"Two-vote system" trial first anniversary of the pharmaceutical circulation chain interest game in progress

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The "two-invoice system" means that the pharmaceutical production enterprise issues an invoice to the circulation enterprise, and the circulation enterprise issues an invoice to the medical institution. One year after the nationwide trial of the two-vote system, a large number of mergers and acquisitions have taken place in the pharmaceutical circulation. This is a value chain reorganization around price, and it is also a big game of interests in the pharmaceutical circulation chain through system reform.

Behind the wave of mergers and acquisitions of pharmaceutical distribution companies are two profit mouths that related parties are trying to seize, medical devices and prescriptions. As Sinopharm publicly claims, this is a value chain restructuring around prices. At the same time, a reporter from the Securities Times is concerned that this is also a big game of interests in the pharmaceutical circulation chain through system reform.

At the end of 2017, hundreds of pharmaceutical distributors, agents, pharmaceutical companies, and hospital managers gathered at a pharmaceutical summit in Chongqing to discuss the impact of the two-vote system on the industry in the past year and their future. Commercial companies (generally referred to as distributors and agents) try to convey to the regulatory authorities, leaving a reasonable profit space for the business; and officials from the Ministry of Industry and Information Technology, the Health and Family Planning Commission, and the Ministry of Commerce threw out a series of profitable Chinese pharmaceutical industry The data of the company told the industry that the "two-vote system" cannot be abandoned halfway.

Sinopharm Holdings, Nanjing Pharmaceutical, these leading state-owned enterprises, have long been clear about the government decision-making to take the opportunity to transform the mind. Nanjing Pharmaceutical said that it must follow the trend. The two-vote system is definitely a positive effect on large pharmaceutical circulation companies. It is an opportunity for adjustment and transformation. Companies can no longer just hold on to circulation. They must make some innovations and layouts around medical reform, otherwise the road will It will get narrower and narrower.

From the perspective of these large enterprises, the implementation of the two-vote system is undoubtedly confirmed. However, there is controversy over who chooses the distributor. Commercial companies believe that it is unreasonable for hospitals to choose distributors in some places. Production enterprises should choose distributors, or the government should list distribution enterprises, and production enterprises can choose from the distribution enterprise list database.

The industry believes that the implementation of the two-vote system for drugs nationwide is relatively optimistic. Many provinces have begun to promote the two-vote system for medical devices, but more complex factors must be considered.

M & A activity is not satisfactory

On January 9, 2017, the National Health and Family Planning Commission issued the "Implementation Opinions on the Implementation of the" Two-Invoice System "in Drug Procurement in Public Medical Institutions (Trial)", announcing the beginning of the national "Two-Invoice System. In this "opinion", the "two-invoice system" means that the pharmaceutical production enterprise issues an invoice to the circulation enterprise, and the circulation enterprise issues an invoice to the medical institution. Its significance lies in standardizing the order of drug circulation, compressing circulation links, reducing falsely high drug prices, purifying the circulation environment, cracking down on "ticket money laundering", and strengthening the supervision and management of the pharmaceutical market.

One year after the nationwide trial of the two-vote system, a large number of mergers and acquisitions have taken place in the pharmaceutical circulation. China's pharmaceutical circulation industry has always been a closed and complex area, with production enterprises connected upstream, hospitals connected downstream, and more than 13,000 agents and distributors, large and small, in the middle. Small disorder is the characteristic of this industry. According to some industry views, the "two-vote system" will rectify the circulation link to about 3000. The merger of commercial companies in the circulation link has become a feature of China's pharmaceutical industry. In overseas mergers and acquisitions, it is usually the upstream and downstream merger of this industry chain.

Circulation enterprises are divided into agents and distributors. The medical representatives who walk in the major hospitals and wards come from agents. Those who enter the hospital through human feelings and contacts are agents, and those who are not large enough are agents. Most of the 27 pharmaceutical commercial listed companies under the three-level industry division of A- share Shenwan are distributors. They have a sound logistics and distribution system, and perhaps some agency services. In the supply chain, agents and distributors are sometimes connected upstream and downstream, sometimes parallel. Mergers and acquisitions, usually distributors and agents.

Industry insiders believe that the country's intention is indeed to promote the circulation of the industry's big merger. The reason is that no matter the pricing of drugs or consumables, the NDRC is not a decision-making, but to comprehensively consider the price of the underlying drugs and set a reasonable price. In the past, there were too many circulation links, too many agents and distributors, each offering a price, and the bidding price was vulnerable to "market kidnapping".

Y, an executive of a pharmaceutical company, said that in terms of medical devices alone, even in the same province, the price is not uniform in most cases. The price of medical equipment is not transparent, and most people do not know how much the hospital sells. Director Q of the Management Research Center of a tertiary hospital in Shanghai said that different devices are packaged in different ways, and it is reasonable to double the price of the same device.

The two-vote system limits the number of circulations, while some provinces specify the number of circulations that hospitals can choose from. The intention of the decision makers is very obvious. They do not want to see so many circulation enterprises and so many prices. In addition, the operation that has long existed in the industry, which leads to the inflated price of medical supplies, will be more difficult to operate with the scale of commercial companies. Policymakers clearly want the circulation ring to be more orderly.

But mergers and acquisitions have also run into some trouble.

Although small and medium-sized agents have hospital acquaintances, some of these companies have excessive financial risks. Large companies will choose to retain part of the merger and acquisition process, divest part, and even implement re-employment and re-employment of personnel. This is what the merged companies do not want to see. And like all mergers and acquisitions, the culture and management after the merger is a problem. "In general, we will have a controlling stake and send the general manager over, but sometimes we will take care of the needs of the target company." A local circulation state-owned enterprise executive Z said.

In addition, the most compliance state-owned enterprises, in the process of mergers and acquisitions will encounter the approval time is too long, the lack of premium capacity and other issues, which has caused some of the good underlying assets were taken away by private enterprises, sometimes self-built subsidiaries to cover the market blind spots than mergers and acquisitions come easier.

Who chooses the distributor: small things have a big impact

This is the same problem encountered by a pharmaceutical analyst. His client asked him who should choose the distributor and what are the criteria for selection?

From the perspective of the industry, for a long time, distributors have been in a weak position in the supply chain, lacking bargaining power for manufacturers upward and hospitals downward. It is not the distributors who make huge profits. What they earn is the meager profits in the intermediate distribution link.

People in the industry will say that distributors are often "splinted" in the supply chain ". In the supply chain system of manufacturers, distributors, and hospitals, the most powerful is the hospital, and then the manufacturers with strong competitive varieties. "Strong manufacturers will require cash on delivery, and signing a long-term agreement may be a 3-month payback period, but when the distributor sells to the hospital, there may be a 9-month payback period. This kind of advance behavior makes the cash flow of commercial companies. The pressure is great. The larger the scale, the greater the pressure on financial expenses. This is also one of the reasons why there are more small companies in the industry." Y, the pharmaceutical company executive, said.

In addition to the two-vote system, the entire health care system is undergoing other institutional reforms at the same time. In the past, hospitals were responsible for their own profits and losses. With the advancement of the medical reform measures of "zero bonus" and "strict control of the proportion of drugs", the hospital's revenue capacity was greatly frustrated. "But the hospital needs money to invest in equipment, talents and daily operations. The profit of pharmacy has been lost. He must make up for the profit from other channels." Y said.

Choose a distributor, why choose you?

In the past, in the process of pharmaceutical circulation, the existence of pharmaceutical agents is because there are so-called "contacts" in the hospital, so the agents to exercise gray trading, and from which to seize profits. Now, if according to the system of Shaanxi Province, the hospital chooses the distributor, then it is still impossible to break the interest chain under this "relationship.

For the selected distributor, it is necessary to connect as many pharmaceutical and equipment manufacturers as possible, not only to invest costs to lay out channels, but also to invest costs to cover product business.

But it is different for pharmaceutical companies to choose distributors. The medical reform policy's restrictions on hospital drugs and consumables are restoring the real demand for drugs and devices in China's medical industry. If hospitals passively accept the delivery of these distributors, the original hospital-led interest chain can be impacted to a certain extent. The above-mentioned pharmaceutical company executive Y believes that the hospital and the original distributor or agent have reached a tacit understanding of gray transactions, and the distributor selected by the pharmaceutical company may not reach the original conditions with the hospital.

Director Q of a hospital said, "Let the enterprise choose what to do in case of monopoly. Our hospital has been losing money in the past two years. If they choose the channel, they will hurt the hospital's profits even more. The most compromised way is for the enterprise and the hospital to make a directory together."

This is a re-competition for the position of the industry, commercial companies have long wanted to be able to control the channels to improve bargaining power. Y, an executive of a pharmaceutical company, said that it is just right for the state and hospitals to reduce unreasonable medical service expenses.

No channels, no "spring"

Now, in some provinces where the two-vote system does not specify who chooses the distribution company, local hospitals have begun to take the initiative to find cooperative distributors.

Distributors should cooperate with hospitals, and hospitals should also provide business space for commercial companies other than external distribution. This is what some commercial companies are starting to do now, such as laying out logistics in hospitals and building information flow platforms for hospitals.

The information flow platform is aimed at the future outflow of prescription. With the promotion of restrictions on doctors and the use of consumables, many hospitals have been unable to prescribe drugs. But patients always need to buy drugs, so prescription outflow is considered an industry necessity.

Although many industry researchers predict that retail pharmacies will usher in a "spring", the industry is not all touted. "The hospital will not lose control over the prescription completely. Considering from a very realistic problem, the prescription belongs to the hospital. If it is not guaranteed to be purchased in the designated pharmacy, who will be responsible for the problem." Mr. Y, the aforementioned pharmaceutical company executive, said.

Z, an executive of the local circulation state-owned enterprises, said: "When will the real outflow be realized? There is too much resistance inside, which directly touches the interests of public hospitals. For example, the proportion of drugs in hospitals should be controlled to less than 30%. It cannot set up pharmacies, but it can set up joint venture pharmacies with commercial companies, hold shares and continue to maintain interests. In addition, commercial companies that take over the hospital's pharmacy will still agree on a way to return profits. Some areas are tacit, and some areas have been involved in supervision, which is considered unreasonable."

Most people in the industry believe that prescriptions will definitely flow out in the future, so now everyone is fighting for it, but not every pharmacy can benefit. Starting from the pharmacy in the hospital, pure retail enterprises may not be able to win, while enterprises with wholesale qualifications will be able to win the pharmacy through the advantages of daily relationship maintenance and close business contacts with medical institutions, and then hand it over to the professional retail platform for operation.

Z's commercial company has been building an information platform for prescription outflow for some hospitals. The purpose is that when prescriptions can actually flow out of the hospital, the company will control the right to speak in the supply chain. These prescriptions may be transmitted to the company's own retail pharmacy or to other retail pharmacies approved by the company. Perhaps, pharmacies will also set up a certification alliance under such an opportunity.

In addition, Z believes that there are still many additional conditions for the great development of retail pharmacies. It is difficult to say which model can develop particularly well now. Therefore, the company is exploring various retail models, including traditional Chinese medicine sitting and non-pharmaceutical products-oriented specialty stores.

What commercial companies want to see is to change the position that hospitals have been in a strong position for a long time and they are at a disadvantage. Some analysts believe that the original large commercial companies are unlikely to cover high-value consumables on a large scale. But the reality is that these companies are actively layout equipment. Sinopharm Holdings set up a medical device business development department in June 2016 to speed up the layout. In that Chongqing pharmaceutical conference, Sinopharm Holdings hosted a device sub-forum. Their view is that the main battlefield of the pharmaceutical circulation industry in the future will be in the field of medical devices.

According to the description, Sinopharm Holdings is actively laying out equipment, high-value consumables, low-value consumables, testing reagents and other different medical devices, of which the proportion of consumables business exceeds 60%. Such a forum is not only a "lecture" of Sinopharm Holdings, but also promotes confidence in the device business. It is understood that in 2018, Sinopharm Holdings will host more such "lectures" on a provincial basis ".

Relevant analysts believe that there are two main reasons why pharmaceutical commercial companies are unwilling to get involved in medical devices. The first is that after the two-vote system of drugs is implemented, the devices will advance rapidly; the second is that the sales of devices are far more complicated than drugs, and there are more gold sales and gray areas. Commercial companies are unwilling to take such risks.

For example, when a commercial company buys an instrument, it must find a way to sell it, which creates gray transactions, and they are all cash transactions without invoices. This poses a risk to commercial companies, and the larger the volume, the more it is necessary to collect enough invoices to hedge the account. Therefore, for a long time, the companies involved in the circulation of instruments are small-scale companies.

With the deepening of medical anti-corruption, prudent hospitals have begun to find more standardized enterprises to cooperate. A local drug circulation state-owned enterprise that did not do much medical equipment before has received olive branches from some public hospitals, hoping that the two sides will have cooperation in equipment.

According to reports, the logic of commercial companies layout equipment has two main points. First, although the central government hopes to implement the two-vote system for consumables nationwide by the end of 2018, the two-vote system for medicines has been tried for nearly 10 years. The complexity of the equipment is far higher than that of medicines. There is no specific opinion, and a certain buffer period can still be reserved in the middle, and it is very likely that each province will take its own measures, and the difference will be relatively large; second, large commercial companies do not want to earn huge profits from agency sales, but only want to generate stable income through distribution. At the same time, they can start with medical services, including providing clinical services, quality inspection and maintenance for high-value consumables. Moreover, national policies are also encouraging hospitals to outsource these specialized medical services.

Many commercial companies believe that as sunshine procurement and bidding prices continue to become reasonable, the original gray part will be greatly reduced, clinical technical services will exist independently, and value will be reflected in a compliant manner. Of course, the profit margin will also be limited to a reasonable range. In this process, some agents with technical service capabilities will be transformed into service providers to provide integrated supply chain services for hospitals together with large pharmaceutical distribution companies.

For commercial companies, the reduction of the binding force of hospitals on channels is their real "spring".