The government is a huge driver in reducing costs, and improving access to healthcare to the poor and marginalized sections. Prices of medicines, for instance, are both controlled and regulated by it. The prices of essential and life-saving medicines are fixed on the turnover criterion, which implies government control. Outside this list, a 10% hike is allowed each year, which transforms into government regulation. “Within this dual framework, there is intense competition between the pharmaceutical companies. In both the essential and free lists, prices of certain brands are lower than what is legally allowed by the government,” explains CMA Kewal Kundanlal Handa, President, Samarth Life Sciences Pvt Ltd and, Independent Director, Akums Drugs and Pharmaceuticals Ltd. For some molecules, there may be two dozen or more companies competing for market share.
Needed A Giant Cluster
Scale is important for drug prices to come down. To achieve global volumes, we need to set up a large plant in a single location, and not seek multiple ones
Outside this competitive market, the government strives to make medicines cheaper, affordable, and accessible through welfare initiatives. Under the Jan Aushadi scheme, government stores sell cheap medicines. The government subsidizes the products for the poor and low-income groups. Under Ayushman Bharat, the largest healthcare welfare program in the world, the government allows citizens to avail hospital facilities worth Rs 5 lakh, along with medicines. Since the people do not pay the hospitals, which are compensated by the government, access has improved, even in rural areas. It has emerged as a strong platform, and continues to grow in numbers.
There are indirect ways in which the government promotes and encourages affordable healthcare. “For instance, large hospitals in urban and rural areas are built on government-leased land, or land provided by the government at cheaper prices, or through monetary assistance,” points Handa. There are community and municipal hospitals that cater to the poor. Today, citizens, even in remote places, are better aware of how to access treatment, where to go, and which government scheme to opt for. Ayushman Bharat is a big game changer. The number of AIIMS, with world quality healthcare, has gone up. More district hospitals are being built, though we need more. As per the Companies Act, companies need to spend a part of their annual profits on CSR activities, and many of these projects relate to supply of medicines or cancer treatment.
From the CMA perspective, these are efforts that lie in the dimension of cost discovery – how to increase access and affordability of medicines, through reduction in costs and, hence, drug prices via various private and public strategies. In fact, CMA Handa, as we will see later in this profile, ardently focusses on cost-related aspects in the start-ups that he is associated with. This straddles another CMA dimension – deploying cost-competitive strategy.
“There exist information gaps, which lead to access issues. In Tier-2 and Tier-3 towns, we require a mix of physical feet-on-ground strategies, and e-channels (online distribution),“ explains Handa. He adds that he works with start-ups to evolve innovative digital solutions. The first step is to get the villagers to enroll on a digital platform, even if it is free. Hence, villagers are trained to help the others to link to the platforms. The member can seek medical advice and treatment. “We direct them directly to the hospitals (public and private), or to specialists. This is a strategy that combines feet-on-the-ground and digital components,” he adds.
Other hospitals now follow similar models. They have smaller outlets at the village level to reach out to outlier patients. There are different forms of such hub-and-spoke models that include mobile apps for face-to-face meetings, data collection and monitoring, and an increasing use of gadgets. “In India, we have six lakh villages, and there is a lot to be done, and a long way to go. We need to build village clusters, further improve connectivity, and improve gadgets,” feels CMA Handa. This is the way forward to improve accessibility in villages. In urban hutments, lower class localities, and homeless areas, technology and digital solutions can be beneficial.
Despite these efforts, India needs to evolve a blueprint to reduce the manufacturing costs of medicines. The giant step needed is to make APIs in India, at competitive prices. At present, we import 70-80% APIs, mostly from China. Through the PLI scheme, the government encourages API manufacture in the country. The scheme has taken off. “What we need is scale to reduce costs, and compete with China. If we wish to maintain quality, we need to bring down the costs of operations, conversion costs, reduce expenses through process improvement, and deal with indirect costs,” explains Handa. He indicates that the costs of transportation, logistics, utilities, and land are more expensive in India, compared to China. These need to come down by 10-12%. The government taxes medicines at 12%, which too can come down. E-commerce can reduce retail margins.
Under the PLI scheme, Indian firms hope to focus on key raw materials to make APIs, which will bring down costs in 4-5 years, and help us to take on China. But the trick will lie in the creation of global scale. Handa feels that the solution lies in a huge API cluster, with an enabling ecosystem. In the past, Hyderabad was being dubbed as a possible location, but now the focus in smaller clusters spread across the states, and across the country. Handa is not sure if such “sub-optimal clusters” can work, given their inherent challenges. He agrees that different regions in the country need to be developed, but is convinced that smaller clusters cannot lead to global scales.
“At a personal level, I am involved with two start-ups, and we are trying to set up a third one. The first question in my mind is inevitably about where my customers are so that I can get volumes. We focus on basic cost issues – what should we make, and what should we outsource? How to optimize outsourcing? We always look at gross margins, and how to improve them. If we cannot run profitable plants, we close them. I have shut down 4-5 plants. We cannot sell high-cost products. Similarly, if we cannot achieve volumes, we do not add capacity,” explains Handa. It seems simple, but is tough to adopt.