Profit margin in Pharmaceutical Sector (Manufacturer to Retailers)

Query:

I am a 3rd year B. Pharm student and want to know about What are the profit margins of a pharma business? Kindly Explain in a particular cycle i.e. Profit from a manufacturing company to retailer?

Response:

Profit margin in pharmaceutical business vary company to company. We can’t estimate any company’s margin just by analyzing from outside. We have to involve deeply with company business strategy to calculate the margin in pharmaceutical sector. Profit Margin of chemists, pharmacies, stockists  and Carrying and Forwarding agent (CFA) also vary depend upon many factors like branded medicine, generic medicines, brand value of medicines, otc product, company status, ethical/unethical practice etc.

Here we are going to explain a general profit margin cycle from manufacturer to retailers. First you need to know about distribution channel in pharmaceutical sector through which profit share divides. A distribution channel includes mainly following parts:

  • Company (Manufacturing and/or Marketing Company)
  • Carrying and Forwarding Agent
  • Stockist
  • Distributor
  • Retail/Chemist/Pharmacy

Profit margin should be divide between above five firms/individuals. But actually profit margin will be distributed in another individuals also. That we will discuss later in article. First we start from bottom side. The reason from starting bottom side is that their margins are some what fixed if profit margin is taken ethically.

In case of unethical practice, profit margin may be many times greater than actual profit margins. Unethical practice means selling a medicines by much higher than its actual cost after adding own profit e.g. selling generic medicines at MRP (Maximum Retail Price) but in actual its cost is 4-5 times less than MRP.

Company’s margin vary according to its expenses. A company will handle a big sales team, executives, staff members, workers etc. Company has to invest at stock, machinery, plant, advertisement, promotion and other aspects. How much bigger their expenses, they have to set profit margins accordingly. Sale turnover also affect profit margin.

Bigger sale turnover will provide bigger profit so company can compete in market by taking low margins. Competitors also play role in mrp, trade rates fixation hence profit margins. Many factor affects the profit margin of a company.

Nothing is fixed in pharmaceutical sector. Below margin’s explanation is based upon standards margins. These can be vary as we discussed above and according to company marketing type like branded marketing, generic marketing, franchise marketing, pcd marketing etc.

A retailer/Pharmacy margin is approx. 16-22% percent ethically. Along with margins they also get benefits of scheme and offers provided by companies. Retailers/pharmacies also enjoy credit facilities provided by companies and/or stockists.

A Distributor margin is approx. 8-12%. Distributors could also enjoy some benefits scheme and offers. At distributor level credit facility could be enjoyed.

A Stockist margin is approx. 6-10%. At stockist level  less chances of scheme/offers. Majority of cases a stockist has to invest many in distribution channel by providing advance payment to company/CFA and/or credit facility to distributors.

Carrying and Forwarding Agent (CFA) margin is approx. 4-8%. CFA plays middle man role in majority of cases. They receive stock from company in bulk and distributes it to stockists in small quantity.

Company profit margin is difficult to fix and/or calculate. Many factors affect profit margin fixation. At pharmacy, stockist, distributor and cfa level, there is fixed expenses and running cost. Hence fixed margins don’t affect their money circulation.

But at Company hand lot of things to consider. As we discussed above company profit margin depend at many factors. What could be the possible profit margin that we will understand with a simple example according to their marketing types.

  • Branded Marketing Type Company
  • Generic Marketing Type Company
  • Franchise/Pcd Marketing Type Company
  • Over The Counter (OTC) Marketing Type Company

Suppose a Medicine’s cost after adding all manufacturing expenses* is 30 Rs. Now margin in each type of marketing will be different.

In Branded marketing type, profit margin will be calculated after adding all sales and marketing expenses like Sales Team Salary/Tour Expenses, Doctor’s expenses*, transportation, office staff salary and expenses, promotional expenses and related expenses.

Practically all these expenses cost could not been added in any single product but expenses calculation verses profit margin is based upon all products included in company’s product list.

In Generic Marketing Type, company don’t spend at sales team, doctors etc. Company Fixed a particular margin like 5%, 10%, 20%, 30% etc and dispatch to CFA and/or Stockist. Now their turn how they distribute it at how much profit margin.

In Franchise/Pcd Marketing Type, Company do the same as in Generic marketing Type and fix a particular margin and dispatch goods to CFA and/or Stockist. But in Franchise/Pcd marketing , stockis/CFA has to calculate their profit margin based upon factors we discussed in Branded marketing type like sales team salary/tour expenses, doctor’s expenses, transportation etc.

In Over The Counter Marketing (OTC) Type, company fixed its margin based upon factors like advertisement expenses, sales team salary/tour expenses, transportation, promotion expenses and other related expenses etc.

Above we have discussed about marketing type. That will be applicable for both pharmaceutical marketing company and pharmaceutical manufacturing company when they will sell and/or market their products. Now we will try to find out profit margin of a Pharmaceutical Manufacturing unit/company at manufacturing end.

Pharmaceutical Manufacturing unit get profits by two ways: By Own Marketing and/or By Third Party/Contract Manufacturing/Loan Licensing. By Own Marketing profit margin will be calculated as we discussed above in Marketing type.

Manufacturing companies who reliable at third party/contract manufacturing calculate their margin depend upon batch size, cost of raw material, plant capacity etc. Generally 25-40% margin is added by manufacturing unit at their cost sheet of third party/contract manufacturing rates.

Loan License manufacturing profit margin is different from above mentioned details. In loan license, a manufacturing unit is hired/rented by loan licensee. Loan licensee can manufacture own product at manufacturing unit by own self. Generally rent and manufacturing process expenses is given by loan licensee to manufacturing unit.

Same Profit margin is applicable for Ayurvedic, Food and Dietary Supplements and Cosmetic Industry

Hope this article will be helpful for you to know about profit margin in Pharmaceutical Sector.

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

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