Indian Pharma Largely Unaffected by Proposed Caps on Trade Margin, Says Fitch Ratings
India's proposal to cap trade margins available to drug distributors will not significantly hurt the profitability of pharmaceutical companies, as the proposal does not restrict the margins at which pharma companies sell to distributors, says Fitch Ratings.
The National Pharmaceutical Pricing Authority (NPPA)—the regulatory body responsible for drug-pricing matters—is making progress in reaching a consensus with pharma companies and distributors to cap the trade margins for drugs that are not under explicit price control.
The proposal builds on the regulator's success in cutting cancer drug prices by as much as 85% following a similar exercise to cap trade margins.
The proposal, which aims to make drugs more affordable, will cover an estimated 80% of generic formulations in India.
"However," Fitch says, "we do not believe it will significantly disrupt pharma distribution, even if implemented in an all-encompassing way, as currently reported. This is because the existing trade margin for the bulk of generic drugs, which are sold under a 'branded generics' model, is already broadly consistent with the proposed 30% level, with wholesale distributors getting 10% and retail chemists 20% of the printed drug price."
India's is broadly a branded generics market in which pharma companies sell generic drugs under their own brands, unlike some larger markets globally. This business model, which accounts for 70%-80% of generic drugs, is mostly physician driven, as most prescriptions include the brand name rather than only the generic formula.
The moderate level of trade margins under this business model reflect the direct involvement of pharma companies in engaging with physicians to promote their product.
Fitch says, "We believe the proposal is likely to have a greater effect on the 'generic-generic' segment, in which pharma companies sell their drugs in bulk to distributors who retain higher margins as they handle sales and marketing expenses. This may temporarily disrupt sales, especially in rural areas, but will also present opportunities for larger pharma companies to gradually establish a greater presence. The proposal is also likely to affect the margins of institutional buyers, such as hospital chains that procure in bulk directly from pharma companies, bargaining for higher margins because of direct access to patients in acute need for niche medicines."
Within Fitch's rated portfolio, Glenmark Pharmaceuticals Ltd derived a large 32% of its revenue from the domestic market in the first half of the financial year ending September 2019. Nonetheless, the ratings agency says, "the company's business is mostly focused on branded generics under the retail model, which accounted for more than 90% of its sales in India. Hence, we do not believe the proposal will significantly affect the company."