We recently interacted with a few distributors and stockists of the domestic pharmaceutical industry to analyze the impact of the economic slowdown on the Indian pharmaceutical sector.
While the economic slowdown has not affected the demand for drugs, distributors and stockists have witnessed a marginal downtrend in their volumes since October 2008.
Though no particular therapeutic segment has seen a specific decline in volumes, the inventory reduction at the retail level has led to a decline in volumes.
Many distributors and stockists have started feeling the heat of reduced inventory demand by retailers and druggists, who have now reduced the procurement of stocks from three to fours months to about 45 days in the past few months.
The retailers, who dispense the drugs to the final consumers, are of the view that although they have not seen any visible impact of the demand slowdown from the end-users, yet they prefer to be cautious and procure drugs only on an ad hoc basis. The aim is to cut overheads.
The cautious approach adopted by the chemists has forced the distributors to increase the credit period given to the retailers, in order to retain their clients. Payment periods have gone up to ~30 days from 15-20 days earlier.
In order to reduce costs in the period of an economic crisis, most pharmaceutical companies have reduced the margins given to distributors by 0.5-1%. This has led to the tightening of profitability and liquidity within the trade channels.
Channel checks reveal that, although the worsening economic environment has not affected the domestic demand for pharmaceutical drugs, yet it has surely increased vigilance and caution amongst the various segments of the industry and the trade.
Inventory reduction at the retail level has led to a marginal decline in the offtake and companies have accordingly scaled back production.
Further, reduced profitability and tightening liquidity have led to an increase in the working capital cycles.
Various segments of the industry have increased their vigilance in order to monitor the situation closely for any further negative developments.