The Hindu Business Line : Going gets tough for pharma cos in Jan-March quarter

APRIL will be a particularly cruel month for pharma companies, as it will reflect the strain that companies have had to bear over the three-month period ending March 2005.

In January came the Centre's directive to levy excise duty on the maximum retail price (MRP), followed by the controversy over increased raids on chemists stocking psychotropic drugs. With February being the `Budget month,' companies tread cautiously, apprehending policy changes that will impact the industry. And it may be déjà vu in March, as uncertainty looms over the industry on the implementation of Value Added Tax (VAT) from April 1.

Drug manufacturers are more than walking the extra mile to prevent stockists from slowing down their purchase of medicines, given the uncertainties over the execution of VAT. All these factors are combining to put a massive strain on the performance of drug companies in the January-March quarter, observe analysts tracking the industry. Similar sentiments are echoed by the top brass of domestic and multinational drug firms. "Business for pharma companies will take a beating and profitability too could be impacted," admits Mr S. Radhakrishnan, Chief Financial Officer, Cipla. The MRP-based excise issue has affected companies and the psychotropic drugs issue, though resolved, has put pressure on sales, he said.

The VAT rate on medicines is 4 per cent and come April 1, traders would not want to foot the bill on products that were purchased from companies at a higher sales tax rate. A trader in Maharashtra, for instance, who purchased medicines at a sales tax rate of 9 per cent, will have to sell them at the VAT rate of 4 per cent. Traders want companies to compensate the difference.

Some companies are convincing traders to stock their products by meeting the cost they are likely to suffer post-VAT. Other companies are giving a "blanket credit" to traders. Certain companies are giving additional margins to traders, while others are assuring traders that they will take back products that bear the old rate, he said.

"The experience is similar to 2003. In mid-January, the market did show reluctance to stock up, as traders were not clear about the off-set. They don't want to lock up their money," concurs Mr Kalyanasundaram, Managing Director, GlaxoSmithKline Pharmaceuticals Ltd.

Pfizer's Executive Director (Finance), Mr Kewal Handa, observes, "There will be pressure on the next quarter." The MRP-based excise duty impact will be felt by companies across the board.

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