Govt weighs incorporating trade-margin rationalisation into DPCO

No deadline set for policy; non-scheduled drugs account for 82% of market, average channel markup on common dosage forms is 43%

In a move that can widen the government’s mechanism for controlling medicine prices beyond setting their ceiling, the Centre is examining a proposal to incorporate trade margin rationalisation (TMR) in the Drug Price Control Order (DPCO), 2013.

 

The TMR mechanism regulates the difference between the price a manufacturer charges a distributor and what a consumer pays.

 

However, no timeframe has been set for it, according to the Department of Pharmaceuticals (DoP).

 

The department is examining the matter, the DoP told a parliamentary committee examining the functioning of the National Pharmaceutical Pricing Authority (NPPA) and the department.

 

The deliberations are significant because non-scheduled formulations — medicines not subject to price ceiling — account for around 82 per cent of the domestic pharmaceutical market by value. Citing the Pharmarack data for 2024-25, covering around 98,000 stock-keeping units, the department said scheduled formulations constituted approximately 18 per cent of the market by value. The data also showed that around 87 per cent of the non-scheduled market had a weighted average markup of up to 45 per cent. Only around 4 per cent had a weighted average markup exceeding 100 per cent of the price to the distributor.

 

“Thus, the huge margin in the sector is not a norm but may be only in a small segment of this market,” the department said.

 

For commonly used dosage forms such as tablets, capsules, sachets, gums and strips, the average combined markup accruing to distributors, stockists, wholesalers and retailers was around 43 per cent, according to the Pharmarack data submitted to the committee.

 

The database, however, captures price points only at distributor and retailer levels. It does not separately capture the margins earned by intermediate participants such as stockists and wholesalers.

 

Margins vary across products

 

Trade margins vary across medicines, the department said, depending on their dosage form, sales volumes, ex-factory prices, marketing and distribution models, and the cost of servicing different markets.

 

Products requiring sterilisation, cold-chain facilities or specialised packaging — including vials, ampoules and glass bottles — generally incurred higher trade-channel costs.

 

Low-volume medicines could also have higher distribution costs per unit because fixed costs are spread over a smaller number of units. Similarly, medicines with low ex-factory prices could show relatively high distribution costs when these were expressed as a percentage of the factory price.

 

Marketing and distribution structures also influenced margins. In the case of some micro, small and medium enterprises (MSMEs), expenditure on developing a market was borne by the trade channel rather than by the manufacturer, the department said.

 

Trade-channel expenses were also higher in remote areas because of lower sales volumes, greater inventory and logistics costs, and the need to maintain stocks across dispersed markets.

 

The DoP said it would take into account stakeholder suggestions and do a detailed analysis of the market data before formulating a policy on appropriate trade margins across therapeutic categories.

 

Enabling provision under examination

 

The DPCO, 2013, was issued under Section 3 of the Essential Commodities Act, 1955. The department said it had consultations with stakeholders and was using both the feedback and the experience gained from earlier TMR pilots to examine the inclusion of a suitable enabling provision in the DPCO.

 

Unlike conventional price control, which fixes a ceiling price for a formulation, TMR seeks to cap the margin available across the distribution and retail chain.

 

The government has previously used TMR as a pilot for 42 high-priced anti-cancer medicines. During the pandemic, it also capped the trade margins on oxygen concentrators and five other medical devices — pulse oximeters, blood-pressure monitors, nebulisers, digital thermometers and glucometers — at 70 per cent of the price to distributor.

 

The DoP said pharmaceutical industry associations and consumer groups had supported the proposed TMR framework, while making recommendations on the method of calculating margins, the percentage at which margins should be capped, phased implementation and the period of sales data to be considered. Suggestions also covered the possible impact on low-value and low-volume medicines.

 

Some stakeholders, however, raised concern about the scope and implementation of the framework.

 

Associations representing MSMEs said that applying TMR to non-scheduled formulations could disproportionately affect smaller companies, lead to employment losses, and disrupt the availability of medicines in remote areas.

 

Such companies often depend on small traders to market and distribute their products in low-volume regions. The need to provide margins at multiple stages of the channel results in high aggregate trade margins while also allowing medicines to remain available at competitive prices, the MSME associations argued.

 

The department said it was engaging with stakeholders to address these concerns while preparing a policy proposal and possible amendments to the DPCO, 2013.

 

No provision for cost-audit pricing

 

Responding to a suggestion that the government should conduct cost audits until the TMR policy was finalised, the department said the present regulatory framework did not permit the NPPA to use cost-audit data for price fixation.

 

“(According to) the existing framework, the mandate of the NPPA is to fix the prices based on market data. There is no provision in the DPCO, 2013 to consider cost-audit-based data for price fixation,” it said.

 

The NPPA sets ceiling prices of scheduled medicines, using market data. It also fixes the retail prices of new drugs and monitors price increases in non-scheduled medicines.

 

For non-scheduled formulations, manufacturers are generally allowed to set prices, subject to restrictions on annual price increases. TMR has so far been applied through the extraordinary powers available to the NPPA under Paragraph 19 of the DPCO, 2013, for limited periods or specified products.

 

Paragraph 19 interventions

 

The government invoked Paragraph 19 during the pandemic to regulate the prices of essential medicines, medical oxygen and medical devices.

 

In September 2020, ceiling prices were fixed at ₹15.22 per cubic metre for liquid medical oxygen and ₹25.71 per cubic metre for medicinal oxygen.

 

In June 2020, the ceiling prices of heparin injections of 1,000 IU per ml and 5,000 IU per ml were raised by 50 per cent to ₹24.39 and ₹60.54 per ml, respectively, to ensure their continued availability during the pandemic.

 

The NPPA has also used Paragraph 19 to grant exceptional price increases where manufacturers indicated that medicines could become commercially unviable and disappear from the market.

 

In July 2021, the prices of nine scheduled formulations, covering three drugs, were given a one-time increase of 50 per cent over their prevailing ceiling prices.

 

In October 2024, a similar one-time increase was granted to 11 scheduled formulations covering eight drugs.

 

The ceiling prices of orthopaedic knee implants, first notified in 2017, have also been repeatedly extended or revised under Paragraph 19. The latest extension, issued in November 2025, continues the ceiling prices until November 15, 2026, or until further orders.

 

Limited data on trade generics

 

The parliamentary committee sought information on margins in the trade-generics segment, which is closely associated with MSME manufacturers and distribution in rural and low-volume markets.

 

The department said “trade generics” had not been defined under the DPCO. Based on industry submissions, the term refers to generic formulations distributed primarily through a separate marketing channel focused on remote, rural and low-volume markets.

 

Distributors and retailers in this channel incur additional costs because of higher logistics expenses, greater inventory-carrying costs, slower stock movements, a higher risk of medicines expiring, and higher financing costs arising from weaker credit access and smaller retail balance sheets.

 

Neither the department, nor Pharmarack separately captures the size of the trade-generics market or the margins earned at different stages of this channel.

 

The Indian Federation of Pharma Generics has estimated that India has around 7,500 MSME pharmaceutical manufacturers, accounting for approximately 10 per cent of the pharmaceutical market, the department told the committee.

 

The lack of granular information on this segment, together with concerns about access in remote markets, is likely to complicate the formulation of a uniform trade-margin cap. The government will have to balance the objective of reducing excessive margins with the need to preserve the commercial viability and nationwide distribution of low-volume medicines.