Pharma retailing set to come of ageAmrita Nair-Ghaswalla, TNN, Jan 10, 2007, 01.02am IST

MUMBAI: Cheaper medicines are to be available soon. Free medical check-ups are in the offing. Tie-ups with laboratories and hospitals will ensure faster turnaround and cheaper diagnostic reports. The stuff of dreams?

Not likely. The $6-billion pharmaceutical retail market in India is priming itself for major changes, aiming to keep ahead of competition. The first off the block is the crowded neighbourhood chemist store, with its potent painkillers and antibiotics.

Not only will drugs be available at a 10% discount in pharmacies and chemists across Maharashtra by the month end, the 32,000 drug retailers who are affiliated to the Retail Dispensing and Chemist Association across Mumbai are gearing up for an unprecedented retail boom.

Taking on the biggies, especially multinational pharmacies, these chemists will flag off their initiation with a discount offering. Scores of freebies like area-wise, free medical check-up, concessional rates on drug testing reports and tie-ups with laboratories and hospitals across the city are on the anvil. Pathologists, doctors and front-end managers have already been enlisted for the pharma retail venture.

What has brought this on? Competition from other retail dispensing chemists like Subhiksha, Apollo and Medicine Shoppe to name a few. Both the Ambani brothers, who have showed more than an interest in investing in pharmacy chains, as also the influx of retail giants entering this premium space, has got chemists and druggists across India grouping together to stave off competition.

All of last year, the Reliance Anil Dhirubhai Ambani Group was said to be talking to the All India Organisation of Chemists and Druggists for its pharma retail venture. Talks failed, because of "reliability and monetary issues with the group," said Kishore Shah, ex-president of the all-India body. "The all India committee body decided to go it alone. We would not give a readymade platform on a platter to any of these retail giants," he added.

The association raised Rs 66 crore from Maharashtra alone in one month's time. All the chemists in Maharashtra are now affiliated to the Maharashtra State Chemists and Druggists Association. We have floated the company and issued equity shares of Rs 10 each. Operations are set to start in another month," said Shah.

Other states have been asked to fall in line. Gujarat with its 7,000 chemists, followed by Karnataka, Tamil Nadu and Orissa will slowly follow pace and become members of the limited company. The apex all India body is to be based in Mumbai.

"Subhiksha has flagged off its pharmacies with a 10% discount. We will also offer the same. We are also looking at membership cards, and other concessions in addition to other value-added services for our consumers," Shah said. Another competitor, the US-based Medicine Shoppe International, the largest franchiser of independent community pharmacies in America, s gearing up for a fight.

An official with Medicine Shoppe India said: "Get ready for a tough fight. For, nine out of 10 blockbuster drugs in the future will be bio-tech based, requiring special storage facilities and transportation. Most existing pharmacies in India would be unable to meet any of the stringent requirements. It's at that time that our strength and reach will be realised."

Modelling pharma retail

The absence of Foreign Direct Investment (FDI) has driven Indian pharma retail trade players to grow through diverse business models, and compelled MNCs to take a back door entry. Arshiya Khan explores models that may work in a highly fragmented Indian set up

According to various estimates, Indian pharmaceutical retail segment is expected to grow at 11 percent over the next five years. Getting down to numbers, there are almost 8,00,000 pharma retailers in India, dispensing about $5 billion worth of pharma products per year. India ranks 13th in the world pharma market in value and 4th in volumes. The pharma market is roughly around Rs 38,000 crore per annum. If we add to it the healthcare and beauty care segments, it works out to Rs 45,000 crore per annum. Out of this, organised pharma contributes just Rs 400-600 crore which is roughly 1.5 to two percent of the total market size with players such as Apollo Healthcare, Medicine Shoppe, MedPlus, Guardian Pharmacy and Subhiksha.There are approximately 25 organised retail chains in India, and still increasing, contributing to three percent of the market. However, this number is expected to increase due to the growing awareness about health and wellness which has increased the average consumer spend on health from eight percent to 20 percent in just two decades. In the last ten years, organised players have made a foray in pharma retail business, which was traditionally about 'Mom and Pop' stores, but their share of the market is less than one percent. Though, hospital chains, few pharma companies and big retailers have emerged, the retail segment largely remains a fragmented sector with its own set of challenges. Impact of globalisation

Globalisation of any business brings in international best practices, access to new technologies, opening up of new

markets and reduction in prices for the consumer. But this is limited to some extent in case of the Indian pharma retail segment, as globalisation has had a negligible impact on the same. The concept of organised pharma retail started to make its presence felt in India only during the last few years. Ashutosh Garg, Chairman and Managing Director, Guardian

Life Care, offers an insight, "Even though FDI in the pharma retail trade segment is banned in India, the organised retail chains are bringing in international best practices into their operations." Although, international pharmacy chains have still not established a major presence in the country, the Indian Government has taken tentative steps towards achieving the ultimate goal of allowing 100 percent FDI in retailing by permitting single-brand stores to set up shop here, paving the way for entry. However, this is also serving as a boon, as this brings in an opportunity for domestic players. Elaborating, Dr Amit Rangnekar, Centaur Pharmaceuticals, highlights that the absence of FDI will impact only the foreign entrants and locals should see this as an opportunity to build and consolidate their presence. “Private equity players are active in smaller regional chains. So far, this is not a major impact as organised pharma retail chains from abroad have not yet entered India, although some Indian organised pharma retail chains have emerged in anticipation. Striking a similar chord, Anupam Shukla, Managing Director, Medica Health Shoppe, Medica Pharmacy, says, "The absence of FDI has also resulted in organised retail operations of large local business houses to expand, and MNCs are finding backdoor entries to the country by forming alliances with local business houses. So through such alliances locally-owned retail chains are rapidly expanding throughout the length and breadth of the country and this has enabled R&D in this field." Roadblocks There may be various reasons for restricting FDI in this segment, which also includes limited investment capabilities and stringent regulatory environment. Prabhakumar BG, International Procurement, Manipal Cure and Care, cites another reason. He elaborates that on account of economic progress as a result of globalisation, there is a perceptible impact on the retail pharma sector with the emergence of organised chain pharmacy and modern retail outlets with a professional approach besides providing value added service. But this phenomenon is confined to metropolitan cities. He remarks, "A great deal of concern has been expressed at various forums that globalisation will wipe out traditional outlets. This concern is more of an emotional outburst rather than a reality. Look at the vastness of the country in terms of geography and population. Traditional outlets will continue, but such outlets in order to survive must change for the better."Shukla points out yet another hurdle. Indian pharma retail segment is strongly dominated by All India Organisation of Chemists and Druggists (AIOCD) that plans to corporatise its operations by building pan Indian drug retail chains, enrolling AIOCD members as shareholders of state specific companies under various levels of registration. "This association has total control on the manufacturers, hence limiting the supply of drugs only through the authorised wholesale distributors, limiting the margins and controlling the additional volume discounts that could be passed to the consumers and hold organised chains at ransom by restricting supplies or blocking it at their will," he remarks. He continues to say that the licensing norms further lead to bureaucratic delays and also leave it at the discretion of the inspectors' interpretation on compliance, leaving the retailer high and dry after making substantial investments in the outlet. He cites an example—every geographical area may have a different interpretation for the same norm by each individual inspector. So, one possible way out is to have a re-look at the licensing norms with business friendly environment, which would drive large investments into organised pharma retail.

Adding to this, problems like multiplicity of formulations, lack of effective regulatory mechanism, inadequate return on investments, lack of due recognition as a service provider, mushrooming growth, particularly in the urban areas, and ill equipped

personnel are some of the key concerns of the retail segment. The need of the hour is to have an effective regulatory mechanism and uniform implementation to tackle the issue of multiplicity of formulations and effective enforcement, and also to encourage investments by providing higher returns as well as a provision to charge service fee when prescriptions are dispensed. However, the existing Drugs and Cosmetics Rule to curtail mushrooming growth is vague, but in a country like India, where there is unorganised growth, it will be a tough proposition to address this issue, feels Prabhakumar.Lastly, though there have been attempts to upgrade the qualification for registered pharmacist at par with the developed countries, the existing minimum qualification of a diploma in pharmacy does not provide competent knowledge, and therefore, needs review. Also, a compulsory periodic refresher course for renewing pharmacy registration will be a good option, remarks Prabhakumar. Developments

Making its way out through all these problems, pharma retail trade has picked up pace during the last decade. There is certainly a proliferation of chemist counters across India in the past decade, but the pharma retail trade has grown more due to the introduction of higher priced new drugs and combinations than due to increase in existing drugs. Also, the growth rate of drugs for high priced chronic therapies like cardiovascular diseases, diabetes and mental health disorders is more vis-à-vis the traditional acute therapies like cough, cold, pain and anti infectives. Moreover, the contribution of sales from drugs has also reduced with the average chemist, as he also stocks and sells an increased amount of OTC drugs, cosmetics, toileteries and personal products. At present, there are approimately 25 chains with total outlets aggregating to 2,000. This number has been achieved in the last three years; however, the growth in number of oulets is 60-100 percent per annum which will change the scenario in next five years.

Business models

"Private equity players are active in smaller regional chains. So far, this is not a major

impact as organised pharma retail chains from abroad have not yet entered India, although some Indian organised pharma retail chains have emerged in anticipation" - Dr Amit RangnekarCentaur Pharmaceuticals and visiting faculty at leading MBA colleges in Mumbai

"Even though FDI in the pharma retail trade segment is banned in India, the

organised retail chains are bringing in international best practices into their operations" - Ashutosh GargChairman and Managing Director Guardian Life Care

"A great deal of concern has been expressed at various forums that globalisation

will wipe out traditional outlets. This concern is more of an emotional outburst rather than a reality. Look at the vastness of the country in terms of geography and population. Traditional outlets will continue, but such outlets in order to survive must change for the better" - Prabhakumar BGInternational ProcurementManipal Cure and Care

Less than one percent of the pharma retail industry is now occupied by organised retailers. Most drug retailers, known as 'medical shops', are stand-alone neighbourhood stores. The pharma market has nearly 8,00,000 retailers competing for customers. In this set up, business models that are operational are—company owned and franchisee model. However, expansion through company owned model will have its own limitation of investments, and then, the challenge of biting away into the existing market share. On the other hand, the franchisee model will enable stand-alone chemist shops to be absorbed by organised retailers, triggering a consolidation wave. But the AIOCD, which represents 5,15,000 pharma retailers across the country, acknowledges the potential for consolidation in pharma retail.

In a typical urban or rural setting, it is very easy to find nearly half the retail pharma stores making losses. Such shops have the option of shutting down or selling out. Or they have an incentive to tie up with a brand and continue their business in an attempt to survive. Organised retail chains have a more wholesome bouquet of services to offer to customers, thus vaulting them into a different league. Besides, as there are very few Indian pharma companies into the retail trade, many large retailers and wholesalers of the past have successfully backward integrated into pharmaceutical manufacturing and established themselves in the industry. A pharma company markets its own products, but a retailer sells products of at least 300 companies. Also, for pharma companies getting directly into organised retails, it helps in driving their company's topline and in the long run may help them get better margins by eliminating the middlemen. This will not only help companies with better margins, but will also help them pass better price to the consumers.

The other model is that of hospitals that are into the retail segment. Hospitals have their own chains, and hence, stock drugs across multiple in-house pharmacies. Expanding into organised retail outside hospitals is natural extension of business which not only helps create brand awareness, but also helps in reaching critical mass that indirectly helps drive consumers to the hospitals, thereby enhancing the economies of scale and scope of drug purchases by negotiating directly with companies. As private hospitals by virtue of high volumes of drug consumption have the buying power and also the understanding of market dynamics, they can eliminate the margins of wholesalers and retailers and earn more profits, as well as pass on more discounts to the customers, thus weaning them away from the fragmented retailers also. The benefit of organised retail is that it will also ensure a sharp decline in counterfeit drugs, which today is a major concern. But in a typical set up of a highly fragmented Indian market, a model that may work out is 'product mix change'. Today, most pharmacies sell 70-80 percent medicines and 20-30 percent non pharma. However, in the next five years this ratio will get skewed towards FMCG ie 50:50 and finally end up 40:60 (limited to 40-50 towns initially), reasons being, better time management—customer picking larger product category, forcing pharmacies to stock FMHG's (fast moving healthcare goods like food supplements. Low carb, fat free, low calorie foods, health aids), beauty products and food items.

But according to Shukla, consolidation and stabilisation will see emergence of three models—neighborhood pharmacy and rural pharmacy, pharmacy chains varying from

250 to 5,000 sq ft, and clinic cum pharmacy models. But as India is a 'price driven value', the 250 to 5000 sq ft model will work best. Next would be the pharmacy with clinic and path lab combined that can drive the segment to a different level, which will be successful only if backed by a strong distribution network.

Going ahead

There will be a very strong boom in organised pharmacy retailing, where the pharmacy models will start following the Western world. International pharma retailers are expected to take advantage of the liberalised FDI rules relating to single-brand stores, and enter the country. Organised retailing today accounts for a negligible share of the overall market. But an increasing number of organised players have entered the business of late. A good example is that of Apollo Hospitals, which has established a formidable network of 300 stores under the Apollo Pharmacy brand. Himalaya Drugs is also on a major expansion spree. It has signed up with Reliance Retail—the ambitious retail foray of the Mukesh Ambani controlled Reliance Industries—to set up its Himalaya Herbal Healthcare stores.

India and China are the two most promising markets for pharma retailers, but the Indian market is unique as it has the largest middle income consuming population, many of whom suffer from chronic ailments. Over the next five years as baby boomers start ageing, consumption of chronic as well as preventive medications will increase. Pharma retailers hope to expand their market share significantly, and are going all out to woo this segment in the market.

Who will drive the market? Corporates and organised pharmacies will drive the change like Apollo did in 1987 and the 'Dial for Health' initiative by the Zydus group. Individuals could also be actively involved in developing the model like AIOCD, Guardian, 98.40, CRS Wellbeing, Life Springs who are still trying the model. Finally, as it happens in retailing, the international retailers will dominate the scene. The future of pharma retailing is in for a big shakeout from all the three stakeholders; manufacturers, retailers and customers, since all are looking at a better value for saving time, costs and delivering a better value with fast and relevant information, there could not be a better time for the changes in pharma retail.