Industry Trend Analysis - 'Two-Step' Procurement Policy To Reshape Drug Distribution Landscape - MAR 2017

BMI View : The move by Chinese authorities to introduce a ' two-step ' procurement process will reshape the drug distribution landscape in the country. By forcing pharmaceutical manufacturers to work with a single distributor that directly supplies their products to healthcare facilities, numerous intermediaries in the supply chain will be cut out. This is likely to prompt a consolidation within the sub-sector , with large drug distributors such as Sinopharm and Shanghai Pharmaceuticals standing to gain substantially.

China's healthcare landscape will continue to see significant change as authorities reform the system to meet the growing medical needs of its population. In line with our expectations for further reform to characterise 2017 [1], the National Health and Family Planning Commission released an explanatory note on a new policy titled 'Two-Step Pharmaceutical Procurement System for Public Medical Facilities (Trial)', (Guan Yu Zai Gong Li Yi Liao Ji Gou Yao Pin Cai Gou Zhong Tui Xing "Liang Piao Zhi "De Shi Shi Yi Jian (Shi Xing )) in January 2017 that elaborates on the imminent changes to drug distribution. Based on the document, officials envision a model where pharmaceutical manufacturers sell to a distributor that directly supplies medical facilities in the country.

The policy will go be introduced on a trial basis in 11 provinces across 200 public hospitals, with the aim of rolling it out across China by 2018. Authorities anticipate this policy to lower final pharmaceutical prices, posing a downside risk to our forecast. We will look to revise our outlook for China's medicine market once more data on the policy's impact are made available. Notably, local news sources in 2016 reported that a smaller trial of the two-step model in Fujian did not effectively control drug prices. We are currently expecting medicine sales in China to rise from CNY766bn (USD115bn) in 2016 to CNY1,802bn (USD237bn) by 2026, with a compound annual growth rate of 8.9% in local currency terms and 7.5% in US dollar terms

Policy To Pose Downside Risks
China: Pharmaceutical Market (CNYbn)
f = BMI forecast. Source: Southern Medicine Economic Institute (SMEI), Association of the European Self-Medication Society (AESGP), local news sources, BMI

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