SHANGHAI – The Chinese Ministry of Health has published the Good Supply Practice (GSP) Standards for Pharmaceutical Products in part in an effort to continue the consolidation of the Chinese drug distribution industry by eliminating smaller and less efficient distributors.

For many of the 13,000 distributors across the country, the standards will be too costly or difficult to meet, and there are expectations of a wave of mergers and closures. That represents a timely opportunity for multinationals looking for distribution rights in China.

"The government has been aware that having thousands of distributors has led to inefficiencies in the system and high costs, and the GSP standards may accelerate consolidation in the industry," said Emma Davies, a partner and head of Asia Healthcare and Life Sciences at international law firm Clifford Chance in an interview with BioWorld Today.

Discussions to revise the GSP guidelines began in 2009. There have been three rounds of public consultation to replace the last set of guidelines put forward in the year 2000.

The new standards set up stringent requirements for pharmaceutical wholesalers and retailers and follow both World Health Organization guidelines and international standards.

The new standards are much more comprehensive, with 187 articles compared to the previous 88. They require higher quality controls in drug distribution and supply chain management and stricter record keeping and tracking requirements.

Quality control measures call for improvements in hardware, such as computerized systems to track everything from SKUs to internal audits, and software, like human resources.

Crucially important for biologics, requirements are laid out for an improved cold chain logistics system with temperature and humidity controls required in both the storage and transportation of drugs.

The creation of this new set of standards matches the goals set out in China's 12th Five Year Plan (2011-2015) to consolidate the industry and develop national champions.

The plan calls for development of between one and three pharmaceutical distribution groups with annual sales of RMB100 billion (US$16.2 billion) and another tier of 20 regional groups with annual sales of RMB10 billion, according to a KPMG report.

After the plan is implemented a group of 100 pharma wholesalers should represent 85 percent or more of the total annual sales, and the top 100 retailers should represent a total of 60 percent.

Today, China has 13,000 licensed wholesale distributors across the country which now have to comply with the new rules by the end of 2015.

The challenge of consolidating pharmaceutical distribution in China is huge. Regulators are trying to reduce the number of distributors from thousands to hundreds in a couple of years. In the U.S., it took about two decades to reduce the number of distributors from 147 to 53 in the mid-1990s.

Today, the three largest U.S. wholesalers, McKesson Corp., Cardinal Health Inc. and AmerisourceBergen Corp., claim an estimated 95 percent of a market that was triple the size of China's in 2010, according to a 2012 report by ATKearney.

China's three largest distributors – Sinopharm Group Co. Ltd., Shanghai Pharmaceuticals Holding Co. Ltd. and China Resources Enterprise Ltd. – account for about 20 percent of the Chinese market, but the largest of those, Sinopharm, is about one-tenth the size of global leader McKeeson.

Nevertheless, the process of consolidation is visibly under way. Players such as Sinopharm have made acquisitions of local distributors numbering in the hundreds over the last three years, and the regulators have not issued new licenses or renewals for smaller players, accelerating industry consolidation.

M&A Opportunity

Davies said U.S. biopharmas that want to sell drugs in China have two viable options.

"They can contract with a local distribution powerhouse like Sinopharm – which is likely to be aware of the FCPA compliance issues – and is a good option for those companies without the cash to invest directly in the market. Companies with around $5 million to $10 million on hand can look to buy a local distributor and obtain their network of sales people and distribution licenses."

With consolidation under way, now is a good time to invest before players become too big to buy. But she warned this means more responsibility for the multinational partner and a lot of work would have to be done to clean up operations to meet FCPA requirements and the new GSP standards. Without the GSP license, it becomes a question for the foreign partner of where to house the necessary sales force, which in a country the size of China can quickly go from a team of hundreds to thousands.

"To date, there has not been a lot of M&A activity in the biopharma space," Davies said. "Companies typically seek co-partner and in-licensing agreements. . . . Many local partners already have huge distribution networks, but an undifferentiated low range of product offering, and are looking to improve their offerings with midrange and high-end products from abroad."

Davies, who has been in China for more than a decade, warned that it can be difficult to get a sense of the market.

"It is better to come in low and soft, than to come in with a big bang. The people who feel their way into the market and come early do better, learning through experience and getting a foothold rather than waiting on the ideal strategy," she said.