China - Merck & Co and UPS Enter Emerging Markets Distribution Agreement08 Jul 2011 • by Natalie Aster
BMI View: China's fragmented pharmaceutical distribution sector represents a considerable obstacle for new players such as UPS, despite the firm's experience in providing supply chain solutions for other sectors. State support for local companies will also present difficult headwinds for foreign firms.
Merck & Co and UPS have broadened their existing distribution and logistics agreement to include emerging markets such as China and Brazil. The partnership will accelerate the delivery of medicines to patients and allow the pharmaceutical company to concentrate on its core competency of discovering and developing new therapeutics and preventatives.
The Merck-UPS collaboration started in 2003 with package transport and delivery services in the US. Currently, UPS manages the distribution, warehousing and transportation of Merck's medicines and vaccines in North America.
Outsourcing pharmaceutical supply chain solutions to shipping firms is a growing trend. In 2010, Pfizer outsourced its US logistics network to Deutsche Post DHL. The DHL-Pfizer partnership was then extended to Australia in 2011 as part of the drugmaker's plan to exclusively distribute direct to pharmacies in order to cut costs.
UPS Foothold in China
Major shipping companies like UPS are equipped with the infrastructure to distribute pharmaceutical products. For instance, UPS has several current Good Manufacturing Practice (cGMP)-certified distribution centres that cater to the temperature-sensitive requirements of some pharmaceuticals. As part of its agreement with Merck, UPS will set up distribution centres to support the drugmaker's facilities.
In 2005, UPS launched the first non-stop, general package delivery service between the US and China, and acquired interest held by its joint venture business partner in the Asian country. This gave it access to 23 cities, covering more than 80% of China's international trade.
Taking Advantage of China's Distribution Sector
According to the China Association of Pharmaceutical Commerce, the top 100 domestic companies contributed CNY8.5bn (US$1.2bn) in pharmaceutical distribution revenues in 2010, a 14.9% jump from the previous year. The top three local firms were China Pharmaceutical Group, Shanghai Pharmaceutical and Jointown Pharmaceutical Group. Despite the double-digit growth, the market share of these distributors was only 15% in 2005. Therefore, a huge opportunity exists for UPS to capture a significant share of the market.
Consolidation of the Fragmented Distribution Sector
It is in BMI's view that as China's government becomes more committed to restructuring the pharmaceutical and healthcare sector, consolidation will increase, thereby making it harder for foreign companies to compete against the local 'supergiants'.
Through the further consolidation of the distribution sector, China's twelfth Five-Year Plan aims to have one to three super pharmaceutical distributors, generating annual revenues of CNY100bn (US$15.4 bn), and 20 large regional distributors with an annual turnover of CNY10bn (US$1.5bn).
For example, state-owned China Post has previously ventured into pharmaceutical distribution, although its recent cooperation with Shanghai Pharmaceutical in April 2011 had a significant objective - to widen its logistics network as part of efforts to promote China's healthcare reforms. Shanghai Pharmaceutical has a national distribution network covering 12 provinces and cities with 32 logistics centres, while China Post operates in more than 100 cities with 50mn square metres of logistics centres.
As of 2010, more than 50% of China's population were still residing in rural regions. It will be challenging for UPS to venture into these hard-to-reach regions without its own network and cooperation with local smaller companies.
In 2009, DHL launched the 'DHL Life Science and Healthcare Competence Center', a temperature-control warehouse, in Shanghai. The firm launched another in Tianjin in 2010, giving it an extra edge over other first movers.
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