Customs Duty exemption has been withdrawn on several imported, life-saving drugs. While the government says there are cheaper domestic drugs available, many social groups foresee high double-digit percentage rise in costs of drugs owing to lack of supply from Indian manufacturers. The Dollar Business analyses the logic of the government and the impact of this decision.

Satyapal Menon | April 2016 Issue | The Dollar Business

On January 28, 2016, the Central Board of Excise and Customs (CEBC) issued a debilitating notification that withdrew customs duty exemptions on 76 medicines, including life saving ones used for treating cancer and HIV. [The notification withdrew the zero duty benefit on import of 15 life-saving formulations of which 10 are in the National List of Essential Medicines (NLEM), apart from withdrawing the 5% import duty relaxation on 61 drugs of which 35 find place in NLEM]. The move immediately created an uproar as many believed that it might end up having widespread repercussions on the Indian pharmaceutical industry and hurting millions of patients fighting hard against terminal diseases.

The objective of the notification, according to the government, is to promote and create an environment for home-grown generic players to manufacture these essential drugs used in the treatment of HIV, cancer, hemophilia, cardio-vascular problems and a host of other life threatening conditions.

The justification from the government is that with this move, indigenously produced generics for these ailments would have more scope in the Indian market vis-à-vis their branded or imported counterparts. Fair enough. “But will the outcome really be as desired?” is a question that many in even the pharma industry are seeking an answer to.

For Public Interest?

The removal of exemptions has put genuinely affected stakeholders in the industry in a catch-22 situation. The generics/formulations segment has to now shell out 5% more duty on import of these APIs (active pharmaceutical ingredients) or intermediates, and the end consumers, i.e. the patients, would (as is usually the case) have to bear the burden of swollen prices. However, policymakers claim that the decision to withdraw the concessional customs duty for 76 drugs was taken in ‘public interest’. For the general public, this line of reasoning seems to defy logic. The Customs Act, 1962 in its Section 28D, clearly states that the amount of duty paid at the time of clearance of goods, will form a part of the price at which goods are to be sold. The full incidence of such duty paid under the Act has to be passed to the buyer of such goods, unless proved contrary. Hence, this additional duty surely cannot benefit the ‘public’. Such unexpected and sudden change in customs duty may have to be passed by the pharmaceutical industry to the patients in the form of price increase of drugs, out of which 15 are life saving drugs. Clearly, this move will go against ‘public interest’! 

Ranjana Smetacek, Director General, Organisation of Pharmaceutical Producers of India (OPPI), points out that the recent hike in duties on life saving drugs will be detrimental to Indian patients and that the OPPI was not consulted by the government in this matter. “Withdrawal of concessional customs duty for these drugs will adversely impact patients’ interest as it may lead to increase in prices. This is in complete contradiction to public interest as mentioned in the notification,” she tells The Dollar Business, adding that the withdrawal of concessional customs duty for 45 molecules, which are part of NLEM 2015, is not in accordance with these being listed as essential drugs and will lead to significant impact, specifically on companies importing these drugs. All in all, a disappointing step for companies and patients!

Another glaring example of the strange ways the bureaucracy functions can be drawn from applicability of the decision on bulk drugs produced in special economic zones (SEZs). Was it not conscious of the fact that SEZs are deemed foreign territory for the purposes of trade operations due to which the bulk drugs sourced from these zones also attract import duties? Biocon, Chairperson and Managing Director, Kiran Mazumdar who is credited with letting the cat out of the bag and bringing the notification into broad daylight in her tweet stated, “The move will make these drugs more expensive for the patients. There are over 75 drugs in this list. This will also impact the indigenous drugs being manufactured in SEZs, thus adversely impacting the government’s agenda of making healthcare affordable and accessible to the patients in India.” Two experts and living in the pharmaceutical arena who are clear in their heads that this question of fortunately-unfortunately is actually a no-brainer. Their verdict – there’s going to be no benefit to the public at large from this move.

Partial Cure

That the decision has been taken without giving considerable forethought to existing realities is apparent considering that not all generic or bulk drug substitutes are available in the country. This stands exposed from the manner in which policymakers beat a hasty retreat as suddenly as the notification had manifested and restored exemption on three drugs – Antihemophilic Factor Concentrate, Octreotide and Somatropin. Reason? Officialdom had realised that there was little or no production of these drugs in the country, specifically Antihemophilic medicines. Industry insiders claim that India produces only 10-12% of the annual requirement of about 700 million units of Antihaemophilic Factor Concentrates VIII and IX.

This afterthought also reveals that there was no thought applied in withdrawing the concessions on essential drug imports. Result: The decision has not only raised eyebrows about the intent, but also justifiable questions about the overall relevance of the withdrawal itself. For instance, India is yet to become self-sufficient in the production of generics and bulk drugs on which exemptions have been removed. A majority of companies which are producing these generics or formulations depend on imported bulk drugs – APIs and intermediates. There are only a few generic companies with their own bulk drugs and intermediates production facilities which do not depend on imports. So what was it that initiated such actions in the first place? Clearly, the manner in which the notification was pushed through in post-haste, without consulting industry stakeholders and considering the impact on consumers, also leads some to believe that the decision was taken with an intent to protect a few companies in India, which have a monopoly on generic versions of some of these essential drugs.

The Diagnosis

There might not be any substance to such claims or allegations, but one thing is for sure – the stated motive behind removing duty exemption on certain life-saving drugs doesn’t really make sense. The reason is simple. There are still not enough companies in India that manufacture generic versions of essential drugs figuring in the concession list (now withdrawn). In fact, the companies involved in the manufacturing of these formulations range from 2 to 14.

A case in point could be anti-cancer drug Imatinib Mesylate. Novartis and Sun Pharma are the only manufacturers that use this API to produce a drug which is used in the treatment of chronic myeloid leukemia. Sun Pharma, on December 15, 2015, was granted approval by the USFDA to manufacture the only generic version of this drug which is also produced by Novartis with the brand name Gleevec.

The generic versions of another drug which has come under the axe of the government, Procarbozine, used for the treatment of Hodgkin’s disease (a cancer that starts in white blood cells called lymphocytes), brain tumor and melanoma, is being manufactured by just three companies in India – Zydus Cadila Healthcare, Alkem Laboratories, and Miracalus Pharma. Ranbaxy is the only company manufacturing the generic version – Macrogen 400mcg – of the drug Molgramostim, an immuno-stimulant for chemotherapy-associated neutropenia and bone marrow transplantation associated complications.

The number of companies involved in the manufacturing of generic versions of essential drugs figuring in the list on which concessions have been withdrawn is small.

These examples reveal that except for a few, who can afford their own bulk drug facilities, most Indian companies manufacturing life-saving, orphan or essential drugs, on which the concessions have been withdrawn, depend on sourcing their requirements through imports. The heavy dependence is evident from the fact that around 70% of India’s requirement of bulk drugs is sourced from international markets – a considerable quantum i.e., around 60% from China. In fact, if industry observers are to be believed, the imports have consistently been heading northwards. Analysis of import data proves them right too, with inbound shipments rising from $800 million in 2004 to $3.4 billion in 2014, recording a CAGR of about 15% during the decade. So what does all this lead to?

Withdrawal of concessions will prove to be counter-productive and perhaps result in detrimental consequences for the public at large. For instance, it would spell the death-knell for import dependent generic manufacturers and lead to dominance by major players, since the former would not be able to cope up with increased cost of inputs which also means inevitable escalation in production cost.

Is this what ‘Make in India’ is supposed to achieve?

India’s policymakers may have got their math wrong. Otherwise how would they explain the withdrawal of concessions despite being conscious of the fact that India first needs to achieve self-sufficiency and self-reliance? Or do we expect bulk drug units mushrooming across India overnight? The Indian Drug Manufacturers Association (IDMA) and the government believe that the withdrawal of concessionary rates will boost Indian drug manufacturing. But who will handhold the SME drug manufacturers when multi-million and billion dollar IPR litigations strike them? Has the government taken a blanket approval from USFDA, European Medicines Agency (EMA) and others, on behalf of Indian drug manufacturers, to mass manufacture all life-saving, patented drugs? Or have the policymakers forgotten that drugs that are patented cannot be produced indigenously without legal permissions?

All this boils down to the question, why did the government extend concessions on import of some of these essential drugs in the first place? Was it not because of a dire need for imports due to a dearth of indigenously produced drugs? The need for imports for essential formulae continues. So there’s essentially no need to alter policy or duties for “making changes” or for pleasing a certain faction of the pharma gentry.

“Prices (of Life-Saving drugs) will rise, supply will fall”

Siddharth Daga, CEO, VINS BIO PRODUCTS LTD

TDB: How would you react to the Indian government’s decision of removing a number of life-saving drugs and bulk drugs from customs duty exemption? Was the notification a hurried job?

Siddharth Daga (SD): It is a decision taken in haste. I feel this was done based on the opinion of financial experts only to minimise the fiscal deficit. According to me, the move will not only result in prices of the life-saving drugs shooting up but would also lead to a heavy shortage in the supply of these drugs.

TDB: Many experts, manufacturers and suppliers are of the view that the decision has been taken without any forethought to existing realities. The ground reality at present is that not all generic or bulk drug substitutes are available in the country. Do you agree?

SD: I do agree. Before taking a decision we have to think of alternatives and substitutes so that the general public does not suffer. In my view, the government should form a separate ministry for pharmaceuticals industry, instead of keeping it under the Ministry of Chemicals and Fertilizers, comprising of the Drug Controller General of India (DCGI), the National Pharmaceutical Pricing Authority (NPPA) and other central bodies related to the sector. That will prevent such less-calculated decision-making.

TDB: The government had in its notification withdrawn the zero duty benefit on import of 15 life-saving formulations of which 10 are in the National List of Essential Medicines (NLEM). Consequently the customs duty on some of these formulations will now go up to 35%. Your views.

SD: The prime objective of any government should be to make life-saving medicines available at affordable prices. There are many ways to do this. Just preparing NLEM list and putting them under Drug Price Control Orders (DPCO), and fixing a price is not the solution to a common man’s problems. Besides, withdrawing zero duty benefits and duties in inputs will only discourage the industry and create unwanted problems. In order to facilitate affordable medicines to the general public, the government should focus on reducing hospital expenses which contribute nearly 80% of the total expenditure incurred by any patient undergoing treatment at a hospital.

TDB: Do you find generic life-saving drugs to be in anyway inferior to branded ones?

SD: Definitely not. The manufacturing of drugs in India is done under very stringent guidelines formulated by Drug Controller General of India (DCGI). These guidelines are meant to ensure quality drug manufacturing in India.

TDB: Why is it that there is little or no spend on drug discovery in India? Do you think some kind of government incentive to promote R&D will help the industry in the long run?

SD: The Ministry of Science and Technology provides several incentives to promote drug discovery. The delays are mainly due to regulatory approvals which take longer time than expected. For growth in science, regulatory approvals and government incentives, should go hand in hand. India can then be recognised as a hub for drug discoveries in the world. Unless the government simplifies the process, there is not much scope for drug discovery in India.

TDB: How conducive is the environment in India for growth of the pharmaceutical industry?

SD: As I mentioned earlier, a separate ministry should be formed to take care of the pharma industry. This will facilitate faster decision-making and quicker statutory approvals will definitely benefit the industry, the common man and the country. Unless there is a ministry dedicated to address the needs and concerns of the pharma sector, the present suffocating environment cannot be done away with.

TDB: How about the incentives provided to exporters of life-saving drugs?

SD: Incentives available to exporters of life-saving drugs are negligible, ranging between 2% and 5%. In order to encourage ‘Make in India’ in the pharma sector, the government should offer more reasonable incentives.