Abbott at number one : concerns about rising drug prices

30 May

Abbott’s acquisition of Piramal’s Indian branded drugs unit has raised the spectre of rising prices in some quarters. The reasons are two-fold : one, Abbott will pay Rs 17,000 crore for a Rs 2000 crore business and the need to earn a decent return on this will make it raise drug prices. And two, Abbott now has 7 per cent of the Indian market and is in number one position. Ergo, it is in a position of strength from where it can get away with price hikes.

Perhaps, Abbott will find the need to raise prices. But I believe it will find it difficult to do so across-the-board beyond a reasonable extent. For two reasons. One, what it has acquired are branded generics.  This business has multiple copycats already on the market and nothing – at least, in the law – prevents more from joining the party. So, it is competitive.  Two,  the Piramal unit’s growth has also been driven by the opening up of ‘bottom-of-the-pyramid’ type markets that hitherto were under-served by companies. For instance, Dharavi (Asia’s largest slum) in Mumbai. These are extremely price-sensitive.  So there will have to be a trade-off between profit and growth which defeats the purpose of the acquisition which is primarily for market share. And three, while a good number of drugs are outside government price control, the National Pharmaceutical Pricing Authority reserves the right to fix prices under a public interest clause if they are raised by more than 10 per cent in a year. Indeed, Piramal and a good number of other companies fell afoul of this law not too long ago and saw some drug prices fixed by the government in spite of these drugs falling outside the purview of drug price control. This also meant that companies could not change prices of these brands again with consulting the drug price regulator.

True, Abbott may launch its patented drugs at a hefty premium but that it is already doing anyway. The concerns of rising drug prices in the context of the Abbott-Piramal deal, to my mind, are overdone.

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4 Responses to “Abbott at number one : concerns about rising drug prices”

  1. ks May 31, 2010 at 7:01 am #

    Very interesting post, thanks for this. Without being expert on this case, let me suggest (more by way of hypothesis than argument) that the effects may be indirect, through politics. That is, to the extent that the policy environment helps restrain the price of drugs, and to the extent that “Indian” and “foreign” firms have conflicting perspectives on important, relevant policy issues, then the purchase of the former by the latter can affect the balance of power in the political arena. In short, the coalition for particular types of policies that help restrain prices loses important members.

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    • Gauri Kamath May 31, 2010 at 7:55 am #

      KS, your point is valid. However, I believe that the need for an industry “lobby” in favour of keeping prices under check (by taking on MNCs for their own vested interest) has been disproportionately high in India simply because the government had conveniently shifted the onus of providing low-cost drugs to the homegrown generics industry. (See my post) And the consumer lobby in the form of patient advocacy groups or health insurers has been virtually non-existent (except for a few left-leaning organisations or MSF and AIDS drugs campaigners). However, I do believe that as the Indian economy develops with the government and insurers gradually starting to pay for healthcare the political arena will see the rise of alternative interest groups from from these constituencies. These should act as a good counter-balance for a more consolidated industry block. It is a matter of time. Besides, I believe that in the short to medium term there will still be enough opposing pulls and pressures given that the Indian pharma industry still has hundreds of small, and medium-sized players. Thanks for your interest.

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  2. ks May 31, 2010 at 8:10 am #

    Gauri — Thanks for your thoughtful response.
    Ken

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  3. Vikas Dandekar May 31, 2010 at 3:55 pm #

    Well put, Gauri ! My reasoning about the pricing strategies post-Abbott’s numero uno rank is the same as yours. Market forces will prevent any undue price escalation and to top that if there are stray instances, NPPA will certianly want to keep its job.

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