Double-Digit Growth Era in China's Pharmaceutical Market May Be Coming to an End, Says Zhongkang Insights

At the 2016 Xipu Conference held today, forecast data from Sinohealth Information indicated that the pharmaceutical terminal market would grow by approximately 7.3% in 2016. This follows a decline in the overall growth rate of the pharmaceutical market from 13.3% in 2014 to 7.6% in 2015, marking a new historical low. It is projected that the pharmaceutical market may bid farewell to double-digit growth for a considerable period. VCBeat (WeChat ID: vcbeat) has edited and compiled the relevant information.

At the 2016 West China Pharmaceutical Conference, Zhongkang CMH released the “Report on Market Size Forecast for the Six Major Drug Terminals in 2016.” The report indicated that in 2015, the total size of China’s pharmaceutical market (excluding medicinal materials) reached RMB 1.3775 trillion (calculated at retail prices; the same applies below), representing a 7.6% year-on-year increase from 2014, with growth continuing to slow down.

According to Wu Han, President of Sinohealth Information, Sinohealth CMH projected a growth rate of 7.3% for 2016. As the drivers that once supported high growth—such as rapid economic expansion, the demographic dividend, and the expansion of medical insurance coverage—fade away, the era of double-digit growth in the pharmaceutical market may have come to an end.

In 2015, China’s full-year GDP growth rate was 6.9%, the lowest since the reform and opening-up policy was initiated. It was a relatively difficult year for China’s economic operation, with reforms at a critical stage of overcoming significant challenges. In May 2016, central government “authoritative figures” characterized the trajectory of China’s economic growth over the foreseeable future as “L-shaped.” It is projected that in the coming years, China’s economy will continue to face substantial downward pressure, inevitably impacting the pharmaceutical industry.

Not only in China, but globally as well, the overall growth rate of the pharmaceutical market has been disappointing. Last year, eight of the top 10 global pharmaceutical companies experienced negative year-on-year growth. In response, Sinohealth Information, based on its data research and analysis of the industry, posits that future growth opportunities for pharmaceutical companies will stem from services rather than drugs. “Future individual growth for pharmaceutical companies will be reflected more in structural competition within the industry, rather than in the rapid expansion of the overall market pie. R&D innovation and resource reallocation will also become central themes of competition,” pointed out Wu Han.

In 2013, Sinohealth Information introduced the concept of the “Six Major Terminals.” After several years of continuous growth, the development of these six terminals has largely stabilized. In terms of market share among the Six Major Terminals, urban tertiary hospitals account for 55% of the entire pharmaceutical market; county-level tertiary hospitals represent 18%; urban primary healthcare and rural primary healthcare markets each account for less than 6%; and retail pharmacies constitute less than 20%.

First, tiered urban hospitals remain the largest healthcare terminal, a position that is difficult to dislodge. Although the state has been advocating policies such as hierarchical diagnosis and treatment and reducing the proportion of drug costs, due to the lag in policy implementation and the deep-rooted medical habits of the public, their market scale still ranks first. According to data from Zhongkang CMH, in 2015, the medication market size of urban tiered hospitals reached 751.5 billion yuan, with a year-on-year growth of 5.8% and a compound annual growth rate (CAGR) of 16.5%. The growth rate has significantly slowed down, and it is expected to grow by 8.1% in 2016, reaching a medication market size of 812.7 billion yuan.

Secondly, as the 12th Five-Year Plan drew to a close and the zero-markup policy was expanded to more regions, the rapid growth of the pharmaceutical market in county-level classified hospitals began to slow down. In 2015, the drug sales volume in this market reached RMB 247 billion, representing a year-on-year increase of 9.7%. Growth is projected at 6.4% for 2016, bringing the market size to approximately RMB 262.9 billion. Overall, classified hospitals remain firmly entrenched as the largest pharmaceutical end-user channel and will retain this position in the near future. However, aligned with policy directions, growth in the hospital sector is expected to gradually decelerate.

Furthermore, at the primary care level, the urban primary healthcare market grew by 11.1% compared with 2014, with a compound annual growth rate (CAGR) of 18.7%. Benefiting from favorable policies under healthcare reform, the urban primary healthcare market has demonstrated robust growth, outpacing the four major hospital terminals. The rural primary healthcare market recorded the lowest growth rate, increasing by only 1.9% compared with 2014. Although the new healthcare reform has directed substantial state financial resources toward the primary care sector—including township health centers, community outpatient clinics, and private practices, which constitute the “third terminal” market—this segment remains dominated by demand for generic drugs. Its market size and growth rate are difficult to boost in the short term, and shifts in market scale and consumption patterns will require more time to materialize.

In the retail pharmacy sector, growth has outpaced the industry average, driven by factors such as the outflow of prescriptions from hospitals, significant price reductions in regional pharmaceutical procurement tenders, and multinational corporations shifting channels after withdrawing from bids. The retail pharmaceutical market (excluding traditional Chinese medicinal materials) grew by 11.6% in 2015, reaching RMB 226 billion, a 3-percentage-point rebound from the 2014 growth rate, with a compound annual growth rate (CAGR) of 11.7%. In 2016, as overall pharmaceutical market growth slows, the growth rate for the retail terminal market is projected to decline to 8.1%, with the market size expanding to RMB 244.4 billion.

Finally, online pharmacies, which began to gain momentum in 2011, currently account for only about 1% of the overall market, and their future development will still depend on the direction of policy.

Although the dominant position of tiered hospitals remains firmly entrenched, the separation of prescribing from dispensing is an inevitable trend against the backdrop of deepening public hospital reforms aimed at making healthcare affordable and accessible. In this process, retail pharmacies are poised to capture market share from hospital outpatient pharmacies, and the entire pharmaceutical retail industry may stand to gain a multi-billion-dollar opportunity driven by the diversion of hospital drug sales—particularly of oral traditional Chinese medicine proprietary products and chronic disease medications.

Data show that the retail market is projected to grow by 8.1% in 2016, outpacing the overall growth rate. Prescription drug sales are expected to rise by 12.1%, significantly higher than the 5.4% growth for over-the-counter (OTC) products. The data also clearly indicate a pronounced shift of prescription drug sales from hospitals to the retail sector. This transition is likely to accelerate as healthcare reforms continue to advance.

However, prior to this, retail pharmacies must adapt to the heightened regulatory environment in the pharmaceutical distribution sector. The normalization of measures such as the “Two-Invoice System” and unannounced Good Supply Practice (GSP) inspections, coupled with the implementation of new policies like the VAT reform, clearly signal the government’s intent to impose stricter oversight on the distribution sector. These efforts aim to “optimize the order of drug purchasing and sales and streamline distribution channels,” thereby enhancing drug quality monitoring, controlling prices in intermediate links, and accelerating market consolidation through survival of the fittest.

Wu Han pointed out that, in simple terms, there will be two trends: on the one hand, industry reshuffling will occur, leading to increased market concentration; on the other hand, market standardization will improve, prompting enterprises to pursue transformation and upgrading.

According to the "2015-2016 China Pharmaceutical Retail Industry Research Report" released by Menet Information, the total number of registered pharmacies in China reached approximately 448,000 in 2015, an increase of 13,000 from 2014. The chain store rate of retail pharmacies rose to 45.7%. Although the total number of stores continued to grow, the number of independent pharmacies decreased by 7.7%. Consolidation and mergers and acquisitions are expected to be the main theme of pharmacy development in the coming years. Meanwhile, according to Menet Information's 2015 survey on the competitiveness of the top 100 companies in the pharmaceutical retail industry, the number of directly operated stores among the top 100 pharmacy chains increased by 12.5% year-on-year to 32,798. The contribution rate of sales scale by the top 100 reached 34.8%, surpassing the RMB 100 billion mark for the first time.

In the coming years, intensifying competition will be reflected not only in increased market concentration but also in fierce rivalry regarding professional transformation and service expansion. On one hand, pharmacies must enhance their professional pharmaceutical care capabilities to effectively manage prescriptions flowing out of hospitals. On the other hand, they need to focus on disease management to gradually build and strengthen consumer loyalty, thereby facilitating a transition from “retailers” to “health service providers.”

Notably, the policy of “seeking medical consultation at hospitals and picking up prescriptions at pharmacies, thereby granting the public free choice” was included in the State Council’s 2016 Key Priorities for Healthcare Reform. This initiative emphasizes encouraging patients to freely purchase medications at retail pharmacies based on their prescriptions. The National Development and Reform Commission’s “Implementation Plan for Division of Responsibilities among Departments on Key Tasks under the Guiding Opinions on Promoting the Healthy Development of the Pharmaceutical Industry” also focuses on facilitating the outflow of prescriptions from medical institutions. It requires healthcare providers to issue prescriptions using generic drug names and proactively provide these prescriptions to patients, thereby safeguarding patients’ right to choose where to purchase their medications. It is reported that, as of now, pilot programs for prescription outflow have been launched in cities such as Shanghai and Liuzhou, with the government working to integrate resources across tertiary hospitals, community healthcare centers, retail pharmacies, and medical insurance payment systems.

Wu Han pointed out, “With the shift in patients’ access to medical care and the outflow of prescriptions, retail pharmacies will gradually evolve into the main channel for pharmaceutical distribution, facing an increasing number of patients with chronic and serious diseases.”