Saturday, October 21, 2006


Pharma cos--govt strike deal--ignoring consumers

ON 2 October, the Indian pharmaceutical industry voluntarily agreed to cap trade margins on
generic drugs at 50 per cent. This will be done by lowering the maximum retail prices on drugs
produced from that date. It had been under pressure from Union chemicals and fertilisers
minister Ram Vilas Paswan to do so.

Two years ago, Paswan found that some companies, including majors like Ranbaxy
Laboratories and Cipla, were offering margins as high as 1,000 per cent to trade to push
medicines not promoted to doctors
. This measure worked as the retailer often switched doctor
-prescribed brands with these drugs (see ‘Price Goes Before A Fall’, BW, 20 September 2004).
Besides, when consumers went to chemists for drugs for common illnesses, they would be sold
the high trade margin (HTM) generics. But this did not benefit the consumers.

With the cap on margins, volumes from HTM generics could be hit. “Retailers may find the
lower margins not enough inducement to substitute a doctor-prescribed drug,” says S. Sawhney, executive vice-president, Dr. Reddy’s, which did not use the HTM route.

In that case, companies earlier making HTM generics will have to find other ways to push them
via pharmacies. Freebies are a possibility. They are common for doctor-promoted brands as
well. But, the companies get margins of 55 per cent or more from doctor-prescribed drugs
compared with 12-15 per cent from HTM generics. So, giving them for the latter may be
unviable. Says a Ranbaxy spokesperson: “Companies will have to keep investing in brand
promotion to keep sales going.”

But are HTM generics worth the trouble? They make up just 10 per cent by value of the
domestic business of large companies. True, companies manage the segment on a shoestring
budget — manufacturing is often outsourced, there is no sales force, and just four or five people
are assigned to run it. But it has caused significant damage to their image as responsible
marketers. Now even maintaining sales will require more effort.

Yet, companies are unwilling to let go of it completely. Ranbaxy and Lupin, two leading players
still want a finger in that pie. Oddly, Cipla, an early mover in generics, says it is winding down
these operations. “We have been at it for nine or ten months,” says joint managing director
Amar Lulla. But its generics sales still hover around Rs 100 crore.

D.G. Shah, an industry veteran and secretary general, Indian Pharmaceutical Alliance, says it is
best for big companies to exit HTM generics. He says any sop to make up for lower trade
margins will take more out of the companies’ pockets than it will bring in. “Where a generic
sold earlier, a prescribed brand may sell just as well,” he adds.

Indeed, it may be better to exit now than 2-3 years ago. The Rs 25,000-crore pharma market is growing at about 12 per cent, double the rate of a couple of years ago, driven by doctor-
prescribed drugs. So, companies may not feel the pinch of getting out of HTM generics.
More important, it appears that the industry has called truce with Paswan. In return for lower retail prices on what makes up 7 per cent of the pharma market, a more benign Paswan will likely not impose more stringent price controls on the entire industry in the proposed new pharma policy as he had threatened he would.

On the whole, Paswan’s medicine may taste a lot less bitter than it looks (for the companies).

Gauri Kamath Businessworld

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