Proposed cap on trade margins will not hurt pharma cos

India’s proposal to cap the trade margins available to drug distributors will not significantly hurt the profitability of pharmaceutical companies, Fitch Ratings said recently. Trade margin is the difference between the price at which manufacturers/importers sell to stockists and the price charged to consumers. “India’s proposal to cap trade margins…will not significantly hurt the profitability of pharmaceutical companies, as the proposal does not restrict the margins at which pharma companies sell to distributors,” Fitch said in a statement.

Citing media reports Fitch said, the National Pharmaceutical Pricing Authority is making progress in reaching a consensus with pharma companies and distributors to cap the trade margins for drugs that are not under explicit price control. The proposal builds on the regulator’s success in cutting cancer drug prices by as much as 85 per cent following a similar exercise to cap trade margins, it added. The proposal, which aims to make drugs more affordable, will cover an estimated 80 per cent of generic formulations in India. “However, we do not believe it will significantly disrupt pharma distribution, even if implemented in an all-encompassing way, as currently reported. “This is because the existing trade margin for the bulk of generic drugs, which are sold under a ‘branded generics’ model, is already broadly consistent with the proposed 30 per cent level, with wholesale distributors getting 10 per cent and retail chemists 20 per cent of the printed drug price,” Fitch said.

India’s is broadly a branded generics market in which pharma companies sell generic drugs under their own brands, unlike some larger markets globally. This business model, which accounts for 70-80 per cent of generic drugs, is mostly physician driven, as most prescriptions include the brand name rather than only the generic formula.

The moderate level of trade margins under this business model reflects the direct involvement of pharma companies in engaging with physicians to promote their product. “We believe the proposal is likely to have a greater effect on the ‘generic-generic’ segment, in which pharma companies sell their drugs in bulk to distributors who retain higher margins as they handle sales and marketing expenses. “This may temporarily disrupt sales, especially in rural areas, but will also present opportunities for larger pharma companies to gradually establish a greater presence,” it said.

The proposal is also likely to affect the margins of institutional buyers, such as hospital chains that procure in bulk directly from pharma companies, bargaining for higher margins because of direct access to patients in acute need for niche medicines.