Policy Tailwinds and Rapid Growth of Supply Chain Cloud Platforms Unlock China's $17 Billion Pharmaceutical Logistics Market
On April 25, the General Office of the State Council issued the “Opinions on ‘Internet + Healthcare’,” which emphasized the need to improve the supply and guarantee services for “Internet + Pharmaceuticals.” For prescriptions of common and chronic diseases issued online, medical institutions and pharmaceutical distributors may entrust qualified third-party agencies with delivery after pharmacist review.
On May 3, a press conference was held in Beijing to announce the national standard “Technical Specifications for Validation and Performance Qualification of Temperature-Controlled Facilities and Equipment in Cold Chain Logistics of Pharmaceutical Products” (GB/T 34399-2017). This national standard officially came into effect on May 1, 2018.
With the establishment of standard policies, competition in the cold chain logistics for pharmaceutical products will become more standardized. Enterprises will also set temperatures during the logistics process according to national standards, aiming to reduce logistics costs and improve service quality.
To this end, VCBeat has compiled an overview of recent developments in pharmaceutical logistics, focusing primarily on pharmaceutical logistics and supply chain cloud platforms.
With the improvement of healthcare coverage, demand for pharmaceuticals in the medical market has been steadily rising. In 2017, global pharmaceutical sales totaled $1.04 trillion, and are projected to reach $1.3 trillion this year, representing an expected growth rate of 25%.
Recently, Ma Junsheng, Director of the State Post Bureau, emphasized at the fifth director’s office meeting in 2018 the need to guide express delivery enterprises to accelerate their development of high-value-added services such as cold-chain logistics and pharmaceutical distribution.
Driven by both policy and market forces, the market size for pharmaceuticals transported via cold chain logistics in China could reach RMB 120 billion.
Although the market is large, it also faces challenges. For hospitals, there is insufficient development of information systems for in-house material management at this stage, and a lack of electronic procurement and supply platforms within hospitals. From an industry-wide perspective, the average expense ratio of China's medical supply chain industry is six times that of the United States, while its average profit margin is only one-fourth of that in the U.S.
Further analysis reveals that the challenges facing pharmaceutical cold chain logistics primarily stem from two aspects: technological limitations and relationships with upstream and downstream enterprises.
Pharmaceutical logistics differs from the logistics of common consumables, with stringent international regulations governing pharmaceutical logistics. For instance, the WHO’s *The Blood Cold Chain* establishes extremely strict temperature limits for blood in its guidelines for blood bank organizations.
The guidelines stipulate that whole blood and red blood cells must be stored at 2–8°C, platelets at 22°C, and fresh frozen plasma below -20°C to ensure the activity and safety of blood component products.
In practice, products with stringent refrigeration requirements, such as fresh frozen plasma, are subject to more rigorous cold chain control. Since temperature loggers are located only inside the container, and the products undergo multiple loading and unloading operations throughout the logistics process—stages that are difficult to control or monitor—companies must set lower temperatures for the containers to prevent damage to drugs and vaccines during handling and avoid losses incurred during loading and unloading.
How to effectively manage relationships between upstream and downstream enterprises in the supply chain, and coordinate the flexibility and leanness of the entire supply chain, is the current trend in supply chain development.
Flexibility requires upstream enterprises to prioritize meeting customer demand over cost as the primary operational objective. Pursuing flexibility can prevent stockouts, but it also leads to higher inventory costs. Typically, inventory is accounted for as a cost in business operations; however, when unexpected events disrupt supply chain flow, inventory can present profit opportunities for the enterprise.
Leanness refers to a corporate strategy that aims for zero inventory by minimizing safety stock levels. Companies pursuing leanness typically incur lower warehousing costs, but their operations rely heavily on accurate forecasts of future business volume, the degree of information technology integration within the supply chain, and the supply chain’s responsiveness. Although this model carries significant operational risks, companies are willing to continuously enhance supply chain stability in pursuit of zero-inventory costs.
The pursuit of two distinct objectives directly influences inter-firm relationships, with pharmaceutical companies exhibiting a stronger preference for ensuring supply chain flexibility.
Liu Zhan, a CIPS member from Clarefield, told VCBeat that the characteristics of the supply chain in the pharmaceutical sector are particularly pronounced. “In the UK, the supply chain has fewer circulation links and a simpler structure, with raw material suppliers gradually assuming a dominant position. For instance, protamine, a biological raw material derived from salmon, is subject to seasonal fluctuations and cannot adequately respond to sudden spikes in demand. In such circumstances, raw material suppliers strictly control pricing power, while downstream enterprises have limited bargaining power and struggle to find suitable alternative suppliers. A vibrant supply chain must have a core enterprise (referring to a node within the supply chain, not a financial institution) capable of driving the development of the entire chain. This core entity should not be a supplier; rather, hospitals or pharmaceutical R&D institutions are most likely to assume this central role.”
Liu Zhan believes that the current cause of low supply chain efficiency is still the lack of interoperability between operating systems at different node enterprises. In the healthcare sector, third-party logistics EMR systems struggle to interface with HIS systems. Since this problem exists, companies will emerge to address it, which pertains to the sustainability of the supply chain.
Foreign supply chain research posits that sustainability is a critical factor for enterprises in assessing their business performance. Here, sustainability carries two layers of meaning: the first refers to the sustainability of an individual enterprise’s development; the second pertains to the sustainability of the entire supply chain in which the enterprise operates. To meet the requirements of this second layer, supply chain cloud platforms have emerged to provide solutions for customers.
Third-party cloud platforms can aggregate a large number of supply chain participants, enabling node enterprises to easily access customer resources and select superior upstream and downstream partners. The entire industry has also become more dynamic due to intensified competition.
In 2000, a group of leading U.S. pharmaceutical companies jointly invested $500 million to establish Global Healthcare Exchange (GHX), with the mission of operating independently, openly, and neutrally to enhance overall pharmaceutical supply chain performance and promote the comprehensive online trading of pharmaceutical products.
As a global leader in pharmaceutical supply chain management, GHX’s greatest success lies in creating a marketplace for the entire network of enterprises along the supply chain. Within this marketplace, downstream companies can easily identify alternatives to upstream suppliers, thereby preventing pricing imbalances at various nodes.
Building on this foundation, GHX offers services such as predictive analytics, supplier collaboration, ePayables, and cloud computing.
Data analytics is a critical tool for GHX in industry management and in helping member enterprises reduce costs. Through data analytics, hospitals can lower pharmaceutical inventory levels and reduce the frequency of drug shortages; pharmaceutical manufacturers can procure materials based on market demand, thereby avoiding drug stockpiling. Meanwhile, manufacturers can forecast cash flow in advance in response to demand fluctuations, enabling proactive investment and financing activities that effectively utilize capital while preventing funding gaps.
Efficient workflow processes are another hallmark of GHX’s services. Discrepancies between orders and actual products represent a major cost driver for supply chain enterprises. GHX’s system provides more accurate drug descriptions, enabling suppliers to easily identify such discrepancies and promptly correct errors when orders do not match the actual products.
Most healthcare-related invoice entry and payment processes remain manual and inefficient. GHX’s latest technological innovations will enhance end-to-end payment methods, improve reconciliation processes, streamline payment workflows, and make the payment process more automated.
Since 2017, GHX has been actively advancing the development of its cloud services. Cloud services provide a scalable and flexible framework that delivers enhanced security and transparency at a lower cost, while driving the healthcare industry toward becoming data-driven.
2017 GHX Supply Chain Conference (Image source: GHX official website)
GHX has also introduced numerous innovations to its existing business. In December 2017, GHX partnered with EHR giant Epic to launch the Clinical ConneXionSM system, which integrates supply chain management systems with electronic health records.
During healthcare delivery, patients typically consume both routine and non-routine supplies. However, existing Electronic Health Record (EHR) systems generally document only medication administration, failing to capture disposable consumables used during hospitalization, such as single-use catheters and disposable sensors.
The new system launched under this collaboration will provide patients with clear itemized billing statements, facilitating budget planning for their overall medical care. However, the addition of more features has inevitably increased the operational complexity of the existing EHR system, and its actual performance remains to be seen in real-world practice.
The pharmaceutical logistics market is substantial in scale. According to the recently released "2017 China Pharmaceutical Logistics Development Report," the total value of China's pharmaceutical logistics reached RMB 3.02 trillion in 2017, representing a year-on-year increase of 11.3%. Based on an annual growth rate of 8%, the total value of China's pharmaceutical logistics is projected to reach RMB 3.8 trillion by 2020.
SF Express established a dedicated pharmaceutical logistics division in March 2014. Two years later, it formally launched its “Cold Chain Logistics Division,” separating resources for pharmaceutical cold chain and fresh food cold chain operations.
For many years, SF Pharmaceutical has been committed to becoming China’s most valuable and influential provider of pharmaceutical and healthcare supply chain services. In response to the stringent regulatory requirements of the pharmaceutical industry, SF Pharmaceutical has obtained Good Supply Practice (GSP) certification and a third-party logistics license.
SF Medicine possesses robust logistics infrastructure and network capabilities, with its pharmaceutical transportation network covering 132 prefecture-level cities across China, thereby providing basic coverage of most key regions nationwide.
In terms of management systems, SF Holding has established multiple quality control protocols and standard operating procedures (SOPs) for pharmaceutical cold-chain logistics, covering all stages including order management, pickup, transportation, transshipment, and delivery. In accordance with Good Supply Practice (GSP) requirements, the company conducts relevant quality training and assessments for personnel involved in pharmaceutical logistics operations, quality assurance, and operations, thereby enhancing end-to-end cold-chain logistics management and traceability capabilities.
SF Pharmaceutical possesses five major closed-loop logistics and supply chain service capabilities, including but not limited to trunk line transportation, urban distribution, pharmaceutical warehousing, last-mile delivery to end consumers, and clinical laboratory logistics. Leveraging robust information technology and the synergistic resources across SF Holding’s various business segments, SF Pharmaceutical has collaborated with industry benchmark clients to develop comprehensive solutions addressing warehouse network layout, inventory and logistics management, and circulation channels and distribution, in response to the reforms of the “Two-Invoice System” in pharmaceutical circulation.
Cold Chain Logistics in Tibet (Image source: SF Express official website)
According to the annual report of SF Holding, the revenue from cold-chain logistics reached RMB 1.437 billion in 2016, accounting for 2.50% of its total operating revenue. In 2017, the revenue from cold-chain logistics rose to RMB 2.295 billion, representing 3.23% of total operating revenue, a year-on-year increase of 59.70%. Its pharmaceutical industry clients include Harbin Pharmaceutical Group, China Resources Sanjiu, Sanofi, and Guangzhou Pharmaceutical Holdings Limited.
SF Holding stated in its annual report: In 2018, SF Holding will continue to strengthen its pharmaceutical logistics infrastructure by gradually establishing a nationwide “T+3” pharmaceutical logistics network through multi-warehouse coordination, trunk-line transportation scheduling, and supplementary air cargo capacity; optimize the business model and operational processes across the entire warehousing, trunk-line, and distribution chain to further enhance precise temperature control capabilities ranging from -40°C to 25°C, thereby improving resource utilization efficiency and operational quality; and continue to strengthen R&D and innovation in validation management technologies for pharmaceutical cold-chain equipment and facilities, as well as in information system management models. It aims to build comprehensive solution capabilities for industry clients centered on pharmaceutical manufacturers, vaccine producers, and biopharmaceutical companies, thereby creating the SF Pharmaceutical Supply Chain Service Platform 2.0.
SF Express is well aware that excelling in the pharmaceutical supply chain requires more than just focusing on logistics. It must also collaborate with healthcare-related e-commerce platforms, O2O platforms, and hospitals.
On January 22, 2018, the First Teaching Hospital of Tianjin University of Traditional Chinese Medicine, a Grade 3A hospital, partnered with SF Express to launch a medication delivery service. This collaboration did not yet involve API integration.
On February 12, 2018, Kangyi Pharmaceutical joined hands with SF Group to jointly establish the “Third-Party Pharmaceutical Supply Chain (Northwest) Logistics Center,” aiming to expand into the Northwest pharmaceutical market.
Based on the above layout, SF Express aims to do more than just serve as a third-party logistics provider in the pharmaceutical industry; it seeks to build a supply chain with itself as the core node and provide solutions for upstream and downstream enterprises. This will significantly improve the efficiency of pharmaceutical logistics. On the other hand, SF Express will also pose a threat to traditional medical logistics companies, forcing them to pursue development through reform.
Unlike food, pharmaceuticals carry critical importance in terms of quality and safety. The illegal vaccine case in Shandong highlighted the importance of tracing vaccine origins, while the core features of blockchain technology are traceability and immutability.
If every link in the pharmaceutical distribution process were recorded on a blockchain, few would dare to engage in such illegal trade. Even if criminal activities did occur, the root cause could always be traced through corresponding technologies.
Furthermore, pharmaceutical distribution reflects societal health trends; however, due to the lack of interoperability among various stakeholders, industry information is difficult to integrate, resulting in excessive system fragmentation. By leveraging blockchain technology for storage, the on-chain process itself can standardize information, thereby alleviating the problem of information silos to a certain extent.
Feiyi Network’s Blockchain Initiative White Paper Discloses Its Future Development Direction. Feiyi Network plans to leverage blockchain technology to build a highly available, secure, and efficient supply chain system, addressing issues related to data encryption and product traceability.
In fact, “Supply Chain + Blockchain” has become one of the primary application scenarios for blockchain technology. It not only addresses the shortcomings of existing supply chain circulation but also integrates with supply chain finance to leverage blockchain’s original financial capabilities. Therefore, recording pharmaceutical and medical device information on the blockchain aligns well with the future development needs of the supply chain.
A vast medical logistics market exists both domestically and internationally. The prosperity of both the biopharmaceutical industry and the medical device sector will drive the development of third-party medical logistics, while the deepening of healthcare reforms and the successive introduction of relevant medical policies will further bolster its growth.
Compared with overseas markets, China’s domestic market offers substantial room for cost reduction. Its supply chain models are not yet fully mature, and advancements in technologies such as blockchain and next-generation cold-chain logistics present significant opportunities for market participants. Whether for logistics companies or cloud-based supply chain management platform providers, the market provides a sufficiently large stage for them to showcase their capabilities.