Centre may cap trade margins for drugs in stages; companies oppose plans

The Centre is considering rationalising trade margins for drugs first at 45 per cent and gradually lowering them and capping them at 30 per cent, possibly starting with one drug category at a time, such as antibiotics and pain and analgesics. Business Standard has learnt that some of the drug majors such as Cipla and Alkem, among others, have opposed the proposal because they have a sizeable business in unbranded generic medicines. 

While the trade margins for branded generics are standardised by trade, the margins vary in the case of unbranded generics. An email sent to Cipla did not elicit an immediate response. Alkem could not be contacted for a comment. 

A pharma industry source, who is part of the industry and government discussions, said, however, that the pharma industry had given in-principle agreement to the proposal and talks were on to work out the staggered implementation.

For scheduled products, the trade margins are 8 per cent to the stockist and 16 per cent to the retailer. For non-scheduled products, it is 10 per cent and 20 per cent, respectively. At present, the pharma price regulator, the National Pharmaceutical Pricing Authority, fixes the prices of scheduled drugs, while non-scheduled drugs are allowed to go up by up to 10 per cent every year. Around 19 per cent of the Rs 1.3-trillion domestic pharma market is under price controls at the moment.

• Margins may first be capped at 45 per cent and then brought down to 30 per cent.

• Pharma industry has in principle agreed to the margin rationalisation plan.

• It has requested the Centre to do so in a phased manner for easier transition.

• Margins for branded generics are standard already and hover around 30 per cent.

• For trade generics, the margins vary.

• Firms like Cipla and Alkem, who have big trade generics businesses, are learnt to have opposed the margin cap move.

The trade margins are quite standard and it is an established industry norm between the drug firms and the trade to have them at around a 30 per cent level. 

“As a manufacturer, our discretion is to fix the maximum retail price and then the trade margins for branded generics are standard. However, for promotional schemes, at times, manufacturers offer higher margins to the trade,” said the sales head of the cardio-diabetic division of an Ahmedabad-based company.

Rationalisation of trade margins, he said, was a good move that was going to benefit the branded medicine players.

For trade generics, however, the margins vary hugely, up to 80 per cent. Trade generics are the unbranded medicines that are sold directly to the distributor and are not marketed through a field force, i.e., medical representatives. This saves the manufacturer marketing costs. This saving is passed on to the trade to incentivise it to promote its products. Almost all big pharma in the country, including Cipla, Alkem, Lupin, Cadila Healthcare, and Sun Pharma have a trade generics business, which helps them to boost their domestic volumes. 

Cipla gets almost a fifth of its domestic revenues from trade generics and so a move to cap margins will affect it, particularly as it has undertaken a major restructuring of its domestic distribution network. Ameesh Masurekar, director at AIOCD Pharmasofttech AWACS, a market research firm, had told Business Standard that for antibiotic injectables, there is some discounting or pricing change at times when a manufacturer sells it to a hospital.