Pharma distribution on threshold of revolutionary changes: E&Y

Ernst &Young in its latest report on the issues and opportunities in the Indian pharmaceutical, biotech and healthcare sectors, said that the pharmaceutical distribution landscape in the country was on the threshold of some revolutionary changes characterised by large-scale consolidation.

The report, titled 'Health Quotient', said that the highly fragmented nature of the prevailing distribution model in the domestic pharmaceutical market had adversely impacted the industry in several ways, including high distribution margins, high logistic costs, ineffective control over channel inventory, sub-optimal penetration of the rural market, among others.

It said that low average revenues per retailer/stockist necessitated high trade margin and also deterred investments in systems.

It also highlighted unfair practices such as substitution of prescribed drugs and non-compliance with the regulatory requirement of storing drugs at the retail level due to loose network.

The report mentioned the value-added tax (VAT) system, rationalisation of product portfolio and growing institutional sales as the prominent forces driving the change in the present distribution system.

"The distribution set up in Indian pharma industry has evolved on the basis of the two-tier tax structure, namely central sales tax and local sales tax. While inter-state sale of goods attract CST, inter-state transfer of goods does not attract any tax. Therefore, in order to avoid CST, all the medium and big pharma companies have a carrying & forwarding agent (CFA)/company depot in each state and transfer goods as inter-state stock transfer," the report said, adding that the VAT regime would eliminate any benefit deriving from transfer of goods, resulting in a change from a sales tax-based distribution network to a logistic-based distribution network.

Increasing focus of pharma companies on 'disease management' is also expected to trigger the growth in direct selling of these products to patients and institutions, which would bypass distribution intermediaries, the report said.

The report also acknowledged the trend of vertical integration of companies into API (active pharmaceutical ingredients) citing the comparative profitability of APIs over finished dosage products as the reason for this.

It also predicted a bright future for Indian biopharma companies in the area of vaccines with low and middle-income countries as the potential markets for their products in future.

"Developing countries may not be an attractive market for the large pharmacos, but they hold considerable opportunity for the emerging players in India," it said. The key challenge, according to the report, is accessing and developing new technologies, which are of interest to low and middle-income countries, either as direct buyers or through agencies such as Unicef.

In its nine-page section on the low-cost and high-quality health and medical treatment facilities available in the country as an attractive destination for medical tourism, the report felt that the market could offer $2 billion-a-year business opportunity to Indian hospitals by 2012 as compared to $333 million in 2004.

It termed Gujarat, Delhi, Mumbai, Bangalore, Chennai, besides Kerala as the attractive destinations for medical tourism in different fields while citing selective names of players from these cities.

Surprisingly, Hyderabad, which has been recognised as one of the important hubs for health and medical services both in terms of quality and cost competitiveness, found no mention in the report.