How to fix Maximum Retail price of Pharmaceutical Products?

Pharmaceutical sector is come under essential commodities. Medicines and other pharmaceutical products has regulated through many rules and regulations. Drug Price Control Order (DPCO) is one of them. DPCO regulates the maximum retail price of medicines and pharmaceutical products. Not all medicines fall under DPCO but a large number of molecules come under DPCO list.

You can check DPCO price of any formulation: Search Medicine Price (NPPA)

Maximum Retail price Calculation for products fall under DPCO:

Medicines and pharmaceutical preparations that fall under DPCO list, NPPA (National Pharmaceutical Pricing Authority) fixes ceiling price of this formulations. No one can fix ceiling price above fixed by NPPA. Maximum Retail Price will be equal to Ceiling Price plus Local Taxes as applicable.

NPPA calculates ceiling price of any medicine and pharmaceutical products as per below procedure:
  • First average Price to Retailer is calculated by taking (Sum of prices to retailer of all the brands and generic versions of the medicine having market share more than or equal to one percent of the total market turnover on the basis of moving annual turnover of that medicine) / (Total number of such brands and generic versions of the medicine having market share more than or equal to one percent of total market turnover on the basis of moving annual turnover for that medicine).
  • Then ceiling price of this medicine is calculated by formula: Ceiling price = Average Price to Retailer x (1+ margin/100). Margin is taken by 16%.

Maximum Retail price calculations for products don’t fall under DPCO:

Medicines and pharmaceutical products that don’t fall under DPCO list, companies are free to fix any maximum retail price based upon many factors for these products.

Here is the calculation, how you can calculate maximum retail price of products doesn’t fall under DPCO:

Suppose a product manufacturing cost is 24 rs (including tax, packaging etc)
Expenses based at manufacturing Cost:
  • Profit Margin: 20%
  • Office and Administration Expenses 20%
Distribution channel margin and marketing/sales expenses are as follow:
  • Retailer Margin: 20%
  • Stockist: 10%
  • CnF margin: 5%
  • Marketing and promotional expenses: 40%
  • Transportation cost: 0.5%
  • GST: 12%
Suppose you have manufactured 1000 pc of that product that cost you at the rate of 24/- per pc. Total investment in this product is 24000/-. Profit margin of Company is 20% i.e 24*20% = 4.8/-. Other expenses like office expenses, salary of staff etc is 20% i.e. 24*20% = 4.8/-. Now total cost is 20+4.8+4.8 = 33.6/-
Above calculation could be done according to your actual value. You can add or subtract any expense and costing factors.

Now come to distribution channel expenses. Total is 20+10+5+0.5=35.5 i.e. 36%
Suppose MRP is X.
GST is 12%. MRP excluding of GST is [X*(100/(100+12)] i.e X/1.12
GST amount will be X-X/1.12 = (1.12X-X)/1.12 = 0.12X/1.12 = X/9.33
Retailer Margin is 20%. Price to Retailer is [X/1.12 * {100/(100+20)}] i.e. X/1.34
Retailer Margin is X/1.12-X/1.34 = 0.22X/1.5 = X/6.82
Stockist margin is 10% of X/1.34. Price to Stockist is [X/1.34 * {100/(100+10)}] i.e X/ 1.47
Stockist Margin is X/1.34-X/1.47 = 0.13X/1.97 = X/15.15
In a similar way CnF margin is X/1.47-X/ 1.54 = X/32.28
Marketing and Promotional Expenses: 2X/5
Transportation cost is 5X/1000
Actual Cost is 33.6/-

Now MRP X = 33.6+X/9.33+X/6.82+X/15.15+X/32.28+2X/5+5X/1000
X= 1425182.98/10358.27 = 137.59 i.e. 138/-

You can calculate MRP by putting your values in it.

Factor affecting Fixation of Maximum Retail Price (MRP):

  • Manufacturing Cost of Product
  • Uniqueness and competitiveness of product in market
  • Innovativeness of molecule
  • Marketing and promotional Expenses
  • Sales Team Expenses
  • Research and Development (R & D) Cost if any
  • Competitors MRP
  • Monopoly or not
  • And many more


Hope above information is helpful to you...

For any query and suggestion, mail us at pharmafranchiseehelp@gmail.com

Read Related: Medicine wholesale business profit margin

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