Pharma cos seek govt help to end trade margin row

Written by Jayati Ghose | New Delhi | Updated: Dec 19 2013, 10:42am hrs
Domestic pharmaceutical players have sought government intervention to resolve the trade margin issue with distributors who are refusing to stock essential medicines of specific companies till their demands of higher commissions are met.

While companies such as Abbott and Sun Pharma, who have not yet agreed to raise trade margins, are facing a boycott of their price-controlled drugs by stockists, others like Cipla, Torrent, Mankind and Lupin have succumbed under pressure and eased margins for retailers and distributors to ensure continued availability of their drugs.

A new drug pricing policy, implemented earlier this year, imposed caps on prices of 348 essential medicines (the average of the prices of brands with at least 1% share in a category as existed in may 2012 with provision of inflation-linked adjustments) and recommended margins for wholesalers and retailers from 10% and 20% on the maximum retail price earlier to 8% and 16% on the price to the retailer.

The wholesalers and retailers want these margins to be maintained at the earlier levels, forcing many companies to give the trade slightly higher margins than prescribed under the new DPCO, while compressing their own margins as the final price to the consumer is capped.

This has led to a situation where the trading community refuses to lift stocks (of both price controlled and control-free medicines) from companies that dont provide them the higher margins demanded.

An industry insider said Zydus Cadila and Aristo Pharma were the latest companies who have agreed to hike margins for essential drugs till a final decision is taken. The move could impact their margins.

According to Edelweiss Securities, the revenue loss to the pharma companies on account of price control can be anywhere between 10% and 24% if the prescribed margins are paid and applied on the retail price. Price-controlled drugs account for around 15% of the R79,000-crore domestic pharma market.

The industry has suffered a loss of R2,000 crore on account of deep price cuts of essential medicines. It is, therefore, unable to absorb additional loss of some R750 crore on the account of higher margins to trade, said the Indian Pharmaceutical Alliance, the lobby group of leading domestic drug makers, in a letter to the department of pharmaceutical (DoP).

Earlier, government officials had asked the industry and trade channels to mutually arrive at a loss figure to compensate distributors for the reduced margins. After numerous meetings, the drug firms had proposed they would compensate the distributors for losses amounting to R490 crore, or 4% of retail sales of new formulations, under the revised policy. However, traders have sought compensation of R750 crore, or 6% of retail sales of new formulations.

The letter, sent on Monday, also states that trade has continued its collective coercive action to extract higher margin from the industry.

An official from All India Organisation of Chemists and Druggists denied allegations of any coercive action to increase trade margins.

He said that companies are negotiating trade commissions on individual basis with distributions which is an ethical trade practice.

In September, the Indian unit of GlaxoSmithKline had said that its sales have been affected due to the new price control regime and a segment of the trade channels not buying inventory on demands of higher trade margins.

GSK posted a 33.7% drop in profit in the September quarter because of a decline in sales. Last week, the company informed that traders have resumed purchasing its products in November, after protracted negotiations.