' ;- " -r '',,1 ; ,.,. _~ -~ . i - . :. ! ;.ai, ; I it ~~~~~~~~~0_4 A~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ I I~~~~~~~~~~~~~~~~~~~~~~~~~~[ _- -,-,-f _. ...- - r 5 - , v~~~~~~~~2 X4 -3i-m ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ - -~~ . ~ ~ , -~~~ , - -~~~~ CIA) - 3f Recent World Bank Discussion Papers No. 351 From Universal Food Subsidies to a Self-Targeted Program: A Case Study in Tunisian Reform. Laura Tuck and Kathy Lindert No. 352 China's Urban Transport Development Strategy: Proceedings of a Sympostum in Beijing, November 8-10, 1995. Edited by Stephen Stares and Liu Zhi No. 353 Telecommunications Policiesfor Sub-Saharan Africa. Mohammad A. Mustafa, Bruce Laidlaw, and Mark Brand No. 354 Saving across the World: Puzzles and Policies. Klaus Schmidt-Hebbel and Luis Serven No. 355 Agriculture and German Reunification. Ulrich E. Koester and Karen M. Brooks No. 356 Evaluating Health Projects: Lessonsfrom the Literature. 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Garry Christensen and Richard Lacroix (Continued on the inside back cover) WORLD BANK DISCUSSION PAPER NO. 437 The Indian Pharmaceutical Sector Issues and Optionsfor Health Sector Reform Ramesh Govindaraj Gnanaraj Chellaraj The World Bank Washington, D.C. Copyright X 2002 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing September 2002 1 234040302 Discussion Papers present results of country analysis or research that are circulated to encourage discussion and comment within the development community. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. The World Bank encourages dissemination of its work and will normally grant permission promptly. Permission to photocopy items for internal or personal use, for the internal or personal use of specific clients, or for educational classroom use, is granted by the World Bank, provided that the appropriate fee is paid directly to Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, U.S.A., telephone 978-750-8400, fax 978-750-4470. Please contact the Copyright Clearance Center before photocopying items. For permission to reprint individual articles or chapters, please fax your request with complete information to the Republication Department, Copyright Clearance Center, fax 978-750-4470. All other queries on rights and licenses should be addressed to the World Bank at the address above or faxed to 202-522-2422. ISBN: 0-8213-5212-1 ISSN: 0259-210X Ramesh Govindaraj is a senior economist and advisor on pharmaceuticals for the World Bank's Africa Region. Gnanaraj Chellaraj is an economist in the World Bank's Office of the Chief Economist. Cover Photo: "Broken Pill." www.freeimages.co.uk. Library of Congress Cataloging-in-Publication Data has been applied for. Contents Page Abstract iv-x Preface xi Acknowledgments xii List of Abbreviations and Acronyms xiii I. Introduction 1 II. Review of Literature 2 III. Methodology 3 IV. Overview of the Indian Pharmaceutical Sector 4 V. Recent Initiatives: 1994-95 National Pharmaceuticals Policy 7 VI. Policy Outcomes 11 VII. Other Implications of the Recent Changes in Pharmaceuticals Policy 19 VIII. Key Health-Related Issues in the Pharmaceutical Sector 22 IX. Recommendations 32 Annex: Pharmaceutical Survey Questionnaire 38 Glossary 47 References 48 Abstract Sectoral Overview The Indian pharmaceutical market, which consists of almost 20,000 manufacturers, was valued in 1999 at US $ 7.2 billion, or only 1.1% of the global market. However, in volume terms, it ranks as the world's third largest market. The industry has been growing at over 10% annually for the last 10 years, which is well above the average industrial growth rate in India. The industry is a net major foreign exchange earner for the country. The exports in 1998 amounted to Rs. 54.19 billion (US$ 1.2 billion). India exports both bulk drugs and formulations. Initially, bulk drug exports were greater in value terms than the exports of formulations. Since 1995, however, more Indian firms have started moving up the value chain, and, as a result, the exports of finished formulations have overtaken the exports of the active bulk ingredients. Pharmaceutical policy in India is perceived as industrial policy rather than health policy. The formulation of pharmaceutical policy, therefore, has traditionally been the responsibility of the Department of Petrochemicals in the central Ministry of Chemicals and Fertilizers, with only limited input being provided by the Ministry of Health and the Bureau of Industrial Costs and Prices (BICP) of the Ministry of Industry. In India, the pharmaceutical sector is affected by a complex variety of laws and policy instruments. Not all of these regulations, however, form part of the National Drug Policies (NDPs) that have been promulgated from time to time by the Ministry of Petroleum and Chemicals. In addition to the national drug policies, the Drug Price Control Orders (DPCOs), the National Industrial Polices, the Foreign Exchange Regulation Act (FERA), and the Indian Patents Act (IPA) also have an impact on the pharmaceutical industry. Since 1947, the objectives of the Indian government regarding pharmaceuticals have remained the same: promotion of the domestic industry and ensuring adequate access to good quality drugs. However, the strategies and policy instruments used by the Indian government to achieve these objectives have changed radically in each of three phases: 1947-1969, 1970-1990 and 1991-present. The period between 1947 to 1969 was characterized by minimal government regulations, during which the multinational corporations (MNCs) dominated the sector. The second period, between 1970 and 1990 was a period of intense government regulatory oversight, with the MNCs being a particular target of the regulation. A number of public corporations also sprang up during this time. The 1990s, on the other hand, were a period that witnessed a substantial relaxation of government controls over the pharmaceutical industry. Recent Initiatives: 1994-95 National Pharmaceuticals Policy In 1994-95, the national drug policy was restructured to bring it in line with the liberalized industrial policy as well as the export import policy, both announced in 1991. The new drug policy, focused primarily on the industrial and trade dimensions of iv pharmaceuticals policy, was formulated with an intention to promote competition, liberalization, and the protection of intellectual property. In the 1994-95 NDP, the functions of the Ministries involved in the pharmaceutical sector were redefined. Price controls were significantly scaled back. MNCs were provided substantial concessions in equity ownership, in the production and licensing of drugs, in drug imports and exports, and in the profit margins that firms could retain. A product patents-based intellectual property (IPR) regime (instead of a process patent regime) was also promulgated, which will come into force in 2006, as a direct outcome of India's signing the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement. However, no new health-oriented measures to promote the availability, affordability, quality, and rational use of drugs were outlined in the new drug policy. Very significantly, an initial proposal to set up an independent National Drug Control Agency to monitor and control pharmaceutical quality assurance was ultimately given up. Nor did the new drug policy outline any strategies to improve compliance with existing laws and regulations, of which there are many. Policy Implications and Outcomes The Indian government's pharmaceutical policy changes have had a significant positive impact on investment, production, profitability, and international trade. The prices of drugs also increased marginally after the implementation of the in the 1994-95 NDP. As a result, the Indian pharmaceutical industry and the MNCs have prospered. The new patent regime presents both significant challenges, as well as opportunities, for the Indian pharmaceutical sector. As outlined in this report, the extent to which India can benefit from the opportunities and successfully face the challenges of the new patent regime will depend critically on the combined responses of the government and the Indian pharmaceutical companies. However, not surprisingly, the 1994-95 pharmaceuticals policy has not resulted in significant improvements in the health sector. Key Health-Related Issues in the Pharmaceutical Sector The results of a survey of three states (Karnataka, Tamil Nadu and Uttar Pradesh), and the other assessments undertaken as a part of this study, indicate considerable variation across states in the availability, affordability, and the quality of drugs in both the public and private sector. Furthermore, the rational use of drugs remains much neglected in virtually all the States. Most of the variations among the states are attributable to differences in the quality of human resources and institutions, with differences in socioeconomic development and political stability also contributing. The results - organized under the headings of availability, affordability, quality and rational use of drugs -- are detailed in this report. Our broad conclusion is that, despite the impressive growth in the Indian pharmaceutical industry over the last 25-30 years described above, problems with the availability, affordability, and rational use of good quality, cost-effective, essential drugs have v persisted in most parts of India, and that these health-related issues need be addressed as a priority. Our recommendations, again organized under the headings of availability, affordability, quality, and rational use of drugs, follow. Recommendations An overarching recommendation is the need to focus on strengthening the implementation and regulation of the pharmaceutical sector at the state-level, rather than on simply introducing new regulations. Adequate pharmaceutical quality assurance needs to be particularly emphasized as, in its absence, other reform measures could be rendered moot. Similarly, the rational use of drugs needs to be emphasized as it is likely to yield significant cost savings to the government and to consumers, in addition to its positive impact on health. The specific recommendations are as follows: Drug Availability * Effective procurement systems should be established in all the states, and drug selection and procurement should be geared to the population size and the epidemiological profiles of each state. States could also learn from each other the best practice in drug selection, procurement, and quality assurance. * States also need to improve their systems for the management of drug supplies. Storage and distribution of drugs should be improved in states such as UP, along with the stock position in remote areas of all states. Involvement of the private sector in drug distribution through effective contracting arrangements would significantly ease the burden on the public sector. Priority should be given to training practitioners and pharmacists, and providing them incentives to work in rural and remote areas. * Emphasis should be given to distributing only good quality generic drugs (as opposed to brand name drugs) through the public outlets, as they are usually cheaper and more cost-effective. In the private sector, too, incentives can be provided to dispensers to encourage the greater use of generics, including generic substitution if drug quality can be assured. Drug Affordability * Improvements in the budgetary procedures at state-level, such as allowing switching of funds between various budget heads, would alleviate the problem of low per capita consumption through the public sector. * 'Access to good quality drugs would be improved by targeting mechanisms that ensure that the poor are not left without a safety net. * In the longer-run, in order to ensure the sustainable financing of pharmaceuticals, consideration will need to be given to the creation of pooling mechanisms through the establishment of social insurance programs, most likely at the state level. vi * The NPPA should collaborate with the states to develop databases to regularly track the prices of key drugs in both the tender and open markets. Price controls may also be warranted on a very selective basis for certain drugs. The lowering of duties and removal of quantitative restrictions should also lead to a reduction in the prices of generic drugs. * The adverse effects of price increases resulting from the implementation of WTO norms could be alleviated by effectively implementing guidelines for the rational use of drugs, and not prescribing newly introduced drugs unless they offer significant therapeutic advantages, are cost-effective, and are affordable. Secondly, specific targeting programs for ensuring access to essential drugs by the poor could be developed. Thirdly, the government could negotiate with pharmaceutical companies to purchase new drugs considered essential in bulk for the public sector, thereby reducing their cost. In general, there is a need to develop better purchasing and reimbursement systems for pharmaceuticals, using cost-effectiveness and other pharmaco-economic criteria. Dru2! Oualitv * Priority should be given to setting up an independent national drugs control agency in India -- along the lines of the USFDA -- that would ensure uniform drug quality across all states, by working in collaboration with the quality enforcement agencies at the state- level. * Drug quality control agencies in all the states need to be strengthened, so that there is uniformity in drug quality assurance and control. The establishment of independent agencies for drug control should be seriously considered, as such agencies (e.g., in Maharashtra) seem to be better equipped for the enforcement of pharmaceutical quality assurance than departments based within Ministries of Health. . Enforcement of quality assurance and control regulations can be strengthened by giving priority to the maintenance of appropriate records on inspections, testing, collection of samples, violations and penal sanctions. In the private sector, it is critical that all states develop, implement, and monitor policies for quality assurance and control. The government policy of supporting small-scale pharmaceutical manufacturers needs to be reviewed in the light of evidence that these firms (along with firms in the informal sector) present substantial problems with regard to their viability, manufacturing efficiencies, and quality assurance, and also create a bad reputation for all Indian products. * Priority should be given to increasing the number of quality enforcement officials through new recruitment and training in states with personnel shortage. This could include national-level inspectors who are deployed at state-level. In order to improve the efficiency of quality enforcement, appropriate incentives and specialized training on functional and general themes should be provided to quality control officials. The services of private sector and university laboratories could also be utilized for quality vii testing, through contractual arrangements, provided effective mechanisms are put in place to regulate these labs. * Measures for revenue generation for quality enforcement, with retention of the revenues by the regulatory agency, should be devised to make the system self-sustaining. Consideration should be given to levying user charges on both public and private firms to support quality assurance. This measure is likely to find support among the large and medium sized firms, many of whom are also interested in ensuring that only good quality are produced in India, whether for domestic consumption or for export. * Quality assurance can be improved if public sector procurement is restricted to firms complying with GMP according to the WHO certification scheme (and the validity of the GMP verification at state level can be ensured). Similarly, all exports should be limited to drugs meeting GMP standards. This would improve the overall reputation of Indian supplied drugs and also protect developing countries with inadequate quality assurance systems from being exposed to poor quality drugs. The extent of coordination between the procurement agencies and the drug quality control departments should be increased. The state government should also monitor the quality of the drugs sold through both public and private outlets, in order to ensure that the drugs meet appropriate quality control standards. * Post-marketing surveillance should be emphasized and inforrnation on adverse drug reactions should be gathered. The sampling system could be improved by taking routine samples, in addition to sampling based only on complaints. The information on the test results (both positive and negative) should be made widely available to regulators from other states and (in an appropriate form) to the public. A quality assurance system for state QC laboratories is also highly desirable. Thus, for example, standard specimens could be sent for assay and results from all state QC laboratories compared to ensure uniformity in standards and processes. Rational Use of Drugs * Standardized Treatment Guidelines (STGs), to be followed by both the public and private sector, must be established in each state. Clear guidelines on self-medication, prescription, and dispensing should be established and enforced in the public sector. Similar measures may be feasible in the private sector by ensuring the close involvement of relevant professional bodies. * The National Essential Drug List (EDL) needs to be evidence-based, and then energetically implemented in every state within the framework of a comprehensive essential drug policy and the concept of "essential drugs" impressed upon the district and peripheral levels by the state governments. The private sector should also be included in this process. Emphasis must, however, be paid to improving the quality of care instead of just focusing on cost reduction. * Drug utilization studies, documenting prescription, dispensing, and consumption viii patterns, should be conducted, with periodic follow-up to enable monitoring and evaluation of reform interventions. Based on the results of these studies, hospitals and other health facilities should be required to establish representative Pharmacy and Therapeutics Committees with defined responsibilities and promoting quality use of medicines. This would assist in setting both policy direction and institutional support. * Appropriate curricula should be developed in medical, nursing, and pharmacy schools to promote the rational use of medicines. There is also a need to implement problem- based medical and paramedical education based on national STGs. This education should be linked to both national STGs and essential drugs list. Effective continuing education programs should be established for disseminating information on essential drugs and the rational use of drugs to physicians practicing in the public and private sector. * There is a need to train pharmacists and drug sellers to be active members of the health care team and to offer useful advice to consumers about health and drugs. This could be attained through upgrading skills of drugs sellers, including their dispensing and prescribing practices. Targeted training of local drug vendors could also be considered. * Consumer organizations should be actively engaged in public education about drugs, and government resources should support these efforts. Advertising should be regulated and statements regarding risks and potential adverse effects should also be highlighted. Public education on impact and uses of drugs should be emphasized. 0 A strategic approach to improve prescribing in the private sector should be developed through appropriate regulations. To this end, the following strategies should be considered: licensing of practitioners and premises used by governments to regulate the public sector; punitive sanctions combined with positive efforts to improve performance; and a strong emphasis on continuing education programs. The proposed recommendations may be prioritized and scheduled as detailed in the matrix below. ix Prioritization and Scheduling of Proposed Reform Recommendations Recommendation Priority (I=High; Short Long Likely Political Resistance 2=Medium; 3=Low) Term Term (I=High; 2=Medium; 3=Low) DrgAvailability 1. Effective procurement systems based on best practice I X 3 2. Improved drug supply & logistics management I X 3 3. Greater generics use in public and private sector I (public); 2 (private) X 3 (public); I (private) Overall 2 Drug Affordability 1. Increased budgets/Switching between budget heads I X 2 2. Public sector targeting of poor I X 2 3. Establishing social insurance 2_ X 4. Tracking prices with lower duties and quantitative restrictions I X 3 5. Policies to address implications of WTO norms I X 2 Overall 2 Drug Quality - I. Creation of National Drug Control Agency I X 2 2. Creation of independent state drug control agencies with uniform 1 X I QA standards 3. Better State enforcement of existing QA regulations 1+ (Vital) X 3 4. Recruitment/training of QA personnel & contracting out I+ (Vital) X 3/2 5. Revenue generation for QA I X 2 6. Regulating supplier quality & monitoring QA standards I X 2 7. Post marketing surveillance & periodic drug sampling I X 3 Overall 1 Rational Use of Drugs 1. Essential Drug Lists (EDL) and generics policy I+ (Vital) X 2 2. Guidelines for prescription, dispensing, and use 1+ (Vital) X 3 3. Drug utilization studies X 2 4. RUD in medical, nursing, and pharmacy curricula and continuing I X 3 education programs Overall 1 Preface James D. Wolfensohn, President of the World Bank, has been a tireless advocate for the institution's mandate ".... to fight poverty with passion and professionalism for lasting results". Recognizing that the economic well-being of a nation depends critically on the health of its population, and particularly the health of the poor and the vulnerable, he has emphasized the timely provision of good quality essential drugs to those in need as a crucial component of this mandate. However, access by the poorest communities to essential medicines at the right time, the right place, and the right price remains an enormous challenge for most low- and many middle-income countries, and India is no exception. Furthermore, as highlighted in this report, as one of the largest producers of pharmaceuticals in the developing world, pharmaceutical policy in India often has to tread a fine line between addressing the nation's industrial sector and health sector priorities. This report on the pharmaceutical sector in India provides a systematic description and analysis of the profound gap that exists between the benefit that pharmaceuticals have to offer, and the reality that for millions of poor people in India medicines are still unaffordable, unsafe, and improperly used. It then outlines several strategic options that could strengthen India's ability to ensure the availability, affordability, quality and rational use of essential medicines on a sustainable basis, using an appropriate mix of public and private sector resources. Overall, the report represents an important and useful contribution to the literature on the role of pharmaceutical policy in delivering equitable, efficient, and high quality health care services to poor people in developing countries. Charles C. Griffin Anabela Abreu Sector Director Sector Manager, South Asia Human Development South Asia Health Nutrition & Population The World Bank The World Bank xi Acknowledgments This paper reports on one of a series of studies undertaken as part of the World Bank's HNP sector work on India, summarized in a report entitled "Better Health Systems for India's Poor" (World Bank, 2002). The contributions to this paper of Jillian Cohen, G.N.V. Ramana, and Ngan Le are gratefully acknowledged. Valuable inputs were provided by the research teams from the Administrative Staff College of India (ASCI) led by B. Bowonder; from the Institute of Human Behaviour and Allied Sciences (IHBAS) led by J.S. Bapna; from Banaras Hindu University (BHU) led by D.C.S. Reddy; from Kilpauk Medical College (KMC) led by R. Murali; and from JSS College of Pharmacy (JSSCP) led by B.G. Nagavi. Richard Skolnik, in his capacity as Director, South Asia, Human Development, and Tawhid Nawaz, India Team Leader, supported the study and worked closely with the team to bring the paper to publication. Support and useful comments were also provided by Emmanuel Jimenez, in his capacity as Acting Director, South Asia, Human Development, by Hugo Diaz-Etchevehere, the then Acting HNP Sector Manager, by Anabela Abreu, the current Sector Manager, and by Charles Griffin, the current Director, South Asia, Human Development. Thanks are also due to David Peters, the Team Leader for the India HNP Sector Work, for his enthusiastic support of this study and helpful comments. Finally, the authors would like to acknowledge the valuable feedback provided by the two formal reviewers of the study: Mukesh Chawla (ECSHD) and Richard Laing (Boston University), and by participants in a seminar on the topic presented at the World Bank. xii List of Abbreviations and Acronyms ARVs Anti Retroviral drugs (used in cases of HIV/AIDS) BDMA Bulk Drug Manufacturers Association BICP Bureau of Industrial Costs and Prices CSIR Council of Scientific and Industrial Research DCGI Drugs Controller General of India DPCO Drug Price Control Order EDL Essential Drug List EDP Essential Drugs Policy FERA Foreign Exchange Regulations Act GMP Good Manufacturing Practices HNP Health, Nutrition and Population IDMA Indian Drug Manufacturers Association INN International Nonproprietary Nomenclature IP Indian Pharmacopeia IPA Indian Patents Act IPR Intellectual Property Rights MNC Multinational Corporation MOHFW Ministry of Health and Family Welfare NBER National Bureau of Economic Research NDP National Drug Policy NPPA National Pharmaceuticals Pricing Authority OPPI Organization of Pharmaceutical Producers of India QA/QC Quality Assurance/Quality Control RUD Rational Use of Drugs R&D Research and Development STG Standardized Treatment Guidelines TRIPS Trade Related Aspects of Intellectual Property Rights TNC Trans-National Companies USP United States Pharmacopeia WHO World Health Organization WTO World Trade Organization xiii I. Introduction The production and distribution of pharmaceuticals' have become increasingly important issues in efforts by developing countries to reform their health sector. In many developing countries, the high prices of pharmaceuticals - particularly for the newer formulations - make them unaffordable to the poor and even to some middle class households. At the same time, pharmaceutical quality in many developing countries is compromised due to the failure of the authorities to effectively implement regulations, thereby endangering the health of the population. The irrational use of drugs further aggravates the situation. Recently, the Trade Related Intellectual Property Rights treaty (TRIPS) has set out the minimum standards for developing countries in relation to intellectual property protection for pharmaceuticals (Watal, 2002, 2001; Maskus, 2000, 2001; Subramanian and Watal, 2000). TRIPS allows the patenting of pharmaceuticals for twenty years from the date of filing; does not permit patent discrimination for imported products; grants exclusive marketing rights until patent expiry; and allows a one-year transitional period, which can be extended to ten years, for developing countries without previous product patent protection.2 In addition, countries must have transparent and judicial-based methods for the aggrieved parties to complain about violations of their patents, and countries must commit resources to enforcement (Phillips and Kerr, 2002). If copyrights of firms in a county are being infringed, it can bring a case to the WTO disputes mechanisms, and, if it wins the case, would be allowed to impose trade sanctions on the imports of the country in violation. These regulations could result in sharp increases in the prices of some pharmaceuticals in developing countries, further compromising drug affordability (Glasgow, 2001). On the other hand, IPR protection also presents opportunities (Maskus and Lahouel, 2000; Maskus, 1998). A recent study indicates that a tight IPR regime could result in increased innovation and a greater focus by both Indian and multinational companies on the diseases relevant to India (Lanjouw and Cockburn, 2001). A detailed assessment of the pharmaceutical sector in developing countries, therefore, is an essential input into the formulation of viable policies to simultaneously promote pharmaceutical competitiveness, and mitigate the impact of rising drug prices while ensuring quality assurance. Hence, this assessment of the Indian pharmaceutical sector was commissioned as a sub-component of a World Bank Health Nutrition & Population (HNP) sector study. The focus of this paper is on four key issues related to the production, procurement, and distribution of drugs in India: a) Availability b) Affordability, particularly to the poor c) Quality and d) the Rational use of drugs. 'For the purposes of this paper, "pharmaceuticals" both medicinal drugs and vaccines. We use the word pharmaceuticals interchangeably with drugs in this paper. 2 Heinz Redwood "Brazil: The Future Impact of Pharmaceutical Patents." Oldwicks Press, Suffolk, England, 1995. II. Review of Literature A number of pharmaceutical sector studies have focused on the drug industry in industrialized countries, such as in the Netherlands (Canton and Westerhout, 1999), United States (Nicholson et al., 2002; Berndt et al., 2001; Ellison and Snyder, 2001; Ellison and Ellison, 2000; Ellison and Wolfram 2000; Zucker et al., 1998; Grabowski and Vernon, 2000; Morton, 2000), Canada (Steele, 1994), and the United Kingdom (Towse, 1996), European Union (Matraves, 1999), OECD (Kyle, 2001; Finkelstein, 2002; Berndt et al., 2000) and at the global level (Achilladelis and Antonakis, 2001). Global drug quality harmonization has been emphasized in many of these studies (Vogel, 1998). Similar studies have been undertaken in developing countries, such as in India (Visalakshi, 2001; Ramani, 2001; Sharma and Hotchkiss, 2001; Lanjouw and Cockburn, 2001; Watal, 2000a; Fink, 2000; ASCI, 2000a,b; Sahu, 1999; Sikka, 1998; Katrak, 1998; Rao, 1997; Dineshkumar et al., 1995; Sen Gupta, 1986; Narayana, 1984; Johri, 1983; Gothoskar, 1983), Turkey (Kirim, 1986; Kirim, 1985), Hungary (Felker et al., 1997), Honduras, 2000; Mexico (Wionczek, 1983), Malaysia (Tidd and Brocklehurst, 1999), China (La Croix and Conan, 2002; Chengsi, 1998; White and Liu, 1998), and developing countries in general (Islam, 2001). More recent studies (Ramani, 2002; Ramani et al., 2001; Ramani and Venkataramani, 2001a, b) indicate that the participation in the bio- pharmaceutical revolution is limited to a small fraction of local firms. It is mostly the small and medium sized firms in the formal sector that undertake research, while larger firms serve essentially as partners for multinationals. Patents and publications play an insignificant role as strategic tools for creating value or market signaling, and R&D collaboration with local agents (firms or universities) have a marginal impact on the creation of innovations. Most of the collaboration of the larger Indian pharmaceutical corporations is with western firms. The lack of cooperation among Indian firms and the low impact of public research laboratories and universities on the market sales or research strategies of Indian firms are a matter of concern. In many countries, such collaboration has resulted in significant success in the pharmaceutical and other industries (Amsden and Tschang, Forthcoming; Battagion and Bussoli, 2000; Chellaraj and Maskus, Forthcoming; Feller et al., 2002; McKelvey et al., 2002; Schartinger et al., 2002; Walcott, 2001), and India could benefit by following their example (Mansfield, 1996). Furthermore, organizational structures, with appropriate incentives that are conducive to the success of R&D initiatives needs to be emphasized (Tapon and Cadsby, 1994). Only a few studies have focused specifically on the impact of pharmaceutical sector polices, including intellectual property (IPR) related issues. Surveys have been carried out in developed and selected developing countries on the relevance of pharmaceutical policies for the health sector in general, and health care for the poor in particular. These include studies in Iceland (Alamarsdottir et al., 2000), Italy (Coscelli, 2000), Laos (Stenson, 2001), Vietnam (Okumura et al., 2002), Laos (Stenson et al, 2001), Nepal (Holloway et al., 2002), Pakistan (Siddiqi et al., 2002), and Zimbabwe (Trap et al., 2002) In addition, some studies have been conducted in developing and transition economies (IHBAS, 1996; Nogues, 1993). Two recent studies on the rational use of drugs (RUD) (Homedes and Ugalde, 2001; Laing et al., 2001) find that the issue remains a low priority 2 in developing countries, and, as a result, expensive and state-of-the-art drugs are frequently prescribed, increasing health care costs. The authors argue that there is an urgent need to design interventions to modify the behavior of everyone involved in the pharmaceutical supply chain (producers, providers, retailers, consumers and governments) in order to reduce over-prescribing and the inappropriate drug use, and rationalize health expenditures. The health policy and child survival literature that specifically analyzed the potential adverse impact of the TRIPS agreement on the health of vulnerable populations in poor countries generally recommended curbs on TRIPS (e.g. Vandemootele, 2000) without necessarily exploring other viable alternatives. While this critical issue was not addressed by the 2000 World Health Report, it has received widespread attention in the recent literature on international trade (Hoekman et al. 2002), although few policies based on the proposed options have been implemented by countries. A proposal by Ganslandt et al. (2001) known as DEFEND was a major attempt to provide solutions to the complicated problems of IPR in pharmaceutical research and development. This proposal is intended to work within the existing international legal structure, but significantly raise the returns to R&D for firms producing critical medicines while also expanding distribution programs, particularly for the poor. According to this proposal, a public international organization would buy the license rights for designated areas and distribute the drugs at low cost with a required co-payment from the local governments, while governments would support price discrimination by restricting parallel trade. Maskus (2001) has analyzed the legal issues of IPRs and their global economic implications (Reichman, 2001) while emphasizing technology transfer commitments, an international competition agreement to make certain that IPRs are not used as an anti-competitive tool, and an international vaccine fund to address the diseases of poverty. Several other proposals have also been made in recent years (Artuso, 2002; Maskus, 2002; Romer, 2002; Park, 2002; Saggi, 2002; Subramanian, 2002; Chen and Puttitanun, 2002; Dumoulin, 2001; Craft and Simpson, 2001; Kongolo, 2001; Markusen, 2001; Watal, 2000b; Dutfield, 2000, 2002; Kate and Laird, 2000; Moran, 2000; Braaga et al., 2000; Rausser, 2000; Swanson and Goschl, 2000; Janssen, 1999; Mazzoleni and Nelson, 1998; Gorina-Ysern, 1998; Scott, 1998; Bhat, 1996; Simpson et al., 1996; Barbier and Aylward, 1996; Hurlbut, 1994; Sedjo, 1992; Field, 1991). III. Methodology This assessment for India was undertaken using a multi-pronged strategy. Personal interviews, record verification, and a review of literature were undertaken to assess and document the pharmaceutical policy formulation in India. This included a description of: * The legislative and policy framework for pharmaceuticals, including identification of the existing laws, policies, standards, and regulations and the enforcement mechanisms at the central and state levels, focusing particularly on programs targeted towards the poorer sections of the population, involvement of the private sector, and quality assurance; and * The institutional framework of the pharmaceutical sector, including the current roles 3 and responsibilities of, and interactions between, public, private and "third" sector agencies involved at various levels of the pharmaceutical "value chain" as well as central and state governments. The economics of the pharmaceutical sector, including financing, pricing, and patent issues are also considered in this section. Primary data on implementation of pharmaceutical policy were collected through surveys of a stratified sample of 20 private drug outlets and 20 public sector health facilities (2 each from the capital city and 6 each from three randomly selected districts) in Kamataka (JSSCP, 2000), Tamil Nadu (KMC, 2000), and Uttar Pradesh (BHU, 2000). In addition, 7 remote facilities were selected from each district to study the availability of drugs at these locations. The surveys used a standardized survey instrument (see Annex) developed by the World Health Organization (WHO). The WHO indicators are classified as general background indicators, structural indicators, process indicators, and outcome indicators. A survey was also carried out at the level of the central government in order to examine the center-state relationship in the pharmaceutical sector (IHBAS, 2000). Both primary and secondary data sources were used to evaluate the pharmaceutical market and the industrial policy for pharmaceuticals. Assessments were made of the public and private pharmaceutical market in India (Govindaraj, 1997), broad trends in the pharmaceutical industry (ASCI, 2000a), including in local production, R&D, and imports and exports of bulk drugs and finished products, and pharmaceuticals procurement and quality assurance (ASCI, 2000b) at the state-level. The rest of the paper is organized as follows: Section IV provides an overview of the pharmaceutical sector in India. Section V provides the details of the latest National Drugs Policy (NDP) formulated in 1994-95. Section VI presents the outcomes of the 1994-95 NDP. Section VII outlines other implications of the NDP. Section VIII describes the key health related issues in the pharmaceutical sector, and Section IX presents recommendations on how these issues may be addressed. IV. Overview of the Indian Pharmaceutical Sector Global pharmaceutical sales were estimated by IMS to be around US$ 330 billion in 1998. The global pharmaceutical market is growing at about 8% per annum. It is estimated to grow to around US$ 406 billion by the year 2002, with the developed countries accounting for 80 percent of the market (Table 1). 4 Table 1: Global Pharmaceutical Market Country 2002 Projected Market Size Projected Growth (%) (Billion US $) 1998-2000 America 169.5 9.8 Europe 100.8 5.8 Japan 45.8 4.9 Latin America 30.5 8.4 SE Asia & China 20.1 11.0 Middle East 10.6 10.6 E. Europe 7.6 8.6 Indian Subcontinent* 7.3 8.6 Australia 5.4 9.8 Africa 5.3 3.3 CIS 3.2 6.7 Average growth rate _ 8.0 Source: IMS, 2001. *Inclusive of all countries in the Indian sub-continent. The Indian pharmaceutical market, which consists of almost 20,000 manufacturers, was valued in 1999 at US $ 7.2 billion, or 1.1% of the global market. However, in volume terms, it ranks as the world's third largest market. The industry has been growing at over 10% annually for the last 10 years, which is well above the average industrial growth rate in India. The industry is a net major foreign exchange earner for the country. The exports in 1998 amounted to Rs.54.19 billion. India exports both bulk drugs and formulations. Initially, bulk drug exports were greater in value terms than the exports of formulations. Since 1995, more Indian firms started to move up the value chain, and, as a result, the exports of finished formulations have overtaken the exports of active bulk ingredients. Pharmaceuticals are a large and growing component of the health care expenditures in India, with the majority of pharmaceutical services being provided in the private sector and involving out-of-pocket payments. Pharmaceutical policy in India is perceived primarily as industrial policy rather than health policy. The formulation of the NDP, therefore, has traditionally been the responsibility of the Department of Petrochemicals in the central Ministry of Chemicals and Fertilizers, with only limited input being provided by the Ministry of Health and the Bureau of Industrial Costs and Prices (BICP) of the Ministry of Industry. In India, the pharmaceutical sector is affected by a complex variety of laws and policy instruments (Mathur, 1990). Not all of these regulations, however, form part of the NDPs that have been promulgated from time to time (e.g., in 1978, 1994, etc.) by the Ministry of Petroleum and Chemicals. In addition to the national drug policies, the Drug Price Control Orders (DPCOs), the National Industrial Policies (issued periodically), the Foreign Exchange Regulation Act (FERA), and the Indian Patents Act (IPA) also have an impact on the pharmnaceutical industry. There has been virtually no change in the overall objectives of the Indian government in the pharmaceutical sector from 1947 to the present. The two main objectives of the Indian government have been to ensure the availability of reasonably priced high quality drugs, 5 and to promote the growth and development of a vibrant domestic drug industry (Mathur, 1990; Ministry of Petroleum - personal communication). However, although the government has professed both objectives to be equally important, evidence indicates that the policy emphasis has always been greater on the development of the domestic drug industry (Gaur, 1981; Johri, 1983; Narayana, 1984; Ekbal, 1988; Bidwai, 1995). In contrast to its overall sectoral objectives, the strategies and policy instruments used by the Indian government to achieve these objectives have changed radically in each of three distinct phases in India's pharmaceutical policies over the years (Table 2). These three phases also correspond with concomitant changes in the structure of the Indian domestic pharmaceutical industry (Johri, 1983; Bidwai, 1995). Between 1947 and 1969, there were only a small number of Indian manufacturers (about 2000 units at the end of 1969), most of them in the private sector, many with capacities only to produce a limited number of formulations, and all dependent on multinational companies for transfer of drug technology (Narayana, 1984). Between 1970 and 1990, there was a substantial increase in the number of domestic firms, primarily in the private sector, but also in the public sector (about 16000 units in 1990). Along with an increase in numbers, several producers grew rapidly in size, and many of them developed the capacity to manufacture bulk drugs, using alternative production processes developed in-house (Narayana, 1984, Bidwai, 1995). Finally, since 1990, while the numbers of Indian firms has risen only slightly, many companies have expanded in size. Direct employment in the industry is about 250,000 and ancillary industries employ another 750,000 (Felker et al., 1997). The overall sales turnover of the domestic industry has also increased rapidly. About 8-10 large Table 2: Sum ary of Government Policy Strategies in Three Phases of Study Phase Government Policy Strategies 1947-1969 1. Reliance of Indian government on a voluntary transfer of technology and drug know-how by pharmaceutical multinational companies (MNCs). 2. Minimal regulation of drug industry by Indian govermnent. Non-interventionist approach towards regulating property rights, as well as the manufacture, importation, and sale of drugs by MNCs in the Indian market. 1970-1990 1. Imposition of various restrictive regulatory controls on MNCs. 2. Protection and subsidization of the domestic drug industry. 3. Strictly enforced system of drug price-control. 4. Change from product patent to process patent regime. 1990s 1. Emphasis on market competition rather than regulatory control to achieve policy goals. 2. Liberalization of pharmaceutical sector. 3. Change from process patent regime back to product patent regime. Source: Adapted from Govindaraj, 1997 Private Indian firms have also been able to develop new drug molecules through local R&D, and have filed for product patents with the US FDA and regulatory authorities in the EU (Bidwai, 1995). In addition, some of these large Indian firms (e.g., Ranbaxy, Dr. Reddy's Laboratories) have become multinationals in their own right (Bidwai, 1995). 6 V. Recent Initiatives: 1994-95 National Pharmaceuticals Policy In 1994, the Indian government revised its National Drug Policy "in order to correct the anomalies observed in the working of the existing drug policy". The government also announced that it wanted to re-structure the drug policy to bring it in consonance with the liberalized national industrial policy, announced in 1991. Further, the Indian government declared that it wished to harmonize the drug policy with the liberalized export-import (EXIM) policy, also announced in 1991 (Ministry of Petroleum: Annual Report, 1995). In the 1994-95 NDP, the functions of the Ministries involved in the pharmaceutical sector were redefined. The Ministry of Chemicals and Fertilizers is now responsible for regulating the pharmaceutical industry. The Drugs Controller General of India (DCGI) and the Ministry of Health and Family Welfare (MOHFW) are responsible for overseeing drug quality and standards in both the public and private sectors, and for maintaining the national Essential Drugs List (EDL). A newly created entity called the National Pharmaceutical Pricing Agency (NPPA) is now responsible for administering the various aspects of licensing and price control. An inter-ministerial committee consisting of the representatives from the Ministries of Chemicals, Health, and the NPPA has been established to ensure proper coordination among these ministries. In practice, however, most of the attention still seems to be on the industrial aspects of the sector, with relatively little attention paid to its health dimension. Furthermore, while formulation of pharmaceutical polices is a central government responsibility, their implementation falls mainly within the purview of individual state governments. According to an official statement of the government, the main objectives of the 1994-95 drug policy were "to create conditions for the adequate availability of medicines of good quality at reasonable prices, and to ensure the continued growth of the drug industry" (Ministry of Petroleum, 1994). While these objectives were exactly the same as in previous policies, the policy strategies (and instruments) that were proposed for achieving these goals were radically altered. The 1994-95 policy, in stark contrast to earlier policies, was premised on competition (instead of controls), liberalization (instead of regulation), and a product patent regime (instead of a system of process patents). These regulatory changes in the Indian pharmaceutical policies in the 1990s are summarized below as four policy instruments: a) price and profit control; b) production, export, and licensing controls; c) ownership and equity controls; and d) patent laws (Table 3). 7 Table 3: Government Drug Policy Instruments in the 1990s Policy Instrument Relevant Policies 1. Price and Profit Controls I. Reduction in the number of drugs under price control Drug Price Control Order, 1995 2. All drugs with an annual turnover of Rs. 40 million or more, Drug Price Control Order, 1995 produced by a firm, will be under price control 3. To achieve uniformity in prices of widely used formulations, there Drug Price Control Order, 1995 would be a ceiling on prices for commonly marketed standard pack sizes of price controlled formulations 4. Increase in the rate of return on capital employed and on net worth National Drug Policy. 1994 for drugs manufactured from the basic stage II. Production, Export, and Licensing Controls I. Liberalization of pharmaceutical imports and exports and abolition National Drug Policy 1994, National of industrial licensing for all bulk drugs, their formulations, and Industrial Policy 1991, and EXIM policy 1991 intermediates 2. Special emphasis on encouraging R&D in the pharmaceutical National Drug Policy. 1994 sector III. Ownership and Equity Controls 1. Treatment of companies with foreign equity up to 51% at par with National Drug Policy 1994 and National wholly Indian companies. Industrial Policy 1991 2. Automatic approval for foreign technology agreements for all National Drug Policy 1994 and National products, as per the industrial policy, except for drugs produced by Industrial Policy 1991 the use of recombinant DNA technology IV. Patent Laws 1. Acceptance of a product patent regime by the year 2005 Termns of GATT (TRIPS) agreement Source: Adapted from Govindaraj, 1997. In terms of drug prices, the 1994-95 national drug policy represented a significant scaling-back of price controls. While the number of bulk drugs under price control had been brought down from 342 in 1978 (out of about 350-360 bulk drugs then in the market, i.e., virtually 100% of the drugs) to 142 in 1986 (out of about 700 bulk drugs then in the market), this reduction was marginal in terms of the volume (and value) of drug sales in the Indian market. In other words, drugs with high volumes of sales and higher prices continued to be under price control, while most of the "de-controlled" drugs had small sales volumes (and values) in the Indian market. However, the new drug policy of 1994-95 reduced the number of drugs under price control to 76 (out of a total of about 1150 bulk drugs in the market), and the sales value of drugs under price control also came down from 75-80% of the total market value in 1986 to about 45% in 1995 (BICP and Ministry of Petroleum - personal communication). The price control mechanism adopted in the 1994-95 NDP in India is shown in Figure 1. 8 Figure 1: The Pharmaceutical Price Control Mechanism in India If number of bulk drugz Drug with n ct turnover f n Insufoicient >Rs. 40 If number of market million formulators