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Does DPCO hurt innovation? - Views on News from Equitymaster
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  • May 22, 2001

    Does DPCO hurt innovation?

    The Drug pricing control order (DPCO) was introduced by the government in 1970 with an objective to make essential drugs affordable. Over the years, these controls coupled with consumer price sensitivity in the domestic pharma markets have become a dampener for new product innovations. The average cost of bringing one new medicine to the market is about US $ 500m and it takes an average of 12-15 years as per international standards to develop it. Quite obviously, companies recover such huge research expenses on future medicines from medicines currently in the market. However, due to the price controls companies cannot afford to allot funds for their research activities.

    Source: OPPI

    The DPCO thus in-effect has discouraged R&D spend in the country, providing a hurdle to precious innovation.

    The above chart shows a comparison of PBT (Profit before tax) margins vis--vis R&D spend of some leading international and domestic companies. It is evident that PBT margins of even the best Indian companies do not compare favourably with their international counterparts.

    Total R&D spend of Indian pharmaceutical industry for FY00 was approximately US$ 68m. As mentioned earlier development cost of a single drug costs anywhere around US$ 500m, which means that it would effectively take 7 years (at the current rate) for the Indian pharma industry to fund a single successful molecule.

    Besides most of the research expenses, which is incurred in India is for process engineering or reverse engineering. A company copies a molecule by arriving at it through a different process. As these would not be recognized post 2005 due to recognition of product patent, Indian companies have started hiking their R&D spends focusing towards research in Novel Drug Delivery System (NDDS) and genetic research. A modest beginning in the field of fundamental or basic research is also being done and a few of the vanguards have started reaping benefits for the same.

    In a nutshell increasing the research base of the Indian pharma industry is imperative as it is a key to its survival. Indian consumer has to accept the fact that the cost of a capsule is simply not the cost of the ingredients, which goes into it but also the intangible cost of years of hard work. The companies also have to recover the cost of R&D to fight future diseases. The knowledge required to discover and develop new medicine does not come cheap. Discovering, testing and gaining new drug approvals is expensive, time consuming and a risky proposition. Its high time for the Indian consumer to realize this.



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