China Today: Pharmaceutical Distribution in China - The country strives to modernize its distribution logistics as thousands of small companies compete for profits - BioPharm International

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China Today: Pharmaceutical Distribution in China
The country strives to modernize its distribution logistics as thousands of small companies compete for profits


BioPharm International
Volume 20, Issue 2

The majority (80%) of Chinese drug distributors can be characterized as small. This has resulted in a relatively unhealthy competitive environment, where multiple firms are competing for small market shares. The average gross profit of China's drug distributing companies has been dropping and is now at 8%, with net profit declining to around 0.5%. This trend is expected to continue. In some cases, as zero net profit is reached, pharmaceutical distributors will seek opportunities to become product agents, where they will make profits by earning commissions and discounts from the manufacturers.


Table 2. Top 10 Chinese distributors in 2005
Table 2 lists the top 10 pharmaceutical distributors in China. In April 2005, five distributors—Shanghai Pharmaceutical Co., Guangzhou Pharmaceutical Corp., Chongqing Medicine Co., Beijing Pharmaceutical Co., and Tianjin Taiping Group—officially formed the "China Pharmaceutical Commercial Economic Alliance," which was an important event in the Chinese pharmaceutical community. Meanwhile, Sinopharm Medicine Holding Co., the major branch company of Sinopharm, was planning a merger with the Tianjing Taiping Group to expand its business network and compete with the alliance. All these activities indicate that the Chinese distribution system expects a major restructuring or large-scale merger and acquisition.

MODERN PHARMACEUTICAL LOGISTICS IN CHINA

Modern logistics management is still in the nascent stage in China. The first modern pharmaceutical logistics center was built by Beijing Pharmaceutical Group Co., Ltd., and started operations in Beijing in March 2004. The center introduced advanced logistics equipment and technologies from Siemens Dematic Co. Since then, numerous logistics centers have been established or begun construction in several major cities including Shanghai, Guangzhou, Luoyang, Shenyang, Changsha, and Lanzhou.

The government has been making efforts to encourage Chinese drug distributors to develop new logistics systems, and also has provided financial support to help major distributors modify their traditional system and build a modern logistics system.

FOREIGN-INVESTED DISTRIBUTORS IN CHINA

In 2003, to comply with the agreement between China and the World Trade Organization, China's pharmaceutical distribution field partially opened to foreign companies. It completely opened up in 2005. Several foreign-owned or joint-venture drug distributors were established in China in 2003.

In December 2003, the first Sino-foreign joint-venture pharmaceutical distributor, China Zuellig Xinxing Pharmaceutical Co., Ltd., was established by the Swiss company Zuellig Pharma and the China Xinxing Group, with a total investment of 120 million RMB ($15 million).

In September 2005, China Ministry of Commerce and Trade approved the acquisition by a US company, Beijing Med-Pharm Corporation (BMP), of a Chinese drug distributor, Wanwei Corporation based in Beijing. BMP became the first wholly foreign-owned pharmaceutical distributor in China.

In October 2005, a wholly-Japanese owned drug wholesale company completed its registration in Guangzhou, China. The company started operations in January 2006.

MAJOR CHALLENGES

Following its long and complicated history, the Chinese pharmaceutical distribution sector now faces major challenges. These include:

  • The current operation mode of most distributors is not in line with the requirements of modern distribution, especially with regard to scale and automation.
  • Many distributors lack logistics management knowledge and talented managerial professionals.
  • Macro regulation and control from the government is limited.
  • Profits today are at very low levels.
  • The existence of a large number of undersized distributors has caused malignant competition and chaotic growth, which has resulted in higher costs, lower profits, and conflicts over limited market shares.
  • Many distributors have limited market development and service capabilities.

FUTURE TRENDS

Chinese pharmaceutical distributors are growing in the following directions:

  • Scale-up to achieve economies of scale required for economic performance
  • Merging with domestic and foreign-owned companies
  • Narrowing their focus to specific geographic, market, or healthcare areas
  • Enhancing modern logistics management.

China's domestic pharmaceutical industry growth is exploding. With 26% growth and $55.8 billion in sales in 2005, the future looks bright.3 However, systemic planning will be required. In the future, Chinese healthcare policy makers and pharmaceutical distributors will continue to grapple with the monumental responsibility and task of supplying 1.3 billion people with medicines, diagnostics, and services. They will continue to play an indispensable role in fueling the expansion of China's pharmaceutical industry.

Eliza Yibing Zhou is project director for research programs on China and India, BioPlan Associates, 301.921.9074,

REFERENCES

1. Langer E. Advances in biopharmaceutical technology in China. Society for Industrial Microbiology and BioPlan Associates. 2006.

2. "11th -5 Year" Development Guidance for Pharmaceutical Industry. National Development and Reform Commission; Sept. 2006.

3. Official data released by SFDA Southern Institute of Medicinal Economy. Pharmaceutical industry sales include chemical synthetic medicines, traditional Chinese medicines, biologics, medical devices, hygiene materials, etc.


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