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I had a strange dream the other night.
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I dreamed that I was lying in a hospital bed with doctors and nurses all around me, tubes
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going into me, tubes coming out of me and the beep, beep, beep sound of some kind of
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heartbeat machine which indicated reassuringly that I was still alive.
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All my living relatives were gathered at my bedside.
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All my dead relatives were standing at the window waiting for my soul to leave my body
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so I could join them in waiting for the souls of other living relatives to leave their bodies.
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I had no idea what had happened to me, but it seemed to be serious.
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Just then a huge doctor in a long white coat walked up to me.
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I'm feeling okay, I said.
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Kind of strange, isn't it?
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Not strange at all, he said.
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In fact, it's what I would expect.
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After all, we have diagnosed you with a fatal disease.
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You have the disease of excessive verbosity.
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One day it will be the death of you.
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Oh my God, I said, alarmed.
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I don't want to die from talking too much.
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The doctor looked at me and said, that's the idea, to cure you.
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There is only one medicine for your deadly disease.
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Your verbosity can only be cured by peace of mind.
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Yes, peace of mind is the medicine.
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Then give it to me, I said.
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What are you waiting for?
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I would like a dose of peace of mind immediately.
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It's not so simple, the doctor said.
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You see, peace of mind is very expensive and you can't afford it.
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That is why you will have no peace of mind.
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You will one day die of verbosity.
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There is nothing to be done.
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Go record a podcast or something.
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Welcome to The Scene and the Unseen, our weekly podcast on economics, politics and behavioral
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Please welcome your host, Amit Barma.
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Welcome to The Scene and the Unseen.
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In today's episode, we're going to talk about drug prices, specifically the tendency of
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the government to fix drug prices so that poor people can afford them.
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This tends to have some unsavoury unseen effects.
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Are there ways around these unseen effects?
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To discuss this subject, I have with me as my guest on the show today, my good friend
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Pawan is a fellow at the Takshashila Institution in Bengaluru and he's also a contributing
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writer at Pragati, the online magazine that I edit at thinkpragati.com.
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Pawan, welcome to the show.
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Pawan, what we're talking about today, The Scene and the Unseen effects is the government
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mandating, setting prices for certain key drugs which the common people can't afford.
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So for example, India is a very poor country and people can't often afford expensive cancer
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And what the government in its wisdom does to look after these people is it sets a price
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for these drugs at certain points.
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And the scene effect of that is that those of them who do get the drug, get it at that
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particular price point.
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What are the unseen effects of that?
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The biggest unseen effect is who is, we have to ask ourselves the question, who is creating
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Who is doing innovation on this?
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And will they have the right incentives to come out with better drugs in the future?
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And I think if the government decides to set a price, then your reward for doing a better
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drug is nothing, right?
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Because now it's fixed at 20 rupees a pop and you come up with a brand new drug which
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You still have to pay the same amount.
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So for example, for a new drug to come up, I've heard a figure of say a billion dollars
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which goes into the research of each new drug.
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And what you're saying is that, and this is especially true for diseases which might be
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specific or very important for India and therefore need research directed here, that people simply
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won't spend the money because they'll say, look, if we can't get our money back, then
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it's a minus EV proposition.
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So here there are many arguments that are thrown around.
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The first is people say, look, whatever private investment has gone into this drug, it's come
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on top of public investment.
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This is especially true in the US, in the UK and elsewhere.
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So the argument is since there is a lot of public funding that has gone into this too,
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maybe some of the intellectual property needs to be owned by the public and whoever the
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And the problem here is that the way scientific research works, the way drug development works
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is that it always rests on a large body of open source scientific knowledge.
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That is, I mean, this is the kind of, I mean, you might have a researcher who is studying
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a fruit fly and how deleting one gene in that fruit fly might change its biology.
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You will have all kinds of very, very esoteric niche types of research that take place.
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And serendipity is a real thing in research.
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So eventually enough connections are made such that the knowledge is enough for someone
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to start doing serious drug development.
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So this is always a publicly funded layer by and large, sometimes also through philanthropy.
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On top of this, now if someone has a promising candidate against HIV, if it's a researcher
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in a university, they might decide to patent it themselves.
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Sometimes they might think, hey, this is interesting, but it's not good enough to patent.
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So they'll just publish it.
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And so then a private player might go in, work more on that and see that one variant
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of this compound might be patentable.
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And eventually things need to work after all this trialing is done.
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Once they come out with some compound, it has to go through multiple phases of clinical
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So the $1 billion is a lot of time and a lot of money by multiple sources.
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So they have to recover this.
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And the norm has been that the public investment will come and let the private investment reap
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a reward on top of that.
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So what happens in India, where none of this happens.
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If you look at India's research and development spending on drugs, probably if you take what
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the Gates Foundation spends on dengue and malaria, you take a few other foundations,
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the Wellcome Trust in the UK, they're probably spending the same amount or more.
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So there is no public investment layer.
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And then India is a poorer country.
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Tropical diseases are a smaller drug market, diabetes is a huge global market.
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So the moment you have a small market, which is not very well off, the incentives for the
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private sector to come in and develop drugs is also weaker.
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So in this environment, if you then go and do price setting, you're killing everything
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and everything becomes dead on arrival.
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But here's the paradox.
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At one level, the unseen effect of price setting as any price controls would be that there
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is a shortage because obviously the producer, which is a drug company, don't have the incentives
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to do the research and development necessary to get the drug to market.
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So the paradox is that the reason for which those price settings were set in the first
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place that we're a poor country and they can't afford the drugs also means that because we
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are such a poor country in this, you know, not that much of a market for these kinds
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of drugs here, that those incentives don't exist in any case for those drug companies
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to actually, do you think that's the case or do you think that the whole system would
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function better if those price controls weren't there to begin with?
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Okay, so I won't use any principles here, but let's just see what's better for the Indian
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So supposing someone invents a new drug to combat blood pressure or diabetes, that's
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a problem that affects people globally and Indians suffer from it too.
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So a company can probably make its margins in the US, in the UK, in rich countries.
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And then the company themselves, I mean, they have an interest in offering the drug at a
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lower cost in India, you know, because it's a big thing and the market's large.
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The alternative is the Indian government can also look sideways on the patent sort of people
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abusing the patent rights and say that, look, anyway this drug is available, anyway they'll
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make their money outside, let's just make it cheap for Indians.
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I mean, that will benefit the public.
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The problem is diseases and disorders that are endemic to India that are explicitly problematic
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Dengue is my biggest example, HIV is also a global problem.
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So what happens is nobody is going to solve these problems at all.
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So either it has to come from public investment, but even their private sector has a role.
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So we are then not able to solve that problem at all.
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So what do you suggest, what's a way forward?
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So the two things, so there are three things actually we'll have to think about.
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One, no matter what public investment in research and development has to go up.
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Second, I think because India is becoming a richer country, we are not nearly as poor
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as we were 20, 30 years ago.
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So we can afford to pay more.
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So where we are thinking about price setting, maybe the government can work out a deal and
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try to subsidize the cost, right?
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Let the government bear the remaining costs rather than just completely destroy the incentives
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The third thing that India can do is not let patent holders run away with all their rights.
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So let's take a few steps back here.
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A patent is basically something where if you've come up with an invention, a patent gives
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you monopoly over extracting value from that innovation for a certain period.
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So you've invested a billion dollars, you've come up with this new drug.
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You need time to recover your investment from this drug.
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So you get 10 years, 20 years where you have a monopoly over manufacture of this drug.
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After that, it becomes public domain.
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So any generic company should be able to pick up that formula and then run with it.
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So the term generic is essentially something that was once under patent, but no longer
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So anyone can look at it, right?
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So what's happening here is that patent holders want to extract value from their patent more
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Who doesn't want more profits?
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So they do something called evergreening.
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So the idea is that for one patent to be superseded by a second patent, you need to show that
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your second drug patent is significantly superior to the first one.
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So what they do is sometimes the original drug formulation that is patented does not
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have a salt along with the drug.
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It's one ion, usually something is a sulfate, hydrochloride, something like that.
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And what they do is in the second drug, they file a patent again when the first one is
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expiring and then they add a new salt over there, which makes the drug slightly more
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soluble in water, you know, it's just more available in the body.
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You know, you take 50 mg of the first drug, you take 25 mg of the second drug, the effect
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So the company will claim that the second drug is a superior product.
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So give me another monopoly for another 10, 20 years.
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This is called evergreening.
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And the Supreme Court of India has said that evergreening is fraudulent and that it won't
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stand for it in a specific case.
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So in this sense, sort of the Indian government has been more conservative and more strict
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in sort of deciding what patent holders can get away with, far more conservative than
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what the American courts have been.
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And I think that's a good thing.
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I mean, it's good to give patent holders the rights to exploit value from this, but, you
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Evergreening is basically a hack to just keep it going beyond these.
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Yeah, it's an illegal monopoly.
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So you've pointed out three different aspects of what the government could do.
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So I have a clarification on the first and a question on the second.
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The first was you said there should be more public investment in medical research.
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Would that be specifically for local elements like dengue, because after all, in other diseases
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like cancer or blood pressure or whatever, we can just free roll on the efforts of public
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We don't actually need to add to that.
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So this would be specifically targeted towards diseases relevant only to us, which are not
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otherwise likely to see funding.
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Yeah, diseases and disorders that affect Indians more than others.
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So this could also include certain strains of cancer that are just more prevalent in,
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you know, genes that are common in the Indian stock.
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And my question on the second one where you talk about the government subsidizing, that's
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instead of setting the price of say a cancer drug at rupees 100 per pill, it can set the
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price at rupees 100 per pill, but subsidize the rest.
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So if it really costs 400, the government pays the remaining 300.
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But when this is not for generics, when this is for a patented drug that only a specific
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company is manufacturing, for example, then doesn't it incentivize that company to charge
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whatever the hell it wants because the government is going to pay anyway?
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So the government can still do interesting things.
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You know, even if say it's blacksmith line or someone selling a drug, maybe the government
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can just buy it on the open market in a neighboring country.
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So there the price has already been set, right?
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So it's not like, I mean, any drugs price needs to be discovered in India for the first
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It will already be operating in the market.
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If the Indian government genuinely has a conundrum where, you know, they're trying to negotiate
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on a drug which does not exist in the market, yes, what you say is genuine.
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So now that they roughly know what the price is in different countries.
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So I think there is enough basis for a negotiation.
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Unfortunately it just has to be a negotiation.
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I can't think of a better way to solve this problem.
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And if I ask you to put on your economist hat for a moment and speculate about the downstream
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unseen effects of such a subsidy, what are the unwanted unintended consequences that
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it could lead to in turn?
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The first is a moral hazard.
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Something is subsidized so it gets consumed more.
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So a drug that costs 1000 rupees is now available for 10 rupees.
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And so you abuse that drug because you don't, it doesn't pinch you.
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The second is supposing the government decides, hey, this is, it's not going to subsidize
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this drug for all Indians, but only for a few, you know, they might be poorer, they
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might be from a particular reason, whatever reason.
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People without Aadhaar cards.
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People without Aadhaar cards, yes.
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And supposing it does so, then the moment you introduce two prices in the ecosystem,
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then you will have arbitrage, you'll have people buying.
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So you'll have a PDS for drugs, which already exists, right?
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The reason it is not exploited too much is because generics are quite cheap to begin
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Indian pharma, generic pharma companies are among the best in the world.
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We have amazing synthetic chemists figure out how to create any drug you want at the
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You know, so we have that going, that's our strength, which is why making policy on this
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becomes more complicated in the country.
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So broadly you'd say that, look, the unseen effect of setting prices for drugs is the
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shortages and the lack of incentives for companies to invest further in R&D.
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So your three-pronged solution therefore would be that A, there should be more public investment
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in India-relevant diseases.
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Two, if you have to set a price beyond which you know the Indian consumer can't buy and
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too many people will suffer, then you subsidize whatever there is on top of that, but you
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make sure that the manufacturer gets a fair market price.
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Whatever that is, I mean, I don't even know in the absence of the market mechanism what
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a fair market price would be, but you make sure that he's got incentive to keep selling
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And the third one is that you don't allow people to exploit patents by doing the kind
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of hackery that evergreening essentially represents.
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I mean, all of these are sort of speculative suggestions.
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I mean, it's just a very difficult area to make progress, isn't it?
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No drug in dengue is fundamentally different from one drug for dengue, right?
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So we can't imagine an India where we have an Indian medical solution for an Indian problem.
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We've still not crossed that bridge in a big way.
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I think we need a few powerful examples.
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Probably they are on the way.
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I mean, there are talks of a dengue vaccine among some researchers.
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Many of these things float around as ideas for about 10, 20 years.
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Lots of research happens.
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Eventually something hits the market.
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So I think the time is right for a few drugs to, few medicines to start coming out of India
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And I think once we see a few of them successful, I think the constituency for more reward policy
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making on this will only grow.
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It's a pleasure talking to you and thanks for coming on the show.
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So I got to finish telling you about the dream that I mentioned at the start of the show.
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I had been diagnosed with terminal verbosity and my doctor had told me that only peace
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of mind could cure me and peace of mind was out of stock.
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Just as I was beginning to despair, the doctor said, there may be no peace of mind for you,
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but I have a find for you.
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There is another medicine that could help you recover deeper than the tender caresses
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That medicine is called wisdom and understanding and your verbosity not withstanding.
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This medicine is within reach, which is why I beseech you to go right now, somehow, anyhow,
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to scene unseen dot i n to listen to the finest podcast that has ever been.
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It is called the scene and the unseen.
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It will make you hush scene unseen dot i n.
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If you enjoyed listening to the scene and the unseen, check out another hit show from
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Indusworks Media Networks, Cyrus Says, which is hosted by my old colleague from MTV, Cyrus
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You can download it on any podcasting network.
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Good evening, ladies and gentlemen.
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This is your captain speaking.
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Sorry to say, but there's been a slight delay due to the apocalypse having suddenly begun.
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As you can see, there's death, destruction and chaos taking place all around us.
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But don't you worry, food and drinks will be served shortly and I would recommend checking
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out IVM Podcasts to get some of your favorite Indian podcasts.
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We'll keep you going till this whole thing blows over.
