Amid China's '4+7' Volume-Based Procurement, Pharma Companies Rush to Expand Outside Hospital Channels as DTP Pharmacies Emerge as Key Growth Drivers
Recently, the State Council Information Office held a regular policy briefing to introduce measures for ensuring the supply of essential medicines in short supply, pilot programs for centralized drug procurement, and medical assistance initiatives. Chen Jinfu, Deputy Director of the National Healthcare Security Administration, stated that as of April 14, the total procurement volume of the first batch of 25 selected varieties under the volume-based procurement program reached 438 million units (tablets and ampoules/vials) across the 11 pilot regions, with a total transaction value of RMB 533 million, accounting for 27.31% of the agreed procurement volume.
The “4+7” initiative is progressing smoothly, with local policies following suit. Efforts will focus on ensuring timely payments, incorporating hospital usage into performance assessments, implementing intra-provincial price linkage, and adjusting prices for non-selected products to further refine centralized drug procurement. If the first round of pilot programs for centralized drug procurement and usage proceeds successfully, centralized drug procurement will become “normalized.”
The progress of centralized drug procurement continues to keep professionals in the pharmaceutical industry on edge. Whether foreign or domestic pharmaceutical manufacturers, pharmaceutical distributors, or retail pharmacy chains, all will be affected by centralized drug procurement. It is clear that under the volume-based procurement model, hospital drug utilization patterns will become more concentrated. For many companies, actively expanding into out-of-hospital markets is particularly crucial, with professional pharmacy chains and Direct-to-Patient (DTP) pharmacies emerging as key channels.
Against the backdrop of centralized drug procurement and the outflow of prescriptions, how will pharmaceutical companies strategize their out-of-hospital channels? Meanwhile, as a key out-of-hospital channel, how can DTP (Direct-to-Patient) pharmacies build a specialized operational system to provide scalable solutions for pharmaceutical companies’ expansion into these channels? VCBeat (WeChat ID: vcbeat) interviewed relevant executives from pharmaceutical companies and DTP pharmacies to analyze these issues.
The current round of centralized drug procurement officially commenced last November with the release of the "4+7 City Centralized Drug Procurement Document," under which the state organized pilot programs for centralized drug procurement in 11 cities, including Beijing, Tianjin, Shanghai, and Chongqing. The document specified the types and quantities of drugs subject to centralized procurement, eligibility criteria for enterprise bids, and the procurement cycle. Subsequently, the Shanghai Medical Products Centralized Bidding and Procurement Administration issued supplementary documents, establishing regulations on enterprise bid submissions, drug distribution, quality monitoring, and payment for goods.
On December 6, the preliminary results of the first batch of volume-based drug procurement were announced, with 25 varieties selected. The most direct impact was price reduction: the average price cut for winning bids reached 52%. The largest decrease was seen in entecavir dispersible tablets produced by Chia Tai Tianqing Pharmaceutical Group, with a drop exceeding 90%. The room for price reduction was offset by guaranteed purchase volumes—exchanging lower prices for higher sales volume—allowing winning enterprises to secure 60%–70% of the market share for equivalent drugs in public hospitals across the 11 cities.
How Should Pharmaceutical Companies Understand Centralized Drug Procurement? A marketing executive at a foreign pharmaceutical company told VCBeat that the advancement of centralized drug procurement has two major impacts on pharmaceutical companies. The first is pricing, as previously mentioned: volume-based procurement establishes medical insurance payment standards. This means that regardless of whether a company participates in the centralized procurement or wins the bid, it will ultimately be affected by the procurement prices, leading to significant adjustments in drug prices. The second impact is on market share: volume-based procurement stipulates usage volumes, allowing winning bidders to directly secure predetermined market shares, thereby leaving very limited market space for non-winning enterprises to compete in.
An analysis of the detailed rules for centralized drug procurement issued by various regions reveals that they primarily focus on payment settlement, provincial-level coordination, alignment with medical insurance payment prices, and hospital performance assessments. For instance, regarding payment settlement, in accordance with Document No. 18 [2019] issued by the National Healthcare Security Administration, medical insurance funds are to be prepaid to medical institutions at an amount no less than 30% of the total procurement budget.
In the supplementary documents of most pilot cities, at least 50% of the total procurement amount is prepaid to medical institutions. Shanghai’s approach differs from that of other cities, following its practice in the previous three rounds of volume-based procurement, whereby the medical insurance fund advances payments to the winning bidders or distribution companies, and these enterprises reimburse the advanced funds upon receiving payment from medical institutions. Meanwhile, Chongqing, Shenyang, and Dalian encourage exploring direct settlement by the medical insurance fund.
“Assessment of the utilization volume for drugs included in the hospital-based volume-based procurement (VBP) program is a key priority. In some provinces and cities, the Healthcare Security Administration has taken the lead in establishing regulatory platforms that enable rapid monitoring of contract execution and usage status between hospitals and selected manufacturers, with real-time alerts issued as needed. Within clinical departments, physicians are also required to prioritize the use of VBP-listed products, and compliance is linked to performance evaluations.” According to a marketing executive at the aforementioned pharmaceutical company, the implementation of these measures has ensured that hospitals meet their mandated utilization targets for VBP-listed products.
A research report by China Galaxy Securities also pointed out that, given the strong bargaining power of medical institutions, the pilot program places particular emphasis on addressing issues previously encountered in drug procurement, such as failures to guarantee purchase volumes and timely payments. Using the performance evaluation method for medical institutions in a pilot city as an example, the report highlights that key weighted indicators include procurement volumes for pilot-listed drugs, patient complaints (aimed at balancing relationships between patients using selected versus non-selected products), and payment settlement.
Regarding intra-provincial coordination, Sanming in Fujian Province actively followed up and began implementing the results of the "4+7" volume-based procurement selection. Liaoning Province encouraged selected enterprises to list their products at the selected prices across the province; for those that voluntarily applied to participate in provincial centralized procurement at these prices, direct listing for procurement was implemented. Sichuan Province continued to enforce its original procurement policies for the purchase of "4+7" pilot varieties by public medical institutions in non-pilot areas.
“Volume-based procurement, as a top-level design, will certainly continue to be implemented. Currently, the number of products involved is limited, and the impact is relatively controllable. The true test of pharmaceutical companies’ market strategies will come if more commonly used drugs and major therapeutic categories are included in volume-based procurement in the future.” The pharmaceutical industry insider further pointed out, “However, volume-based procurement has a multifaceted impact. It is difficult to predict that some companies will necessarily cease operations. Large enterprises, with their diverse product portfolios, can balance the effects of volume-based procurement, while smaller companies, with their agility and flexible market strategies, are not necessarily forced to exit the market.”
The industry consensus is that volume-based procurement, while compressing intermediate links in drug distribution, lowering drug prices, and saving medical insurance funds, reserves policy space for the market entry of innovative drugs and patient benefits. In the short term, this policy has imposed significant pressure on industry development. From a medium- to long-term perspective, it is conducive to promoting healthcare system reform, accelerating consolidation within the pharmaceutical industry, and enhancing the innovative R&D capabilities of Chinese pharmaceutical enterprises.
Major pharmaceutical companies have all responded positively to volume-based procurement (VBP), planning to address policy changes through innovations in products, channels, and other areas. For instance, China Resources Pharmaceutical’s annual report stated that the group will align with policy shifts and trends in market structure adjustment, proactively responding to the impacts of policies such as volume-based procurement, medical insurance cost containment, and tender-driven price reductions. It will continue to focus on strategic key products and core therapeutic areas, further optimize its product portfolio, strengthen management to unlock internal potential, and consistently enhance product quality.
CSPC Pharmaceutical Group also stated in its annual report that, in the face of a dynamic policy environment, the Group will leverage its brand influence, channel architecture, marketing models, distribution networks, and scale advantages to deeply cultivate the primary healthcare market. Meanwhile, it will continue to diversify the varieties and dosage forms of its generic drug products, foster flagship products with greater growth potential, and establish branded generics, thereby ensuring stable growth in its generic drug business.
Meanwhile, the widely discussed phenomenon of prescription outflow in recent years has also had a significant impact on pharmaceutical companies’ development of the out-of-hospital market. Prescription outflow refers to the practice whereby medical institutions issue prescriptions using the generic names of drugs and proactively provide these prescriptions to patients, enabling them to purchase medications independently at either medical institutions or retail pharmacies with their prescriptions, thereby safeguarding patients’ right to prescription information and choice in medication procurement. Prescriptions for chronic diseases will be the first to flow out of hospitals and be taken over by community pharmacies.
Prescription outflow is an effective solution to address the challenge of “funding healthcare through drug sales” and to achieve the separation of prescribing from dispensing. Supported and encouraged by policies ranging from national to local levels, a solid foundation has been laid for the smooth implementation of prescription outflow. With advances in medical information technology and internet-based healthcare, prescription outflow has adopted diverse implementation models. These not only facilitate prescription circulation and improve medication access for patients, but also generate substantial incremental growth for chain pharmacies and pharmaceutical e-commerce platforms.
How Do Pharmaceutical Companies Evaluate Prescription Outflow and the Out-of-Hospital Market? A representative from the pharmaceutical company stated, “Prescription outflow has been a hot topic for several years. In terms of actual impact, it is difficult to achieve the trillion- or even multi-trillion-yuan market size claimed by some. This is because only outpatient prescriptions can be diverted outward, which accounts for merely half of the hospital market volume. Moreover, not all of these prescriptions are actually diverted. Coupled with the influence of medical insurance reimbursement policies and pharmaceutical companies’ strategies, the outcome is less optimistic than anticipated.”
“The out-of-hospital market and the broad market are key areas of strategic focus for pharmaceutical companies. Major multinational pharmaceutical firms such as Pfizer, AstraZeneca, and Bayer have established dedicated broad-market teams targeting primary care settings and prescription outflow. Under the tiered diagnosis and treatment system, the primary care market offers substantial growth potential. If ‘prescription outflow’ specifically refers to prescriptions originating from large tertiary hospitals being filled outside these institutions, then prescription outflow and the broad market are indeed closely linked.” Specific sub-channels include “Internet + Healthcare,” retail pharmacies, and DTP (Direct-to-Patient) specialty pharmacies.
DTP/DTC pharmacies are a critical channel for accommodating the outflow of prescriptions from hospitals and expanding the non-hospital market, representing a direct-to-patient pharmaceutical marketing model. Their purpose is to streamline the pharmaceutical distribution chain, enabling patients to conveniently obtain prescribed medications at specialized off-site pharmacies after receiving a prescription. These pharmacies typically provide additional services, such as professional pharmaceutical care and patient management. In terms of business format, they are largely consistent with retail pharmacies, forming an integrated dual entity within the pharmaceutical retail sector.
The core product portfolio of traditional DTP (Direct-to-Patient) pharmacies focuses on novel and specialty drugs for conditions such as cancer and autoimmune diseases, catering particularly to patients with chronic diseases requiring long-term medication. From the perspective of drug supply, the availability of novel and specialty drugs is set to increase as China implements policies such as zero tariffs on anticancer drugs and prioritized review and approval for innovative medicines. There is a time lag between the market approval of new drugs and their inclusion in the national medical insurance coverage; during this transitional period, DTP pharmacies will serve as a critical distribution channel.
Ping An Securities’ research report points out that DTP (Direct-to-Patient) pharmacies are not merely simple channel endpoints but rather platform-based entities connecting pharmaceutical companies, hospitals, and patients. They emphasize meeting the needs of pharmaceutical companies for promoting innovative drugs and collecting data, enabling hospitals to accommodate outbound prescriptions and assume medication management responsibilities, and allowing patients to conveniently access professional medications while receiving expert medication guidance services. Therefore, amid multiple favorable factors such as the outflow of prescriptions from hospitals and the accelerated entry of new specialty drugs into the Chinese market, DTP pharmacies are better positioned than ordinary retail pharmacies to seize these opportunities. Whether the DTP model can truly stand out depends on its accumulated strengths in professional services, channel control, logistics capabilities, and O2O (Online-to-Offline) layout.
Multiple types of enterprises are actively deploying DTP (Direct-to-Patient) pharmacies, including pharmaceutical manufacturers, distribution companies, retail chain operators, and “Internet + Healthcare” enterprises. Currently, pharmaceutical distributors and retailers are the primary participants in the DTP pharmacy sector. This is because DTP pharmacies require robust connections with pharmaceutical companies, making supply chain resources critically important. Securing agency rights for pharmaceutical products enables DTP pharmacies to attract a large patient base and secure sustainable resources. Furthermore, DTP pharmacies demand professional medical guidance and pharmaceutical care capabilities; strong ties with hospitals facilitate access to prescriptions and enable the delivery of in-depth services.
In the context of volume-based procurement, Direct-to-Patient (DTP) pharmacies have become a critical channel for off-patent originator drugs and non-winning generic drugs, giving rise to the concept of "new-type DTP pharmacies." Unlike traditional DTP pharmacies that primarily focus on novel and specialty drugs, new-type DTP pharmacies also dispense high-value out-of-pocket prescription medications, offer diversified choices, and provide high-quality pharmaceutical care services. Furthermore, by leveraging technologies such as medical big data and artificial intelligence, they deliver full-cycle patient services, including follow-up care and rehabilitation.
LinkCare Smart Pharmacy is a typical example of the new type of DTP (Direct-to-Patient) pharmacy. It is affiliated with LinkDoc Technology, a unicorn enterprise in medical big data and artificial intelligence. As an important offline scenario entry point for LinkDoc’s medical big data platform, the operations of LinkCare Smart Pharmacy are all supported by big data and medical expertise, pioneering the pharmaceutical retail 3.0 era characterized by “dual-driven patient education through medicine and data-empowered new retail.”
Zhu Zhidong, General Manager of the Market Business Division at Linker Smart Pharmacy, told VCBeat that Pharmaceutical Retail 1.0 refers to traditional retail pharmacy chains, which primarily focus on selling over-the-counter (OTC) drugs and health supplements, with limited service-oriented attributes; Pharmaceutical Retail 2.0 encompasses specialty pharmacies and traditional Direct-to-Patient (DTP) pharmacies, offering basic pharmaceutical care services; while Pharmaceutical Retail 3.0 is dedicated to providing patients with personalized, full-cycle, one-stop services, including medication management, follow-up care, and disease progression management.
Leveraging LinkDoc Technology’s in-depth collaborations with numerous major pharmaceutical companies and top-tier hospitals both domestically and internationally, as well as the resource connectivity capabilities of Yinchuan LinkDoc Internet Hospital, Linke Smart Pharmacy comprises six service systems: Hubble AI-assisted diagnosis and treatment services, Linkcare smart follow-up services, MDT multidisciplinary remote consultation services, UPS-guaranteed end-to-end cold chain delivery services, LinkDTP patient management services, and internet hospital connectivity services. This framework establishes an integrated service system combining online and offline channels, as well as in-hospital and post-discharge care. Currently, Linke Smart Pharmacy operates more than 45 stores, covering major cities across China.
With certain achievements and experience already in place, can the Linker Smart Pharmacy model serve as a reference for other peers aspiring to operate DTP pharmacies? Zhu Zhidong told VCBeat that whether for chain drugstores or “Internet + pharmaceutical” enterprises seeking to establish a presence in the DTP pharmacy sector, the foundational requirements are consistent. These include cold-chain management capabilities, as many DTP products require storage at 2–8°C, with even stricter conditions for special medications; prescription review and pharmaceutical care capabilities to ensure safety and service quality; and medical service capabilities. More importantly, these elements are essential for creating greater value for both pharmaceutical companies and patients.
Amid prescription outflow and the “4+7” volume-based procurement policy, pharmaceutical companies will inevitably strengthen their presence in out-of-hospital channels, creating more opportunities for retail pharmacies and Direct-to-Patient (DTP) pharmacies. For pharmaceutical retailers, capturing the incremental volume from prescription outflow and building a professional out-of-hospital drug sales and service system presents both opportunities and challenges. Leveraging their capabilities in professional drug supply assurance, specialized pharmaceutical care, and integrated medical and rehabilitation management services, DTP pharmacies can transition from merely providing medications to delivering comprehensive disease management solutions. This transformation benefits both pharmaceutical companies and patients while enabling the rapid growth of DTP pharmacies themselves.