China lays out new vision for pharma distribution as it seeks benefits of scale
This article was originally published in Scrip
China is planning to promote the reform of the domestic pharmaceutical distribution industry under a new five-year plan for the 2011-15 period announced earlier this month by the ministry of commerce (MoC), in which a big increase in the number of retail pharmacies is also envisaged.
Suggesting that companies should use methods such as acquisitions and initial public offerings (IPOs) to support their expansion, the plan calls for the further consolidation of the sector to create one to three nationwide distribution conglomerates with annual sales of over Yuan100 billion ($15.4 billion). The ministry sees about 20 major regional pharma distribution companies operating by 2015, each with sales in the Yuan10 billion range.
China's largest pharma distributor, Sinopharm, has already said that it is aiming for revenues of Yuan100 billion in 2012.
Although it stops short of laying out specific methods, the plan also aims to establish a truly nationwide network of retail pharmacy outlets, and envisages large chain pharmacies accounting for two-thirds of all retail pharmacies across the country by the end of 2015. In line with this goal, the ministry expects such chains to generate more than 60% of annual retail sales nationwide, up from 39% in 2009.
China had 2,149 chain pharmacies in that year, although few had a presence in the rural areas where half of China's more than 1.3 billion population resides, according to the MoC.
The new distribution reform plan sends a positive signal to foreign companies, especially in terms of acquisitions, said Liu Yifu, a Beijing-based analyst with Datamonitor. "Many deals have recently been done between foreign companies and Chinese distributors. They will surely bring advanced distribution models and standardised operations to China, which will affect local small distributors," he said.
He pointed in particular to firms such as Cardinal Health, which bought China's largest imported drugs distributor, Zuellig Pharma China, in November 2010 (scripintelligence.com, 1 December 2010).
However, Mr Liu said that it is still hard for foreign companies to compete against big state-owned distributors, which have all built up strong regional presences. "In a country as huge as China, it surely is an evident advantage," he said.
Johnny Huang, an analyst at the US research firm Frost & Sullivan, agrees. "Foreign companies usually sell high-end drugs, targeting big hospitals and pharmacies, which have already established a solid relationship with the Chinese state-owned companies," he said.
Both analysts predict that the plan is not likely to make much difference in terms of drug pricing, an area of policy that is ultimately decided by China's National Development and Reform Commission rather than the MoC. "It makes sense that the plan aims to reduce prices through squeezing distributors' profit, but given that the gross profit rate is only about 8%, it really doesn't affect the prices that much,” Datamonitor's Mr Liu said.
China's second-largest distributor, Shanghai Pharmaceuticals, launched a secondary IPO in Hong Kong on 20 May, which was the largest offer by a Chinese pharma company in the past five years. The float went ahead successfully despite the emergence of claims from one Chinese company over alleged quality and manufacturing source issues with some products distributed by Shanghai Pharmaceutical group companies.