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Pharmaceutical Manufacturing and Packing Sourcer

The Road Ahead


China presents a unique opportunity for many logistics providers. The country’s domestic pharmaceutical market continues to open to foreign providers, while its position as a major outsourcing location is another growth opportunity as many western pharmaceutical manufacturers move operations to this area

According to IMS Health estimates, China's drug spending is expected to expand 15-18 per cent annually through 2016 to reach about $165 billion. In fact, it is estimated by Transport Intelligence that the Chinese pharmaceutical logistics market was valued at almost $8 billion in 2011, with a growth rate of over 25 per cent from 2010. As a result, China represents at least 13 per cent of the global pharma logistics market.

Domestic Market

With a population of over 1.3 billion, China’s government began the implementation of a national strategy in 2011 to expand and improve the country’s healthcare system. Primarily, the plan is to develop an affordable and accessible healthcare system with a medical insurance system covering the whole population. The plan’s broad objectives include:
  • To strengthen the public healthcare infrastructure
  • To strengthen the healthcare service network
  • To develop a comprehensive medical insurance system
  • To improve the drug supply system, including the strengthening of drug manufacturing and regulation of drug procurement by healthcare institutions
  • Reform the public hospital system
  • Support the development of Chinese medicine

The plan will impact the pharmaceutical industry in a number of ways, including restructuring of the fragmented distribution network. The complexity of the distribution network has resulted in some of the highest costs compared to other countries. According to Booz & Company, it often takes two to three intermediaries to get drugs from the manufacturer to the dispenser. For some products, as many as six intermediaries may be involved in the distribution chain. Add to this a still uneven transportation network across a large country, and additional complications occur.

Due to the uneven transportation infrastructure, the distribution network has been regionalised, with the three largest distributors – Sinopharm, Shanghai Pharmaceutical and Jointown Pharmaceutical Group – controlling less than 30 per cent of the market. Not only are these the three largest distributors, but also the largest pharma manufacturers in China.

Expanding National Distribution


As part of the government plan, the authorities are encouraging increased pharmaceutical manufacturing and consolidation in the distribution market in order to create a more national network. For example, one of the largest pharmaceutical companies is Sinopharm. According to Klynveld Peat Main and Goerdeler (KPMG), Sinopharm has built out both its national distribution and retail network by focusing on acquiring regional distribution leaders, expanding into second and third tier cities and into traditional retail channels, as well as emerging channels such as e-commerce. Since 2009, the company has made over 60 acquisitions.

Sinopharm manages its logistics network through its subsidiary, Sinopharm Logistics, which manages four major regional logistics centres in Shanghai, Guangzhou, Tianjin and Beijing, with each logistics centre running multiple local distribution facilities.

Shanghai Pharmaceutical is another large pharma company. It is more focused on sales to hospitals, with over 70 per cent of revenues coming from this sales stream. In 2011, the company went public, with proceeds going towards acquisitions to expand its national network. Since then, the company has made significant acquisitions in eastern and southern China, as well as in large cities. Of particular interest, however, is its relationship with China Post. In 2011, the company signed an agreement with the government-controlled postal operator to “create a new national medical logistics and distribution network” according to the joint press release. Included in the agreement is not only the building of a nationwide medical distribution network, but also one for specialised medicines along with direct delivery of high-value pharmaceuticals.

Additionally, China Post Logistics and the China Postal Savings Bank will jointly provide for Shanghai Pharmaceutical financial solutions for the build out of a national pharmaceutical supply chain.

According to Booz & Company, Jointown Pharmaceutical has made several small acquisitions to build up its market presence in prefecture-level cities. It has established logistics centres in 21 capital cities in China.

US-based Cardinal Health entered the Chinese pharmaceutical distribution market in 2010 when it acquired Yong Yu and Kinray. In early 2012, Cardinal Health announced plans to invest $90 million for additional acquisitions in China to expand its geographic reach and further its direct distribution business. By the end of Cardinal’s third quarter, the company expects to have grown its Chinese business to 10 distribution centres, with a coverage area that includes 250 million people. Other western-based pharmaceutical companies have entered China and some have partnered with domestic Chinese pharmaceutical companies. For example, Pfizer and Shanghai Pharmaceutical plan to explore future cooperation opportunities, including distribution and commercialisation, research and development activities, manufacturing and equity investment opportunities. Pfizer also invested $50 million in Shanghai Pharmaceutical’s 2011 initial public offering.

Western-based pharmaceutical companies only comprise a small portion of China’s domestic market. However, China has become a major outsourcing location for these companies, which has resulted in many international-based logistics providers expanding their pharmaceutical logistics service offerings into China.

China as an Outsourcing Location

Expiration of blockbuster drug patents, the need to control costs, and increasing regulations and legislations in the mature markets of the US and Europe are among the reasons for pharmaceutical manufacturers expanding into emerging markets such as China.

Besides manufacturing, research and development and clinical trials are also being outsourced more frequently in China. Research and development costs are on the rise in Europe and the US; thus, many manufacturers are moving research and development facilities to more affordable regions.

According to the US National Institutes of Health’s clinical trials database, as of November 2012 there were 65,274 trials under way, followed by Europe with 36,443. China was in third place with 11,500 trials being conducted. In fact, China has overtaken India as one of the fastest growing locations for clinical trials because of lower costs.

DHL’s clinical trial depots provide services such as inbound receipt, storage, pick, pack, secondary packaging, distribution and management of returned medications. TNT Express also provides clinical trial logistics solutions via healthcare centres in key countries around the world. The centres provide one point of contact for all services, monitor and report on shipments and provide contingency management. The company’s key pharmaceutical transport solution is ‘Clinical Express’. The service offers several key platforms, as can be seen in Table 1.




To transport the samples safely, TNT uses its Clinical Express suite of services for the healthcare industry, including temperature-controlled packaging and dry shipper containers that keep the bio samples frozen during transportation. Niche pharmaceutical logistics provider, Marken, recently expanded in China to meet the anticipated need for increased clinical trials logistics services. The company was granted a 12-year licence to ship biological samples and drug products within China. In addition, Marken announced the start of its Phase 2 depot roll-out plan as it has begun construction of its pharmaceutical depot at its new branch location near Beijing International Airport.

Besides support for research and distribution and clinical trials, demand for certified pharmaceutical warehousing and distribution facilities is on the increase, particularly as the government seeks to establish a national network in order to bring quality healthcare to its population across the country.

During its 2012 second quarterly analyst call, UPS announced plans to open several healthcare distribution facilities, two of which will be in China: Hangzhou and Shanghai. According to the company, these facilities will serve both multi-national and regional healthcare manufacturers’ distribution needs. The facility in Hangzhou consists of 22,000m2 of healthcare distribution space. The Shanghai facility, located within the Waigaoqiao Free Trade Zone, comprises 7,575m2.

As part of its healthcare plan, the Chinese government is encouraging China-based pharma companies to expand drug manufacturing. This will likely increase competition with western-based companies, while at the same time encouraging the formation of partnerships. Chinese pharma companies are shifting away from generics towards higher value products such as biologics, but for many, there is a lack of patent protection, investment, and the knowledge of the more experienced western competitors.

In many cases, biologics present a unique transportation situation: that of maintaining required temperatures throughout the transport. Many logistics providers that offer pharmaceutical solutions usually possess some type of temperature-controlled transportation. For example, Panalpina has invested in a temperature-monitoring visibility solution. The solution provides visibility of temperature-sensitive pharmaceutical products during storage and distribution around the world and through transport. Ambient, Panalpina’s IT solution provider, installed wireless networks at Panalpina’s Luxemburg cargo centre and its Huntsville, Alabama facility. Upon arrival at a hub, the ‘SmartPoints’ battery-operated wireless tags with calibrated temperature sensors that act as RF data loggers or as sensors for monitoring in-storage facilities, automatically downloading temperature logs to the Ambient network. The information is then available in a web-based system, SmartView, providing information when shipments are still in transit. Companies such as Envirotainer and CSafe provide various types of temperature-controlled air cargo containers that are leased to airlines and forwarders. For CSafe, airline partners include such companies as FedEx, Cathay Pacific and Swiss World Cargo. Their forwarder partners include DHL, Expeditors, FedEx Custom Critical and Kuehne+Nagel. For Envirotainer, their qualified carriers for China include World Courier, Emirates and AA Cargo.

Supporting Growth

Perhaps one of China’s biggest challenges is its sheer size. Its transportation infrastructure is still immature and unable to connect all regions of the country. Through the years, China has made investments in infrastructure such as ports and airports in the larger, tier one cities that supported its export-driven economy. Now it is seeking ways to spur domestic growth and encourage intra-trade. As a result, the country now needs to improve its infrastructure to support this growth. In July 2012, the Chinese government announced plans to boost development in the country’s distribution industry. This will include distribution networks to link cities and the countryside, and should not only lower costs but also improve the distribution and transport of pharmaceuticals across the country.

In September 2012, the country announced a trillion yuan of infrastructure projects to revive the country’s economy. The recent economic slowdown has resulted in a decline in demand for Chinese exports as such; this stimulus will result in plans to build highways, waterways and urban rail projects.

Conclusion


Many logistics providers have expanded into China’s pharmaceutical market by following western-based pharmaceutical manufacturers as their operations grow in China. However, as China makes investments in its domestic healthcare system, these same logistics providers may benefit by offering such services as pharmaceutical warehousing and distribution facilities for the domestic market. They may also benefit by partnering and providing services for China’s domestic pharmaceutical companies such as Sinopharm and Shanghai Pharmaceutical, as they are likely to grow and expand internationally.

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Cathy Roberson is an experienced professional in knowledge management, combining a detailed understanding of the supply chain industry with extensive market intelligence skills. Before being appointed Transport Intelligence’s Senior Analyst, she spent several years at UPS Supply Chain Solutions as a marketing analyst within the freight forwarding and contract logistics groups.
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Cathy Roberson
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