Tuesday, November 27, 2007
Selling Medicines
Businessworld
Gina S Krishnan
A decade ago, when Subhiksha, the no-frills discount chain, opened its first store in Chennai, a 100-strong crowd gathered outside on its third day. Founder and poster boy for organised retail, Ramaswami Subramanian, had little cause to rejoice, though. His vociferous visitors were neighbourhood chemists protesting the sale of medicines at 8-10 per cent below the maximum retail price.
“It took us two-and-a-half years to win our freedom to operate [the pharmacy business],” Subramanian was quoted as saying in an interview. It was a 1999 Supreme Court judgement that forced wholesalers to resume supply to Subhiksha, allowing it to sell medicines at a discount, which set a precedent that remains, regrettably, only that.
The Subhiksha experience is a reflection of the power wielded by the All India Organisation of Chemists and Druggists (AIOCD), the Mumbai-headquartered association of pharma wholesalers, stockists, distributors and retailers that decides who can be a part of the pharmaceutical supply chain in India. It issues discretionary no objection certificates (NOCs), creating, in the process, one of the toughest pharma retail markets in the world.
India tops the ranking in the Global Retail Development Index compiled by A.T. Kearney, ahead of Russia and China. The estimated $350-billion (Rs 14-lakh crore) market, pegged to nearly double by 2015, is full of internal pushes and pulls. Nowhere is this more obvious than in pharma retail, which has assiduously kept organised competition at bay so far.
More’s the pity. As elsewhere, the pharma sector can benefit from organised retail. Economies of scale will result in better prices for consumers. Bulk sourcing directly from manufacturers will also serve to neutralise the spurious drugs market, which is estimated to account for a whopping 25 per cent of all medicines sold in India.
Wrong Chemistry
India’s highly fragmented medical drugs market has close to 20,000 registered pharmaceutical companies with large manufacturing capabilities. And prescriptions are written according to the doctor’s preference, so pharmacies have to store a number of brands even if the molecule is the same.
Pharma companies appoint carrying and forwarding (C&F) agents for every state, sometimes more than one for large states such as Maharashtra and UP. They move products to at least one stockist or wholesaler in smaller cities, who then pass them on to neighbourhood medical shops, many of which are owned by wholesalers.
The government controls the price of 354 products and wants to increase that number. Retail margins are an assured 25 to 32 per cent. But the inefficient four-level supply chain and large number of pharmacies mean that revenue per pharmacy is really low.
Maximum Retail Problems
Zuellig Pharma, a Hong Kong-based pharma distribution company and logistics major in South Asia, started operations in India last year. It does not have a single order from a pharma company or retail firm till date.
A large player such as Zuellig can bring in economies of scale. But they have no idea when they will service the first order. “We have to be present in India”, says a senior official of Zuellig, who does not wish to be named. “It is an investment in the market. Right now, our expenses are only on meeting with companies and understanding how the market works. We are sure we will get orders. In any case, large players like us will also bring in efficiencies of scale.”
Even manufacturers are inhibited about dealing directly with bulk buyers such as Subhiksha, and logistics companies such as Zuellig. The AIOCD is a strong association and most feel that it’s best not to antagonise it. Moreover, drug companies neither have the time nor the inclination to go against existing relationships, which have been built over years, sometimes even decades. In any case, the volumes are not large enough for the pharma company to antagonise local AIOCD players.
Subhiksha has been able to procure supplies only from existing channels, for cash as against the 60-day credit enjoyed by other chemists. Its skirmishes with AIOCD continue. For instance, in March, the Chandigarh Chemists Association cut supplies of all medicines and pharma goods to Subhiksha. Distributors demurred delivery on grounds of depleted stocks.
Rajendra Pratap Gupta, formerly head of retail and supply chain at Reliance Health, which may yet prove to be a major player in the future, initiated the setting up of a parallel ‘Association of Professional Chemists and Distributors of India’. While agreeing to the idea in principle, many of its potential members believe that taking on AIOCD will be easier prescribed than achieved. With Gupta’s exit from Reliance Health, this alternative stands shelved as of now.
Growing, Growing...
Organised pharma retail has grown in three waves. In 1999-2000, chains such as Lifesprings, Subhiksha, Medicine Shoppe, and Health and Glow stirred the market. Some have grown, others closed, yet others stagnated. Dial for Health, CRS, 98.4, Guardian Life and Medplus led the second wave. This year, three large groups have heralded fresh hope: the Ranbaxy-promoted Fortis Healthworld, Manipal Cure and Care and, most recently, Reliance Wellness. None are members of AIOCD but accept whatever discount wholesalers and distributors give them for the volumes they lift.
“In times to come, there will be Wal-Mart and Walgreens coming to India,” says Shinde. That’s the opportunity Zuellig is waiting for. In the US, almost 80 per cent of the market is controlled by three wholesalers, McKesson, Cardinal Health and AmerisourceBergen. They operate with warehouses in strategic locations and sell to hospitals and retail pharmacies.
The Apollo Group, which buys through its central procurement company Keimed and has 300 pharmacies besides 22 hospitals, currently, gets the highest discounts. Reliance Retail and Wal-Mart will also cut out intermediaries. An Ernst & Young study provides evidence of efficiencies derived by operating with big wholesalers.
They protest needlessly. With pharma as a small part of its retail outlets — often just one counter — Subhiksha does not sell the 30,000-odd products that the average pharmacy stocks. Only a list of generic medicines is put up. Customers cannot expect to meet all their prescription needs here.
Gina S Krishnan
A decade ago, when Subhiksha, the no-frills discount chain, opened its first store in Chennai, a 100-strong crowd gathered outside on its third day. Founder and poster boy for organised retail, Ramaswami Subramanian, had little cause to rejoice, though. His vociferous visitors were neighbourhood chemists protesting the sale of medicines at 8-10 per cent below the maximum retail price.
“It took us two-and-a-half years to win our freedom to operate [the pharmacy business],” Subramanian was quoted as saying in an interview. It was a 1999 Supreme Court judgement that forced wholesalers to resume supply to Subhiksha, allowing it to sell medicines at a discount, which set a precedent that remains, regrettably, only that.
The Subhiksha experience is a reflection of the power wielded by the All India Organisation of Chemists and Druggists (AIOCD), the Mumbai-headquartered association of pharma wholesalers, stockists, distributors and retailers that decides who can be a part of the pharmaceutical supply chain in India. It issues discretionary no objection certificates (NOCs), creating, in the process, one of the toughest pharma retail markets in the world.
India tops the ranking in the Global Retail Development Index compiled by A.T. Kearney, ahead of Russia and China. The estimated $350-billion (Rs 14-lakh crore) market, pegged to nearly double by 2015, is full of internal pushes and pulls. Nowhere is this more obvious than in pharma retail, which has assiduously kept organised competition at bay so far.
More’s the pity. As elsewhere, the pharma sector can benefit from organised retail. Economies of scale will result in better prices for consumers. Bulk sourcing directly from manufacturers will also serve to neutralise the spurious drugs market, which is estimated to account for a whopping 25 per cent of all medicines sold in India.
Wrong Chemistry
India’s highly fragmented medical drugs market has close to 20,000 registered pharmaceutical companies with large manufacturing capabilities. And prescriptions are written according to the doctor’s preference, so pharmacies have to store a number of brands even if the molecule is the same.
Pharma companies appoint carrying and forwarding (C&F) agents for every state, sometimes more than one for large states such as Maharashtra and UP. They move products to at least one stockist or wholesaler in smaller cities, who then pass them on to neighbourhood medical shops, many of which are owned by wholesalers.
The government controls the price of 354 products and wants to increase that number. Retail margins are an assured 25 to 32 per cent. But the inefficient four-level supply chain and large number of pharmacies mean that revenue per pharmacy is really low.
Maximum Retail Problems
Zuellig Pharma, a Hong Kong-based pharma distribution company and logistics major in South Asia, started operations in India last year. It does not have a single order from a pharma company or retail firm till date.
A large player such as Zuellig can bring in economies of scale. But they have no idea when they will service the first order. “We have to be present in India”, says a senior official of Zuellig, who does not wish to be named. “It is an investment in the market. Right now, our expenses are only on meeting with companies and understanding how the market works. We are sure we will get orders. In any case, large players like us will also bring in efficiencies of scale.”
Even manufacturers are inhibited about dealing directly with bulk buyers such as Subhiksha, and logistics companies such as Zuellig. The AIOCD is a strong association and most feel that it’s best not to antagonise it. Moreover, drug companies neither have the time nor the inclination to go against existing relationships, which have been built over years, sometimes even decades. In any case, the volumes are not large enough for the pharma company to antagonise local AIOCD players.
Subhiksha has been able to procure supplies only from existing channels, for cash as against the 60-day credit enjoyed by other chemists. Its skirmishes with AIOCD continue. For instance, in March, the Chandigarh Chemists Association cut supplies of all medicines and pharma goods to Subhiksha. Distributors demurred delivery on grounds of depleted stocks.
Rajendra Pratap Gupta, formerly head of retail and supply chain at Reliance Health, which may yet prove to be a major player in the future, initiated the setting up of a parallel ‘Association of Professional Chemists and Distributors of India’. While agreeing to the idea in principle, many of its potential members believe that taking on AIOCD will be easier prescribed than achieved. With Gupta’s exit from Reliance Health, this alternative stands shelved as of now.
Growing, Growing...
Organised pharma retail has grown in three waves. In 1999-2000, chains such as Lifesprings, Subhiksha, Medicine Shoppe, and Health and Glow stirred the market. Some have grown, others closed, yet others stagnated. Dial for Health, CRS, 98.4, Guardian Life and Medplus led the second wave. This year, three large groups have heralded fresh hope: the Ranbaxy-promoted Fortis Healthworld, Manipal Cure and Care and, most recently, Reliance Wellness. None are members of AIOCD but accept whatever discount wholesalers and distributors give them for the volumes they lift.
“In times to come, there will be Wal-Mart and Walgreens coming to India,” says Shinde. That’s the opportunity Zuellig is waiting for. In the US, almost 80 per cent of the market is controlled by three wholesalers, McKesson, Cardinal Health and AmerisourceBergen. They operate with warehouses in strategic locations and sell to hospitals and retail pharmacies.
The Apollo Group, which buys through its central procurement company Keimed and has 300 pharmacies besides 22 hospitals, currently, gets the highest discounts. Reliance Retail and Wal-Mart will also cut out intermediaries. An Ernst & Young study provides evidence of efficiencies derived by operating with big wholesalers.
They protest needlessly. With pharma as a small part of its retail outlets — often just one counter — Subhiksha does not sell the 30,000-odd products that the average pharmacy stocks. Only a list of generic medicines is put up. Customers cannot expect to meet all their prescription needs here.
