According to a recent information release by China National Association of Pharmaceutical Commerce, the total sales of the top 100 pharmaceutical distributors in China in 2006 was CNY 228 billion, representing 67.88% of the total national pharmaceutical distributor sales in the same year.

 

The Association has over 700 members, and 665 of them have an annual turnover of CNY 20 million. Their total annual turnover was CNY 299.7 billion (US$39.6 billion), accounting for 89.19% of total national pharmaceutical distributor sales in 2006.

The three largest pharmaceutical distributors in the country in 2006 were SinoPharm Holdings, Shanghai Pharmaceutical Shareholding Ltd., and Jointown Group. Their total combined sales in the year was nearly CNY 64 billion, accounting for 18.95% of the total national pharmaceutical distributor sales, up from 17.70% in 2005. 

 

In 2006, nine pharmaceutical distribution companies had annual turnover more than CNY 5 billion, 15 had annual turnover above CNY 3 billion, 27 with annual turnover above CNY 2 billion and 55 with annual turnover more than CNY 1 billion.

 

Local pharmaceutical industry analysts believe that the Chinese pharmaceutical distribution sector will be increasingly consolidated, and the sector is likely to become dominated by a few large companies in future.

Zhu Changhao, Vice President of China National Association of Pharmaceutical Commerce, told the local press that the trend in the sector shows that the strong companies are becoming even stronger, while the market shares of those weak ones are being taken over by the strong. 

The intensifying consolidation is largely driven by the low and falling profitability of the sector. Official statistics show that the total pharmaceutical distributor sales in China was CNY 280 billion in 2006, up 17% compared with 2005. However, the sector's profits were CNY 1.68 billion in the same year, up only 6.1% compared with 2005. Profitability of the sector has been between 0.55% and 0.73% of sales in recent years.

Larger pharmaceutical distribution companies tend to have better returns. The top 20 pharmaceutical distributors had total sales of CNY 141.9 billion representing 42.25% of the total national distributor sales, while their total profits accounting for 69.16% of the national total. Nine of the top 20 had profitability above 1%, which was much higher than the average profitability of the sector.

 

Territorial consolidation began to take shape

Larger pharmaceutical distribution companies are also consolidating their territories. While SinoPharm and Jointown are busy building their nationwide sales and distribution coverage, other large distributors are focusing on becoming dominant regional players. Major regional distributors include Shanghai Pharmaceutical, Huadong Pharmaceutical and Nanjing Pharmaceutical in Yangtze River Delta region, Guangzhou Pharmaceutical and Accord Pharma in Pearl River Delta region, Beijing Pharmaceutical, Tianjin Taiping Pharmaceutical and Topsun Yinghua in Bohai surrounding areas, and Tongjunge Pharmaceutical and Chongqing Pharma in Southwest China region.

 

Foreign investment in the sector speeding up

A trend of accelerating entry by foreign companies into the Chinese pharmaceutical sector has been observed since 2006, and this trend is likely to intensify in the years to come. In 2006/2007, Guangzhou Pharmaceutical sold 50% of its equity to Alliance BMP, while Shanghai Pharmaceutical formed a joint venture with Japan's Suzuken.

 

Most recently, Jointown Group reached an agreement with a foreign investment company to sell a part of its equity in exchange for cash injection. It is believed more foreign investment deals in the pharmaceutical distribution sector are under the way at the moment.

 

 

The following trends are likely to emerge or further intensified in the near future:

 

*  Consolidation in the distribution sector will accelerate driven by government encouragement, rising investments (both foreign and domestic) into the sector, and the need of distribution companies to expand market share, improve profit margin, and achieve better control of their end market. The government has set an ambitious target of fostering between five to ten pharmaceutical distributors with more than CNY 5 billion in annual turnover and 40 such companies with over CNY 2 billion in annual turnover in 2007, and these companies are expected to achieve a national market share of at least 70%. As the size of pharmaceutical distributors grows, their market dominance will also rise, leading to restructure of the Chinese pharmaceutical marketplace.

 

*  The trend of strategic alliance between major pharmaceutical manufacturers and distributors is likely to become main stream, and certain integration of the two sectors may take place for the common goal of pursuing high market share and profitability. Exclusive distributorship for pharmaceutical products may gain rising popularity in future.

 

*  More pharmaceutical distributors with regional market dominance will continue to emerge and their strength in regional markets will grant them bargain power with pharmaceutical companies. Smaller distributors will have to find their own niche in the market in order to survive on their own.

 

* Distribution companies will increasingly expand into the hospital sales and marketing business, which can offer them much higher profitability and better control of the end market.

 

* Competition will intensify among distribution companies, not only in terms of  geographic coverage, but also in areas such as logistical and delivery capabilities, customer service, information service, brand management, etc.

 

* Geographic coverage of the pharmaceutical distribution sector will increasingly be extended to suburban and rural areas, which have significant future growth potential for drug consumption as a result of rising living standards and growing government healthcare funding.