Pharma Sector – Drug Pricing, NPPA, FDC, Generics, etc.

Fund for pharmaceutical innovators


From UPSC perspective, the following things are important :

Prelims level : Drug patents

Mains level : Paper 3- Drug pricing issue

Pricing of the drugs in a contentious issue across the world. In some countries like the U.S. price of the drug at 100000%  of the production cost is not atypical. In India, prices are much lower. This article suggests the novel of Health Impact Fund which could strike the balance between affordability and R&D.

Medicines: Humanities greatest achievements

  • They have helped attain dramatic improvements in health and longevity as well as huge cost savings through reduced sick days and hospitalizations.
  • The global market for pharmaceuticals is currently worth ₹110 lakh crore annually, 1.7% of the gross world product (IPFPA 2017, 5).
  • Roughly 55% of this global pharmaceutical spending, ₹60 lakh crore, is for brand-name products, which are typically under patent.

Issue of high drug prices

  • Commercial pharmaceutical research and development (R&D) efforts are encouraged and rewarded through the earnings that innovators derive from sales of their branded products.
  • These earnings largely depend on the 20-year product patents they are entitled to obtain in WTO member states.
  • Such patents give them a temporary monopoly, enabling them to sell their new products without competition at a price far above manufacture and distribution costs, while still maintaining a substantial sales volume.
  • In the United States, thousandfold (100000%) markups over production costs are not atypical.
  • In India, the profit-maximising monopoly price of a new medicine is much lower, but similarly unaffordable for most citizens.

Covering large R&D costs: before we think about a solution

  • To be sure, before such huge markups can yield any profits, commercial pharmaceutical innovators must first cover their large R&D costs.
  • Currently, this cost is  ₹14 lakh crore a year (Mikulic 2020).
  • This includes the cost of clinical trials needed to demonstrate safety and efficacy, the cost of capital tied up during the long development process, and the cost of any research efforts that failed somewhere along the way.

Three concerns with R&D

1. Neglect of the diseases suffered by the poor

  • Innovators motivated by the prospect of large markups tend to neglect diseases suffered mainly by poor people, who cannot afford expensive medicines.
  • The 20 WHO-listed neglected tropical diseases together afflict over one billion people (WHO n.d.) but attract only 0.35% of the pharmaceutical industry’s R&D (IFPMA 2017, 15 and 21).
  • Merely 0.12% of this R&D spending is devoted to tuberculosis and malaria, which kill 1.7 million people each year.

2. High prices of new medicines

  • Thanks to a large number of affluent or well-insured patients, the profit-maximising price of a new medicine tends to be quite high.
  • Consequently, most people around the world cannot afford advanced medicines that are still under patent.
  • This is especially vexing because manufacturing costs are generally quite low.

3. Rewards are poorly correlated to the therapeutic value of drugs

  • Firms earn billions by developing duplicative drugs that add little to our pharmaceutical toolbox — and billions more by cleverly marketing their drugs for patients who won’t benefit.
  • These large R&D investments would be much better spent on developing new life-saving treatments for deadly diseases plaguing the world’s poor.

Health Impact Fund: Solution to the above problems

  • The Health Impact Fund as an alternative track on which pharmaceutical innovators may choose to be rewarded.
  • The basic idea behind it:
  • Any new medicine registered with the Health Impact Fund would have to be sold at or below the variable cost of manufacture and distribution.
  • But would earn ten annual reward payments based on the health gains achieved with it.

How health impact fund would work?

  • The Health Impact Fund could start with as little as ₹20000 crore per annum and might then attract some 10-12 medicines, with one entering and one exiting in a typical year.
  • Registered products would then earn some ₹17000-₹20000 crore, on average, during their first ten years.
  • Of course, some would earn more than others – by having greater therapeutic value or by benefiting more people.
  • Long-term funding for the Health Impact Fund might come from willing governments.
  • Those countries would contribute in proportion to their gross national incomes — or from an international tax, perhaps on greenhouse gas emissions or speculative financial transactions.
  • Non-contributing affluent countries would forgo the benefits: the pricing constraint on registered products would not apply to them.
  • This gives innovators more reason to register as they can still sell their product at high prices in some affluent countries and affluent countries reason to join.

The fund will have the following 5 major benefits

1. Help the Neglected areas of research

  • The Health Impact Fund would get pharmaceutical firms interested in certain R&D projects that are unprofitable under the current regime – especially ones expected to produce large health gains among mostly poor people.
  • With the Health Impact Fund in place, there can be more research on diseases like Tuberculosis or Malaria, even Covid.
  • We can develop rich arsenal of effective interventions and greater capacities for targeted responses quickly.

2. Rewarding health outcomes and not sales

  • The Health Impact Fund will focus on performance of drugs and not make it a marketing stunt.
  • Like in its model, firms would earn annual reward payments based on the health gains achieved with by the medicine.
  • Present scenario: firms seek to influence hospitals, insurers, doctors and patients to use their patented drug and to favour it over other more effective medicines.

3. Sustainable research and marketing system

  • A reward mechanism oriented towards health gains rather than high-markup sales would lead to a sustainable research-and-marketing system.
  • How? Simple for health gains, innovators will have to ensure:
  • They will have to think holistically about how their drug can work in the context of many other factors relevant to treatment outcomes.
  • They will need to think about therapies and diagnostics together, in order to identify and reach the patients who can benefit most.
  • They will need to monitor results in real time to recognize and address possible impediments to therapeutic success.
  • Finally, they will have need to ensure that patients have affordable access to the drug and are properly instructed and motivated to make optimal use of it with the drug still in prime condition.
  • Such a system would obviously make research more streamlined and sustainable.

4. No fear of compulsory licence clause

  • Participation of commercial pharmaceutical firms is crucial for tackling global pandemics.
  • At present such firms have issues with use of compulsory licences by governments as it divest them of their monopoly rewards.
  • Health Impact Fund registration would remove this risk as states would have no reason to interfere with innovators whose profit lies in giving real and rapid at-cost access to their new product to all who may need it.

5. Holistic approach

  • Multinational firms can collaborate with national health systems, international agencies and NGOs, to build a strong public-health strategy around its product.
  • The highest goal here would be complete eradication of many communicable diseases(Example: Malaria) which we are fighting right now.

Can we apply the above to Covid-19?

  • Applying it to a new disease like COVID-19 is complicated by the fact that we lack here a well-established baseline representing the harm the disease would have done in the absence of the new medicine to be assessed.
  • For malaria, such a baseline can be established on the basis of a stable disease trajectory observable over many years.
  • In the case of a new epidemic, one must rely on a modelling exercise that estimates the baseline trajectory on the basis of obtainable data about the spread of the disease and its impact on infected patients.
  • This surely is a challenging undertaking which cannot yield precise or uncontroversial results about what damage the epidemic would truly have done if the vaccine or medication in question had not appeared.

Consider the question “Drug pricing has always plagued the authorities and policymakers. Cap it and you tend to lose on innovation. Deregulate it, and high prices make it unaffordable. In light of this, examine the issues with the R&D in the pharmaceutical sector and suggest the ways to strike the balance between lives and innovation.”


The Health Impact Fund would give innovators the right incentives. It would guide them to ask not: how can we develop an effective product and then achieve high sales at high markups? But rather: how can we develop an effective product and then deploy it so as to help reduce the overall disease burden as effectively as possible?

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Hitesh Gupta
3 years ago

benefits of this initiative are quite complicated in terms of understanding…..if possible please elaborate them easily…

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3 years ago
Reply to  Hitesh Gupta

Hey Hitesh
Hope this new version helps!!


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