THE FUTURE OF INDIA’S DISTRIBUTION SYTEMS IN PHARMA INDUSTRY

Organized Retail

Although organized retail pharmacies are still in their infancy in India, they have begun to make inroads into the distribution system. Subiksha Retail Services Pvt Ltd was the first to open a retail pharmacy chain. Subiksha Retail Services Pvt Ltd. opened two outlets in Mumbai by The Medicine Shoppe, a large US retail drug store. It also franchised three other locations in Calcutta and Baroda. Other companies have entered the market, including Health & Glow and Pills & Powders. Reliance Wellness has also set up units.

Nitin Gokarn is a senior Merck India manager for supply chain management (SCM). He is optimistic about the growth of organized retail. He stated that organized retail is facing strong resistance from traders, but it still has great potential. He adds that it will require a lot of political will and reforms to make this happen. A well-organized retail system would allow pharmaceutical companies to sell medicine at higher margins. Some speculate that retailers might even be able to pass cost savings on to end-users.

Large Untapped Rural Market

According to the Indian Retail Druggists and Chemists Association, the growth in institutional sales did not have an impact on rural medicine accessibility.

Rural populations still have limited access to medication, and it may take a while for this situation to improve. Rural areas make up around 21% of the total pharmaceutical market. The rural pharmaceutical market was valued at $1.4 billion in 2006-2007. Nearly 70% of India’s population lives in rural areas with poor healthcare infrastructure. The rural market is growing in popularity due to rising rural household incomes. The Planning Commission estimates that rural households spend 12% of their income now on healthcare.

Impact Value Added Tax (VAT).

The introduction of VAT has made medicine prices more consistent and reduced-price discrimination. Different states may pay different prices for identical products. The illegal interstate transfer and unethical interstate commerce for higher margins have been reduced by VAT. The new rules provide that sales tax is collected at every stage of value addition, and credit can be given for tax paid.

IT Adoption

IT adoption in healthcare has increased dramatically. Integrated solutions in SCM have become a necessity for pharmaceutical companies to maintain inventories at the optimum level, improve distribution, liquidate stock, and streamline interconnection between manufacturing facilities, pharmaceutical warehousing, and CFAs from different states. Apart from custom software, SAP and SAS are increasingly being used. However, the adoption of radio-frequency identification (RFID), has been slow.

Future Challenges

Indian pharmaceutical companies have come to realize the importance of SCM, and are actively seeking ways to reduce costs. India’s distribution is more expensive than in the US and EU. Companies have dedicated as much as a third of their revenue to financing supply-chain operations in India. They also know that logistics costs are very high in India. The average SCM expenditure in India is 4-6% of total sales. This compares to the 2% spent on SCM in the US and EU. Gokarn says that India’s drug prices are much lower than those in developed countries. It is hard to reduce the costs of SCM when you consider the poor infrastructure and the extreme geographical conditions.

Long-Channel Inventory Management

Lobbying at all levels and the multilayered distribution channel has prevented pharmaceutical companies from bringing about significant reforms towards higher trade margins. It also helped them bypass multiple distribution layers to directly reach their customers. Pharmaceutical companies don’t have direct access (tertiary sales) to data from retailers, so most pharmaceutical companies rely on the sales data of stockists to monitor sales (secondary). Transferring stock from the central warehouse into its CFA is part of the primary sale. Predetermined sales targets are set for medical representatives. They push stockist inventory to levels that are higher than the actual demand to meet their predetermined sales targets. If the next level is not reached, the stockist will return the goods or expire the stock.

Increased Competition between Wholesalers & Retailers

With so many acquisitions and mergers in India’s pharmaceutical industry, there has been an increase in stockists. Two stockists may work for the same company and could be competing with each other. This is where retailers take advantage by asking for longer credit terms and asking for higher discounts. This hurts stockists because they must comply with the retailers to maintain their business.

Substitution of a Brand

Indian pharmaceutical companies have also suffered from generic drug prices, which can be as low as two to fifteen times the price of the same drug. To capture market share, generic drugs companies often offer greater retail trade margins. Generic drugs can sometimes offer up to 500% trade margins which can be a lucrative offer to retailers and lead to brand substitution.

Recalling Drugs

India has no reliable system for recalling medicines. Because of the fragmentation of India’s distribution network, recalling a drug can be a difficult task. RFID, a newer technology that tracks products throughout the chain, would make it easier to prevent counterfeit drugs from entering the system.

International Competitiveness and Cold-Chain Management

Indian pharmaceutical companies are looking for ways to sell drugs to the global market. This goal will only be achieved if cold-chain management techniques are improved. If the industry wants to maintain product quality throughout shipment, this is a major challenge. In India, Eli Lilly has implemented initiatives like having its vehicles equipped with cold chain management systems. World Courier and other companies have also developed cold-chain management systems to aid pharmaceutical companies in maintaining their cold chains.

CONCLUSION

Manufacturers need to ensure that their drugs reach customers in a safe and compliant manner. In India, cold-chain management is expensive because the manufacturers don’t have control over the multilayered distribution system. Manufacturers are becoming more aware of the importance and effectiveness of a distribution system that reaches the end customer. The patient and healthcare system will benefit from Indian systems that are streamlined.

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