This week, the pharmaceutical industry around the world and in India bore witness to how prices of medicines were decided more as a matter of executive grit and determination than any other factor that affects market dynamics. When the chief of India’s top pharmaceutical company, Cipla Ltd., announced an up to 75% cut in prices of some important cancer drugs in its portfolio, it expectedly evoked a general response of relief from all quarters. The one announcement that especially kicked observers, was the huge price reduction in the generic copy of Bayer’s kidney cancer drug, Nexavar. This was the same drug that the Indian Patent Office (IPO) had, in March, allowed another Indian company, Natco, to make and sell in India despite its original research company Bayer, holding a valid patent.
The decision was then hailed as one that would benefit Indian patients at large – both because Nexavar became relatively more affordable at Natco’s price of Rs 8,800 per month against Bayer’s price of Rs. 2.8 lakhs a month and also because this decision of the IPO had set a precedence for pulling up other profiteering companies. Yet, the man who walked away with the “Humanitarian of the Year” title was not Natco’s chief, but Dr. Yusuf Hamied, Chairman and MD of Cipla.
What most people seemed to have missed was that Cipla didn’t introduce its generic product at this price point. It simply reduced the price from Rs. 28,000 to Rs. 6840 per month for a generic version that was already on the market. And, this happened only because Natco had pegged the price of its product at Rs. 8800 per month. Before that, when Nexavar was the only option available to patients, Cipla sold the same product at Rs. 28,000 per month!
So what seems to be the case here was that with a reference price of Rs. 2.8 lakhs, Cipla priced its product at Rs. 28,000 per month (a tenth of market price), and when Natco brought the price to Rs. 8,800 per month, Cipla simply cut its price to Rs. 6840 per month (approx 25% of its original price to still stay the cheapest). Dr. Hamied clarified today that while he was being humanitarian, he certainly wasn’t doing charity. There was a business angle to it and he didn’t deny it. That the price of the product, even at Rs. 6840 per month, is out of bounds to over 90% of Indians is probably what he meant when he said he wasn’t doing charity. Therefore the question, why not make it really affordable while you’re at it? The reason is explicitly offered by Dr. Hamied himself. Its not because Cipla would lose money in the bargain, but because physicians in India associate the quality of the product with its price. So, if Cipla priced its products very low, the doctors who prescribed them would worry about the quality. Seems it’s more about doctors than patients, doesn’t it? Did you hear concerns for the suffering humanity in that argument? I didn’t!
Interestingly, the same yardsticks do not seem to apply when these companies view opportunities overseas. While bidding for tenders in developed markets, most generic companies price their products at a significant premium over the price of the same products in India. Even though these range in the bottom quartile of the category, they are still quite high. And by quoting the least price in large value tenders, generic players are able to bag these orders – despite the high prices – simply because they are lower than the even higher prices of the innovator brands.
So, as Cipla did before Natco triggered the price spiral in the Nexavar category, generic drugs can price themselves just a little lower than the innovators and make significant profits. The question therefore is, do generic manufacturers sacrifice profits a little bit in India and appear “humanitarian”, while making a lot more money in the developed world?
Steve Jobs had once asked of his competitors in utter dismay, “Why join the Navy when you can be a pirate?” suggesting that they took the easy way out by copying Apple’s products and not sweating it out by creating better products (or services) of their own. It is more harmful to customers in the long run when innovation dries up and newer products that can create better value don’t emerge.
This does not behoove of an industry that holds within it sparkling talent, enviable human capital and an inextinguishable competitive spirit. India must create game-changing moves, not those that can raise unflattering remarks, but those that customers will see most value in and place a premium on. The best successor for Apple is not some cheap Chinese imitator but Samsung, preferred by customers the world over for its innovative and appealing products. That is a worthy way to be remembered. Not as a pirate, but as one who sailed with the navy, proudly.