Govt penalty demand on 'overcharging' not tenable, says Cipla

The champion of affordable medicines has been charged with overcharging.

Cipla, whose chairman Yusuf Khwaja Hamied, jolted the global pharma industry in 2001 with his offer to sell anti-AIDS drugs at less than 4 per cent of the price charged by international drugmakers and sold them at less than a dollar a day in Africa, has in January this year got a notice for overcharging for some medicines in India.

The notice, according to an official from the National Pharmaceutical Pricing Authority (NPPA), is for a penalty of Rs 105 crore for overcharging on two drugs. The official, who does not wish to be idenfied, says, "This is an ongoing process at the NPPA and we send out notices to companies whenever we notice any overcharging."

Therefore, this is neither new as there is lot more that has to be recovered from Cipla nor is Cipla the only company that is overcharging. In fact, he says, since the time the drug price control order has been in place in India (called the DPCO-1995), NPPA has to recover around Rs 1,700 crore, including the Rs 105 crore from Cipla.

In response to BUSINESS TODAY's query, a spokesperson of Cipla said in an email: "Cipla would like to clarify that we received a demand notice in January 2014 for Rs 81 crore for overcharging in relation Ciplox eye drops. This notice was for the period May 2008 to November 2013. This demand notice was erroneous because we were complying with the government announced prices effective April 2010. For the period prior to April 2010, the matter was pending in the Supreme Court and we were protected by an interim order of the Supreme Court."

He further says: "We also received a demand notice for another product (Alerid D) for Rs 32 crores for the first time in Jan 2014, towards overcharging for a period of 13 years (Y2000 to Y2013). We had not manufactured this product at all during this period."

The spokesperson says: "Cipla has challenged various price notifications including that of Ciplox eye drops and Alerid D tablets and the Supreme Court of India has already issued an interim order that no coercive steps can be taken against the company to recover the money. The company has also received legal advice that entire amount demanded by the Government is not tenable and sustainable."

In fact, Cipla and some other companies, as we understand from the people at NPPA, have challenged the inclusion of some of the drugs under the NPPA list and that this matter is pending before the Supreme Court with a stay order prohibiting NPPA from taking any coercive action for recovery of the penalty amount.

The penalty amount is the difference between the MRP and the price fixed by the company and is recovered from the company along with interest.

Analysts and those in the industry are divided on what is defined as "overcharging" and what is "affordable". Also, given that affordability is a relative term, being affordable does not necessarily imply a company will made "zero profit margins".

Many feel in most cases a lot depends on the view that the regulator takes on each product. While, globally with most government interventions - mainly through tender-based route of drug procurement, like in Germany - profit margins are getting wafer thin in generic medicines. However, there is still scope to make margins in countries like India where there are branded generics.

As Hemant Bakhru at CLSA points out, "typically the NPPA while working out the pricing of a drug will look at the cost of raw material and cost of production whereas when a company talks of its margins it will also look at its SG&A (selling, general and administrative) expenses, which would also mean expenses incurred on the sales and promotion of the drug".

Estimates vary on the kind of margins possible in India though analysts feel margins in the domestic business can be very good for established brands and by some estimates be in the region of 20 to 25 per cent if not more.

What margins was Cipla making? No one knows. For the moment, all eyes would be on the merits of the case and the view that the Supreme Court takes on the matter.