Prescription for pharma MNCs: DPCO or EMR? - Views on News from Equitymaster

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Prescription for pharma MNCs: DPCO or EMR?

Apr 6, 2000

Two issues that have dominated and confused investorís perception about Multinational Pharma companies (MNCís) are DPCO (Drug Price Control Order) and EMR (Exclusive Marketing Rights). We view DPCO to be critical than issues related to EMR. The ground reality for MNCs operating in the country is that their pipelines (flow of products into India from international parents) are irrelevant, unless full patent protection is provided. Until then, their pipelines will consist of products, which their parent organizations are willing to launch at cutthroat prices, without worrying about patent protection.

As full patent protection is likely to come into effect only from 2005, the Government of India introduced an interim arrangement whereby MNCís were granted exclusive marketing rights (EMRís) till 2005 for products patented after January 1, 1995. Though the perception at the time when this facility was given was that MNCs could benefit immensely by this rule (the perception was that they could enjoy selling a product till 2005 without competition), the facts are otherwise.

The fact is that it takes anywhere between seven to eight years from the time a molecule is patented to the time it is introduced in the market as a drug. Hence even if a company had received a patent approval on January 1,1995 the actual product may come into the market only by 2003, hence the benefits of EMR would only be for 2 years. Alternatively if the approval was received in 1997 the product would come into the market by 2005 by which time full patent protection would any way be in force.

Hence most MNCs are unlikely to use the EMR facility to launch products in India as the cost of R&D is so high that the short period of EMR may not be enough to recover costs. It could take anywhere between US$350 to US$ 500 m (the entire annual turnover of the biggest Indian pharmaceutical company Ranbaxy) to conduct research and launch a new drug.

The more important problem for the sector is the Drug Price Control Order (DPCO). The DPCO was promulgated in 1970 and revised thrice thereafter in 1979, 1987 and 1995. It was originally introduced to check the supernormal profits reportedly being made in the industry; the social objective of ensuring availability of common drugs at reasonable prices was almost an afterthought. There has been many debates on whether to relax this order by reducing the number of drugs under its purview (they stand at 76 currently). Though no decision has yet been made on this issue, if any relaxation is given it could have substantial impact on the bottomline of MNCís. For instance Hoechst Marion Roussel sells one billion capsules of Avil (antibiotic) at 25 paise each. Even if the price were to be increased to Rs 1 it would add Rs 750 m to Hoechstís bottomline, almost four times its expected profits in the current year (Rs 200 m).

* - Drug Price Control Order

And with the relaxation of the DPCO unlikely in the short term, the health care environment for MNCs is unlikely to undergo a significant change in the near future, EMR or no EMRs. Hence to conclude, MNCís would continue to be regarded as DPCO plays irrespective of the quality of their parentís product portfolio.

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