With GST, however, simplicity is suddenly able to yield rich dividends for drug manufacturers. And they’re getting rid of dead weight.
Upendra Dinani, chairman and managing director of Nasik-based D. Vijay Pharma, a distributor, and C&F for multiple pharma companies, knew times were going to be tough post-GST.
In April 2017, Emcure Pharmaceuticals went from six C&Fs in Maharashtra to just three in preparation for GST. D. Vijay was one of the C&Fs cut. It still maintains 20,000 square feet of head office and warehouse space as a distributor for them but has lost out on the service fee it used to receive as a C&F.
Are Pharma Companies merging?
Suvra Shankar Chakraborty, director of Kolkata-based Soham Distributors, often hears rumors that pharma companies are mulling merging C&Fs or shutting them down altogether. He says that it will happen sooner than later, given the basic function of a C&F is now redundant.
Their primary role was to store the drugs within the confines of a state and transfer them to local distributors as and when required. This was on account of the fact that going outside the state meant paying a central sales tax of 2%. Their role in pharma companies was to save this 2%. Now, that medicines can flow freely between states, pharma companies need fewer C&Fs in general.
Chakraborty, however, refuses to despair. A company cannot handle thousands of distributors across India, says Chakraborty. Their role is to distribute as fast as possible, and for that, they need C&Fs in at least each region if not every state; otherwise, it will affect their service.
In a competitive market, service is a big differentiator; that is why they are still considering keeping some C&Fs, he adds. Chakraborty is convinced that a commission of 1-2% is a small price to pay for drug manufacturers for this convenience and efficiency.
Warehouse coming to an end
Chakraborty realizes that he will have to adapt. “I am thinking of closing down our warehouse in Ranchi, and transferring drugs from Calcutta,” he says. However, he also sees an opportunity, since he now has a larger region to supply to. “We are expecting bigger volumes by catering to Odisha and Jharkhand and Bihar,” he says.
The end of days for C&Fs, though inevitable, is still a little way away. Bhavik Kumar says that manufacturers cannot do away with C&Fs en masse as yet. Kumar says that for C&Fs to truly become redundant, drug manufacturers will have to optimize and digitize their supply chain. This hasn’t happened yet, with Kumar estimating that the whole industry spends only $1.04 billion on IT.
“As much as they intend to save this money, they can’t right now because they need better digitization to ensure that they are able to send medicines when the demand arises. Someone has to manage the inventory,” he says. Thus, for C&Fs to survive, they need both a strategic location as well as a scale.
Side effects may vary
So, all in all, a stronger chain with fewer links. But will it translate to fewer medicines wasted due to expiry in overstocked warehouses?
Patients are largely brand and drug agnostic. Instead, the demand for one drug of one brand over others is created by medical reps, who meet with doctors and convince them to prescribe a certain brand. They also work with distributors and retailers to ensure that they stock that brand.
A Delhi-based distributor tells the story of a medical rep whose target was to create demand for Rs 5 lakh ($6,907) in South Delhi for one drug, but he could only create demand for Rs 3.5 lakh ($4,835). “The rep came to me and asked me to stock an extra Rs 1.5 lakh ($2,072) worth of that drug, and agreed to share the incentive he will get from the pharma company for meeting the target. Thus, the stock was dumped, artificial demand created, and most of those drugs expired,” he says. He later returned the expired drugs to the pharma company and got a credit note.