Is SF Express the 'Big Bad Wolf' Entering Pharmaceutical Distribution? Aggressive Talent Poaching, 2 Pharma Cold Stores, and 12 Dedicated Pharma Routes Raise Industry Alarms

On the day SF Express went public, Hu Jiqiang, Chairman of Zhejiang Conba Group, wrote a sentence in his work diary: “This is a disgrace to us as pharmaceutical professionals.”。

These remarks stem from his speech at the 2017 “Voices and Responsibilities” Symposium for NPC Deputies and CPPCC Members in the pharmaceutical sector. He argued that despite the rapid growth of the express delivery industry, it remains a small sector compared with the pharmaceutical industry; yet, it has spawned companies with a combined market capitalization of RMB 300 billion. “Hengrui Medicine, the company with the largest market cap in China’s pharmaceutical industry, is valued at only slightly over RMB 100 billion. What accounts for this disparity?” Even more concerning is that SF Express is entering the pharmaceutical distribution arena, directly threatening the livelihoods of pharmaceutical professionals.

In addition to Hu Jiqiang, the head of a major pharmaceutical distribution company also publicly spoke out, accusing SF Express of poaching employees and procurement managers from its logistics subsidiary. “SF Express is extremely aggressive in recruiting talent. First, they hired away the general manager of our logistics company, who helped build up their cold-chain operations; now they’ve taken our procurement chief, bringing clients along with them. Their executive team is being hollowed out.”

SF Express’s entry into the pharmaceutical sector has become a fait accompli, leaving industry professionals appearing passive and flustered, aside from their righteous indignation. Critical questions urgently demand answers: What is SF Express’s strategic layout in the pharmaceutical distribution industry? How significant is its impact on pharmaceutical distribution? Whose interests are being disrupted? And what magnitude of influence will it exert on the future trajectory of the pharmaceutical industry?

As the leading private express delivery company, SF Express has long been established in the pharmaceutical industry. As early as March 2014, SF Express established its Pharmaceutical Logistics Division. In November of the same year, it founded its Cold Chain Division, focusing on cold-chain transportation and distribution for food and pharmaceuticals. By last August, SF Express had 17 cold-chain branches across China. In mid-November, SF Express held a launch event in Haikou for its cold-chain pharmaceutical land transport trunk line network, demonstrating its continuous strategic initiatives.

Early 2017,The pharmaceutical logistics center project launched in Chengdu by SF Express’s subsidiary, Chengdu Shunyifeng Pharmaceutical Co., Ltd., and Sanofi China Investment Co., Ltd., has sparked heated discussion within the industry., many people began to cry “wolf.”

According to VCBeat (WeChat ID: vcbeat), this is actually Sanofi’s third pharmaceutical logistics center project in China. Relying on SF Express’s existing cold-chain resources in Chengdu, the project primarily includes a GSP-compliant cold-storage warehouse exceeding 6,000 square meters and 54 refrigerated trucks. It enables warehousing and cold-chain transportation of pharmaceuticals, vaccines, and biological products. Additionally, SF Express’s surplus cold-chain capacity will serve as a third-party pharmaceutical logistics hub, providing warehousing, distribution, and related services to other pharmaceutical companies.

Sanofi’s decision to partner with SF Express stems from its recognition of SF’s pharmaceutical warehousing and distribution capabilities. According to the head of Sanofi China’s supply chain, the company conducted a 10-month audit and assessment of SF Express, confirming that its overall capabilities in warehousing, transportation, and delivery met Sanofi’s customized evaluation requirements. Based on this, Sanofi ultimately selected SF Express as its pharmaceutical logistics partner in China.

Sanofi reported revenue of €37.057 billion in 2015, ranking it as the fifth-largest pharmaceutical company globally, behind Johnson & Johnson, Novartis, Pfizer, and Roche. Gaining Sanofi’s endorsement demonstrates SF Express’s unique advantages in pharmaceutical logistics and distribution.

Compared with traditional third-party pharmaceutical logistics enterprises, SF Express possesses many advantages in terms of transportation speed, business outlets, and logistics handling capabilities that are unmatched by many pharmaceutical merchants and third-party pharmaceutical logistics enterprises. Furthermore,SF Express has obtained GSP certification, and its cold-chain capabilities are even superior to those of many pharmaceutical distributors.

Data disclosed during SF Express’s backdoor listing via Dingtai New Materials indicated that SF Express operated nearly 8,000 service outlets, covering all 31 provinces, autonomous regions, and municipalities directly under the central government in China, and possessed robust logistics handling capabilities. In addition to ground transportation, SF Express maintains a dedicated air cargo fleet and has integrated GPS and GIS cargo tracking systems throughout its transportation network to ensure the accuracy and timeliness of deliveries.

On February 24, SF Express officially listed on the A-share market. Its high brand recognition, high average transaction value, and strong profitability attracted significant investor enthusiasm, driving its share price to a peak of RMB 73.48 and its total market capitalization above RMB 300 billion. This surge prompted the aforementioned “sidelong glance” from Hu Jiqiang. As of March 13, its share price remained at a high level of RMB 61.06, with a total market capitalization of RMB 255.5 billion, solidifying its status as a bona fide “high-quality stock” in the A-share market.

On March 13, SF Holding disclosed in its annual report that its operating revenue for 2016 was RMB 57.482 billion, with a net profit of RMB 4.18 billion. Compared with industry peers, this net profit approached the combined total of the “Three Tongs and One Da.”The annual report also shows that in the pharmaceutical logistics business segment, SF Express owns two pharmaceutical cold storage facilities and 12 pharmaceutical trunk lines, connecting core cities in Northeast, North, East, South, and Central China.

As evidenced by the renaming to “SF Holding” following its backdoor listing, diversification is SF Express’s primary objective for the foreseeable future, with pharmaceutical logistics representing a key direction in its exploration of new business ventures.

From the perspective of the industry in which SF Express operates,The period of rapid growth in China's domestic express delivery industry has passed., the boosting effect of e-commerce on express delivery volume is not significant. Although SF Express positions itself in the mid-to-high-end market, with an average revenue per parcel exceeding RMB 20, and continues to invest in automation and informatization to reduce costs, it still faces pressure on profit growth. Therefore, actively exploring new businesses is an inevitable choice for the company.

From another perspective, SF Express can no longer operate as Wang Wei’s “one-man show” following its public listing. It must now balance the interests of major investors and the capital market. The imperative to ensure sustained performance growth and maintain high profitability has also compelled SF Express to adjust its business framework. Transitioning from commercial express delivery to pharmaceutical logistics represents a relatively smooth strategic shift for the company.

SF Express’s entry into pharmaceutical logistics is driven by two additional key factors,Industry players have failed to establish effective entry barriers, while policies have facilitated the entry of third-party logistics providers into pharmaceutical distribution.

According to statistics from the China Food and Drug Administration, as of the end of November 2015, there were 13,500 pharmaceutical wholesale enterprises and 4,981 pharmaceutical retail chain enterprises across China. The vast majority of these entities are small and medium-sized pharmaceutical companies with limited financial resources, making it difficult for them to establish robust pharmaceutical logistics service systems; consequently, they rely on third-party logistics providers for outsourced management.

In terms of policy, in February 2016, the State Council issued a document announcing the cancellation of approval requirements for engaging in third-party pharmaceutical logistics. Any courier company that meets the requirements for pharmaceutical transportation can join the third-party pharmaceutical logistics network serving China’s 13,500 pharmaceutical distributors. This has attracted a large number of courier enterprises to enter the pharmaceutical logistics sector, with companies such as SF Express, China Post, and UPS all reportedly planning to establish pharmaceutical logistics centers.

Take China Post as an example; it has already achieved remarkable success in the pharmaceutical logistics sector. As early as 2015, a pharmaceutical subsidiary under China Post was designated by Fujian Province as a distributor for essential medicines. The Fujian subsidiary of China Post has completed its coverage and layout across seven major regions, including Fuzhou, Putian, Sanming, and Quanzhou. Despite being established only two years ago, the local China Post subsidiary has achieved an annual sales volume of RMB 1 billion, a feat entirely attributable to its recruitment of professional pharmaceutical management personnel, government support, and the robust infrastructure of the postal network.

The government encourages consolidation within the pharmaceutical distribution industry, as also mentioned in the "13th Five-Year Plan for Pharmaceutical Distribution." The plan’s specific objectives call for cultivating a group of large-scale pharmaceutical distribution enterprises with nationwide network coverage and a high degree of intensification and informatization. The annual sales revenue of the top 100 pharmaceutical wholesalers shall account for more than 90% of the total pharmaceutical wholesale market; the annual sales revenue of the top 100 pharmaceutical retailers shall account for more than 40% of the total pharmaceutical retail market; and the chain pharmacy rate shall exceed 50%.

This meansOver 90% of small-scale enterprises in the pharmaceutical distribution sector will be eliminated or merged.. In Fujian, China Post has adopted the approach of acquiring local small-scale pharmaceutical distributors. If long-term observation demonstrates significant effectiveness, this model will inevitably be rolled out and replicated on a large scale.

On the other hand, it is necessary to mention the impact of the “Two-Invoice System” on pharmaceutical distribution. On January 9 this year, the State Council’s Office of Healthcare Reform, together with eight other departments, issued the national version of the “Two-Invoice System,” marking the full implementation of a scheme that had been piloted at the grassroots level since 2010. The implementation guidelines stipulate that no more than two invoices may be issued along the supply chain—from manufacturers to distributors and then to medical institutions. The policy encourages the adoption of a “One-Invoice System,” whereby pharmaceutical manufacturers deal directly with medical institutions, while delivery can be handled by third-party logistics providers.

From an implementation perspective, the fundamental purpose of the “Two-Invoice System” is to reduce the number of drug distribution links and address the issue of artificially inflated drug prices. It also serves to standardize order within the pharmaceutical distribution industry and clean up and rectify the fragmented and chaotic competitive environment. At that time, voices pointed out that,Mergers and Acquisitions in the Pharmaceutical Distribution Industry Are Set to Reach a Peak, industry leaders will directly benefit, and third-party logistics may become the third major pharmaceutical distribution model, on par with distributors and delivery providers.

At a seminar on the “Two-Invoice System,” senior executives from a pharmaceutical company stated that drug distribution through medical institution channels had previously relied mainly on distributor and delivery models. However, both models are characterized by an excessive number of small-scale enterprises, which may account for approximately 40% of the total channel but contribute less than 20% of turnover. This fragmentation poses significant management challenges due to operational complexity. Outsourcing to third-party logistics providers would simplify cost control and also help address drug pricing issues.

But how can 13,500 pharmaceutical distribution-related enterprises simply cede the pharmaceutical logistics market to others, relegating themselves to mere “goalkeepers” of the industry?

In fact, the entry of third-party logistics providers into pharmaceutical distribution has had a limited impact on the industry. An intuitive reason is that “cross-industry” players such as SF Express and China Post still lack sufficient penetration into medical networks and specialized capabilities.

The aforementioned pharmaceutical executive also noted that companies like SF Express currently focus primarily on warehousing and distribution for industrial manufacturers, without having deeply penetrated the pharmaceutical distribution sector. “To put it plainly, only the items being delivered have changed; in terms of pharmaceutical distribution, SF Express has yet to develop a specialized workforce and capabilities,” the executive stated candidly.

Traditional pharmaceutical distribution primarily relies on two models: distribution and logistics. Under the distribution model, manufacturers focus solely on production, while distributors control resources at hospitals and other medical institutions. Consequently, distributors determine the sales volume of pharmaceutical companies, holding the decision-making power over shipments; thus, manufacturers can only reach medical institutions through distributors. In the logistics provider model, pharmaceutical companies are required to organize academic promotion activities to guide medication use at the terminal level, placing high demands on their marketing capabilities. However, under the “Two-Invoice System,” medical representatives have been prohibited from conducting business-related activities within hospitals, presenting significant implementation challenges for this model as well.

As third-party logistics providers actively enter the pharmaceutical distribution sector, incumbent industry giants have not remained idle. Companies such as Sinopharm, Shanghai Pharmaceuticals, Jointown Pharmaceutical Group, and Chongqing Pharmaceutical are accelerating their deployment at the primary care level, focusing on the “last mile” of drug distribution, building more refined marketing networks, and achieving effective coverage of grassroots markets. These capabilities are notably lacking in third-party logistics enterprises and represent significant barriers to entry with high thresholds.

Therefore, it is unlikely that third-party logistics will disrupt the existing pharmaceutical distribution system in the short term.

But the real fear is “Beaten to Death by a Mob of Amateurs", the entry of third-party logistics providers into pharmaceutical distribution is more than just a single strategy for assisting manufacturers with delivery. As previously mentioned, China Post adopted the approach of acquiring local pharmaceutical distributors in Fujian Province. If adequately capitalized, third-party logistics enterprises could replicate this model on a larger scale, thereby addressing challenges related to "guanxi" (personal connections) and resources, and rapidly enhancing their coverage of the healthcare network.

On the other hand, the state encourages the development of "pharmaceutical e-commerce." If logistics enterprises establish their own platforms or collaborate with pharmaceutical e-commerce platforms to handle distribution, it will fundamentally disrupt the industry. This is because pharmaceutical e-commerce platforms can directly connect medical institutions, retail outlets, clinics, and other endpoints with manufacturers. For manufacturers, entrusting third-party logistics providers enables them to obtain complete data on drug flow, which is highly significant for adjusting their production and marketing strategies.

According to the 2015 Annual Regulatory Statistics Report issued by the China Food and Drug Administration, as of the end of November 2015, there were 5,065 manufacturers of active pharmaceutical ingredients (APIs) and finished dosage forms across China. These companies held approximately over 100,000 drug approval numbers, meaning that more than 100,000 types of drugs were circulating in the market. This situation directly led to a “sales-oriented” model among pharmaceutical enterprises. Precisely because of this, the pharmaceutical distribution sector is highly sensitive; any shift in the strategic intent of manufacturing enterprises would directly reshape the landscape of pharmaceutical distribution, circulation, and retail.

The main players in this pharmaceutical distribution war are not SF Express and third-party logistics providers, but rather the self-driven adjustments within the pharmaceutical distribution industry that urgently need standardization.

“A butterfly flapping its wings in the Amazon may trigger a storm on the other side of the ocean. Who knows if SF Express’s entry into pharmaceutical distribution is that very butterfly heralding a transformation in the healthcare industry?”