Chemicals and Fertilisers minister Ram Vilas Paswan has accused the pharmaceutical industry of "cheating". It had gone back on its assurance of cutting down prices of generic drugs, he charged.
Paswan said the industry was calculating profits margins on the maximum retail prices (MRP) rather on the cost of manufacturing drugs.
"This matter has come to our notice and we shall take it up with the representatives of the industry. I would not hesitate to say that it amounts to vishwasghat ( cheating)", Paswan told reporters at the Economic Editors conference in New Delhi on Tuesday.
The pharmaceutical industry submitted a list of 886 drugs to the government and said that they would impose a cap of 15 per cent on the wholesale margins and 35 per cent on the retail margins.
The list of drugs submitted includes generic versions of several popular formulations such as Omeprazole and Ciprofloxacin.
Ciprofloxacin is an oral antibiotic approved for the treatment of many common bacterial infections while Omeprazole is an ulcer antidote.
The price reduction is applicable on drugs manufactured on or after October 2.
The controversy has arisen because of the interpretation of what constitutes the 'margin of profit'. Margins, as interpreted by the government and consumer groups, should be calculated on the cost of production of a particular drug. For instance, if the cost of production of a drug is Rs 100, the retail price should be capped at Rs 135, while the wholesale price should be Rs 115.
However, the minister said that it has been noticed that the pharmaceutical companies have calculated the cap on margins on the existing retail prices. In other words, if the maximum retail price of a particular drug is Rs 100, according to the pharma companies, the retailer's price would be Rs 65 while the wholesaler will sell to the retailer at Rs 55.25. The retailer will then sell to the consumer at Rs 100.
Secretary general of Indian Pharmaceutical Alliance (IPA) DG Shah contested the interpretation of the government and said that the industry's interpretation was as per the order of the Drug Pricing Control Order (DPCO) 1995.
"There is a difference between margins and markups. Margins are always calculated on a top-down format with the MRP being the base, while markups are calculated on a cost-plus basis. The minister was always aware of these notions," Shah told Hindustan Times.
The issue of trade margins has been the subject of intense debate and in the Draft Pharmaceutical Policy.
Prior to the voluntary assurance by the industry, these margins were not prescribed and varied widely across drugs—in some cases the prices of the generic version is almost as high as the patented branded drug itself.
The generic drug market constitute between five to seven per cent of the total medicines market in India and is estimated to be worth around Rs 1500 crore.
One of the main reasons for the very low penetration of generic drugs is the usual practice among medical practitioners of prescribing branded drugs, even if a generic version of the same formulation is available in the market.
A senior executive of a leading pharmaceutical company, who did not wish to be named, said that the move to cap trade margins might not result in a decline in the overall cost of treatment for patients through reduced prices of medicines.
"The prices of those branded drugs which companies promote among doctors through medical representatives (referred to as 'ethical promotion') will not decline, at least not immediately", he said.