How Retail Pharmacies Can Capture the Off-Hospital Prescription Drug Market: Insights from Five Pharmaceutical Executives on Six Core Challenges

"In the past year or two, out-of-hospital sales of prescription drugs have become a hot topic and a new focal point of competition among retail outlets."

From a policy perspective, the out-of-hospital market for prescription drugs has been impacted by new drug procurement policies—namely, State Council Document No. 7 and National Health and Family Planning Commission Document No. 70—which have led to stricter public hospital tendering processes and reduced the growth rates of both the drug-to-total-revenue ratio and medical expenses, with strict controls keeping them below 10%.

This has severely compressed the in-hospital market space for prescription drugs. Stricter policy implementation across various provinces has led to a gradual decline in pharmaceutical companies’ market share within hospitals. Under the combined impact of multiple factors, many pharmaceutical companies have begun to expand into the out-of-hospital market, resulting in diminished momentum for hospital-based drug sales.

So, against the backdrop of the expanding out-of-hospital market, how can pharmacies seize this rare business opportunity?

At the 2017 West China Pharmaceutical Conference, five distinguished guests—He Yu, Chairman of Xi’an Yikang Pharmaceutical; Lan Lei, Vice President of Kunming Shenghuo Pharmaceutical; Liu Xingwu, Vice President of Laobaixing Pharmacy; Xiao Junxiong, General Manager of Liuzhou Guizhong Pharmacy; and Zhao Biao, President of Yunnan Hongxiang Yixintang Pharmaceutical—engaged in discussions on “Launching a Blitzkrieg in the Out-of-Hospital Market for Prescription Drugs,” exploring strategies for capturing this market. VCBeat (WeChat ID: vcbeat) has compiled the highlights from these discussions.

1. With over 80% of pharmaceutical sales consisting of prescription drugs and more than 80% of distribution channels concentrated in hospitals, what is the strategic significance of developing and competing for the out-of-hospital market for the growth of chain pharmacies?

Zhao Biao:The outflow of hospital prescriptions has long been a development eagerly anticipated by pharmacies. However,In 2016, the pace slowed significantly., The process of outpatient prescription drug diversion from hospitals is protracted, as incumbent vested interests will inevitably employ various tactics to impede any acceleration.

The short-term interception is unsustainable, and the flow of prescriptions to pharmacies will inevitably continue in the future. As part of the retail sector, chain pharmacies remain subject to conventional market forces and must leverage various competitive advantages to capture the spillover of outpatient prescriptions.

Amid the outflow of hospital prescriptions, pharmaceutical manufacturers are also facing significant challenges. As there is currently no clearly established approach to addressing this shift, manufacturers should collaborate with chain pharmacies to jointly explore viable strategies, ultimately identifying suitable methods to adapt to the profound transformation in pharmaceutical distribution.

Xiao Junxiong:Prescription outflow has been a widely discussed topic for many years, and the market potential is indeed vast. Currently, retail terminals can only capture approximately one-quarter of the total market, with the remaining three-quarters still concentrated within hospitals. Hospital medication usage is roughly split equally between outpatient and inpatient settings. The outflow of outpatient prescriptions implies that the market size for single-prescription drugs could potentially double.

Meanwhile, the outflow of prescription drugs is also driving demand for over-the-counter health products, including a wide range of items related to self-medication and self-care. The market potential is substantial and the outlook is promising, though it will indeed take time to materialize.

Lan Lei:The industry has entered a period of sluggish growth, with even lower growth expectations in the future. In such an environment, where will growth breakthroughs come from? The outflow of prescriptions will bring about a restructuring of the entire market structure.Primary healthcare institutions and retail pharmacies dispensing prescription drugs represent a certain opportunity.

Prescription drugs, especially those for chronic diseases, require lifelong administration. The pathogenesis of chronic diseases is highly complex, often necessitating the concurrent use of multiple complementary products. In fact,Prescription customers with chronic diseases should be high-quality customer resources that bring sustained revenue to pharmacies., this area holds immense significance.

As for how to undertake this, it involves the construction of specialized capabilities, which is a consideration of the specialized capabilities of both partners. For industrial enterprises, the most important factor is whether the prescription foundation is solid. Our products cover more than 4,000 medical institutions, and over 30,000 doctors interact with prescription products daily. Undertaking the outflow of prescriptions is a significant topic ahead and also our focus area.

He Yu:The outflow of prescription drug sales can be summarized in three phrases: a promising outlook, a harsh reality, and the need for self-reliance. In particular, manufacturers and distributors within the industry chain, along with retail pharmacy chains, must join hands to expand the market.

This year, the zero-markup policy has been implemented. There are many pharmacies located near a large Grade 3A hospital in Xi’an, where stakeholders have been awaiting the outflow of prescription drugs, including those dispensed through Direct-to-Patient (DTP) pharmacies. However, it did not take long; in recent months, this Grade 3A hospital established its own pharmacy, which is directly integrated with the hospital’s information system. Under these circumstances, how can the outflow of prescriptions be achieved? While the future outlook is undoubtedly promising, the path ahead will inevitably involve various twists and difficulties.

Liu Xingwu:The outflow of prescription drugs is no longer in doubt. In the next 3–5 years, 40–50 million prescriptions are expected to shift outside hospitals. The beneficiaries could be retail pharmacies or community healthcare institutions. Due to varying policies across provinces, the outflow of prescription drugs does not necessarily go exclusively to retail pharmacies; many community medical institutions are also capable of absorbing this shift. Ultimately, it depends on who has the capacity to do so.

Following the implementation of the zero-markup policy, retail pharmacies have faced a harsh reality, with gross profit margins declining as they are prohibited from exceeding those of hospitals.. If our prices are higher than those at hospitals, customers will not purchase our medications, while prescription drug manufacturers are unwilling to lower prices to subsidize hospitals. This squeezes the gross profit margins of retail pharmacies; with no significant growth in sales, the survival of retail pharmacies has become increasingly difficult, particularly for many small and medium-sized pharmacy chains that have been heavily impacted.

2. Can the out-of-hospital prescription market truly achieve sustained growth? A key challenge lies in prescription management. Xi’an recently launched a pilot program for electronic prescriptions; what have been its specific outcomes?

He Yu:Purchasing medications at pharmacies without a prescription is subject to strict enforcement by the Drug Administration, particularly in Xi’an, where some pharmacies have been directly shut down for selling drugs without prescriptions. One model recognized by the local Drug Administration is the use of electronic prescriptions.

The original intent of electronic prescriptions may have resolved the legitimacy of prescription sources for pharmacies and addressed how medications are purchased, with the trend showing continuous improvement. As more doctors come online, particularly after the implementation of multi-site practice policies, physicians can prescribe medications through various systems and platforms. Consequently, pharmacies will have access to an increasing number of channels for obtaining prescriptions.

Yikang operates both hospital distribution and pharmaceutical retail. Its distribution network covers tertiary Grade A hospitals, county-level hospitals, and community health centers. The local Health Bureau has approved our own team of 20 online video physicians, who are highly familiar with our product portfolio. We have developed an in-house system that issues prescriptions for over 900 stores, generating 4,000–5,000 prescriptions locally, with nearly 10,000 prescriptions issued nationwide.

We hope that community healthcare providers, including certain departments of tertiary hospitals, can prescribe medications through this platform. We aim to introduce the concept of family physicians through this model, and we also encourage pharmaceutical manufacturers to collaborate in driving the platform’s development.

Pharmaceutical sales cannot rely solely on tertiary public hospitals; they also need to be conducted throughDiversified Diagnostic and Treatment Systems Generate Some Sales。

3. With the use of technologies such as telemedicine, electronic prescriptions offer greater security. How can pharmacies ensure the professionalism of prescriptions and prevent the horizontal leakage of prescription data?

Xiao Junxiong:Last year, Guizhong Pharmacy, in collaboration with the local Health and Family Planning Commission and China Mobile, jointly established a platform connecting hospitals and pharmacies. Through this platform, prescriptions can be routed to pharmacies. Physicians generate a QR code for each prescription, which patients can link to their mobile devices. By scanning the QR code at a pharmacy, the prescription is automatically connected to that specific pharmacy. Prescriptions are not transmitted directly to pharmacies; instead, they are hosted on the platform, allowing patients to choose their preferred pharmacy independently.

However, the prescription volume through this channel is still relatively low.The hospital's momentum is not very obvious and has not met our expectations.。

Additionally, in April 2017, a local public hospital partnered with Tencent to launch another initiative. With the hospital’s participation, platform adoption has become faster and easier, and prescriptions can be transmitted more effectively to pharmacies. The project is in its final implementation stage, currently undergoing commissioning, and prescription flows are expected to commence shortly.

Another scenario may arise where a prescription reaches the pharmacy, but the staff cannot interpret it because physicians’ handwriting is sometimes difficult to read. Therefore, certain preparations must be made in advance, andStandardized Management, including the need to keep pace with prescription management, which poses a significant risk. Furthermore, upstream and downstream customer resources are critical; without such resources, building these channels and carrying out subsequent operations would essentially be meaningless.

4. Many provinces across China have undertaken various forms of experimentation, whether at the policy level or the prescription level. Stakeholders are awaiting developments or making preparations; how can they leverage the power of prescription drug resources during this window of opportunity?

Liu Xingwu:Resources are abundant; how can we leverage supplier resources to achieve breakthroughs? Prescription drug companies have relatively mature medical and physician resources. Pharmacies can utilize supplier resources to facilitate training aimed at enhancing employee capabilities, even those of retail pharmacy management, with a particular focus on improving the professional competencies of pharmacists.

Pharmaceutical manufacturers conducting research on a drug will inevitably perform in-depth studies based on the pathogenesis of the specific disease, leveraging professional resources that retail pharmacies lack. Since many medications have side effects, a broader health perspective allows for the combination of various products. Consequently, this approach can boost sales for retail pharmacies, while from the customer’s perspective, it helps reduce side effects and enhance therapeutic efficacy.

Another critical resource is the customer base. Over the years, prescription drug manufacturers have engaged extensively with hospitals and patients, accumulating a substantial customer portfolio. Future success in the prescription drug market hinges on winning over both customers and patients. Therefore, it is essential to collaborate with prescription drug manufacturers to jointly analyze customers and identify personalized needs based on big data. Only in this way can prescription drugs be effectively distributed and adopted in retail pharmacies in the future.

A study of a prescription drug company reveals that for each retail pharmacy and each product, the second-time repurchase rate for dispensed prescriptions is minimal, at only 10%. This indicates that 90% of the prescriptions are filled but the medications are not used or taken. Therefore, further in-depth customer research is required.

5. How can resources across the industrial and commercial supply chains be integrated? What advantageous resources or cooperation models are offered by the prescription market for pharmacies to choose from?

Lan Lei:Our core cardiovascular and cerebrovascular product line began its retail market expansion in 2009, and a nationwide team was formally established in November 2015, with some detours along the way.

We have been operating according to the traditional OTC model, which includes the previous supply and marketing patterns such as maintenance, promotion by store staff, and in-store and out-of-store promotional activities. However, we have identified an issue,Sales volume increases during promotions, but such growth is unsustainable.. Our ongoing review indicates that the extension and evolution of terminal channels in the prescription drug retail market have not altered product attributes.

The national definition of prescription drugs is clear: they are products that can only be sold and purchased with a doctor’s prescription. Given this characteristic, the professionalism and safety of prescription drugs are of paramount importance. Following a comprehensive review and restructuring of the healthcare model last year, even major liver disease drug brands such as CR Sanjiu’s “Essentiale” have been realigned. Leveraging the retail-oriented promotion model for prescription drugs, Shenghuo Pharmaceutical has established a dedicated marketing department to oversee this business segment, with the Shenghuo team currently comprising over 200 employees.

In 2017, we will further focus on market demands,Improving Service Quality with a Patient-Centered Approach, the core is to identify patient needs.

For instance, our product is targeted at patients with ischemic conditions. Aspirin is a mandatory medication for these patients; however, its use increases the risk of bleeding and causes damage to the gastrointestinal mucosa. These issues can be addressed through combination therapy. This indirectly underscores the critical importance of promoting prescription drugs through retail channels and extending specialized professional services.

Professional Service Capabilities, in Simple TermsThe Solidity of Corporate Healthcare Foundations and the Robustness of Professional Academic CapabilitiesFurthermore, the extension of specialized services requires content, which necessitates sustained investment in research and development to accurately identify and retain customers.

The closed-loop system integrating physicians, patients, and pharmaceuticals is critical.Hospitals can provide accurate diagnoses for patients, primary healthcare institutions offer daily diagnosis and treatment services for patients with chronic diseases, and pharmacies deliver professional services through their pharmacist systems, thereby achieving a closed-loop integration of the healthcare provider-patient-pharmacy ecosystem.

Currently, our primary approach involves face-to-face services provided by pharmacists, leveraging the specialized expertise of existing pharmacy staff to deliver health education to high-risk patients with cardiovascular and cerebrovascular diseases. Through these initiatives, we have established a comprehensive service system that spans from initial diagnosis and treatment at hospitals to daily chronic disease management and medication adherence support.

6. The prescription drug market is fraught with uncertainties, and capturing market share inevitably involves addressing numerous pain points. In the context of manufacturer-distributor collaboration to seize the out-of-hospital prescription drug market, what are the key pain points, and what solutions are recommended?

Xiao Junxiong:The real pain point lies neither in commerce nor in chain operations,The most important factor is the current mechanism.. Following the implementation of the zero-markup policy, hospital pharmacies, which previously generated substantial annual revenue for hospitals, no longer contribute to income. Instead, hospitals must now cover personnel salaries and various other benefits. Consequently, hospitals are compelled to seek new avenues for financial sustainability.

Currently, government fiscal compensation for hospitals is far from sufficient. Hospitals must prioritize their survival and development. Therefore, to tap into the out-of-hospital prescription drug market, it is essential to first identify what hospitals need most and how you can meet those needs. Focusing on this entry point will yield faster results.The key lies in whether hospitals have the incentive to drive prescriptions to outside pharmacies.. Although patients can choose to obtain their medications either at hospitals or pharmacies, significant uncertainty remains.

Furthermore, while multi-site practice has been promoted, physicians remain within the hospital system, making it difficult to establish multiple practice sites; prescriptions are still subject to various constraints. However, addressing these pain points of hospitals, clearly understanding their current needs, and providing targeted solutions to help them resolve specific issues represent a sound strategic approach.

Lan Lei:Following the shift in distribution channels for prescription drugs, it remains essential to enhance regulatory compliance in response to changes at the terminal level. Additionally, improving patient medication adherence is a key challenge. Chronic disease medications typically require lifelong use; however, our survey data reveals that despite single-product sales exceeding RMB 100 million, the repeat and continuous purchase rates among the hundreds of thousands of purchasing patients remain low. This indicates that there are numerous interfering factors influencing patients’ choice of medication for chronic diseases.

In fact, it is better to maintain an existing customer than to acquire a new one.. Therefore, the continuous improvement of professional service capabilities to enhance patients' medication adherence has become critically important.

Regarding the interest-based game in hospitals, logically, after the implementation of zero-markup policies, pharmaceutical profits have little to do with hospitals. These methods are essentially games from the perspective of pharmaceuticals. How to think about the issue from the hospital's perspective and address prescription outflow through reasonable consideration of interests is also a feasible approach.

Zhao Biao:The biggest pain point in the outflow of prescription drugs is the "leap." Historically, the hospital market and the retail sector have operated as two parallel segments, with a significant gap between them. Bridging these two segments essentially requires a leapfrogging process. Pharmaceutical companies transitioning directly from the hospital segment to the retail segment is a move that retail pharmacies strongly desire.

For prescription drug manufacturers, the existing channels are mature and offer relatively secure and stable distribution pathways; the current priority is to establish a safe framework for a smooth transition. This essentially reflects their prevailing stance.

The other party consists of hospital wholesalers, the entrenched beneficiaries within hospitals who are reluctant to make the leap. Retail enterprises face the challenge of being unable to handle the sudden emergence of a “elephant” in the market, as their existing operational models, sales structures, human resource frameworks, and overall prescription drug sales systems lack sufficient strength. Nevertheless, this strategic leap must ultimately be executed.

In the future, among manufacturers of prescription drugs, those who complete such a leap first will gain a leading advantage. Retail enterprises will naturally accumulate strength and make professional preparations driven by the market. It is believed that they will ultimately be able to handle it, although they will inevitably face some risks.

He Yu:To truly resolve this issue, it is likely stillRequires support from national industrial policies.. The construction of this pathway should be relatively straightforward. For the retail sector, one direction is to transform by integrating pharmacies with clinical services and health management; such a transformation could represent a significant breakthrough, as the more effectively it is executed, the stronger the capacity to accommodate prescriptions flowing out of hospitals.

Liu Xingwu:In addition to what the aforementioned guests mentioned,The lack of prescriptions, low gross margins, and inability to sell prescription drugs are also current pain points for retail pharmacies.。

Regarding gross profit margins, the operational approaches of retail pharmacies differ entirely from those of hospitals. This disparity often leads to mutual misunderstanding among stakeholders; therefore, prescription drug manufacturers should enhance communication with retail pharmacies.

It does not sell prescription drugs; this is primarily an issue for retail pharmacies.Retail pharmacies have been learning from supermarket operational practices for many years., extensive efforts have been made in marketing and promotions, but there may still be insufficient improvement in professional capabilities.

From the current perspective, senior management of retail pharmacies has recognized this issue; however, frontline staff and grassroots employees have not fully grasped its implications. Moreover, there have been no significant changes in management models or performance evaluation methods. Therefore, to achieve strong sales of prescription drugs, pharmacy performance appraisal systems must undergo certain adjustments.