Can the 520,000-pharmacy market be absorbed?

Article reprinted from Pharmacy Manager; please contact us for removal if there's any infringement.

▍Compiled by: Yunmeng

Recently, the website of the National Medical Products Administration released the 2019 Annual Report on Pharmaceutical Regulatory Statistics. As of the end of 2019, there were a total of 544,000 enterprises nationwide holding Drug Trading Licenses, including 14,000 wholesale companies; 6,701 retail chain enterprises operating 290,000 stores under their chains; and 234,000 standalone retail pharmacies.

Chain-store operations are becoming a trend.

Compared to the 2018 data from the National Medical Products Administration, the number of retail pharmacies remained unchanged, but the number of retail chain enterprises increased from 5,671 to 6,701, representing an approximate 18% rise. Meanwhile, the number of stores operated by retail chain enterprises grew from 255,000 to 290,000, an increase of 35,000 outlets.

As China's pharmaceutical retail industry continues to undergo deepening reforms, the operational structure of pharmacies nationwide has undergone significant changes. Independent pharmacies are struggling to keep pace with chain stores, while chain pharmacies are steadily expanding and simultaneously absorbing and merging with some independent outlets.

The wave of mergers and acquisitions among chain drugstores is gradually subsiding.

According to incomplete statistics, from 2015 to 2018, the four major publicly listed pharmacy companies—Yifeng Pharmacy, Dashenlin, Laobaixing, and Yixintang—completed mergers and acquisitions of approximately 4,111 pharmacies, investing a total of about 6.6 billion yuan.

After 2018, the four major publicly listed pharmacy companies have collectively hit the "brake." In their 2019 annual reports, these companies simultaneously revealed that mergers and acquisitions are no longer the primary growth strategy for leading players in the pharmaceutical retail industry. Yifeng Pharmacy, once the most aggressive in pursuing acquisitions—having acquired nearly a thousand stores in 2018—slowed down significantly to 390 stores in 2019. Meanwhile, Laobaixing added 709 new stores in 2019, marking a 41.20% year-on-year decline, while Yixintang’s pace of new store openings dipped to just 8.82%.

After the land-grabbing phase of the Wild West era, most pharmacy companies now face heightened goodwill pressures and increased business risks.

Surviving in the cracks—good days are gone forever.

In 2018, China's National Healthcare Security Administration spearheaded the introduction of volume-based procurement policies, leveraging the "group-buying effect" to negotiate lower prices with pharmaceutical companies. As this policy took effect, hospital-sold drug prices have significantly dropped. Meanwhile, in order to remain competitive in pricing, chain pharmacies will inevitably follow suit by cutting their own prices in the future.

Today, volume-based procurement has entered its third round, and pharmacies are gradually being included as key players in centralized purchasing. However, governments in many regions have imposed strict limits on the markup rates for pharmaceuticals sold by pharmacies. Several local authorities have already issued regulations stating that pharmacies can charge no more than a 15% markup when selling drugs selected through volume-based procurement.

As the country strengthens its oversight of medical insurance funds, pharmacy retailers can no longer offer the same product categories as before. As of August 2019, medical insurance authorities in 20 Chinese cities have explicitly prohibited designated pharmacies from displaying or selling health supplements—either through public announcements or by means of contractual agreements.

At the end of 2018, the Ministry of Commerce officially released the "Guiding Opinions on the Categorized and Graded Management of Retail Pharmacies Nationwide (Draft for Comments)," stating that by 2020, a basic system for categorizing and grading retail pharmacies will have been established in most provinces and cities across the country. By 2025, a unified regulatory and policy framework for the categorized and graded management of retail pharmacies will be largely in place nationwide. Under this categorized and graded system, pharmacies will need to incur higher costs in order to secure broader operating scopes.

Established chain actively explores new business opportunities

On July 15, Yifeng Pharmacy announced the establishment of two subsidiaries: Yifeng Telemedicine Center and Yifeng Internet Hospital, aiming to provide users with services such as online medical consultations, prescription transfer platforms, personalized family doctors, and comprehensive health management. Notably, Yifeng is the first publicly listed retail pharmacy to receive an internet hospital license.

In addition to Yifeng Pharmacy, Yixintang also issued a similar announcement at the end of June. Meanwhile, at the end of July, the official WeChat account of Laobaixing shared updates on the opening of Hunan Women and Children's Hospital, which was built with a 4-billion-yuan investment. Meanwhile, major chain drugstores are actively exploring new business opportunities.

Market saturation may lead to one-third of pharmacies closing down.

"Within the next 5 to 10 years, at least one-third of China's pharmacies are expected to go out of business." This is gradually becoming a fundamental consensus among owners of mainstream chain drugstores today.

Data shows that after industry consolidation, the average number of people served per retail pharmacy in China has slightly decreased but remains stable at around 3,000. In contrast, the average number of people served per pharmacy in the U.S. is 6,250, while Japanese drugstores serve an average of 6,285 customers each. As a result, industry insiders have remarked: "We don’t need 460,000 pharmacies—200,000 would be sufficient."

Therefore, how pharmacies can sustain themselves in the future—without being swept out of the market—is a question every pharmacy professional must ponder.

References:

1. Yiyaohui: "Behind Pharmacies Embracing the Internet"

2. Zebra Consumption: "Major Shift Looms for Leading Chain Pharmacy—Sinopharm United to Acquire for 1.8 Billion, Targeting 7,000 Stores"

3. Chinese Entrepreneur Magazine: "Tencent, Alibaba, and Hillhouse Clash as 500,000 Physical Pharmacies Brace for Major Transformation"