Drug distribution reform in China	January 2009

By Joshua Slatko

Chinese health authorities are looking to reform the country’s drug distribution process. In September 2006, the Chinese government formed a special “healthcare reform coordinate commission,” or HRCC, tasked to develop a new healthcare reform plan. This commission includes 16 government departments. One critical issue the healthcare reform committee is facing is that about 80% to 90% of all prescription medicines are purchased by hospitals, which usually operate their own internal pharmacies.

“The problem is not the pharmaceutical manufacturers’ prices, but the prices charged by hospitals,” says Stephen Potts, regional director for healthcare, Asia Pacific, the Middle East, and Africa, TNS Healthcare (tnsglobal.com). “This is considered to be one of the main reasons that medicine prices remain high despite 24 price reductions made by the governmen in recent years.”

The HRCC has already considered two major changes that may be advantageous to foreign marketers, according to Mr. Potts.

“The high price of patented drugs has so far prevented deeper market penetration in the hospital drug market,” he says. “Under the new regulations, hospitals can purchase no more than two drugs with the same generic name. This policy will certainly push some smaller pharmaceutical companies out of the hospital market. On the other hand, companies with patent-protected products will have the edge over generics manufacturers and will be able to exploit previously unavailable opportunities in the hospital drug bidding process. Another promising model – known in Chinese as ‘Yao Fang Tuo Guan,’ and translating to ‘outsourcing hospital pharmacy business to external medicine wholesalers’ – aims to reduce the number of middlemen involved in the drug-distribution channel.”

Efforts to shorten the distribution chain, and thus reduce the cost of branded drugs, so far have met with mixed success. “Guangdong’s experimental ‘Two Receipts’ policy has experienced a shaky start,” Mr. Potts says. “Under this model, only two drug transactions are allowed; one from the drug manufacturer to the distributor, and the second from the distributor to the hospital. Clearly it will likely take some time for a universally accepted drug-distribution model to mature in China.”

The Chinese distribution situation presents a major challenge to even the largest pharmaceutical company. According to Bayer executives, about 6,000 companies in China handle the distribution of medications. Bayer Schering Pharma works intensively with about 100 of these companies. By way of comparison, only a handful of pharmaceutical distribution companies are active within Germany, and they handle mainly the logistics of distribution. This makes the role of each distributor in China even more crucial than usual.

“Our distributors’ reps are even more important than their colleagues in the West,” says Liam Condon, managing director of Bayer Healthcare Ltd. (bayer.com) and general manager of Schering Pharma in China. “They often provide physicians with information about our products, and in many cases also serve as our eyes and ears regarding local conditions and needs, especially in rural areas where we do not yet have our own reps.”