Shen: What are your observations of the major contemporary trends, issues and future direction in today’s Chinese pharma distribution sector?

Zwisler: There are two major trends I can talk about. Firstly, consolidation has been taking place and accelerating in the Chinese pharmaceutical distribution sector, and we are also beginning to see rising foreign investment in the sector. Secondly, a critical issue facing the pharmaceutical distribution sector in China is its continued ability to bridge finance the pharmaceutical sales business.

Shen: On your first point, do you foresee the Chinese pharmaceutical distribution sector to be consolidated in the near future to the extent where it is dominated by a few major distributors, just like what we see in the United States?

Zwisler: I do see consolidation in the sector intensifying with many major distribution companies, who are quite successful in raising funds from the stock market, announcing their plans for M&As. It is driven by the need to reduce costs, expand market coverage and improve direct access to regional markets.

However, the level of industry consolidation will heavily depend on how well-developed and integrated the local distribution system is. I believe a high level of consolidation in the Chinese pharmaceutical distribution sector is possible, but it will take a long time before this will be achieved.

It took ten years for China to reduce its number of pharmaceutical distributors from 16,000 to presently more than 6,000. To bring the present number down to a few major distributors will require much longer time and market maturity. Even Europe and Japan, whose pharmaceutical markets and distribution systems are much more sophisticated, have yet to achieve high levels of consolidation.

Shen: On the second trend you suggested about financing the pharmaceutical business in China, can you elaborate on it?

Zwisler: Pharmaceutical distributors in China traditionally have a large role in financing the sales of drug products in China by bridging the cash flow between hospitals and manufacturers. The payment terms imposed by Chinese hospitals on distributors are usually much longer than credit terms offered by manufacturers, thus leading to large working capital requirements on the part of distributors.

However, with interest rates rising and profit margin falling, pharmaceutical distributors in China are finding it increasingly difficult to fulfill this role.  The balance sheet of a typical distributor in a developed market is not strong enough to continue this bridging role, thus the relationship between manufacturer, distributor, and hospital will have to be rebalanced in the future as the China pharmaceutical distribution industry matures.

Shen: Foreign investment into the Chinese pharmaceutical distribution sector has intensified since the beginning of 2007, what are the impacts of this trend on the sector and specifically Zuellig Pharma China?

Zwisler: Foreign investment into the sector is still at an early phase. It will inject more funds into the sector and help improve service and management levels of local companies. However, it remains to be seen how well the integration between local companies and foreign investors/companies will unfold, which will decide the final success of foreign investment projects in the sector.

Increased foreign investment in the sector may also lead to more intensive competition among distributors, but Zuellig has grown in China through competition and we are confident of our strengths.

The devil is in the details – irrespective of how much capital is available, the ability for execution is the key to this business. The bottom line is that we need to provide our customers with the most direct service at the lowest costs.

While Zuellig’s strengths lie with its history and experience with international pharmaceutical distribution operations thus enabling us to offer world class management, customer service and transparency, the advantages of local companies are rooted in their history and experience with the local market as well as their strong local connections and broad geographic coverage.  I’m sure that both manufacturers and hospitals will benefit by the improvements in service and lowering of distribution costs in the future.

Shen: Some local distributors are seeking to increase their profit margins by moving into hospital detailing and promotion of drug products, can you comment on this trend?

Zwisler: While it is true some distributors are moving into this area, I have not observed this to be an increasing trend. I believe generally pharmaceutical manufacturers do a better job promoting their own products. Pharmaceutical promotion is very capital intensive and distribution companies may not have the right funding to do this job.

The skills and experience required for pharmaceutical distribution and hospital detailing and promotion are quite different, and it is very challenging for a pharmaceutical distribution company to be in both businesses.

Shen: We are observing a trend of larger local pharmaceutical distributors seeking to pressure large pharmaceutical manufacturers into offering them higher sales/distribution margins in recent months, can you share with us your views on the subject?

Zwisler: In the past, many local pharmaceutical distribution companies accepted unsustainably low margins for major branded products under competitive pressure and in their quests to expand sales, territories and market share. However, some of them became public companies now and may be under increasing pressure for higher profitability. Falling profit margins in the pharmaceutical distribution business in recent years further intensify such pressure on them. These are attempts to rebalance the profit distribution between distributors and manufacturers.

Shen: Can you tell us any latest developments with Zuellig Pharma's business in China?

Zwisler: We have recently completed two acquisitions in Wuhan and Chongqing, this brings the number of cities that Zuellig Pharma has direct distribution service to five. The three other cities that we have direct service are Beijing, Shanghai and Shenyang. The acquisitions are efforts by Zuellig Pharma to improve direct access to regional markets, and we will continue to pursue such expansion.

Shen: In closing this interview, can you share with us any future goals of Zuellig Pharma in China?

Zwisler: The goal of Zuellig Pharma China is to be a good citizen of China by providing pharmaceutical products to the Chinese people, at a reasonable cost through a sustainable, safe and efficient supply chain. We will continue to build on the infrastructure and business base by further expanding our direct access to hospitals, retail pharmacies and vaccination centers. It’s important for foreign companies in China to be good models and introduce best practices, and we will continue to do this.