China to slash drug distribution groups in price drive
Rules limiting number of invoices between drugmakers and hospitals to be rolled out
2017/2/20 by: Tom Hancock in Shanghai
A state initiative to reduce intermediaries in China’s pharmaceutical market is expected to more than halve the number of companies in the sector, but experts say the government will struggle to achieve its aim of cutting drug prices and tackling bribery in distribution chains.
The vast majority of China’s $110bn annual pharmaceutical sales are to state-run hospitals, which depend on drug and medical equipment sales for most of their revenue. Drug sales are conducted through a byzantine network of some 13,500 distributors, with kickbacks to doctors rife.
Regulations limiting the number of invoices between drugmakers and hospitals to a maximum of two will be rolled out nationwide by next year, the State Council said last month. The number of drug distributors is expected to plummet as a result.
“Reducing the number from more than 10,000 to 2,000-3,000, that is what I have heard from officials,” said Xie Qilin, deputy secretary-general of the Chinese Medical Doctor Association.
The “two invoice reform” as it is known is already being tested in 11 provinces, with Fujian in the east reporting a halving of distributors since its adoption in 2012. “The market is not concentrated enough,” Wu Zhen, vice-minister of China’s food and drug administration, said last year, explaining the rationale for the policy.
“The agencies will have to enlarge or die,” said an employee at an overseas medical device manufacturer who asked not to be identified. The sector employs more than 3m people, many of whom will be forced to switch to larger companies or change professions, the Economic Observer newspaper reported.
Eric Carlson, a partner at law firm Covington & Burling, said in a recent report that the crackdown on small distributors would accelerate sector consolidation, “centralising distribution in a handful of pharmaceutical distributors, many of which are state-owned or state-controlled”.
Beneficiaries would include companies such as Sinopharm Group, in which the Chinese government has a majority stake, with Fosun Pharma as a partner.
The reform is likely to be more of a challenge for Chinese drugmakers that typically distribute their products indirectly, through local intermediaries. If applied to the medical device market it could benefit overseas companies by reducing the need for complicated supply chains.
Ireland-based Medtronic, for instance, was fined $17m by Chinese anti-monopoly authorities last year for price fixing in its multi-layered local distribution system.
Other large multinationals tend to have their own sales teams, which employed some 20,000 staff as of 2011, according to Rachel Lee, an industry observer.
But use of direct sales staff has not prevented bribery. GlaxoSmithKline paid a record ￡297m fine in 2014 after its sales staff were found guilty of corruption, while Bristol-Myers Squibb faced $14m in US penalties over alleged bribery of Chinese hospital officials. Novartis agreed to pay $25m last year over similar charges.
State officials have said the reform is aimed at reducing drug prices. The current drug distribution system is “very inefficient and very costly, and the cost in the end is borne by the patient”, said Franck Le Deu of McKinsey’s healthcare practice. “Provinces and even cities can have a vested interest in having homegrown distributors in their backyard.”
But, according to Liu Tingfang, a hospital reform researcher at Tsinghua University, the squeeze on distributors will benefit pharmaceutical companies — which will save on distribution costs — more than patients.
“Prices will not see much impact. Kickbacks will still exist,” he said, with low-paid medical staff at hospitals still expecting a share of sales. “It is necessary to reform doctors’ salaries.”
