How will China's new regulations on pharmaceutical wholesalers affect manufacturer costs and drug prices?
In April, China’s state council toughened regulations on its pharmaceutical industry, banning wholesalers from selling non-compulsory vaccines directly to hospitals, clinics, and government health authorities. This change comes as the result of a scandal made public on March this year in which around $90 million worth of drugs were reportedly sold illegally in a number of provinces. We examine how these new regulations will affect wholesalers and pharmaceutical manufacturers.
There has always been harsh competition within the growing number of pharmaceutical distributors struggling to maintain and increase customers in China. According to a study conducted in 2009, there are more than 13,000 drug wholesalers in China. The new regulation does not exclude but limits the wholesalers’ function in the distribution process. Wholesalers who meet the standards set by the government for drug cold-chain transportation will only be allowed to participate in medicine transport-—meaning a small window of opportunity to be shared by these thousands of distributors. Back in the 1990s, when China implemented the Good Supply Practice campaign, the number of wholesalers decreased almost 50 percent. This new regulation may have the same impact.
From the manufacturer’s perspective, these changes could be an advantage. Cheaper cold-chain transportation is possible since more companies would be competing to provide the service to manufacturers.
For existing drugs in the Chinese market, prices were determined due to levels of wholesale distributors. The price difference between the manufacturer and the levels of wholesalers varies: first-level wholesalers should not be more than 5%; second-level should be from 5% to 8%; and third-level in which hospitals and pharmacies belong should not exceed 15%. But since the new regulation will remove these wholesalers in the selling process, it would mean two things; cheaper drugs or higher profit for the manufacturers. There is a possibility that prices will be reduced since there would be less external factors that will add to the costs. After all, this legal action aim is to simplify the distribution and prevent mediary institutions such as wholesalers, disease control agencies, clinics, and others from absorbing all profits. On the other hand, it could also mean more profit for the manufacturers by just retaining the existing market price. The Chinese government could not pressure the manufacturers to lower their prices due to what the New Drug Price Policy dictates. Therefore, all the profits that usually go to wholesalers will go to manufacturers alone.
Drug manufacturers from outside China who depend on local wholesalers and distributors to penetrate the Chinese market will be greatly affected by this regulation. One example is Pfizer’s move to partner with Shanghai Pharmaceutical’s to widen their market reach in China. In 2011, Shanghai Pharmaceuticals sold around 3 billion yuan worth of Pfizer’s medicines in China. If these wholesalers that link foreign manufacturers to the local Chinese market now play a limited role in the distribution process, then other options to enhance market reach and availability are important. One edge foreign companies have is that local Chinese drug manufacturers are generally focused on producing generic drugs, creating a strict competition among local drug manufacturers for the same generic drugs. Therefore, investments into research and development to make new kinds of drugs available in the market creates an advantage. Another option is getting in a joint venture with a local pharmaceutical company that shares the same strategic goal as they do. The venture will be a win-win scenario for both companies; creating a wider opportunity to reach more patients. In 2009, GlaxoSmithKline (GSK) and Novartis entered joint ventures to strengthen role in the vaccine market; GSK with Shenzhen Neptunus Interlong Bio-Technique Company and Novartis with Zhenjiang Tianyuan Bio-Pharmaceutical. Both local companies provided the foreign companies access to government vaccine-procurement programs, local talent pool, and R&D involvement.
For those companies hoping to expand their pharmaceutical reach into China, look out for fiercer competition and fluctuating drug prices. Now is the time to closely monitor pharmaceutical news in China, and make sure your supply chain is prepared for a big shift.
By Amy Clark - July 10, 2015
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