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China's drug-distribution system has undergone development over the years. Prior to the reforms, state-owned wholesalers purchased drugs directly from manufacturers, resulting in bureaucratic order and lack of competition. When the country opened its doors to the world in 1978, manufacturers were given the go-ahead to sell drugs directly to pharmacies and hospitals. Although citizens have easy access to medicines today, drug distribution remains unregulated and users often obtain drugs from unknown or unauthorized sources.

Drug manufacturers and distribution companies therefore continue to face daunting challenges in the Chinese market. To begin with, China is a huge country spanning 9.6 million kilometres with an estimated population of 1.3 billion, of which 700 million are located in difficult-to-reach rural areas. The government's aim is to narrow the gap of healthcare offerings between the urban and rural areas. However, Vice Health Minister Huang Jiefu cautions that, "the gap will probably not be closed in the next 30 years."

Given this situation, it is not surprising that the government supports integration and consolidation of its drug-distribution network. Wu comments that, "this will contribute to the emergence of market leaders, support local pharmaceutical companies to market their products beyond China, and escalate the market position of the country." Huang Donglin, an industry analyst in the healthcare division of Frost & Sullivan China adds, "The gross margin of drug distribution has decreased over the years. Companies need efficient management, higher service quality and size to develop the business. And integration can only be achieved through in-depth organization and business adjustment."

Well-established distributors have already adopted this approach. In 2010, Sinopharm Group, based in Haidian, Beijing, became the first to own distribution channels in all Chinese provinces by acquiring small and mid-size companies. In January 2011, Shanghai Pharma Group acquired CITIC Pharma to enter the northern China market. Newcomers such as Cardinal Health, based in Ohio, acquired Hong Kong-based Yong Yu (also known as Zuellig Pharma China) for $470 million in 2011. Cardinal also opened a logistics center in Shanghai to expand its business horizon in the country.

The government's commitment to overhaul China's drug-distribution network has become quite transparent as a means to lower drug prices. Last September, it reduced the retail price ceiling of 82 pharmaceutical drugs by an average of 14%. The Ministry of Public Security recently ended a campaign involving 1280 investigations across 170 cities in 29 provinces and autonomous regions to ensure drug safety. There is also a need to ramp up digitalization of drug supervision. The plan has also included unified code management for approved drugs and electronic supervision of all drug types.

China's five-year plan includes developing one to three large-scale leading distributors with annual sales of more than $15.9 billion. There is also a plan to establish 20 regional distributors with annual sales of more than $1.6 billion by 2015. The leading domestic players (i.e., Sinopharm Group, Shanghai Pharmaceutical, and Guangdong Jiuzhoutong Pharmaceutical) held less than 20% of the drug-distribution market share in 2009.

Wu says, "The plan may not have rigid performance indicators but it has identified six entrance thresholds. For example, a distributor's warehouse must be 50,000 square metres and cover 80% of its hospital network. Other requirements involve areas of transportation vehicles, information systems, e-commerce, and annual sales volume."

Interestingly, online purchasing of drugs is gaining popularity on Chinese soil. Wu comments that online drug sales may still be in its infancy, but "it is expected to be a low-cost sales channel supporting major sales channels in the coming years." The online purchase option has also made the drug-procurement process for healthcare institutions easier and faster, a spokesperson at the drug purchasing department of Anhui province adds.

In fact, many provincial governments, including the Beijing Municipality and the Guizhou province, are promoting the use of online platforms. At the end of January 2011, Beijing's 167 medical institutions placed 289,423 online orders and 85 drug-distribution companies had fulfilled them. The online platform registered a 9858 medicines bought online with daily transaction value of $14.86 million.

Looking forward, there are many opportunities for industry players in the drug-distribution business. The sector is expected to maintain an annual growth rate of 8% during the next five years to raise total sales to more than $1.2 trillion by 2015, up from $773 billion in 2009. However, drug-distribution companies will need to streamline their processes to strengthen their competitiveness in the market. Huang explains, "Distribution companies need to set up new operational strategies and optimize management structure to serve clinical demands. Ultimately, service quality and ability affect the competitiveness of a distribution company. Because it acts as a bridge between manufacturers and users, it must build on its range of value-added services to benefit both up and downstream parties."

Jane Wan is a freelance writer based in Mumbai