How to kill innovations: is bigger always the better?

At a time when the whole country, rather the world is looking for reviving the economy, our country seems to be racing ahead in killing innovations systematically.  We all know that the maximum number of jobs in the industrial sector is created by the small and medium companies and enterprises.  It would make sense, therefore, to provide incentives to such companies, particularly when they do not have any quality or cost disadvantage.  When it comes to promotion of innovations, it is equally well known that start-ups and small companies based on innovative technologies and processes need support of various kinds, including public procurement for advancing the societal innovative index.

Let me state the problem, particularly from the perspective of the drug industry, and share the policy mismatch between the need to promote innovations and dysfunctional procurement procedures for safe and innovative medicines. Once a drug is approved to be safe and effective, based on rigorous evaluation by regulatory agencies and vetted through publication in peer review journals or other scientific means, there should be no discrimination in the procurement policy in favour of large corporations.  Recently, I came across a situation where such a bias is not only evident but also seems so blatant that it puts a question mark on the purpose of national policy.  Several public health institutions such as All India Institute of Medical Sciences, TATA Memorial Hospital, and Safdarjang Hospital seem to require minimum turnover of 50 or 100 crore in the current year raised from 20 crore in 2010 for at least Safdarjang Hospital, New Delhi.  Lifesaving drugs produced in a safe and effective manner do not get any quality advantage merely because of scale.  Let us say, company X has ten crore turnover and has met all the regulatory requirements and may even have a patent and in some cases, recognition by the Department of Science and Technology. Should procurement from such a company be either restricted to only 20 per cent, it being an MSME, or should the entire procurement be made from such a company if it meets quality and price norms in the tender? This is the central question.  By putting a minimum turnover criterion, a reverse reservation is being practiced in favour of larger companies.  Since this will mean disqualification of lower priced, equally good drugs, public institutions will patronise large inefficient producers and thus slowdown economic growth.

There is yet another clause in the tender document requiring patents certification from drug regulators.  It is obvious that patents cannot be certified by drug regulators.  Whosoever has put this clause, neither knows the law nor understands innovations.

The review of procurement policies of various countries including the European Union, the US and some of the developing countries shows no such bias as is apparent in Indian policy.  In fact, the US FDA says, “In consonance with Congressional directives, special effort is made to assure maximum participation by small and disadvantaged businesses in the procurement of materials and services by the Administration”.  Between 2005 and 2010, the Brazilian pharmaceutical sector had increased its production by 50 per cent and capacity utilisation was about 74 per cent. The share of domestic producers of generics is more than 50 per cent and their prices are lower by 35 per cent. This could not have been achieved without a healthy public procurement policy. Brazil has reduced its public procurement cost by following reverse auction and removing any advantage that large corporations might have had in the past.  It is only India which seems to be doing the opposite. Brazil had 170,000 registered suppliers with 2000 new suppliers joining every month in 2002 competing for federal contracts involving 50,000 material items and 2500 service items. It not only reduced corruption but also improved value for every Real it spent. At a time when the need for government intervention in public health is increasing, perverse procurement policies are reducing the efficiency in the system and slowing down the growth of economy and employment.  If somebody can explain how a minimum turnover requirement can ensure better quality of drugs or advantages for patients, a new economic theory will have taken birth. Paying more because turnover is high involves making assumptions which seem completely illogical.  Ironically, as an entrepreneur observed, why would 20 per cent procurement from an MSME unit for a drug (developed through public R&D spending, awarded for its innovativeness and quality), be a good goal by keeping 80 per cent for higher priced and less innovative formulations from a larger company.

It shows that potential for economic growth in our society is being stifled by design.  Whose interest does this design serve is not difficult to imagine. As if there were no lessons to be learnt nearby, in Delhi itself by pooling the procurement requirement of different hospitals, the prices of many of the essential drugs were one fifth to half of the ones paid by the national drug procurement agency more than a decade ago. Incentives for innovative firms providing cheaper and equally efficient and safe drugs are a must if we want to promote innovations in this decade.  I hope the PMO is listening.