Pharmacy consolidation may disrupt domestic drug market: Credit Suisse

As of now, the Indian retail pharmacy market is highly fragmented, with over 850,000 pharmacies and 60,000 distributors, and largely unorganised.
As organised pharma retail channel consolidates in India with the entry of big players, a recent Credit Suisse report highlights that volume-based discounts may increase and end up disrupting the branded generic drugs market. 

The report says that if substitution of medicines (where chemists can replace the doctor's prescription with a generic drug) is allowed in India, then firms which have high exposure to chronic therapeutic drugs will be impacted more as the trade channel becomes more consolidated. Firms like Torrent Pharmaceutical, Sun Pharma, Lupin, and Cipla would be impacted more, Credit Suisse feels. 

"Our discussion with the industry suggests that volume-based discounts are prevalent and could increase further with higher consolidation of channel (through higher credit days or more bonus offers, etc.)....If substitution is allowed or private labels pick up, it could derate the multiple of the entire sector but, on a relative basis, the impact should be higher for companies with high exposure to chronic and semi-chronic drugs like Lupin, Torrent, Sun Pharma and Cipla," the analysts said. 

A senior official at a Mumbai-based firm that sells both generic and branded products said channel consolidation may increase the bargaining power of the trade. "If the fragmentation decreases and we have more larger players there is a likelihood of the trade having more bargaining power, just like in the US. However, we also see that with the entry of Reliance and Amazon into this space, distributors are now more than willing to partner with us as they fear that these heavy-weights may introduce the concept of dark stores soon," he said. 

As of now, the Indian retail pharmacy market is highly fragmented, with over 850,000 pharmacies and 60,000 distributors, and largely unorganised. The largest organised player, Apollo Hospitals, operates some 3,800 stores with a value market share of just 4 per cent. This is set to change. 

The penetration of e-pharmacies is very low (only 2-3 per cent of the market) so far. Deliveries of orders usually take one to two days and this limits the market for e-pharmacies to refills of chronic prescriptions. 

With the entry of large players - Reliance Industries buying Netmeds, upcoming merger of PharmEasy and MedLife, Apollo starting online services, Flipkart exploring entry into the space, Amazon launching e-pharmacy services - the  organised channel is expected to grow from 9 per cent now to 30 per cent over the next four years. 

This significant channel consolidation can disrupt a branded generic market like India. For example, Brazil, an out of pocket market like India where trade channels are consolidated, around 34 per cent of the market volumes have already shifted to generic-generic medicines. 

Generic medicine is a copy of a patented drug whose patent is expired. It can be of two types - branded generic (where a molecule can sell under different brands) and generic-generic (without a trade name). 

In Brazil, the shift towards generic generic medicines was driven by the entry of new players who passed on savings from doctor promotion costs to the channel and the patients. Eventually, the end prices were 30-35 per cent lower. 

"In India, the difference lies in the fact that substitution is not yet allowed. However, as an initial step, the regulations have allowed substitution in Jan Aushadhi stores," Credit Suisse noted. 

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