Stockists stare at shortage as pharma industry gears up for GST

Most companies are minimising the stocking at the distributor level before the roll-out of GST

The pharmaceutical industry expects supply shortages as it gears up for transition into the goods and services tax (GST) regime from July 1. Inventories lying with stockists at the end of May were lower than the levels the previous month, with most companies minimising stocks lying with distributors, ahead of GST implementation. 

According to the data from the market research wing of All India Organisation of Chemists and Druggists (AIOCD), the AIOCD-AWACS, May saw a marginal reduction in Day 1 inventory being carried by distributors. For the overall Indian Pharmaceutical Market (IPM) there is a reduction of 1.3 days in inventory. AIOCD represents over 500,000 medicines sellers across India.

Analysts claim that apart from the stockist inventory, the in-transit stocks too have fallen. Basically, the stockists do want to be saddled up with old stock. 

There is some apprehension amongst stockists that in the new regime, drugs would attract a 12 per cent GST compared to about 9 per cent tax on the maximum retail price (MRP) now. The current tax includes excise and value added tax (VAT) paid by the manufacturer. Daara Patel, the secretary general of the Indian Drug Manufacturers Association (IDMA), said that from July 1 the price of the drug would include GST instead of excise. 

"The retailers are worried whether they would be reimbursed for GST, as excise is paid by the manufacturer and it is the manufacturer who would be reimbursed by the government. Manufacturers have assured retailers that some mechanism would be worked out for reimbursement and there is no reason for the AIOCD to under-stock," he said. 

Things on the ground, however, are quite different. Dr Reddy's Laboratories' inventory days have fallen from 43.9 days in the April end to 39 days by the May end. For Torrent Pharma, it has fallen from 32.5 days to 31.1 days, and for Novo Nordisk, it has fallen from 37.7 days to 25.8 days. 

For drugs that are under price control, the National Pharmaceutical Pricing Authority (NPPA) is now expected to release a fresh list of prices that contains the GST component. After the meeting with industry representatives, it is being said that the NPPA is okay in principle to allow the industry a three per cent rise in prices of medicines when the fresh stocks come in. 

Sources claimed that while the NPPA chairman has agreed to the suggestion and assured to take action, no written communication has been released so far.

A senior official from a leading pharma company in Gujarat said that retailers are refusing to take in additional stocks, fearing that they would have to return them to companies later on. "This has created a temporary slowdown in channel movement. This, however, is likely to get solved soon as more clarity emerges," said the official, who did not wish to be quoted.

In fact, in a recent report, HDFC Securities has hinted about the temporary channel disruption. Companies like Alkem, Torrent Pharma and Cipla, focussed on the domestic market will experience some difficulties in the first half of the financial year 2017-18, owing to the impending GST implementation and resultant channel disruption, the report said.