If the government settles on the first option, there is some scope for a conversation on what the trade margin should be. The margins in the graph above have been calculated at 50%, but the senior executive states that only a nuanced policy can decide the right margins for devices. What is fair for one is not fair for another.
For instance, he says, the margin for a product priced at Rs 100,000 ($1,465) could be 20%, but for a smaller product, say, a syringe, priced at Rs 5 (7 cents), 20% margin won’t work. Rs 1 (1 cent) won’t work for most dealers to recover transportation and inventory costs as these could need Rs 2-3 (3-4 cents) per syringe.
If the government agrees to this policy, MNCs can sell innovative products right to the last mile, and then, doors can be opened for a conversation. Until then, with medical devices, MNCs are bearing the cost of capped prices.
Since the National Pharmaceutical Pricing Authority (NPPA) capped the prices of knee implants at Rs 54,720 ($801) and Rs 76,600 ($1,122) in August 2017, the revenues of the multinational knee implant manufacturers have been squeezed by 30-40%, says a former senior executive of a Michigan-based medical device company who resigned recently. The Ken could not independently verify this, apart from the drop of $9 million in American MNC Johnson & Johnson’s international quarterly earnings from knee implants, which the company attributed to the price control policy in India. The executive was the head of India operations when the price of knee implants was capped in August 2017.
Among different models of knee implants, the sale has shifted to the lower-end products. The sale of most high-end products has halved in the last quarter, he says. The cost of transportation and logistics also means that Tier 2 and 3 cities will remain underserved, if not unserved altogether. “We do sell those but are not replenishing the stocks, and we are not servicing surgeons in Tier 2 and 3 cities as it would mean incurring losses. It is no longer viable to go and sell knee implants in Hisar or Rohtak,” he explains. The capped prices also ensure distributors have fewer resources to invest in expanding to these places.
“We once had close to 2,000 surgeons who would use our knee implants. They utilised the instruments by conducting two to four surgeries in a day, but now we have shrunk this to 300 customers just to break even,” he adds.
Right now, he says, knee implant manufacturers are waiting for the inventory to finish. Once it is exhausted by the end of the year, high-end models — such as like Triathlon by Stryker, Attune by DePuy Synthes and Persona by Zimmer Biomet — will either disappear from the market or become scarce. Just like stents. Any plan to expand is scrapped, he concludes. “We are not even considering bringing newer products to India.”
The future looks bleak as the Government of India has not favoured the idea of deciding trade margins at the first point of sale. At least, not yet. While the industry is hanging its hopes on the government changing its stance, the government is keen on the other two options.
The government, for its part, wants to enact the second option, but it is willing to settle for the third option, says a source working closely with the government, who did not want to be named. “Over the last six months, in all the meetings between the industry and Niti Aayog or the Department of Pharmaceuticals, the bureaucrats have pushed for the second option,” he says. And there’s merit to that. Because option one would mean that everyone in the supply chain of medical devices, be it the manufacturer, the distributor or the hospital, all bear the burden of controlled margins equally.
“It was when the trade negotiations started building up that the government added the third creative option that may appease the MNCs, distributors and the hospitals,” he says. It is this option that the government intends to put its weight behind. It requires the device manufacturers to declare their markups and allows distributors and hospitals to pre-determine margins.
The device manufacturers agree that unlike the NPPA, which could never justify how it determined the capped price for drug-eluting and bare metal stents at Rs 7,660 ($112) and Rs 28,000 ($410) and cobalt-chromium knee implant at Rs 54,720 ($801), respectively, the three policy options are transparent.