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GST supply crunch: Stockists paring drug inventories

Aneesh Phadnis & Sohini Das/Mumbai | Ahmedabad 20 Jun 17 | 02:51 AM

A reduction in inventory ahead of the implementation of the goods and services tax (GST) on July 1 may result in a shortage of about 5-10 per cent drug brands at the retail level, pharmaceutical industry executives and experts Business Standard spoke to said.

Stockists are keeping inventories at a minimum level to reduce the impact of tax increases and to bring down complexities that will accompany changes in the tax regime. The current rate of tax on medicine works out to around nine per cent, while under GST most drugs will be taxed at 12 per cent.

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According to the All India Organisation of Chemists and Druggists (AIOCD), stockists were holding 24 days’ inventory on June 14, which is 16 days lower than their May-end stocks. On June 7, the inventory holding was of 27 days.

Industry preparedness for the switch-over to the GST regime is also sub-par. “Managing short-term disruptions due to the new tax regime will be challenging — 50-70 per cent of stockists and chemists are not clear and have not initiated implementation of the GST in their businesses. Inventory rationalisation by stockists till July 1 might lead to short-term availability challenges," health care services provider QuintilesIMS said last week.

The AIOCD, however, has ruled out a shortage of medicines. “With two weeks to go for the GST and more than three weeks of inventory at the distributor level (plus retail inventory of two to three weeks), the industry is in a positive situation and a drug shortage is unlikely at the consumer level," said Ameesh Masurekar, director of the market research wing of the AIOCD. Masurekar expects distributors to register on the GST Network portal by June-end and does not see this as a reason for supply disruptions.

The AIOCD data reveal panic-buying of medicines due to fears of a drug shortage. An executive with an Ahmedabad-based drug company said, “Some amount of overbuying is happening among consumers. This is likely to deplete inventory faster."

“Stockists generally keep inventory far in excess of requirement and I do not see any possibility of a shortage," said Shakti Chakraborty, former head of Lupin’s domestic business and chief executive officer (CEO) of Ergos Life Sciences. Drugmakers, including Cipla, Alembic and Sun Pharma, are offering incentives of 6.5-8.5 per cent on purchases by stockists to ensure they keep adequate inventory in June. Cipla and GSK Pharma are also offering additional credit period to stockists. But these measures are yet to calm nerves. “Some companies have said they will not take back the unsold inventory of April-June except for quality issues. Also companies have asked us to manage distribution of incentives at the retail level," said a Mumbai-based drug stockist.

Ranjit Kapadia, senior vice-president, Centrum Broking, felt there might be a drug shortage towards the end of June as stockists and retailers were apprehensive about holding inventory. Daara Patel, secretary-general of the Indian Drug Manufacturers Association, said there was no reason to panic. “As many as 15 companies have provided assurances to stockists and wholesalers that they will be compensated for any losses. The government, too, has decided to offer a 40 per cent input tax credit refund on goods purchased before July 1," he said. “We are constantly in touch with our suppliers, who have assured us that supplies to our hospital will not be affected," said Gautam Khanna, CEO, PD Hinduja Hospital, Mumbai.

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