The State Bank of Pakistan (SBP) has said that massive delay in adjustment of medicine prices has made foreign and domestic investors wary of investing in pharmaceutical sector. The pharmaceutical industry has extensive exposure to exchange rate risk and depreciation of the PKR has a direct impact on this industry. The profitability of the industry gets squeezed, as producers were not allowed a timely and commensurable increase in the prices of their products.
The dependence on imported materials is a critical factor in limiting the growth potential of the industry under lagged adjustment of prices. The SBP in its recent report has discussed Drug Pricing Policy and the Pharmaceutical Sector and said that determination of the prices of medicines is a very lengthy process and typically taking 1-2 years need to fix the price of a medicine.
Drug Regulatory Authority of Pakistan (DRAP) is the implementing body of the Drugs Act of 1976, which was promulgated to ensure availability of medicines at affordable prices.
DRAP exerts control over all the aspects of drugs market. While the current policy regime has kept prices mostly at par with inflation in the medium term, the pricing policy is the cause of disagreement between the private sector and the regulator.
"Extensive delay in adjustment of prices has made investors, both foreign and domestic, wary of investing in pharmaceutical sector," the report said added that the government fixes the maximum price of medicines based on the respective cost of production of each drug and a generic case involves a lengthy regulatory procedure to determine the prices of medicines and the process also requires the eventual approval from the federal cabinet.
Retrospective analysis of prices reveals interesting insights to the patterns of price adjustments, i.e. prolonged periods of low medicinal inflation, followed by periods of significant adjustments. These price corrections have been more frequent in recent times.
In this regard, DRAP issued a new drug pricing policy in 2018 and to overcome the lag issues, domestic price of medicines were linked with average price of the same dosage form and strength of the same brand in India and Bangladesh.
Moreover, the policy also allowed annual price increments equal to 70 percent of the annual inflation rate with a cap of 7 percent.
Whilst the latest policy has a more relaxed tone compared to the previous one, SBP pointed out that it still has some issues. First, it should be noted that compared to Pakistan, India has very different cost dynamics, as it is one of the largest producers and exporters of generic drugs and its raw material.
On the other hand, Pakistan's pharma industry is heavily reliant on raw material imports and its industry is inward looking. Pakistan imports some US$ 1.1 billion worth of pharmaceutical products annually.
Second, the latest drug pricing policy does not say anything about the adjustment of prices under foreign currency movements. The policy becomes ineffective in mitigating the external risk, given the origin of imported raw material is mostly different from India and Bangladesh.
In addition to slow regulatory framework, another critical factor is the lack of government support for the industry, especially in R&D required for obtaining international certification from the US Food and Drug Administration (FDA). This certification is a prerequisite for exporting medicines to developed countries where profit margins are higher.