30-01-2019

The Central Government has fully rolled out the two invoice system in 2018, which requires pharmaceutical products to be processed by only one distributor from manufacturer to hospital. Since the two invoice policy has taken into effect, the growth of Chinese pharma distribution companies has significantly slowed down as the smaller and less competitive players being squeezed out from the market. However, as major pharmaceutical distributors have begun to adjust their business model after the full implementation of two invoice system, it is expected that concentration of the industry will be higher in the future. In 2017, the top 3 players’ accounted for 34.6% of market share in China compared with 90.0% in the US. We believe this reform will help speeding up the consolidation of the entire industry and favor those large distributors as they can gradually capture more market share from small distributors and achieve higher profit margin. Furthermore, the implementation of zero mark-up policy (ZMP) has led to lower demand for drugs from hospitals. Also, the separation of medical treatment and drug sale has promoted the growth of drug retail segment which has a profit margin of 8-10%, significantly higher than distribution segment. Retail segment is anticipated to be the future main driver for the drug distribution industry. Investors are recommended to accumulate large pharmaceutical distributors for medium/long term investment.

Reference:
Bloomberg
State Food and Drug Administration

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