 3 of the Essential Commodities Act, 1955 (10 of 1955). In 1997, the Government felt that the prevailing mechanism for the fixation and revision of prices of bulk drugs and formulations is cumbersome, complicated and time consuming.

Therefore, to streamline and simplify the procedure and to bring about a greater degree of transparency as well as objectivity, Govt. has decided to establish an expert body with the powers, interalia, to fix prices and notify the changes therein, if any, of bulk drugs and formulations, from time to time, under the Drugs (Prices Control) Order. The Body of Expert is called as National Pharmaceutical Pricing Authority (NPPA).

 

The National Pharmaceutical Pricing Authority, consisting of a Chairperson in the status of the Secretary to the Government of India, Members having expertise in the field of Pharmaceuticals, Economics and Cost Accountancy and Member Secretary in the status of Joint Secretary / Additional Secretary to the Government of India, and the same is entrusted with the task of price fixation revision and other related matters such as updating the list of drugs under price control by inclusion and exclusion on the basis of the established criteria / guidelines.

 

The National Pharmaceutical Pricing Authority is empowered to take final decisions, which shall be subject to review by the Central Government as and when considered necessary.

 

The Authority shall also monitor the prices of decontrolled drugs and formulations and oversee the implementation of the provisions of the Drugs (Prices Control) Order.

 

The National Pharmaceutical Pricing Authority (NPPA) is mandated with the task of implementing the “DPCO”-Drugs (Prices Control) Order 2013, which aims at making available all essential and lifesaving medicines to all at affordable prices through the instrument of price control. Attentions of readers are drawn to the recent decision of NPPA making substantial price reduction of stent used for angioplasty and implants for knee replacement. Such action has reemphasized the importance of the NPPAs role in making medicine affordable.

Pricing under DPCO is a vast subject. However, we would restrict this article to the calculation of ceiling price of existing product and calculation of MRP based on ceiling price..

To start with, let us understand some of the terminology as stated in The Drugs (Prices Control) Order, 2013.

 

“Formulation” means a medicine processed out of or containing one or more drugs with or without use of any pharmaceutical aids, for internal or external use for or in the diagnosis, treatment, mitigation or prevention of disease and, but shall not include – (i) any medicine included in any bonafide Ayurvedic (including Sidha) or Unani (Tibb) systems of medicines; (ii) any medicine included in the Homeopathic system of medicine; and (iii) any substance to which the provisions of the Drugs and Cosmetics Act, 1940 (23 of 1940) do not apply.

Thus Ayurveda, Unani and Homeopathic system medicine are not covered under DPCO 2013.

 

NLEM – “National List of Essential Medicines” means National List of Essential Medicines, 2011 published by the Ministry of Health and Family Welfare as updated or revised from time to time and included in the first schedule of this order by the Government through a notification in the Official Gazette. There are around 850 medicines which are currently covered in the national list of essential medicine.

 

“scheduled formulation” means any formulation, included in the First Schedule whether referred to by generic versions or brand name (mainly products covered under National List of Essential Medicines are Scheduled Formulation). In other words, all medicines that are covered in National List of Essential Medicine, which are notified in Schedule 1, by the Govt are scheduled formulation.

 

“Ceiling Price” means a price fixed by the Government for Scheduled Formulations in accordance with the provisions of this Order. Ceiling Price is the Maximum Price to Retailer (excluding Taxes, if any)for the given product.

 

“Wholesale Price Index” means annual Wholesale Price Index (WPI) of all commodities as announced by the Department of Industrial Policy and Promotion, Government of India, from time to time.

Having understood some of the relevant terminology, let us understand the pricing and revision in pricing of existing schedule product.

 

First let us understand the Calculation of Ceiling Price of Existing product which is a scheduled product..

 

Calculation of the First Ceiling Price of a Scheduled Formulation: – (1) The ceiling price of a scheduled formulation of specified strengths and dosages as specified under the first schedule shall be calculated as under:

Step 1:

First the Average Price to Retailer of the scheduled formulation i.e. P(s) shall be calculated as below: Average Price to Retailer, P(s) = (Sum of prices to retailer of all the brands and generic versions of the medicine having market share more than or equal to one percent of the Total Market Turnover on the basis of moving annual turnover of that medicine) / (Total number of such brands and generic versions of the medicine having market share more than or equal to one percent of total market turnover on the basis of moving annual turnover for that medicine.)

 

Step 2:

Thereafter, the Ceiling Price of the scheduled formulation i.e. P(c) shall be calculated as below: P(c) = P(s) x (1+M/100), where P(s) = Average Price to Retailer for the same strength and dosage of the medicine as calculated in step 1 above. M = 16 % Notional Margin to retailer.

This 16% is being considered by NPPA for calculation or fixing up ceiling price, though manufacturer / marketer can offer higher margin, without affecting the notified ceiling price (before taxes).

 

In simple words, first Celling price of Schedule formulation (existing product) is simple average of prevailing Price to Retailer (PTR) in respect of all branded-generic and generic versions of that particular drug formulation having a market share of 1 percent and above, and then adding a notional retailer margin of 16 percent to it.

 

The market based data i.e. Price to Retailer, for fixing the Ceiling Price of Scheduled Formulations for the first time after the notification of this order, shall be the data of May, 2012.   Currently, NPPA uses the data provided by the AWACS for the purpose of calculating ceiling price.

 

Let us understand the above with practical example of one product.

It is important to note that in above example, Aciherpin cream price is not considered for calculative average price, market share being less than 1%. Also, important to note that for calculating ceiling price, price per common unit (1 gm in this example) is derived from price to retailer of the same product for the different pack.

 

Once the ceiling price is notified by NPPA, every manufacturer / marketer having price higher than ceiling price shall reduce its price to the level of ceiling price. At the same time, manufacturer/marketer

 

who is already selling the product at lower than ceiling price need to continue the same old price.

In above example, manufacturer of Herpex cream, Herperax Cream and Acivir Cream shall reduce the price to Rs. 7.66 + 16 % margin+ taxes per gram.  However, manufacturer of other brand in above table shall maintain existing prices.

From Ceiling price, MRP is to be calculated and charged. Interestingly, though NPPA consider 16 % notional retailer margin, industry normally gives 20 % margin to retailer. Under the scenario, industry realization is further reduced from the ceiling price. Let us understand the same with the above example assuming 5 gm pack of the product.

 

Now the obvious question is how long the ceiling price so fixed remains valid and when one can change price in normal situation.  The same shall be discussed in next article.

 

Disclaimer: Views expressed in this article is the personal view / opinion of the author.

 

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