NPPA & Overcharging: The MRP v. ASP conundrum
Until not that along ago, drugs and medical devices were distinct from each other and it was this distinction that kept manufacturers of medical devices away the clutches of India's pricing regulator
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India's pharmaceutical industry is no stranger to ever expanding regulatory framework and statutory reach prevailing for manufacturers of drugs and medical devices. Price control of drugs has long been a focal part of India's pharmaceutical regulatory regime, but in recent times the claws of the pricing regulator have been sharpened with access to an industry that was previously out of bounds for them – manufacturers of medical devices.
Until not that along ago, drugs and medical devices were distinct from each other and it was this distinction that kept manufacturers of medical devices away the clutches of India's pricing regulator. However, between 2017 to 2019, several medical devices were included within the ambit of "drugs', seemingly with the intention of regulating such devices to meet, inter alia, quality standards prescribed by the Central Government/Central Drug Standard Control Organization. Subsequently, the Medical Devices (Amendment) Rules, 2020 were introduced and alongside, a notification under the Drugs and Cosmetics Act, 1940 was also issued in 2020, which, in effect, has brought all medical devices within the meaning of "drugs'. The implications of this paradigm shift are many, but more pertinently it brings medical devices within the scope of the Drug Pricing (Control) Order, 2013 (DPCO), the provisions of which are enforced by the National Pharmaceutical Pricing Authority (NPPA).
Under the DPCO, drugs/formulations are broadly segregated into two categories: (a) scheduled formulations; and (b) non-scheduled formulations (NSFs). Pricing regime applicable for both categories are different. While the price for scheduled formulations is fixed by the government, the DPCO mandates that Maximum Retail Price (MRP) of non-scheduled formulations cannot be increased beyond 10 per cent of its MRP prevailing in the preceding financial year. The consequences of breach of this requirement – the NPPA can mandate the restoration of the MRP within the permissible limit and can also recover the overcharged amount / impose penalties. By virtue of the change in the definition of "drugs', medical devices now fall within the scope of NSFs and therefore, have to comply with the restrictions operating on the MRP of their products.
In exercise of its powers to monitor drug prices and recover purported overcharged amounts, NPPA has alleged that various drug manufacturers have violated Para 20 of the DPCO and accordingly, raised demands with such manufacturers for overcharging. While there may be several errors in the demands raised by NPPA on a case-to-case basis, one recurring theme is that the NPPA does not consider the actual selling price (ASP) of the products and instead arrives at a demand for overcharging after factoring only the MRP of the products, as opposed to their ASP.
The issue has been raised by several manufacturers of medical devices while challenging the demand notices received by them for alleged overcharging from the NPPA before the Hon'ble Delhi High Court. In the matter of Terumo Penpol Private Limited v. Union of India and Anr, the Hon'ble Delhi High Court categorically held that NPPA was required to consider the ASP of the products while determining overcharging by the manufacturers and set aside the demand notice issued by NPPA for overcharging. The Hon'ble Court also noted that even though the manufacturer had increased the MRP beyond the 10% threshold, NPPA could only recover the amount actually overcharged and the same was required to be determined basis the ASP of the products and would not be the difference between two of the MRPs. This view has been further relied upon in subsequent Orders passed by the Delhi High Court in relation to the said issue.
In arriving at its calculations for demand in relation to overcharging, NPPA does not account for trade margins afforded to supply chain intermediaries (dealers, distributors, retailers, etc) and proceeds on making its calculations basis the difference between the two MRPs in question, which has now been held to be incorrect by the Hon'ble Delhi High Court.
Another recurring issue with demand notices issued by NPPA for overcharging under DPCO is NPPA's failure to consider the right and option of the manufacturers to increase prices of NSFs by 10%, year-on-year, and the failure to factor the same results in gross inflation of the quantum of the demand notices. The statutory right of the manufacturers must be considered by NPPA to rightfully reduce the overpricing margin for each year since even if the manufacturer increases the MRP of its products above the allowed 10% in any particular year, the manufacturers do not forfeit their right to increase the MRP in subsequent years.
Accordingly, if manufacturers of NSFs receive show cause notices / demand notices for violation of Paragraph 20 of the DPCO 2013 from NPPA, manufacturers ought to carefully review the calculations basis which the demand amount has been arrived at by NPPA and after factoring in any potential errors and omissions on their part, take a decision on next steps in relation to the demand.