China’s Essential Drug List prompts Rise of Retail Drug Stores

On August 18, the Chinese MoH released that will become available at heavily subsidized prices starting on September 25th.   An IHS Global report summarizes things well;

All the drugs in the list will be included in the country’s basic health insurance catalogue with a higher reimbursement percentage, which is expected to be finalized by the end of this year. Meanwhile, the pricing of the essential drugs will be decided by the governments through public tender at the provincial level. The target of the system in 2009 is to make sure that 30% of government-controlled community medical institutions will stock and sell essential drugs with zero profit margin. In addition, the distribution of essential drugs will also be carried out through unified channels by either drug manufacturers or drug distributors.

Developing an essential drug list was cited as a key goal of the Health Care Reform plan, and its release represents an important milestone, and  victory for health reform architects.

The financial implications of the list for drug manufacturers and distributors were responsible for long delays in the list announcement.  Though it was finally released this weekend, the list was originally targeted to be completed before the month of August, and before that, the original goal was for the essential drug system to be implemented in April of this year.  According to inside sources, intense lobbying by various international and domestic pharmaceutical companies wanting their drugs on the list (or a competitor’s drugs off the list) led to many revisions before the final list was put out.  Many expect the list to be changed again before the September 25th implementation date.

Implications for various players:

This is dark news for government run hospitals and their medical staff that derive a large chunk of their incomes from medicine sales.  This change is  great for consumers who will no longer have to go to central hospitals for essential medicines, and for whom the new, subsidized drug prices are going to provide a financial windfall in savings.

For pharmaceutical and neutro-ceutical players (producers of alternative and TCM medicines) inclusion means stock gains, while exclusion means less happy stock holders.  Unfortunately for multi-nationals,  most of the drugs on the list are already genericized, meaning that local generic distributors have the edge on securing deals with the ministry.  For companies that have gotten exclusive supply contracts for drugs, however, the situation is obviously different.

Where the industry is really being forced to change:

The real sea-change, however, is going to occur with Chinese drug manufacturers and distributors.  In China, for a long time, small distributors have been able to make do with providing basic drugs locally to clinics, hospitals, and pharmacies.  The publication of the essential drug list, however, is going to marginalize and push out many of these distributors because the MoH will be signing exclusive contracts with distributors able to deliver goods nationally, and, therefore, at a cheaper price to clinics and hospitals.  In areas where those drugs are sold, no one else will be able to sell them.   The lower players will fall off, while many of the mid-level distributors with capacity to distribute on a provincial scale are going to be bought up by the top five or so distribution players.  This same kind of logic applies to smaller drug distributors as well if they do not have the capacity to cover more than a small number of drug distribution channels.

Some drug distributors, far from packing it in, are starting to transfer their skills  to a new kind of budding business, chain store pharmacies selling cosmetic products.  Drug stores selling products other than drugs is a new concept in China, largely because, in the past, these stores could not or did not have to.

This is not a sudden change, however, but one that these distributors have been planning for half a decade.  They read the writing on the wall way back in 2004 when the government published the first The National Essential Drug List containing some 2000 medicines.  They knew then that the ‘good times’ of selling any and every kind of drugs to doctors willing to take under the table payments, were going to change.

Looking at Western drug store models they realized that once drug distribution stop being possible, they would have to find new products to supplement their sales.  The natural accompaniments to pharma sales were general health products and cosmetics.  In addition, in many parts of the rural country side, drug stores can be a very convenient health access points for residents.

So far, no article has connected is the creation of the National Essential Drug List with the rise of these new drug stores, but when researching the impact of health reform one cannot help but to eventually read about a new trend of supermarket based drug stores. As if to drive the point firmly home, on August 24, six days after the new essential drug list was published China Daily ran a story about an IPSOS group online survey of Chinese health consumers aged 16-65, called Healthcare Survey Finds Misconceptions.  Among other things, the IPSOS survey finds that the majority of Chinese have a limited understanding of the health care reform program and that, so far, the announcement and early implementation of the USD 128 billion health care reform bill has not strengthened Chinese confidence in rural and community health clinics* (see notes).

Looking at consumers relationships to Drug Stores, IPSOS also finds that

1.) …43 percent of consumers chose to buy their medicine at drugstores for self -treatment.

“Convenience, more complete drug stocking and ease of purchasing without waiting in long lines at large hospitals are the main reasons for this trend,” Li of Ipsos China said.

The use of health insurance cards is another key reason, she added.

2.) The frequency with which respondents use their health insurance cards in drug stores is once every two to three months.

This figure is higher than their usage in large hospitals and community health facilities, which is once every three to four months.

3.)….Drugstore patrons also buy some over-the-counter, or OTC, drugs to store at home. Nearly 90 percent of consumers surveyed said they buy and store medicines for common colds, and 29.2 percent said they purchased antibiotics at drugstores.

4.)…According to the survey, 57.7 percent of consumers would buy general health products in addition to medicines at drugstores. Of those surveyed, 32.6 percent said they would buy daily necessities at the multi-service drugstores, and 30 percent would purchase cosmetics, too.

All of these findings represent support for the drug distributors shift to creating drug store chains. I would bet that this is quickly going to reveal itself as one of China’s most profitable emerging market opportunities and make quite a few entrepreneurs billionaires in the process.

Meanwhile, somewhat unexpectedly, drug stores, a product of private enterprise, might end up being one of the best effects of the Health Care Reforms.

Notes:

*The fact that the Health Care Reforms have not so far swayed the hearts and minds of Chinese is not in itself surprising – no one should expect decades of stigma to be erased in only a few months of reform implementation.  Indeed, there are countless issues which need to be worked out before hand. More important, it is a bit odd that the China Daily would run with this article before the start of subsidized drug sales in community clinics.  One can be sure that once community clinics start to become associated with cheap, high quality drugs, and shorter lines to get those drugs, Chinese attitudes towards these clinics will start to change dramatically.