The Indian government is mulling plans to control the prices of life-saving, but highly expensive, patented drugs in a bid to make them affordable for the patients. The government is considering taking away patent rights of certain life-saving drugs and licensing them to domestic companies for manufacturing. While the move is at a preliminary stage, it could affect the pharmaceutical majors including Pfizer (NYSE:PFE), Merck (NYSE:MRK), Johnson & Johnson (NYSE:JNJ) and Abbott Labs (NYSE:ABT), which have been eying the emerging markets to offset the weakness in European and the U.S. markets.
India, with a population of 1.2 billion, has a huge patient base suffering from life-threatening diseases. However, the country’s per capita income is considerably lower compared to developed and other emerging countries. Furthermore, most of the people in the country pay directly from their pockets as opposed to insurance proceeds in the developed markets and, therefore, the market remains quite price-sensitive. While the government does subside medical costs for the poor, the country still doesn't have deep pockets to afford drugs that can cost as high as $5,000 a month at times. So the government is considering ways to cap the prices of certain life-saving drugs in order to make them affordable to a greater number of patients. While unclear at this stage, there could be reference pricing or a fixed-pricing system.
The news has fueled worries for the global pharmaceutical industry over the use of the country’s compulsory licensing provision. Recently, the government granted license to a domestic drug manufacturer Natco Pharmaceutical to make and sell Germany company Bayer’s patented cancer drug at nearly 1/30th of the price (from approximately $5,000 to $150 per month), in return for a 6% royalty on sales to the latter.
On the face of it, the move doesn’t seem to bode well for the pharmaceutical giants who try to recover their R&D costs by heavily charging for their patented products (sometimes at exorbitant prices). But we think it is more of a trade-off between volumes and margins. One should consider the potential of the market, which remains untapped due to affordability. We believe the additional revenues from new patients could easily make up for revenue losses from low prices. Lower prices will certainly result in lower margins even as volumes jump. But, on a absolute basis, profits may continue to grow and add to shareholder’s value.
Furthermore, by selling products at affordable prices, these companies can build goodwill over a period of time and be well-positioned to tap the growth potential in primary and generics market. The average income level in the country is catching up with the rest of the world. In addition, India’s spending on healthcare (as a percent of GDP) is considerably lower than most of its peers, and is likely to go up in the future. All these factors point to a rapidly growing market that pharmaceutical companies cannot afford to ignore.
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