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Trade Margin Rationalisation Needs A Rational Approach

Under the proposed Trade Margin Rationalization regime, manufacturers would be allowed to offer a limited price margin for the entire trade channel

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The government's recognition of trade margin rationalization for medical devices as a fair and balanced approach to ensure reasonable prices to consumers is a welcome move for the patients as well as the industry. Under the proposed Trade Margin Rationalization regime, manufacturers would be allowed to offer a limited price margin for the entire trade channel.
'Price to Trade' is an important element in rationalising trade margins and there should be an equitable framework for ascertaining the Price to Trade for both importers and local manufacturers. However, a few media reports indicate that there is an apparent intent of the government to calculate the Price to Trade for domestically manufactured medical devices and imported medical devices differently.
Some stakeholders suggest that the 'Landed Cost' (the price of a device after customs clearances in India) should be considered for the trade margin calculation for imported products, while simultaneously advocating that in case of domestic manufacturers' the first sale to the distributor should be the starting point for calculation of trade margin. Confusing the policy makers further, these stakeholders use the term 'Ex-Factory Cost' and 'first sale to distributor' interchangeably. The correct definition of Ex-Factory Cost as defined by the erstwhile Drug Price Control Order, 1995 is standard manufacturing costs. The Ex-Factory Cost leaves a lot of scope for manipulation of costs, lending a free hand to local manufacturers to escalate prices by manipulating costs. By definition and impact, Ex-Factory Cost is different from 'first sale to distributor' and should be treated as such.
Logically, a comparable base for calculating margins for both foreign and domestic manufacturers would be the first commercial sale to an unrelated third party (Distributor/Stockist) in India. However, the jury is still out on the location of the 'First Point of Sale' in case of imported medical devices and NITI Aayog has issued a Concept Note to seek comments from all stakeholders with regard to the same, including importers.
Landed Cost is an overly narrow and unfair framework which does not consider a foreign firm's numerous expenses in India such as training clinicians, providing technical support, financing sales and collection costs, paying corporate taxes, and other normal expenses for developing and serving the market in India. Historically, the Department of Pharmaceuticals has looked at Landed Cost as the basis for trade margin rationalization but it ultimately abandoned this approach recognizing that it did allow for sufficient value generation. Fixing trade margins on Landed Cost to arrive at Price to Trade will asphyxiate the innovators and hurt the patients alike. This will not only compromise accessibility to innovative and latest technologies but may also lead to complete market collapse.
The approach developed by the Department of Pharmaceuticals in its 2016 Report on High Trade Margins is by far the most practical methodology to usher in better transparency in pricing medical devices leading to more accessibility and affordability. Implementation of this Report would not only allow medical device companies to continue innovating but also tackle excessive mark-ups that distort the market and unnecessarily burden Indian patients.
If the Indian government decides to set different starting points for foreign and domestic manufacturers, specifically applying Landed Cost for foreign manufacturers while allowing the Price to Distributor for domestic producers, it would be highly discriminatory and unjustified. This will amount to treating two equally placed entities unequally under the law. An even-handed definition of Price to Trade for both domestic and imported manufacturers is fundamental for ensuring a fair market and appropriate investment climate, which are critical to advancing India's ambitious health, economic, development, and innovation goals.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Trade Margin medical devices medical devices makers

Sanjay Bhutani

The author is Managing Director, Bausch & Lomb India

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