Mumbai: Distributors started restocking medicines in July, albeit at a slow pace as they adjust to the new indirect tax regime, since the trade channel continues to face problems, an industry report said.

As on 21 July, distributors held 22 days of inventory, marginally higher than 17 days at the end of June, AIOCD-AWACS, the market research unit of All India Chemists and Druggists Association (AIOCD) said in a report.

As of May-end, distributors held 40 days of inventory.

Ahead of the debut of goods and services tax (GST) on 1 July, medicine distributors had reduced stocks to avoid potential losses.

On the pre-GST stock, distributors can avail of 100% credit on Cenvat if they possess a central excise invoice issued by the manufacturer, importer, super-stockist or carrying and forwarding (C&F) agent. In case they do not have an excise invoice, then credit can be availed of only on 40% of the central GST, which could lead to losses.

“As seen from the trend, there has been a slow and gradual build-up of inventory days. The drastic reduction in June is taking lot of time to recover. There are still issues with software updation at stockist level, registration of GSTN by few stockists and confusion on tax rates and HSN codes of some products where variable tax rates have been applied by different companies for similar products," Ameesh Masurekar, director at AIOCD-AWACS, said in the report.

Under GST, most medicines are taxed at 12%, while life-saving drugs, including insulin, are taxed at 5%.

Considering this trend, the primary sales loss of June may only be partially recovered in July and the recovery may continue till September-end or beyond, the report said.

A distributor said on condition of anonymity that most stockists and retailers in major cities like Mumbai have more or less made the transition to GST, but is the smaller towns and rural areas where issues persist.

Stockists had higher-than-average inventory of products from companies such as Abbott Healthcare, Cipla Ltd, Glenmark Pharmaceuticals Ltd, and Wockhardt Ltd as per the report.

Analysts said pharmaceutical companies are likely to report 10-12% drop in domestic sales in the June quarter due to the destocking. The impact is expected to be more on profitability as India business has high margins.

Company officials and analysts believe that this is a short-term hit for the industry and sales should normalize in couple of months.

“We sense it to be temporary. We expect a recovery to normality in two to three months period," Andrew Aristidou, chief financial officer of GlaxoSmithKline Pharmaceuticals Ltd, said, adding that in the pharma industry, the last week of the month accounts for the majority of sales and hence, it will be critical to watch how it turns out to be.

The upcoming first quarter earnings of pharma companies and management comments are expected to give more clarity on the extent of GST impact on the industry.

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