Pharma PSUs Are Not Ready To Die!

The government could do so much better with drug PSUs than being an unimaginative zamindar.
The Bengal Chemicals factory in Panihati, West Bengal, India. (Source: Wikimedia Commons)
The Bengal Chemicals factory in Panihati, West Bengal, India. (Source: Wikimedia Commons)

The government's decision to explore the strategic sale of Indian Drugs and Pharmaceuticals Ltd. and Bengal Chemicals – even as questions were asked of the move last week by parliamentarians including those from the BJP – shows a lack of imagination by successive governments. The two public sector undertakings (PSUs) were pioneers in laying the foundation for the self-sufficiency in drug production in this country. With such a platform, an almost unlimited supply of money, access to government infrastructure and a helpful regulatory and patent regime, they had all the ingredients for lasting success.

It is difficult to understand why the government has not been willing to re-purpose these investments. Rather than sell off the land, there is a great opportunity for the government to include these industries in the 'Make in India' project. It is sad that while we import simple drugs like paracetamol, PSUs like IDPL and Bengal Chemicals are allowed to disappear into oblivion.

Produce NLEM Drugs, Sell At Government Hospitals

Rather than seem like a grumpy arm chair critic, here are a few suggestions:

  • The National List of Essential Medicines (NLEM) has several drugs which are manufactured by a handful of Indian companies.
  • If all the drugs in the NLEM are indeed essential, which by a legal fiction they are, the drug PSUs should be able to manufacture them easily and ensure that they are easily accessible to the poor at an affordable price. There are no product patents and the technology to manufacture them is freely available.
  • These drugs can be sold at all government and ESI hospitals – including railway hospitals and hospitals run and managed by the defence and paramilitary forces, under the CGHS scheme and Jan Aushadhi stores.

Offsets And Technology Transfer

There seems to be a consensus that defence contracts should mandate a local element of technology transfer, often described as offsets. We should be able to agree that healthcare is as important as the security of the country.

After all, with sick and dying poor citizens, will the armed services – who often themselves have inadequate access to healthcare – be securing the nation only for the rich who can afford to be healthy?

The drug PSUs should be required to bid for all government drug procurement contracts where tenders by all state and central governments and departments are centrally procured. A poorly executed but significantly pioneering effort was begun with NACO tendering nationally for HIV-AIDS drugs.

Most of the national drug tenders will be for generic drugs. Participation by these PSUs will increase competition and create a vibrant local market for these drugs.

  • To the extent that patented drugs are to be procured, PSUs should participate with other Indian manufacturers who are capable of manufacturing the patented drug.
  • Since a patent is essentially a monopoly, there is really no reason that the government can’t impose reasonable restrictions on patent holders from making an exorbitant and extortionate profit from government tenders.
  • If the patent holder or its licensee is successful in the tender, it will be allowed to supply pursuant to the tender, with a condition that a part of the total quantity (say 25 percent) to be procured will be manufactured by the PSU under a licence with either a royalty or technology transfer fee of say 6-8 percent.
  • However, if a local manufacturer is successful, the patent holder will license the patent and the technology for the manufacture to the Indian manufacturer and the PSUs upon payment of a royalty as before.

This will ensure that the government gets value for money when it is a monopoly buyer in an extremely large market which is currently fragmented with various different entities issuing tenders. It will also ensure that there is technology transfer from patent holders to Indians. This principle was a key element of government tendering where BHEL, a profitable PSU competing with giants like GE and Siemens, was a preferred vendor and received a 'local manufacturer credit' to give it a competitive edge over global rivals.

Over time, the PSUs will become significant players in the public market and this position can be leveraged for the private market as well. A good example of this policy is Hindustan Lifecare Ltd., the largest manufacturer of condoms.

The government policy has been to procure condoms for the HIV-AIDS and family planning projects in such a manner that the government sources a significant part of its requirements from Hindustan Lifecare and procures the rest from private Indian manufacturers, all a part of the tender process. As a result, the government is able to procure condoms at the lowest global price from both PSUs and private manufacturers. The Indian condom manufacturers have a good customer buying huge quantities which allow them to compete globally for large World Health Organisation and other United Nations-funded projects, and also supply to global brands in the private markets.

There is no reason to think that this same effect cannot be achieved in the domestic drug markets for the benefit of all stakeholders. It has the potential for better long-term results than selling land. The government could do so much better than being an unimaginative zamindar.

Murali Neelakantan is Principal at Amicus and the former Global General Counsel of Cipla.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.

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