Dear Colleagues! This is Asrar Qureshi’s Blog Post #864 for Pharma Veterans. Pharma Veterans aims to share knowledge and wisdom from Veterans for the benefit of Community at large. Pharma Veterans Blog is published by Asrar Qureshi on WordPress, the top blog site. Please email to email@example.com for publishing your contributions here.
We have seen drug pricing in relation to government policies, its historical perspective, and the controversies. It would now be instructive to understand drug sales channels and how these may impact the drug pricing for the consumers.
Drug Sales Channels
The channels are distributors, wholesalers, and retail pharmacies, each of whom gets a certain percentage as service charges. Since the maximum selling price of a drug is fixed by DRAP already, these percentages are deducted backwards to calculate ex-factory price, which is the revenue that the pharma manufacturing company receives. If the selling price of a drug is fixed at 100 rupees, most manufacturers may receive about 76.50 rupees. It may go up slightly or go down considerably depending upon the company strength and the size of its business in the market.
The obligations of pharma distributors are to have a proper space for storage and working, environment controls as prescribed by GSP – Good Storage Practices, and work ethics as prescribed by GDP – Good Distribution Practices. After acquiring space, furnishing it as per requirements, and getting a letter of understanding from at least one principal, they will apply to the provincial health authority to get license to sell as distributor, upon receipt of which they will start business. Meanwhile, they will try to get as many agencies as they can get.
Their responsibilities are to keep enough stocks, ensure supplies to all areas, provide area-wise sales figures to the pharma companies whose agent they are, keep the principals informed about market situation, work in coordination with the company’s sales teams, and provide space to company teams for holding their meetings at the distribution place.
Distributors are independent businesses who purchase medicines from manufacturers and supply these to wholesale market and retail pharmacies; the street pharmacies where consumers/patients go to buy medicines. A typical distributor would be having several agencies of pharma companies, a large warehouse to store medicines, a sales team for booking orders, a delivery team to supply drugs and receive money, and several delivery vehicles. Distributors are authorized to work in a designated area, beyond which they must not go. Their designated area usually includes several adjoining towns also. Their sales teams go to market at fixed frequency, which is determined based on market dynamics, for example, pharmacies outside a large hospital may be visited daily for order booking and supplies.
Distributors purchase drugs from pharma companies at ex-factory price, and supply to market at trade price, and keep the difference as their service charges. Smaller companies may pay 10% or more to distributors; larger companies may pay little less.
Very few distributors have nation-wide presence, with offices and staff in all major cities, some have regional presence with offices and staff in few cities, while the majority has only one office in one city.
Due to lax controls at regulatory levels, all may not be well at all distributors. There are frequent complaints from markets and pharma companies for undesirable practices.
Distribution business is largely documented business where proper taxation is also applied.
The obligations of wholesalers are to have a premises prepared as per regulatory guidelines, obtain a drug sales license from provincial health authority, and keep stock in proper storage conditions. Wholesalers are not authorized by the companies; they can buy and sell any stock they choose.
Wholesale market concept started from Europe where big wholesalers are still a replacement for distributors. In Pakistan, wholesale market evolved because the distribution system was weak, and it provided a buffer to retail market. Retailers from various parts would go to wholesale market to get their requirements filled because the distributors’ visits were few and far between.
Distributors found it convenient to supply drugs in bulk to wholesale market while offering them a portion of percentage they received from the company. It would save the distributor from the expense of supplying from shop to shop.
Over time, pharma companies discouraged bulk supplies to wholesale market and insisted that the distributor ensured supplies to all pharmacies. This has reduced the role of wholesalers considerably in the availability of drugs. This was also done because wholesale market had been the place for many unauthorized and even illegitimate practices. They did cross border trade, they would run speculative business on certain fast-running brands like share market, and sold stocks pilfered from government hospitals; few were even involved in selling counterfeit drugs.
Presently, a large part of wholesale market is doing parallel kind of business where they buy heavily discounted drugs from smaller manufacturers and sell these to pharmacies and practitioners in rural and suburban areas. They are affecting drug prices in selected cases seriously due to unduly high discounts they demand.
The amount of business done at wholesales market is huge but largely undocumented. The market size cannot be determined accurately and obviously, the taxes are not paid.
Their obligations are to have a proper premises, prepared according to regulatory guidelines, proper racking, and refrigerators to store cold chain products. They must obtain drug sales license from provincial health authority, employ qualified pharmacists, and fill prescriptions carefully. Due to poor controls, any drug can be purchased over the counter without prescription.
Almost all retail pharmacies now also store various other healthcare related things which do not have fixed prices and therefore can be sold at will. They are also displaying and selling local and imported supplements at exorbitant prices as it gives them huge profit.
Retail pharmacies get 15% margin on registered drugs by law. For example, they would buy the drug for 85 rupees and sell it at 100 rupees. While this is legal, there are several ways in which retailers maximize their profits. The proliferation of large pharmacies, chain pharmacies, and pharmacy franchises prove that their gross margins are not limited to 15%. This is largely cash business; both buying and selling, and therefore, may not be subject to taxation.
In all illicit practices, the final component of chain is retail pharmacy. Though good pharmacies do not indulge in such things, but others do.
Regulatory controls, which are already defined, should be deployed religiously. This is about human health and must not be taken lightly.
Service charges/gross margins cannot be reduced, but the practice of heavy discounts should be controlled to contain the drug prices.
About financial controls. The entire selling chain of pharmaceutical business is now computerized, all pharma companies, all distributors, and most wholesalers and retailers. It is extremely easy to obtain data which can be used to know the size of business, and type of business.
As far as tax is considered, no one pays taxes happily anywhere, it is the system which ensures that taxes are paid. The entire drug selling chain is liable for taxation. For example, if the NTN registration is made mandatory part of drug sales license, at least all of them will be registered. Of course, the rampant corruption in the inland revenue service is to be blamed for small tax net, low tax to GDP ratio, and undue pressure on salaried class. We wonder that if the Federal Board of Revenue is disbanded, and fixed tax is applied, the tax collection will increase dramatically.
Disclaimer: Most pictures in these blogs are taken from Google Images and Pexels. Credit is given where known; some do not show copyright ownership. However, if a claim is lodged at any stage, we shall either mention the ownership clearly, or remove the picture with suitable regrets.