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China’s distribution changes force major US company out

Published on 25/07/17 at 10:01am

Cardinal Health, one of the largest drug distributors in the US, is looking to sell on its network in China, before the ‘two-invoice’ system is implemented next year, according to Reuters. The company values its business in China as worth around $1.5 billion and it has already had interest from state-backed companies.

The decision by the company has taken some by surprise, as its network of 16 distribution centres across 20 cities managed to develop sales from $3 billion in 2015 to $3.5 billion in 2016. However, the company is reportedly worried that China’s changing distribution system will strangle this growth.

The so-called two-invoice procurement system has been undergoing trials in China since 2012, with the system aimed at refining the bloated network to reduce the cost to its healthcare system. Currently, there are 13,500 distributors of various sizes throughout China and the scope of the system means that it can be difficult to regulate, with kickbacks to doctors common.

China’s new system will mean that drug manufacturers will have to sign deals with a distributor that will supply its products straight to the healthcare facilities, rather than passing through an intermediary. It is expected that this will see a consolidation of the market, as the larger and potentially state-run operations will acquire or force out of business smaller operators.

This was the case when the new system was piloted in Fujian province, which saw the number of distributors fall by over half since 2012. In terms of employment, this could have serious ramifications, as the sector currently provides employment for 3 million people.

The overall process has been adopted to try to reduce the price that hospitals pay for medical products. China is currently struggling with the price of pharmaceuticals, with many individuals unable to afford the price of medication which has led to a burgeoning black market.

The aim is that streamlining the distribution network will reduce costs for the companies producing products that can then be passed onto the hospitals. However, some have voiced fears that the pharmaceutical companies will retain prices at current levels and kickbacks will continue to ensure product sales.

For Cardinal Health, this prospect has made them reconsider its position in the marketplace. Reuters reports that Shanghai Pharmaceuticals, China Resources Pharmaceuticals and Sinopharm have all expressed interest in taking on the network. It is no coincidence that each of these companies is either state-owned or has leverage within the government.

It points towards the early arms-race that could kick into action once the plan is fully implemented by the end of 2018 that will see the larger companies move to consolidate their positions in the market.

Ben Hargreaves

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