PRICING AND MARGINS
The prices and the margins of drugs for the wholesaler and retailers are largely decided by the National Pharmaceutical Pricing
Authority (NPPA), which varies depending on whether the active constituent of the product is a scheduled drug or a nonscheduled
drug. Scheduled drugs are price-controlled whereas nonscheduled drugs are not. The NPPA is an organization of the government
of India established to fix or revise prices of controlled bulk drugs and formulations. Companies must keep drug prices affordable
to the general public. To keep medicines within reach of the poor population, the government has covered 76 scheduled drugs.
In addition to the above mentioned margins, wholesalers and retailers are also compensated with additional trade offers. Hospitals
and large institutions sometimes directly negotiate with the manufacturing company and get the drugs in their pharmacy at
lower costs. Stockists compete with each other in a given city. Generally, hospitals order large quantities and can negotiate
with stockists, who provide payment terms, credit periods, and margins.
Further, retailers and distributors form associations locally and nationally, and manufacturing companies must comply with
their terms. For example, in many states when a company launches a new product (either branded or generic), to make that product
available in the pharmacy, the company has to pay commissions to the chemist (pharmacy) association. On receiving the commission
the association will issue a no-objection certificate, which is mandatory for any company to make their product available
in the market. Cipla, a manufacturer of asthma drugs, tried to bypass the supply chain by providing home service for its products.
Cipla faced strong resistance from the traders lobby, which stopped stocking Cipla's product. Ultimately, Cipla had to withdraw
the scheme.
THE FUTURE OF INDIA'S DISTRIBUTION SYSTEMS
Organized Retail
Organized retail pharmacies are in a nascent stage in India, but have started making inroads in the distribution system. The
first retail pharmacy chain was started by the Subiksha Retail Services Pvt Ltd. The Medicine Shoppe, one of the largest retail
drug stores in the US, opened two retail outlets in Mumbai and has franchised three more in Mumbai, Calcutta, and Baroda.
Others have also entered the field including Health & Glow, Pills & Powders, and Reliance that has set up units under the
brand name of Reliance Wellness.
Nitin Gokarn, senior manager of supply-chain management (SCM) at Merck India, is optimistic for the growth of organized retail.
He says that, "Though organized retail faces strong resistance from the traders lobby, it has a great potential." He also
opines that, "It will take a great deal of political will and reforms to make this happen." With an organized retail system,
pharmaceutical companies would be able to offer medicine at higher margins, and some speculate that retailers may even be
able to pass on cost benefits to the end-users as well.
Large Untapped Rural Market
The growth of institutional sales had little impact on the accessibility of medicine in rural areas, according to an analysis
by the Indian Retail Druggists and Chemists Association.
A large proportion of the rural population still does not have access to proper medication and the situation may take long
to improve. Rural areas contribute around 21% to the total pharmaceutical market. In 2006–2007, the rural pharmaceutical market
was estimated at around $1.4 billion. Nearly 70% of India's population lives in rural areas where the healthcare infrastructure
is poor. With increasing rural household incomes, the rural market is becoming more attractive. According to estimates by
the Planning Commission, rural households now spend 12% of their income on healthcare.
Value Added Tax (VAT) Impact
With the introduction of VAT, medicine prices have been standardized and price discrimination, in which different states pay
different prices for the same products, has reduced. VAT has also helped reduce the illegal interstate transfer of goods and
the unethical interstate trade for higher margins. Per the new rules, sales tax is levied at each stage of value addition
and credit for the tax paid on the inputs can be obtained.
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