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Pharmaceutical Distribution in India


Drug manufacturers in India are struggling to cope with
the highly fragmented nature of the distribution network

T
he Indian pharmaceutical industry is con- dence of brand substitution makes it mandatory
tinuing its high growth rate at 13% for for a company to make all its stock keeping units
the last six years. From foreign control, to (SKUs) available at all levels at all times. In India,
domestic grass-roots growth, the Indian phar- most brands have generic versions of drugs and
maceutical segment has evolved over the last retailers can usually obtain higher margins with
three decades. According to BioPlan Associate’s generics than for branded products. To reduce
recent report, Advances in Biopharmaceutical risks of substitution, innovator companies must
Technology in India, the Indian pharmaceutical make sure their products are made available to
industry has the potential to reach $25 billion the stockists and retail shops.
by 2010. Drug distribution in India has witnessed a
This rapid growth has yet to create radical paradigm shift. Before 1990, pharmaceutical
changes in the Indian distribution system. The companies used a different distribution system,
main hurdles include the highly fragmented in which they established their own depots and
nature of the distribution network, limited warehouses that now have been replaced by
advancement in regulatory reforms, and pres- clearing and forwarding agents (CFAs). These
ence of strong resistance from lobbies organizations are primarily responsible for
of traders involved in the supply chain maintaining storage (stock) of the company’s
of pharmaceutical products. products and forwarding SKUs to the stockist
India’s current distribution situa- on request. Most companies keep 1–3 CFAs in
tion creates greater risks for biotech each Indian state. On an average, a company
products, which require careful cli- may work with a total of 25–35 CFAs. Unlike
mate control throughout their transit a CFA that can handle the stock of one com-
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period. The lack of awareness toward pany, a stockist (distributor) can simultaneously
the importance of these requirements handle more than one company (usually, 5–15
Langer
makes biotherapeutics even more vul- depending on the city area), and may go up to
nerable to spoilage during distribution. even 30–50 different manufacturers. The stock-
Moreover, the infrastructure for cold- ist, in turn, after 30–45 days (a typical credit
chain management is still developing or time limit) pays for the products directly in
in India. This situation has forced both the name of the pharmaceutical company. The
pharmaceutical and biotech companies CFAs are paid by the company yearly, once or
to consider alternate distribution sys- twice, on a basis of the percentage of total turn-
tems. These attempts, however, have over of products.
faced severe resistance by the lobbies Figure 1 shows how a manufactured product
Kelkar of traders involved in the channel. passes through the company-owned central ware-
Eric Langer is president and house, which supplies it to the CFA or super stock-
managing partner at BioPlan Indian distribution ist. From the CFA the stocks are supplied either to
Associates, Inc., Rockville, MD. system: The Current State the stockist, substockist, or hospitals. The retail
301.921.9074, India is a geographically diverse country pharmacy obtains products from the stockist or
elanger@bioplanassociates.com. with extreme climates that make dis- substockist through whom it finally reaches the
Abhijeet Kelkar is a business unit tribution a critical function. The long consumers (patients). Certain small manufactur-
director in India. channel of distribution and high inci- ers directly supply the drugs to the super stockist.

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In 20 06, the market size of Figure 1. Current distribution chain in India
India’s pharmaceutical logistics
segment (distribution) was val- Manufacturer
ued at around $200 million and
the logistics/distribution industry
has been growing at an average
annual growth rate of 4% since
20 02. According to the Indian Central warehouse
Retail Dr uggists and Chemists
Association, in 1978, there were
roughly 10,000 distributors and
125,000 retail pharmacies in India.
Today, the total number of stock- Super stockist
ists in India is around 65,000 and
the number of pharmacies is about
550,000, an increase of around 6-
and 4-fold, respectively.
Despite the rapid increase in the Stockist Sub-stockist Hospitals
number of stockists and pharma-
cies, there has not been a propor-
tional increase in the volume of
prescriptions distributed. Thus, the
efficiency of the current system
has clearly not been demonstrated. Retail shop
Further, it is estimated that more
than three-fifths of Indians still do
not have access to modern medi-
cines. This clearly shows that the retailers are also compensated with uct available in the market. Cipla,
rural market is largely unattended additional trade offers. Hospitals a manufacturer of asthma drugs,
and untapped. and large institutions sometimes tried to bypass the supply chain
directly negotiate with the man- by providing home service for its
Pricing and margins ufacturing company and get the products. Cipla faced strong resis-
The prices and the margins of drugs in their pharmacy at lower tance from the traders lobby, which
drugs for the wholesaler and retail- costs. Stockists compete with each stopped stocking Cipla’s product.
ers are largely decided by the other in a given city. Generally, hos- Ultimately, Cipla had to withdraw
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National Pharmaceutical Pricing anstar Communic
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pitals order large quantities and can the scheme.
Authority (NPPA), which varies negotiate with stockists, who pro-
depending on whether the active vide payment terms, credit periods, The Future of India’s
constituent of the product is a and margins. Distribution Systems
scheduled drug or a nonscheduled Further, retailers and distribu- Organized Retail
drug. Scheduled drugs are price- tors form associations locally and Organized retail pharmacies are in
controlled whereas nonscheduled nationally, and manufacturing a nascent stage in India, but have
drugs are not. The NPPA is an companies must comply with their started making inroads in the dis-
organization of the government of terms. For example, in many states tribution system. The first retail
India established to fix or revise when a company launches a new pharmacy chain was started by
prices of controlled bulk drugs and product (either branded or generic), the Subiksha Retail Services Pvt
formulations. Companies must to make that product available in Ltd. The Medicine Shoppe, one of
keep drug prices affordable to the the pharmacy, the company has the largest retail drug stores in the
general public. To keep medicines to pay commissions to the chem- US, opened two retail outlets in
within reach of the poor popula- ist (pharmacy) association. On Mumbai and has franchised three
tion, the government has covered receiving the commission the asso- more in Mumbai, Calcutta, and
76 scheduled drugs. ciation will issue a no-objection Baroda. Others have also entered
In addition to the above men- certificate, which is mandatory for the field including Health & Glow,
tioned margins, wholesalers and any company to make their prod- Pills & Powders, and Reliance that

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Table 1. Margins at various levels of distribution system US and EU, the expenditure on SCM
alone is perhaps 2%, whereas in
Levels Margins
India it averages 4–6% of total sales.
Clearing and forwarding agents 1–10% on the total turnover + other expenses According to Gokarn, “It’s mainly
Stockist or distributors 8% on scheduled drugs because in India the cost of drugs is
10% on nonscheduled drugs very low compared to the developed
Retailers 16% on scheduled drugs markets. Taking into consideration
20% on nonscheduled drugs the poor infrastructure and extreme
SOURCE: http://www.nppaindia.nic.in/index1.html geographic conditions, it is difficult
has set up units under the brand With the introduction of VAT, to curtail the cost involved in SCM.”
name of Reliance Wellness. medicine prices have been stan-
Nitin Gokarn, senior manager of dardized and price discrimination, Long-Channel
supply-chain management (SCM) in which different states pay dif- Inventory Management
at Merck India, is optimistic for ferent prices for the same products, The multilayered distribution chan-
the growth of organized retail. He has reduced. VAT has also helped nel and lobbying at all layers has
says that, “Though organized retail reduce the illegal interstate transfer been successful at preventing phar-
faces strong resistance from the of goods and the unethical inter- maceutical companies from bring-
traders lobby, it has a great poten- state trade for higher margins. Per ing in significant reforms toward
tial.” He also opines that, “It will the new rules, sales tax is levied higher trade margins, and at bypass-
take a great deal of political will at each stage of value addition ing the multiple distribution layers
and reforms to make this happen.” and credit for the tax paid on the to reach customers directly. Because
With an organized retail system, inputs can be obtained. pharmaceutical companies do not
pharmaceutical companies would have direct access to retailers’ data
be able to offer medicine at higher IT Adoption on sales (tertiary sales), most phar-
margins, and some speculate that IT adoption in healthcare has maceutical companies depend on
retailers may even be able to pass grown drastically. Pharmaceutical stockists’ sales data to monitor sales
on cost benefits to the end-users companies have realized the need (secondary sales). The primary sale
as well. for integrated solutions in SCM to involves transferring stock from the
keep inventories at optimum lev- central warehouse to its CFA. The
Large Untapped Rural Market els, to improve distribution, to pro- medical representatives are given
The growth of institutional sales had vide for liquidation of stock, and predefined sales targets. To meet
little impact on the accessibility of to streamline interconnectivity these targets they push inventory
medicine in rural areas, according between manufacturing facilities, on the stockist to levels that exceed
to an analysis by the Indian Retail warehouses, and CFAs in differ- the actual demand. When the next
Druggists and Chemists Association. ent states. The use of software like level of sale does not take place, the
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A large proportion of the rural popu-anstar Communic
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SAP and SAS, apart from other cus- stockist will either return goods to
lation still does not have access to tomized software, is increasing. the company or the stock expires.
proper medication and the situa- However, the adoption of technol-
tion may take long to improve. Rural ogies such as radio-frequency iden- Increasing Competition Between
areas contribute around 21% to the tification (RFID) has been slow. Wholesalers and Retailers
total pharmaceutical market. In Today, with so many mergers and
2006–07, the rural pharmaceutical Future Challenges acquisitions in the Indian phar-
market was estimated at around $1.4 Pharmaceutical companies in India maceutical industry, the number
billion. Nearly 70% of India’s popula- have realized the importance of of stockists for each company has
tion lives in rural areas where health- SCM and are aggressively looking increased. Now two stockists of the
care infrastructure is poor. With for ways to improve the costs asso- same company may be compet-
increasing rural household incomes, ciated with SCM. Distribution in ing against each other. Retailers
the rural market is becoming more India is proportionally much more take advantage of this situation by
attractive. According to estimates costly than it is in the US or EU. prolonging the credit period and
by the Planning Commission, rural The companies, which have spent as asking for more discounts, which
households now spend 12% of their much as one-third of their revenues has an adverse effect on stock-
income on healthcare. toward financing their supply-chain ists, because they have to comply
operations, recognize that the cost with the retailers to sustain their
Value Added Tax (VAT) Impact of logistics is very high in India. In business.

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Brand Substitution t i layered d ist r ibut ion system,
The emergence of generic drugs the cold-chain management pro-
has also taken a toll on Indian cess continues to be difficult and
pharmaceutical company sales, as expensive. However, manufactur-
prices can be almost 2 to 15 times ers are increasingly realizing the
less for the same drug. Moreover, importance of an effective distri-
to capture market share generics, bution system, all the way to the
companies offer higher trade mar- end-customer. Coping with the
gins at the retail level. Sometimes challenges of streamlining the sys-
generic drugs provide up to 500% tems in India will ultimately ben-
trade margins, which is a lucrative efit the patient and the healthcare
offer for a retailer to pass up, and system. ◆
this leads to brand substitution.

Recalling Drugs
There is no foolproof system for
recalling drugs in India. Once a
medicine is released into the mar-
ket, it becomes a daunting task for a
pharmaceutical company to recall
because of the highly fragmented
nature of the distribution net-
work. Newer technologies such as
RFID would help in keeping track
of products along the entire chain
and would limit counterfeit drugs to
enter into the system.

International Competitiveness
and Cold-Chain Management
Indian pharmaceutical companies are
increasingly seeking opportunities to
supply drugs to the world market.
More developed cold-chain manage-
ment practices will be required to
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achieve this goal. This is one of the ati
ons Inc.
major challenges faced by the indus-
try if they are to retain product qual-
ity during shipment. Companies like
Eli Lilly in India have implemented
initiatives such as having their own
vehicles equipped with cold-chain
management systems. Other com-
panies such as World Courier have
developed cold-chain management
models to help pharmaceutical com-
panies maintain the cold chain.

Conclusion
Manufacturers must ensure that
t hei r d r ug reac hes c ustomer s
with uncompromised quality. In
India, because manufacturers do
not retain control over the mul-

BioPharm International www.biopharminternational.com September 2008 

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