[China] Year-End Review | Comprehensive Analysis of Pharmaceutical Supply Chain in 2021

Author: The Healthcare Logistics Association of China Federation of Logistics & Purchasing

Update : 24th February, 2022 Chinese Version

Originally Published on 30th December, 2021. Unofficially translated from the original Chinese article published by The Healthcare Logistics Association of China Federation of Logistics & Purchasing.

The year 2021 is a year of special importance, the first year of the “14th Five-Year” Plan, and the starting point of the new journey of building a modern socialist country and marching towards the second 100-year goal. At present, the pattern of the world is affected by the change and epidemic situation that have not been seen in more than 100 years, and the global supply chain is entering a phase of reconstruction. With the significant achievements made by China in COVID-19 control and social and economic development, for pharmaceutical supply chain, many new features and changes have been seen.

Main development features of the pharmaceutical supply chain

Pharmaceutical industry companies focus on supply chain capability improvement

According to the National Bureau of Statistics, from January to October 2021, industrial enterprises above designated size in of the pharmaceutical manufacturing industry made an operating revenues of 2353 billion yuan, with a year-on-year increase of 22.8% and a year-on-year increase of 76.7% in total profit. As the COVID-19 is under control and the diagnosis and treatment activities are recovering gradually in China, the revenue and profit of the pharmaceutical industry have seen rapid recovery, especially with the cost control measures such as drug collection, medical insurance negotiation and DRGs payment, the profit level has been improved significantly.

Figure 1. Income growth of pharmaceutical manufacturing companies above designated size

BLUE:Revenue (100 million yuan) | ORANGE:Revenue growth rate

Source: National Bureau of Statistics

In the face of the normalization of epidemic control, the complex and changing international political situation, the opening of the new consumption and retail era and other factors, such as rising raw material costs, order fragmentation and the increase of customers, pharmaceutical companies have to focus on improving supply chain management and synergy capabilities to reduce operating costs and increase supply chain efficiency.

Logistics capacities in pharmaceutical distribution industry has been further improved

The pharmaceutical distribution market fully recovered in the 1st quarter of 2021, and the growth rate of the industry basically recovered to the level of the same period in 2019. From the 1st to the 3rd quarter, the growth rate of the industry maintained a growing tendency, and the total sales of the medical products throughout the country reached 1.89 trillion yuan, with a year-on-year increase of 10.60%. According to initial estimation, the total sales of the national pharmaceutical distribution market reached 2.65 trillion yuan in 2021, an increase of about 11% year-on-year.

Figure 2. Summary of the scale of the pharmaceutical distribution market of China

BLUE:Revenue (100 million yuan) | ORANGE:Revenue growth rate

Source: Ministry of Commerce, China Federation of Logistics & Purchasing Pharmaceutical Logistics Branch

The pharmaceutical distribution industry has shown the development trend of expanding market scale, accelerating industry consolidation, increasing market concentration, strengthening the degree of digital intelligence and transforming business models. Logistics capacities of pharmaceutical distribution companies have been further improved, promoting their drug distribution service capacities in cities. Pharmaceutical distribution companies are building their own pharmaceutical distribution systems to create modern pharmaceutical logistics centers by integrating and applying various automated logistics technologies.

Public hospitals have a dominant role to play in the pharmaceutical terminal market

According to www.menet.com.cn, under the influence from COVID-19 and centralized volume purchasing, the scale of the terminal market witnessed reduction in 2020 for the first time in the past 5 years. The sales of the three major drug terminals was 1643.7 billion yuan. Public hospitals played a leading role in controlling COVID-19, with the greatest impact on terminal sales throughout the year. Retail pharmacies, on the other hand, have seen growth under the harsh conditions thanks to the sales of masks, alcohols and other epidemic prevention materials, becoming the only one of the three major markets showing growth. In terms of the structure of the terminal market, public hospitals still have an absolute dominant role to play.

In the first half of 2021, the sales of China's three major drug terminals reached 839.3 billion yuan, up 8.8% year-on-year. Where, public hospitals accounted for 63.8% of the terminal market, retail pharmacies accounted for 26.4%, and public grassroots medical terminals accounted for 9.8%.

Figure 3. Market shares of sales of three major drug terminals

BLUE:Public hospital terminal | ORANGE:Retail pharmacy terminal | GREY: Public grassroots medical terminal

Source: www.menet.com.cn

Online pharmacy sales increased significantly in the retail pharmacy market

Retail pharmacies saw steady growth in the first half of 2021, with drug sales reaching 221.8 billion yuan, up 6.3% year-on-year. Where, the physical pharmacy market drug sales reached 202.7 billion yuan, up 3% year-on-year; while online pharmacy market drug sales reached 19.2 billion yuan, up 60.9% year-on-year.

Table 1. Sales and growth rates of the three major drug terminals from 2015 to date

Source: www.menet.com.cn

Pharmaceutical e-commerce market witnessed rapid growth in scale, becoming a medical profit maker in the Internet

With the implementation of the Health China Strategy, the model of the Internet + Medical Care represented by pharmaceutical e-commerce has become a new tendency. During the epidemic, pharmaceutical e-commerce highlighted the unique value of the Internet in terms of products, services and efficiency.

Online pharmacy sales in 2020 were 159.3 billion yuan, increased by 59.1 billion yuan or 59.0% year-over-year, becoming a high point of growth in the past four years. The epidemic situation has promoted the rapid development of online pharmacies, accumulating health traffic, technology and distribution resources, and the scale is expected to exceed 220 billion yuan in 2021. Pharmaceutical e-commerce market witnessed rapid growth in scale, becoming a medical profit maker in the Internet.

By the end of 2020, more than 17% of China's pharmacies were connected to the Meituan medicine purchasing platform, and the top five pharmacies on the display pages of Meituan and Ele.me basically occupied 80% of the traffic in an area of 2-3 kilometers around them. Note: With the change in consumer behavior, the number of pharmacies joining large e-commerce platforms will continue to increase significantly; the change in consumer behaviors will lead to a change in the focus of the business model, and many chain pharmacies are seeing the development of pharmaceutical e-commerce as a strategic focus for the future.

Under the dual influence of policies and market, the industry reconstruction period has come, the pattern of the industry is gradually taking shape, and the four major tendencies will dominate the growth of pharmaceutical e-commerce market, namely, the new increase of pharmaceutical retail, prescription outflow, medical insurance payment access and service extension.

Total pharmaceutical logistics continues to grow, with the increase of more than 10% for four consecutive years

Pharmaceutical logistics industry has seen rapid grown in scale. The diversified market and business demands, fragmented orders, end-user distribution, logistics cost reduction and efficiency improvement, integrated solutions and other demand characteristics have made higher requirements for logistics service level. With the overall stable growth of the pharmaceutical manufacturing industry and pharmaceutical distribution industry, and the continued development of the pharmaceutical e-commerce industry, it is initially expected that the total scale of China's pharmaceutical logistics industry will exceed 85 billion yuan in 2021, an increase of over 15% compared to 2020.

Figure 4. Total pharmaceutical logistics cost of China from 2016 to 2021

BLUE:Pharmaceutical logistics cost (100 million yuan) | ORANGE:Growth rate

Source: China Federation of Logistics & Purchasing Pharmaceutical Logistics Branch

The reasons for the growth mainly include: the full recovery of China's pharmaceutical industry in 2021, which is one of the main factors driving the growth of pharmaceutical logistics costs; in addition, the continued growth of the market scale of biological products such as vaccines and blood products, which drives the increase of pharmaceutical logistics costs; the COVID-19 promoting the explosive growth of the pharmaceutical e-commerce market scale, which drives the growth of the pharmaceutical logistics costs due to the relatively high logistics rates of pharmaceutical e-commerce market; in addition, the construction of customized and specialized logistics solution service capacity of pharmaceutical logistics industry and the improvement of emergency protection capacity and other factors leading to the increase of costs.

Changes to the development of the pharmaceutical logistics industry in the new pattern and environment

Pharmaceutical logistics infrastructure investment will become more rational from rough investment to fine investment

☑ Pharmaceutical logistics vehicles

In 2020, the number of special transport vehicles for pharmaceutical logistics was 38,582, an increase of 11.91% year-on-year, and it has been growing at a rate of more than 10% for four consecutive years. According to the initial estimation, the growth will be kept at more than 10% in 2021. Pharmaceutical transport vehicles are developing for lightweight, large space, temperature control precision, safety and environmental protection, easy operation and multiple temperature zones.

☑ Pharmaceutical logistics information systems

Pharmaceutical distribution enterprises will put the required information system into operation according to their business and management needs, and the enterprises in the industry have basically completed the construction of their in-house IT systems. However, according to the collected and summarized industry information, many enterprises are lagged behind in IT construction. Therefore, the coverage of IT systems shall be further improved to promote the overall IT level of the pharmaceutical logistics industry, so as to realize the high efficiency and high level development of the industry.

☑ Policy features

However, due to the differences among provincial policies, the requirements for client qualifications, the requirements for the qualifications of the third-party logistics enterprises for the entrusted pharmaceutical products, and the requirements for the hardware, software and workforce of such enterprises are different, and some places have established entry thresholds for such enterprises. The working efficiencies of such enterprises are still affected in learning the provincial policies and applying for qualifications.

☑ Enterprise features

According to the analysis of the third-party logistics enterprises for pharmaceutical products, their main features include: the unbalanced inter-regional development, and the major enterprises are mainly concentrated in the eastern coast of China, accounting for more than 60% of the market; about 80% of the enterprises are conducting the wholesale and retail of pharmaceutical products, and only 20% of them are specializing in logistics; only few enterprises have cold chain logistics capacities for pharmaceutical products, accounting for about 40%; and the scales of the enterprises are small with low industry concentration. (Extended Reading>>>Authoritative release|Analysis Report of China's Third-Party Logistics Industry for Pharmaceutical Products)

Pharmaceutical cold chain market is developing in a good way, driving the pharmaceutical cold chain logistics industry to grow significantly

In recent years, along with the successive release of favorable national policies, people's growing attention to pharmaceutical safety, and increase in demand for pharmaceutical cold chain products, the pharmaceutical cold chain industry has been developing rapidly. According to the incomplete statistics by the branch, in 2020 China's pharmaceutical cold chain market sales reached 390.34 billion yuan, an increase of 14.97% year-on-year. In 2021, as the COVID-19 vaccines are available on the market, the bio-pharmaceutical industry will keep its booming development to drive the scale of the domestic pharmaceutical cold chain market to grow to 500 billion yuan, a year-on-year growth of more than 30%. The scale of China's pharmaceutical cold chain logistics industry is expected to reach 22 billion yuan in 2021. (Extended Reading>>>Original | China Pharmaceutical Cold Chain Logistics Industry Research Report (2021))

Figure 5. Total pharmaceutical cold chain logistics cost of China from 2018 to 2021

BLUE:Pharmaceutical cold chain logistics cost (100 million yuan)

Source: China Federation of Logistics & Purchasing Pharmaceutical Logistics Branch

The standardization of pharmaceutical logistics industry is becoming more and more perfect

The Working Group on Pharmaceutical Logistics Standardization of the National Logistics Standardization Technical Committee led the development of 12 pharmaceutical logistics standards, covering the issuance, implementation and revision of the standards related to facility and equipment validation, pharmaceutical logistics, cold chain logistics, pharmaceutical refrigerated trucks, coolers, holding tanks, IVD, medical testing, in-hospital logistics, carrier audits, reefer certification and pharmaceutical logistics talents, reflecting the process of establishing pharmaceutical logistics standards from nothing, and significantly improving the standardization level of the pharmaceutical logistics industry of China.

Among them, the implementation of the Code of Practice for Pharmaceutical Cold Chain Logistics effectively ensures the safety of cold chain drug storage and transportation. According to statistics, more than 20 provinces and cities have used this standard as one of the bidding conditions for more than 200 bidding projects, including provincial disease control, hospitals community health service centers, some government agencies and production, distribution and terminal enterprises.

Table 2. Pharmaceutical logistics industry standards

Intelligent pharmaceutical supply chain will gradually take shape in the "14th Five-Year Plan"

Policy guidance for The "14th Five-Year Plan"

In March this year, the Ministry of Commerce, the Ministry of Industry and Information Technology, CPAG and other eight ministries and commissions issued the notice on Further Implementing the Supply China Innovation and Application Demonstration Creation in China, proposing to cultivate a number of national supply chain innovation and application demonstration cities and enterprises in five years, so as to achieve new supply chain advantages, make new improvements in supply chain efficiency and effectiveness, reach new levels of supply chain security and stability, and make new improvements in supply chain governance effectiveness.

In October this year, the Ministry of Commerce issued the Guiding Opinions on Promoting the High-Quality Development of the Pharmaceutical Distribution Industry in the “14th Five-Year Plan” Period, defining the overall development goals during the “14th Five-Year Plan” period, clearly stating that the pharmaceutical distribution industry shall focus on breaking the barriers of the pharmaceutical distribution systems and mechanisms during the period, improving the ability of drug supply guarantee services, distribution efficiency and quality safety, and developing towards digitalization, intelligence, intensification and internationalization of the industry. During the "14th Five-Year Plan" period, the rural drug distribution network and urban drug distribution service capacity will be further improved to gradually optimize the industry layout. The development of the third-party pharmaceutical logistics, pharmaceutical cold chain logistics and traditional Chinese medicine logistics shall be standardized to create a green low-carbon supply chain. "Internet + drug distribution", new retail and other new business models will continue to emerge. Great efforts will be made for international exchanges and foreign trade of traditional Chinese medicines. The work related to standardization, talents, operation management and statistical services will be further improved.

In December this year, the General Office of the State Council issued the "14th Five-Year Plan" for the Development of Cold Chain Logistics, defining the direction for the development of the pharmaceutical cold chain logistics industry during the "14th Five-Year Plan” period, which is important for improving the quality control capability of the whole process of pharmaceutical product logistics and building a new development pattern. The four key points for the construction of the pharmaceutical product cold chain logistics industry include: improving the network of pharmaceutical product cold chain logistics facilities; seamlessly integrating information management of the entire pharmaceutical cold chain; improving the quality assurance of pharmaceutical cold chain logistics and use links; and improving the pharmaceutical emergency cold chain logistics system.

At the same time, in the national 14th Five-Year Plan, high-frequency words such as double carbon green and digital smart are particularly highlighted, and the hot spots such as smart logistics and smart medical care will always be emphasized throughout the 14th Five-Year Plan period and even the 2035 vision.

Table 3. Important policies for the 14th Five-Year Plan

Influence of a series of health care reform policies

A series of health care reform policies, such as the "4+7" quantitative drug procurement, the hierarchical diagnosis and treatment system, the new drug management law, and separate vaccine legislation, have been overlapping to generate a series of impacts on the industry. Higher requirements are put forward for the supply chain management capability of pharmaceutical manufacturers and further reduction of the cost of distribution links; the procurement categories are extended and the purchasing of biological drugs and proprietary Chinese medicines is coming; order fragmentation and intelligent splitting and picking functions will become the focus of operational planning; the mandatory GSP certification is abolished to carry out full process monitoring and accelerate the construction of drug traceability system; and stricter requirements and specifications are put forward for logistics links involving vaccine safety.

Table 4 The impact of a series of important medical reform policies

The "Internet + medical care” and medical insurance payment policies have proposed to integrate the costs of Internet + medical services into the scope of medical insurance payment, implement the "long prescription" medical insurance reimbursement policy, explore the interoperability of prescription information and drug retail consumption information in medical and health institutions, use real-time sharing to promote the standard development of drug network sales and medical logistics and distribution services, and actively explore the sharing of information to achieve the integrated services for flow of prescriptions, online payment and settlement and drug delivery.

Table 5 The impact of important favorable policies for pharmaceutical e-commerce

Based on the above policy influences, during the 14th Five-Year Plan, a flat, flexible, intensive and international intelligent pharmaceutical supply chain driven by technologies will be established. Agility, flexibility and resilience have become the new characteristics of the pharmaceutical supply chain, and the demand for specialized pharmaceutical logistics services has become more and more urgent. In the future, a group of typical modern pharmaceutical logistics enterprises or alliances with concentrated resources, reasonable layout, obvious driving forces, high-efficiency systems synergy and ability to build multi-level logistics network will emerge in the industry to provide diversified, customized and integrated pharmaceutical supply chain services.

Digital and intelligent transformation and updating direction of the pharmaceutical supply chain

Science and technologies have enabled the pharmaceutical supply chain enterprises to deal with market changes. Information technologies shall be used to promote the standardized operation and process management, digital technologies shall be used to support accurate decision-making and active warning, and intelligent technologies shall be used to improve the scale benefits and working efficiency of the logistics industry. Cost reduction, risk control and quality assurance shall be realized to provide clients with great service experience.

Improve the integration and optimize the industry structure

The competition and merging in the industry will be further updated, the mergers and acquisitions cross regions and ownership systems will be sped up, and the structure of the pharmaceutical supply chain industry will be further optimized. Strategic business alliances will be established among manufacturing enterprises, distribution enterprises, logistics enterprises, hospitals, pharmacies, chain drug stores and other terminal institutions to further improve distribution efficiency, reduce logistics costs of pharmaceutical enterprises, improve the level of pharmaceutical supply chain intensification, and achieve rapid response to market changes. The control platform, storage platform, transportation platform and information platform shall be used to build a smart pharmaceutical supply chain information platform to unify business access, task scheduling, resource allocation and supervision and auditing. All scenarios shall be realized to adapt to different business patterns such as production, distribution and e-commerce and meet the TOB, C and F logistics operation modes through integration.

Use diversified supply pattern to meet the consumption updating demand

The pharmaceutical supply chain pattern with diversified service modes and enterprise types will take place gradually to meet the diversified and individualized consumption needs of end users. The pharmaceutical supply chain service enterprises with intelligent, special and platform services in the future will become a new force in the industry. New technologies regarding pharmaceutical cold chain and temperature control will be constantly researched and developed, such as green, efficient and deep low temperature control system; packaging material system that can prolong service lives with intelligent cases in different sizes; and temperature and humidity sensor systems with high precision, speed and safety.

Digital and intelligent technologies promote innovations, and smart pharmaceutical supply chain system takes shape

The massive applications of 5G network and big-data technologies will drive the digital transformation and updating of the pharmaceutical supply chain, promoting the enterprises to go online, cloud and platforms. The traditional model of drug distribution will be gradually optimized to achieve iterative upgrading of elements, structures, processes and services.

Automated storage facilities and equipment will be subject to integrated development and each process link will be integrated with corresponding intelligent equipment to save labors, reduce labor intensity, improve efficiency and accuracy and ensure throughput; pharmaceutical transport vehicles that are more suitable for the pharmaceutical market characteristics will be put into use, featuring lightweight, large space, high efficiency, high quality, high standards of the combination of advantages to further enhance the level of pharmaceutical transport specialization; and special pharmaceutical refrigeration units will be developed and available, with two-way communication, cold machine management system, auxiliary heating system, custom defrost system and other features to achieve accurate temperature control.

The digital and intelligent technologies will promote the standard operation management, scientific operation decisions and accurate early-warning to speed up the construction of the smart pharmaceutical supply chain system with reduced cost, controllable risks and safe quality.

Source : The Healthcare Logistics Association of China Federation of Logistics & Purchasing

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