Foreign medicine retailers keep watch
(Business Weekly)
Updated: 2005-01-05 14:01

Although China's medicine retailing market has been fully opened since the middle of last month, major foreign medicine retailers will not rush in over the next few years as once expected.

"Many foreign medicine retailers are just watching the situation," Zhu Changhao, president of the China Association of Pharmaceutical Commerce, said last week.

"And most of them probably will not enter even in the next few years. It is not purely a policy issue."

According to its commitment to the World Trade Organization (WTO), China removed all previous restrictions on foreign medicine retailers from opening outlets in China since December 11 last year.

But few foreign firms have responded to this policy shift, with even the few that had previously announced deals just testing the water, said Zhu.

An Australian medicare company had reportedly signed letters of intent with the Shanghai Citizen Drug Store in the middle of last month on jointly setting up store selling imported medicines for severe illness such as cancer and diabetes, with the Chinese company holding the majority share.

Meanwhile, a UK-based medicine retailer is in talks with Shanghai Zhilin Drug Store on similar deals.

"They are just beginning, and yet aggressive," said Zhu. "The aggressive ones, if any, are not real retailers."

The most eye-catching deal in China's medicine retailing market last year was in last June between Goldman Sachs and Shenzhen-based Nep-star Drug Store.

Goldman Sachs agreed to invest US$40 million, with more cash coming later, to build Nep-star into China's largest medicine retailer with an annual revenue of 4 billion yuan (US$481 million) in five years. After that, Goldman Sachs will help Nep-star get listed either in Hong Kong or the United States.

"As a strategic investor, Goldman Sachs surely looks for returns through IPOs (initial public offerings). We are not talking about an industrial partner," said Qian Ranting, Nep-star's marketing supervisor.

Indonesia's No 1 financing company, Lippo Group in October acquired two drug chain store companies in Chengdu, the capital of Southwest China's Sichuan Province, holding a 51-per-cent share in each.

Profitability always comes first and foreign companies will not boldly enter a market in which profitability is uncertain, said Hou Dakun, general manager of Beijing-based Kevin King Management Consulting Co Ltd.

"China's medicine retailing market differs greatly from that in developed countries where those top retailers originated," he said.

The market share for drugstores is squeezed to only 15 per cent in China, as hospitals, the major medicine retailers, supply about 85 per cent of the medicines needed annually, according to Zhu.

And despite its great long-term potential, China's total medicine retailing market currently remains quite small, said Zhu.

The US market, with an annual sales revenues of US$280 billion, is more than ten times that of the China market.

Moreover, the government has got itself involved in the market and thus the market is not transparent to investors, he said.

Medicine stores have been prevented from selling antibiotics to buyers without doctor's prescription since June 1 last year, as demanded by the State Food and Drug Administration.

By the end of 2005, the above rule will be applied to all non-OTC (over-the-counter) medicines.

And the National Development and Reform Commission, the country's top economic policy-maker, once demanded drug stores to lower their prices, but the move was later suspended.

"It's beyond the government's rights in a market-oriented economy," he said. "And it makes life harder for retailers, which are struggling for a market share."

Most drugstores in China are small in business scale, and the sector's low profit margin leaves half of them running at a deficit. There are some chain stores, but none of them has a nationwide presence, resulting largely from the local government protectionism, said Zhu.

"What foreign retailers want is a Chinese player with nationwide presence, since profitability of retailing business depends on scale," he noted.

Hou shares Zhu's view, suggesting the government should speed its medical reforms, separating hospitals from the medicine distribution system and promoting medical insurance.

In addition, the development of medicine retailing sector depends on the country's logistics sector, which lags far behind market demand. To many domestic manufacturers, logistics remains part of their daily operation, and that results in higher production costs, he explained.

"It will take some time before foreign medicine retailers feel confident about the China market and rush in as retailers in other sectors have," said Hou.

Close