Drugmakers from GlaxoSmithKline Plc (GSK) to Lupin Ltd. (LPC) are grappling with Indian distributors, whose demand for maintaining commissions threatens to erode profits after the South Asian nation imposed price controls.
Talks are under way after traders temporarily boycotted some treatments until their demands were met, Nilesh Gupta, managing director of Lupin, a maker of anti-tuberculosis medicines, said in an interview. Distributors want the terms of their commission to be restored after drugmakers slashed margins for traders following India’s move to cap prices of 348 essential remedies.
Drugmakers may resort to new medicines and vaccines that don’t face caps to revive margins in the world’s second-most populated nation. India’s $12 billion drug market shrank for the first time in September, after growing at an average 7.2 percent in the first eight months of the year, according to data from the All India Organization of Chemists & Druggists.
Wholesalers “were going slow, there were boycotts, they selectively decided to boycott companies,” Lupin’s Gupta said in a phone interview. “They’ve basically been giving us and other companies a pretty hard time, and that kind of messed up the order flow.”
India’s government in December announced details of a policy aimed to make drugs more affordable. The policy set the prices of the essential medicines at the average of all brands that have a market share higher than 1 percent.
Retailers and wholesalers receive a proportion of the drug’s retail price as their commission. Traders say that drugmakers reduced the percentage value of their fees while cutting prices as mandated by the government.
“Without telling us, without giving us any notice, they have reduced our margin,” Jagannath Shinde, president of the pharmacists’ trade body, said Oct. 18. “Our margin has been snatched, and we are asking that it be given back.”
Glaxo’s Indian unit Glaxosmithkline Pharmaceuticals Ltd. (GLXO)’s profit is estimated to have dropped for a second straight quarter after the price of its best-selling antibiotic treatment Augmentin fell more than 40 percent, according to data compiled by Bloomberg. More than a third of the company’s domestic portfolio falls under price control now, from about 23 percent earlier, according to an Aug. 8 report from Tata Securities Ltd.
Net income is projected to have fallen 15 percent to 1.29 billion rupees ($21 million) in the three months ended Sept. 30, according to the median of 14 analysts’ estimates compiled by Bloomberg. The Mumbai-based company will report third-quarter earnings on Nov. 11.
Glaxo’s shares have risen 14 percent this year. They fell 0.7 percent to 2,465.05 rupees as of 10:01 a.m. in Mumbai. Lupin, which earned 27 percent of its revenue from India in the year ended March 31, has advanced 44 percent this year.
“The multinationals are affected the most from the drug pricing rules because all their business comes from domestic sales,” Hitesh Mahida, an analyst at Fortune Equity Brokers India Ltd., said in an interview. “Indian companies have a lot of exports that offset any impact from the local business.”
When prescribing medication, Indian doctors typically refer to brands rather than chemical names. Pharmacists are prohibited from substituting one generic for another, even if it’s cheaper, so drugmakers try to persuade doctors to think of their brands first.
About 90 percent of prescriptions are generics, which the manufacturers seek to differentiate with unique names -- making them branded generics. Ranbaxy Laboratories Ltd. (RBXY), the unit of Japan’s Daiichi Sankyo Co., sells its version of Glaxo’s Augmentin as Moxiclav, while Cipla Ltd. markets it as Novamox, and Mankind Pharma Pvt. retails it as Moxikind. Before the government’s price controls took effect, Augmentin was among the nation’s top three best selling drug by revenue.
Prices of the brands can differ by as much as 75 percent for 10 tablets, according to drug encyclopedia MIMS. A pack of six tablets of Augmentin used to cost about 250 rupees earlier this year, before it was reduced to 142 rupees after the government policy took effect.
An e-mail seeking comment sent to Rupali Kalav, a spokeswoman for Glaxosmithkline Pharmaceuticals in Mumbai, received an automated out-of-office reply.
Revenue from India’s 50 largest drug makers dropped 1.8 percent in September, according to the AIOCD.
Drug sales will recover in the next few months, AIOCD’s Shinde said. The pharmacists’ trade organization is working with drugmakers to restore their commissions to the earlier levels, and an agreement is expected to be reached soon. As many as 40 companies have restored the fees, he said.
Glaxo’s market share in India fell to 3.8 percent in September from 4.2 percent in June, while that of Pfizer Inc.’s Pfizer Ltd. and Wyeth Ltd. units combined slipped to 2.7 percent from 2.8 percent in the same period. Sun Pharmaceutical Industries Ltd. (SUNP), owned by billionaire Dilip Shanghvi, saw its share grow from 5.1 percent to 5.5 percent.
The price controls have affected companies selling antibiotics, pain killers and treatments for acute conditions, said Surya Narayan Patra, an analyst at Phillip Securities Ltd. in Mumbai. Companies such as Sun and Lupin, that focus more on medicines for long-term conditions like diabetes and heart disease, were less affected, and are hence more valued by investors, he said.
“In pharma itself, investors are selectively playing” on these stocks, Patra said.
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