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  • Development plan on drug distribution industry may have limited impact 0 comments
    May 25, 2011 10:22 PM

    China’s drug distribution market is currently fragmented and is also excessively competitive. In 2009, there are 13,000 drug companies that are mainly engaged in the wholesale of pharmaceutical products while nearly 400,000 are in pharmaceutical retail industry (2,149 drug companies, 135,000 chained pharmacies, and 253,000 single pharmacies). In a bid to establish a more organized system and encourage innovation, the Ministry of Commerce (NYSEMKT:MOC) has indicated in its Twelfth Five-Year Plan (2011-2015) that it intends to spur significant consolidation within the pharmaceutical distribution, wholesale, and retail sectors.

    Per the newly released development plan, the government aims to form 1-3 national distribution enterprises with annual sales exceeding RMB 100 billion and 20 distribution enterprises with annual sales exceeding RMB 10 billion by 2015; the sales obtained by the top 100 wholesaling enterprises should account for more than 85% of total sales (obtained by all wholesalers); the sales obtained by top 100 retailing enterprises account for more than 60% of total sales (obtained by all retailers); chain pharmacies should account for over 2/3 of the retailers. In short, MOC aims to promote few but strong drug distributors that can expand their distribution network to rural areas and, thus, eliminate other small-sized drug distributors in the market. Seemingly, the government is eyeing the establishment of an industry focused on promoting wholesaler M&A, new logistics technology, and a regulated/standardized market. Indeed, such a scheme may definitely promote appropriately scaled operations, cut costs, and increase profits for the industry in general.

    However, these intentions results may be foiled by the currently ongoing system of pricing, tendering and reimbursement. In China, there are two types of sales terminals for drug distributors: the medical institutions and patients.  Medical institutions purchase drugs via provincial tendering and sell these drugs to patients with a 15% markup; this distribution scheme accounts for almost 80% of drug sales and is regulated by the government. This state-run type of drug sale is significantly affected by the current tendering and reimbursement system as well as the pricing system – all of which are currently in flux and facing significant downward pressure. Take for instance the increasingly favored (by the government) ‘Anhui model’ of tendering, in which drug trade companies are not the same access to tendering as drug producers. As such, the drug distribution development plan in the country may only have a significant impact if issues such as tendering are resolved/addressed accordingly.

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