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The Complex Factors that Influence Drug Prices

Pharmaceutical companies typically use a variety of factors to determine the price of their drugs, including: Development and production costs: Pharmaceutical companies invest significant amounts of money into the research, development, and production of new drugs. The cost of these activities, including clinical trials and obtaining regulatory approval, is factored into the price of the drug. Marketing and Distribution Cost: Marketing and distribution costs may also be considered by pharmaceutical companies when determining drug prices. These costs include expenses related to advertising, sales representatives, and distribution networks. Drug Uniqueness: If a drug is the first of its kind or represents a significant improvement over existing treatments, the pharmaceutical company may set a higher price for it. If a drug has many competitors or is like existing treatments, the company may have to set a lower price to remain competitive. Market demand: Companies also consider the dem

Profit Margin in Pharmaceutical Industry

Profit margin in pharmaceutical sector varies according to marketing structure and distribution channel adopted by the company to sell their pharmaceutical products. For understanding profit margin, first you need to understand different types of sale strategy and distribution channel in pharmaceutical sector.

There are most common sales techniques are:

Read: Difference between branded medicine and generic medicines

Different type of sales technique, different will be margin for distribution channel. A tradition pharmaceutical distribution channel includes:

Profit margin in pharmaceutical sector is distributed among its distribution channel members. In regulated market like USA, European countries, insurer also get share in profit margin which is not the case in Indian medical market.

Branded Medicine Marketing:

In Branded Medicine marketing, manufacturer/marketer among distribution chain which get most of gross profit share. But net profit share depend at many factors like sales team expenditure, promotion and distribution cost, salary and wages, production cost, taxes etc.

Suppose we have a medicine having MRP of 100/-. Nearly 12% will be used as Tax i.e. 10.72/-. Form remaining 89.28/-, all margins will be distributed along with expenditure and cost. A branded medicine will be supplied at trade rate to CnF. CnF will supply at Price to Stockist to distributor and Distributor will supply to retailer at price to retailer.

Deduct retailer margin 20%, Now it is 74.4/-. Deduct distributor/wholesaler margin 10%, now it is 67.63/-. CFA margin 5%, 64.40/-. This 64.40/- is amount which is billed by pharmaceutical company to its CFA. This amount seems to be lucrative but a pharmaceutical company in branded marketing has high expenses like Raw Materials, Power & Fuel Cost, Employee Cost, Selling and Admin Expenses, Miscellaneous Expenses etc which lead to reasonable net profit margin only.

But in Branded medicine marketing, pharmaceutical company has to keep a huge sales team which is major expenditure for a company which account a large percentage of gross profit margins. Promotional and sales advertisement is also eat major portion of gross margin.

Percent margin among distribution channel is as follow:
  • Retailer: Profit margin is 18-22% plus scheme
  • Distributor/Wholesaler: Profit margin is 8-12% plus scheme
  • CFA: Profit margin is 3-6%
  • Pharmaceutical Company: Net Profit margin is 10-15%

Read Related: Medicine wholesale business profit margin

Generic Medicine Marketing:

Generic marketing is different from branded medicine marketing. Pharmaceutical company doesn’t require appointing sales team to convince doctors to prescribe their products. Generic marketing is basically done through institution selling, corporate hospitals, distributors having vast network etc. Retail counters are major player in generic marketing, so enjoy high percentage of margin.

Percent margin among distribution channel is as follow:
  • Retailer: Profit margin is 35-50% plus scheme
  • Distributor/Wholesaler: Profit margin is 8-12% plus scheme
  • CFA: Profit margin is 3-6%
  • Pharmaceutical Company: Net Profit margin is 10-15%

Pharma Franchise Marketing:
In pharma franchise marketing, a new distribution member has been added or replaces an old one. Means Pharma Franchisee Distributor either will be added or will replace a distributor/wholesaler to become part of distribution channel. In most of cases, CFA is also not part of distribution channel and pharmaceutical franchise company directly supply to franchisee distributors and franchisee distributors further sell medicines as branded medicine marketing or generic medicine marketing basis.

Profit margin will be same as in case of branded medicine marketing type or generic medicine marketing type as we discussed above. Just replace Distributor/Wholesaler with pharma franchise distributor. Read in detail about Pharma Franchise Distribution calculations

Institutional Sales:
Institution sales refer to the sale directly to hospitals (corporate or government), educational institutions and other institutions. Pharmaceutical company or its distributor supplies to institutions. Filling of Tenders or Bid type is bases of institution’s procurement. Institutions invite tenders or bid to procure pharmaceutical products. Lowest price quoted company generally gets the tender for supply medicines to institutions.

Profit margin in institutional sale is not fixed. Due to bulk quantity, pharmaceutical companies play at lowest margin as possible. Institutions get major part of profit margin.

Over the Counter (OTC) Drugs Marketing:
Over the counter drugs marketing is similar to generic marketing and profit margin is also similar unless you have a well known established brand. Over the counter drugs are segment which don’t require prescription of registered medical practitioner to sell by retailer to consumer.

Over the counter drugs can also be categories into Branded Medicines and Generic medicines, and profit margin will be same as applicable with branded medicines marketing segment and generic medicines marketing segment. Refer above to check profit margin in branded marketing and generic marketing.

Pharmacy Chains and Online Pharmacies:
In both pharmacy chain and online pharmacies is like institution sales. Corporate housed and administrative bodies of pharmacy chains and online pharmacies purchases in bulk as institution sale but tender or bid is not applicable possible at all circumstances because medicines sold here are based at prescription or on demand by consumer. As distributor/wholesaler is not involved during transaction which lead to high margin of online pharmacies and pharmacy chains as compare to offline pharmacy.

In case of branded medicines, Online Pharmacies or Pharmacy chains are not in command to decide which product to procure or which to not. In case of generic medicines, they can act like institutions and bargain as much as possible to procure medicines.

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