December 06, 2007

Medicines may get cheaper

In a major blow to chemists charging hefty margins from consumers, the government has decided to limit trade margins on all medicines sold in the country. The move will take away companies’ freedom to decide trade margins for almost three-fourths of the market. Currently, trade margin cap is prescribed for only one-fourth of the Rs 35,000-core domestic pharmaceutical market.

The margin for this three-fourth of the market will be fixed at 10% of the maximum retail price (excluding excise duty and other applicable levies) for wholesalers and 20% for retailers, government sources said. Consequently, the retail prices of medicines may come down. A notification to this effect is likely in the next couple of weeks. The ministry is expected to amend the drug price control order of 1995 soon to introduce the caps.

Sources said margins for a smaller fraction of the market — brands sold by their chemical name, which account for less than about 5% of the market — will be fixed at 15% and 35% respectively.


Reigning in trade margins was a priority for chemicals and fertilisers minister Ram Vilas Paswan, who had earlier asked companies not to charge margins as high as 10-20 times the cost of production on many drugs.

The policy will be enforced by National Pharmaceutical Pricing Authority (NPPA). The chemicals and fertilisers ministry has already said it would be the price watchdog’s responsibility to monitor overcharging of trade margins.
There will, however, be some exemptions for the small scale companies as most of them rely on chemists unlike bigger companies that employ a vast army of salesmen to ‘educate’ doctors about their brands.

Small companies will be allowed to pay an extra fee to the chemist as a support to compete with larger firms. In terms of percentage, it is this segment where margins are the highest. Bringing margins from above 1,000% of production cost to 50% (wholesale and retail together) would benefit the consumer, and at the same time, the extra fee would still give them an edge over bigger rivals.

It is to be noted that for the three-fourth of the market where new margins are being notified, there is no check on the retail price. That is, companies are free to decide a price but have to restrict trade margins to a percentage of that. Earlier it was thought that increasing the retail price would enable companies to give a higher margin in rupee terms, while complying with the percentage ceiling.

However, with the National Pharmaceutical Pricing Authority strictly enforcing the cap on annual price increase — 10% since early this year — on all medicines outside government price control, a cap in percentage terms is considered not prone to abuse.

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