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Understanding Unmet Needs in China’s Pharma and Med Device Distribution

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IMS Consulting Group conducted an independent study in China to seek the perception of pharmaceutical and medical device manufacturers of the distribution industry in China. Read this white paper to …

IMS Consulting Group conducted an independent study in China to seek the perception of pharmaceutical and medical device manufacturers of the distribution industry in China. Read this white paper to discover the unmet needs of medical device and pharmaceutical manufacturers, arising from changes in industry structure and regulatory environment.

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  • 1. 1 Understanding Unmet Needs in China’s Pharma and Med Device Distribution Overview of Industry Survey Results | September, 2011
  • 2. 2 1 Tier I: Beijing, Shanghai, Guangzhou; Tier II: 22 Cities: Changshu, Changzhou, Chengdu, Chongqing, Cixi, Dalian, Dengfeng, Dongguan, Fuqing, Fuyang, Hearbin, Jimuo, Jinan, Nanjing, Shenyang, Shenzhen, Taiyuan, Tianjin, Wuhan, Wulumuqi, Xian As follow-on to a global study jointly conducted with IFPW in 2010, IMS Consulting Group conducted an independent study in China during the second quarter of 2011 to seek the perception of pharmaceutical and medical device manu- facturers of the distribution industry in China. The study indicates several opportunities for the distribution industry to partner with manufacturers, and unlock value in the health- care supply chain. In the study, we evaluated a range of services that distribu- tors offer in China,understood their importance and gauged the current levels of satisfaction of manufacturers. We un- covered unmet needs of medical device and pharmaceutical manufacturers,arising from changes in industry structure and regulatory environment. Some of the key findings of our study are highlighted below. Pharmaceutical distribution • Market access and penetration support is the most important service sought by manufacturers from distributors. While manufacturers valued the strategic importance of distributors in market access, they also cited opportunities for improvement. • Manufacturers believe that distributors can play a larger role in gather and analyzing sales data, timely and accurately. • Manufacturers highlighted that efficient distribution infrastructure can lower cost and improve time to market, thereby facilitating deeper penetration into regions and channels that are not supplied to directly. • Distributors can also provide contract sales support beyond Tier I & II cities1 , and support point-of-sale activities at retail pharmacies. • Other areas of collaboration for distributors with their clients include currently ‘in-house’ services such as aspects of market access and pricing, patient education programs and pharmacy/hospital training programs. Medical Device distribution • Hospital listing and sales is the most important service for medical device manufacturers. However, manufacturers find it difficult to manage multiple distributors in a highly fragmented distribution industry. • Increasing fragmentation is also adversely impacting supply chain efficiency, with manufacturers already dissatisfied with both cost and service levels. • Clear opportunities exist for distributors to provide better data services such as track and trace solutions, given the ‘cash and carry’ nature of contracts. Manufacturers need to closely track distributor inventory and actual sales, to manage credit cycles and avoid distributor bankruptcies. • Patient related services are another important unmet need in medical devices. However, none of the companies interviewed have developed concrete plans,either in-house or through partnerships. • Training services for lower tier distributors, hospital staff as well as physicians are other areas for collaboration with clients. Executive Summary
  • 3. 3 Research Background Strategic Imperatives & Project Objectives In early 2010, IMS conducted a joint study along with IFPW (the global trade association of pharma- ceutical wholesalers),to gain insight into pharmaceu- tical manufacturers’ perceptions of wholesalers. The study spanned key global markets in North America, EMEA, Latin America,Asia and Australia. IMS iden- tified a core set of services that were perceived as im- portant, including several new growth opportunities, for the distribution industry.The study identified key steps to enhance the strategic partnership between pharmaceutical manufacturers and distributors. Given the significant transformation of China’s health- care market, and its increasing importance in the glo- bal context, IMS extended the IFPW study to gain specific insights into opportunities and challenges in distribution in China. Our China survey aimed at un- derstanding how the distribution industry can adapt to meet the needs of pharmaceutical and medical devices industries in a rapidly changing environment. The key objectives of this survey are: • To understand current industry view on the importance of various distribution services currently provided by distributors or managed in-house by manufacturers. • To assess satisfaction levels among pharmaceutical and medical device companies with these services. • To identify and prioritize unmet needs in distribution, separately for pharmaceutical and medical devices sectors. • To identify opportunities for distributors to position distributors as partners in success. Methodology & Scope The study has been conducted in three main phases: Phase 1 - We identified a set of services relevant to the Chinese market,based on the results of the IFPW survey. Phase 2 - We interviewed senior executives in the pharmaceutical and medical devices industries. Phase 3 - We aggregated results to understand industry wide implications and derive conclusions. We targeted stakeholders within top MNCs in China to address unique challenges faced by companies with differ- ing portfolios and ambitions for the market. One-on-one interviews were conducted with 32 executives from 18 different pharmaceutical and medical device companies. We interviewed two types of stakeholders - (1) General Managers on strategic issues and imperatives, including their distribution strategy and their view on implications of the current consolidation in the industry,and (2) Com- mercial Directors (or heads of the commercial function directly responsible for managing distributor relationships for a more nuanced perspective on satisfaction levels and challenges faced in managing distributors.We used ‘rank- ing’ and ‘rating’ (e.g. on a scale of 1 to 5) techniques to quantitatively assess level of satisfaction.This generated re- sults that allowed us to develop and standardize industry wide insights.
  • 4. 4 The survey was structured around the following seven broad areas: 1.MarketAccess 2.Hospital related services/solutions 3.Cold storage related services 4.Patient solutions 5.Retailer services 6.Contract Sales and Marketing services 7.Channel intelligence A sample of sub-sections within Market Access is illustrated below. Study Limitations The analyses and results in this research project are qual- itative,leveraging‘top of mind’primary research insights and IMS expertise. Reasonable best efforts have been made to cross validate findings and outcomes, but no quantitative analysis has been undertaken in the process. While a sizable number of stakeholders have been con- tacted (32 interviews in total), respondents are a cross section of the collective view of MNCs, and as such only representative of the larger MNC marketplace,and may not represent the viewpoint of domestic operators within China. Standalone services Knee implant system (Yes/No) Hip implant system (Yes/No) Bearing surfaces (Yes/No) Trauma implant system (Yes/No) Clinical Therapies (Yes/No) Relevance to BU Service 1.1 Importance or relevance of this service or parameter 1.2 Currently used by your organization (Yes/No) 1.3 Is this service being done internally or by an external service provider 1.4 If internal, does the distributor sup- port you in any manner Satisfaction of current service based on (none if not currently used) (Yes/No) (Yes/No) (Yes/No) 1 - 2 - 3 - 4 - 5 1 - 2 - 3 - 4 - 5 1 - 2 - 3 - 4 - 5 1 - 2 - 3 - 4 - 5 1 - 2 - 3 - 4 - 5 (Internal/ Extermanl Regulatory Services Pricing Approvals Market Ac- cess Provincial Tendering Hospital Listing Broad Market Expansion Support (Internal/ Extermanl (Internal/ Extermanl (Internal/ Extermanl (Internal/ Extermanl (Yes/No) (Yes/No) (Yes/No) (Yes/No) (Yes/No) (Yes/No) (Yes/No) (Yes/No) (Yes/No) (Yes/No) (Yes/No) (Yes/No)
  • 5. 5 Pharmaceutical Distribution Industry Structure Distribution is a strategic focus area for most respondents, and distributors are seen as strategic partners who comple- ment pharmaceutical company capabilities with: • Better ability to manage pricing and market access • Strong hospital relationships for product listing •Ability to rapidly create logistics and storage infrastructure to penetrate deeper into the country Respondents believe that the current wave of consolidation driven by government policy initiatives will benefit the phar- maceutical industry.The key future benefit of having two to three large and regionally focused players (as envisaged in the China government’s healthcare reform policy) is reduction in the number of tiers in distribution.This would reduce dis- tribution margins and hence lower the final price. It would also lower logistics and storage cost due to economies of scale, and enable increased penetration of drugs beyond large cities, which is a focus area for almost all interviewed stakeholders. While most acknowledged that bargaining power of dis- tributors will increase with consolidation,they also believe that it will allow the government to better control distribution mar- gins in the long run. The benefits are not yet visible to pharmaceutical companies and most think it will take significant time for them to actually materialize (anywhere from several to ten years).The top three distributors, although pursuing aggressive M&A, have not yet integrated their acquisitions.The acquired entities continue to operate as before,and sometimes with lower efficiencies due to the lack of management attention. Relative Importance of Service Offerings Pharmaceutical companies believe that market access and mar- ket expansion related services are‘must haves’for a long term strategic partnership. Sales and stock data aggregation and contract sales force (especially in NDC, or Non-Direct Coverage areas) is also very important. Pricing approvals and key account management are also valued by pharma- ceutical companies. Logistics and storage services are viewed as basic requirements from a distributor. Interestingly, specialized storage services such as cold chain hubs and transportation infrastructure are lower on priority. “Value added services” like channel ana- lytics, track and trace solutions, retail pharmacy sell through enhancement services etc. are also lower in priority. Also, some services that were identified in the IFPW survey as growth opportunities globally, are “low in importance” in China: • Contract marketing support • Compliance monitoring & adherence data • Patient registry • Drug administration support • Medical/Merchandizing management • Pharmacy management & training services • Agency model • Contract sales force support (for DC) • Hospital pharmacy related training • Hospital associated pharmacy management programs •Trade/wholesaler/modern trade target programs • Pharmacy integration Key Findings: Pharmaceuticals Figure 1: Relative importance of distribution services in China Market Expansion Market Access Channel Information Cold Storage Patient Services Retail Services Supply Chain Integrity
  • 6. 6 Satisfaction Levels with In-house Activities The following chart summarizes the satisfaction levels of dis- tribution related activities currently kept in-house by phar- maceutical companies: Among important services,satisfaction levels of market access related services were lower. Respondents felt that in the en- tire market access activity spectrum (product approvals, pric- ing approval, provincial tendering, hospital listing and volume quotas) there were several activities that could be more effi- cient. It was felt that the overall time to penetrate the market for new products needs to come down significantly, both due to internal capability improvements and increased involvement from distributors. Provincial tendering could benefit from in- creased support from distributors. Large distribution companies have their own pharmaceutical products and hence an inherent conflict of interest.While this is not seen as a major barrier currently, pharmaceutical com- panies seek better transparency and obviously leaves several question marks in how and who with which to partner. For patient education, regulatory barriers were cited as the reason for very low (almost no) activity.However,respondents also strongly believed that patient education services would be more important in future; hence, specialized service providers could evolve to bridge this gap. Most pharmaceutical companies acknowledged significant in- ternal investment in sales and stock data gathering infrastruc- ture (IT) and are satisfied with the outcome thus far.This raises the question of whether this is an effective use of internal time and resources, given it is being replicated over and over again, company by company.They pointed out data visibility as a tan- gible benefit of current and future consolidation. Figure 2: Level of satisfaction with ‘in-house‘ activities in the pharmaceutical industry Key Account Management Provincial Tendering Trade/Wholesaler/Modern trade programs Downstream Cold Chain Storage Training Pricing Appovals Hospital Pharmacy related training Track & Trace Disease Management Programs Pharmacy Management & Training Services Patient compliance tracking Drug administration support Channel Analytics Patient Education Satisfaction levels
  • 7. 7 Satisfaction Levels for Distributor Services The following figure summarizes the satisfaction level of services provided by distributors: Hospital listing,although fairly satisfactory,is an area of focus for distributors, since MNCs would rather involve distribu- tors than invest in trying to build direct relationships. Market expansion requires efficient logistics and the coverage to tap target hospitals beyond top cities, and is a significant gap in the industry currently. Prohibitive logistics costs and limited coverage of only large cities have deterred respond- ents. Several companies stated successful joint initiatives of expanding into specific geographies/regions or hospital tiers. However, it was widely acknowledged that no distributor currently has the requisite depth of penetration in any region beyond the Tier 1 and 2 cities.This was even more severe for products requiring specialized storage and transportation (such as cold chain). Data services have seen rapid improvements recently and are expected to show significant enhancements in the medium term.However,there were specific instances where respond- ents referred to hiring third-party audit services to ensure data integrity.The time it took (minimum of a week,in many cases much longer) was seen as a major area of improvement in data gathering. However data analytics was seen as cur- rently satisfactory. Figure 3: Level of satisfaction for distributor provided services within the pharmaceutical industry Smart Solutions Cold chain hubs Cold chain transportation Compliance to storage specifications Cold-chain equipment Hospital listing Hospital associated Pharmacy management Agency Model Space & Product display management to.. Contract sales force support (for DC) Sales & stock data Medical/Merchandising Management Data Capture & Analysis Patient Registry Contract sales force (NDC) Market expansion Contract marketing support Satisfaction levels in distributor provided services
  • 8. 8 Prioritization of Unmet Needs The following figure distinguishes ‘internal’ and ‘external’ services provided by service providers ranked by the current satisfaction level. Within ‘internal’ services distributors can aim to collaborate with clients to enhance satisfaction levels. Niche services within market access could be very beneficial to pharmaceu- tical companies. Also, evolving current data gathering into analytics services aimed at decision-making is a clear oppor- tunity to build relationships with clients.Patient education and other training programs provide opportunities for collabora- tion, but remain relatively small given reservations around en- gaging patients directly. Among ‘external’ services, activities that are low on satisfac- tion are immediate areas of focus or potential opportunities for distributor-led solutions.While cold chain storage is perceived as satisfactory, cold chain transportation is clearly an unmet need. Market expansion and contract sales support provide opportunities to get involved in offering segments that are less competitive currently. Among important services,which are perceived as satisfactory currently,it is important for distributors to innovate to achieve a higher level of differentiation to either enhance their strategic relationships or begin relationships with new clients. Hospital listing, provincial tendering, cold chain storage infrastructure and track & trace services fall under this category. Figure 4: Internal vs. External services ranked by satisfaction Satisfaction Internal Services External Services Key Account management Hospital Listing & Provincial Tendering Trade Programs & Incentives Cold chain, Storage Pricing Approvals for Imported products Smart Solutions (R FID, GPS) Patient Education Programs Cold Chain Transportation Channel analytics Broad Market Expansion Support Pharmacy Training & Management Programs Contract Sales Force (NDC) Retail Pharmacy BTL Services Stock & Sales Data Collection
  • 9. 9 Implications for the Pharmaceutical Distribution Industry Based on our research,we see a few key implications for Chi- na’s distribution industry along two aspects of their business model, as they consider their strategies for the rapidly evolv- ing healthcare environment: 1.What role to play:What role should the distribution in- dustry aim to play in the pharmaceutical landscape in China? Unlike in developed countries,large distributors in China play a direct role in selling products.They take on greater risk (credit risks ofTier 2 level and below distributors,provincial tendering, hospital listing,tendering,etc.) and hence command significant premium compared to the global distribution industry. Given the government’s focus on reducing overall distribution margins to control healthcare costs,these premium margins will come under pressure.We see distributors adapting their business model to offset this pressure - Expansion into ‘fee for service’ value added offerings such as contract sales & marketing that complement MNC capabilities and thereby form separate rev- enue streams that don’t necessarily qualify as‘distribution mar- gins’will form the platform of this new business model. For the largest domestic distributors, it would seem there is a need to clearly separate distribution related activities from their in-house pharmaceutical business (branded and unbranded ge- nerics and in-licensed products) to inspire trust among their MNC clients. The industry offers significant synergies to pharmaceutical companies (especially MNCs).The current focus is on enabling market access and expansion, and rightly so. In the future dis- tributors should aim to break the mold of traditional services and seek further avenues to complement strengths of pharma- ceutical companies, like R&D, sales, marketing and product quality. 2.What services to offer: Which markets/service offerings to focus on, which to re-evaluate, and which new opportunities to pursue? For large tier 1 distributors, two strategic services are vital for survival currently – providing regional coverage and market ac- cess related services (especially provincial tendering support and hospital listing). Large distributors hence need to differentiate and remain ahead of competition. Specialized storage infrastructure and data services are becom- ing increasingly relevant and could provide immediate avenues to strengthen existing relationships and provide a source of competitive advantage. Seamless cold storage & transportation infrastructure is a clear unmet need currently and could provide opportunities in specific regions in the immediate future. By collaborating with existing clients on certain services (name- ly training programs for retail and hospital pharmacies, pricing and reimbursement consulting services, patient education pro- grams), distributors can increase their strategic importance and strengthen their client relationships. 3. How to win: What approaches will ultimately position dis- tributors for success with manufacturers? As mentioned earlier, distributors need to proactively take positions that complement capabilities of their clients. Large pharmacos (who are MNCs), are facing several challenges that are unique to China; for instance training and retaining a high quality sales force.Distributors who can recognize these as op- portunities can proactively build capabilities that will be valued by clients. Innovation need not be confined to building new capabilities but improving on current offerings – both in terms of serv- ices and pricing structures will provide value to pharmaceutical companies. For instance, logistics costs and lead times are sig- nificantly higher in China,when compared to global standards. Another example is the pricing structure where distributors command a proportion of price irrespective of their inherent cost structures. Finally, ensuring that the significant investments being made on acquisitions currently translate into direct and immedi- ate benefits to clients is important in the short term. This will lead to pharmaceutical companies becoming more com- fortable with working with a significantly lesser number of distributors and hence with higher strategic importance and interaction.
  • 10. 10 Medical Device Distribution Industry Structure Medical device company executives interviewed were of the uniform view that fragmentation in the distribution industry was significantly higher.The reason for this is a mix of policy and business model factors.The policy reform framework for medical devices is not as evolved as in pharmaceuticals in the current day.The primary focus of health policy reformers in China today is on increasing access and affordability - medi- cal devices have not yet become a high priority given their relatively smaller contribution to the overall cost of health- care in China. Hence there is no external push or incentive that is driving consolidation in the medical devices distribu- tion space. The other reason is the credit terms and cycles in the medical devices industry. Medical devices are sold by manufacturers on a ‘cash and carry’ basis to distributors, along with a ‘sug- gested’ selling price.This is true even for high value medical devices which are not sold directly to hospitals. As a result, apart from few exceptions, a typical medical de- vice distributor (commonly referred to as ‘dealer’) handles only $ 1-2 Million USD of business with its principal, with a significant number accounting for even smaller revenues. Dealers also tend to specialize in certain devices depending upon their relationships and prior experience and do not usually have the incentive or desire to expand their portfo- lio. Given the capital constraints they face, it is beneficial for them to generate higher volumes in their preferred device types than expand their portfolio. Respondents also believe that consolidation in medical de- vices distribution is inevitable in the long run and will bring several benefits to manufacturers and the healthcare industry on the whole.Although large pharmaceutical distributors are increasing presence in medical device distribution, their cur- rent focus is on rapidly consolidating and scaling up in their core business.Hence,medical device distribution in the short to medium term will continue to remain dealer driven. Relative Importance of Service Offerings In comparison to pharmaceuticals, medical devices compa- nies highlighted a wider number of services as ‘important’. This is clearly a reflection of the state of the distribution in- dustry,which is currently driven by dealer relationships rath- er than professional expertise. China being a growth market, services related to market ac- cess and market expansion (Market expansion support, hos- pital listing,tendering,pricing) are the most important.Inter- estingly, data services (Sales/stock data, channel analytics etc) are also rated as very important.The reason for this is that the current fragmentation makes it challenging for medical de- vice companies to accurately track sales and stock informa- tion and manage their supply chain.Another reason for the higher importance is the need to help dealers manage their cash flows and minimize the risk of stock returns from (and possible bankruptcy of) aggressive dealers. Another service that rates high on importance is dealer train- ing. This is understandable as dealers who bring inherent strengths of hospital relationships need to be trained on other core distribution and product-related skills. After sales services is rated highly again,since medical devices companies intend to outsource after sales/procedure service completely, but with systems to monitor service efficiency. However, unlike in developed markets as highlighted in the global IFPW joint study,‘high-touch’ patient services aren’t deemed significantly important in China. Remote and GPS tracking also score low overall on importance, though there are some high end devices where respondents stated that these could be particularly useful to track actual sales from distributors into end users. Key Findings: Medical Devices
  • 11. 11 Satisfaction Levels in In-house Activities The following chart summarizes the satisfaction levels of distribution related activities done in-house by medical de- vice companies: Training related activities seem to be a major area for im- provement for ‘in-house’ services in medical device compa- nies. Given the scale of China and the need to continuously penetrate newer regions, training is an area where medical de- vices companies are looking for external training partnerships. Due to the nature of the very technical sale of many of these products, the relative talent level of recruiting is high and may need to be spread across more than one portfolio to pay divi- dends on the investment. Sales and stock data collation is anoth- er area where medical devices companies have already invested significantly (both IT and audit processes).While respondents claimed to have begun to witness improvements,the satisfaction index indicates there is significant progress to be made. Satisfaction Levels in Distributor Services The following chart summarizes the satisfaction levels of distribution related activities done in-house by medical de- vice companies: Market access related services (Hospital listing, broad mar- ket expansion support) experience a significantly lower sat- isfaction in the medical devices industry. This reflects the challenges faced by medical device companies to enter new markets and hospitals, where they need to find specific dis- tributors who have the right relationships or are willing to invest to do so. Figure 5: Level of satisfaction with ‘in-house‘ distribution services in the medical device industry Key Account Management Dealer Training Disease Management Programs Provincial Tendering Regulatory Services Downstream training Pricing Appovals Other training Sales & Stock data In-theatre support Physician education/training Channel Analytics Key needs for in-house services Figure 6: Level of satisfaction for distributor provided services in the medical device industry Storage hubs Ensuring compliance Receivables Management Storage specifications adherence Hospital listing Quality of storage & transport equipment Order taking & processing Broad market expansion support Smart Solutions Hospital inventory management support Sales & Stock data Track & Trace Diagnostic campaigns Contract sales forc (NDC) Satisfaction levels in distributor provided services
  • 12. 12 Traditional distribution services like order taking, sales and storage data score poorly on satisfaction.These activities are significantly more important in medical devices due to the prolonged credit cycles (6-18 months), which affect working capitals of small and medium sized dealers. Recognizing the obvious advantages of float and lack of transparency in some of these aspects, those that can develop capabilities and serv- ices that will address these issues may become valued strategic partners. Notably, contract sales support (NDC) is deemed less impor- tant in medical devices,but it also carries with it poor satisfac- tion, which may contribute to such a rating.The traditional viewpoint of medical device companies is that most high end devices need to be marketed directly,given a significantly low- er volume/sales ratio. A few ‘good to have’ services actually scored high on satisfaction,reflecting that these are clearly areas not to focus on. Prioritization of Unmet Needs The following figure distinguishes ‘internal’ and ‘external’ services provided by service providers ranked by the current level of satisfaction. 2 Distributors who have direct contracts with pharma/ medical device companies Figure 7: Internal vs. External services ranked by satisfaction Satisfaction Internal Services External Services Regulatory Services Receivables Management Provincial Tendering Spread of storage hubs Disease management programs Storage specification adherence Dealer Training Broad market expansion support Retail BTL Services Contract Sales Force (NDC) Channel Analytics Hospital pharmacy & Staff Training In-theatre Support Trade target programs Physician education/training Sales & Stock data Hospital inventory management Track & trace For tier 1 distributors,identifying and managing a large number of dealers who have the right relationships at hospitals is the sin- gle most important capability. Respondents have asserted that finding new dealers who are willing to work towards common objectives is the biggest unmet need.Hence,tier 1 distributors2 who are willing to take on this responsibility will be able to dif- ferentiate their offerings compared to competition.However,it is important to note that managing dealers also involves taking on credit risk in ensuring inventory and receivables are control- led, given long credit cycles. Investing in adequate and high quality storage and transport infrastructure is another important facet required to capture this opportunity. Respondents even quoted internal debates on whether separation of 3PL services from other distribution services would help them bring better focus.Services that enable medical device companies to expand beyond key cities (hospital listing, contract sales force) are clear opportunities for distributors. Medical device companies be- lieve that there is no one in the market currently with the right set of capabilities to strategically partner with them for expan- sion. Some respondents cited examples of failed experiments of trying direct sales models in regions where they could not identify the right dealers. Also, improving service levels in traditional distributor services such as inventory management,order processing,sales and stock data services can enable distributors to gain a foothold in medi- cal devices.Value added services like tracking hospital inventory and implementing track and trace solutions in specific high-val- ue markets is another such opportunity for distributors to gain traction with clients.
  • 13. 13 We also identified two areas for distributors to collaborate closely with clients: data analytics and hospital related serv- ices. Most respondents cited having invested significantly in improving their data visibility.However,they also expressed in- terest in analytic solutions that will enable them to make faster decisions. In addition, hospital related services like in-theatre support,pharmacy and technician training and physician edu- cation were cited as areas of unmet need due to their relatively low effectiveness. However, respondents also believed that no distributor currently had the capability to support them effec- tively in these areas as well. Implications for the Medical Device Distribution Industry Based on our research, we believe current players and future participants in China’s medical device distribution industry must consider the following strategic imperatives as they for- mulate their business model in the rapidly evolving healthcare environment: 1.What role to play:What role should the distribution indus- try aim to achieve in the medical device landscape in China? In the absence of aggressive policy reform today,medical device distribution is expected to remain fragmented in the medium term.Hence,the imperatives for distributors to clearly separate their core distribution offerings from value added services are not of immediate relevance in medical devices. Several unmet needs in core distribution exist, such as fast and reliable goods movement and high-quality storage that need more immedi- ate attention. However, relationship driven sales, and hence dealers, will re- main the single most important service sought from distribu- tors by clients. 2.What services to offer: Which markets/service offerings to focus on, which to re-evaluate, and which new opportuni- ties to pursue? Opportunity exists for players to build a large scale distribution business for medical devices in China. However, establishing relationships that drive hospital listing (and hence sales) is the most important capability sought by the medical device indus- try.The market is significantly less competitive beyond Tier I cities; several companies interviewed acknowledged inability to identify even a single qualified dealer/distributor in several regions.Careful consideration on which geographies to pursue before making significant investments will ensure distributors are aligned to client needs. Poor logistics efficiency is another significant opportunity for distributors looking to either provide a comprehensive set of services or build standalone services based on clearly agreed and measurable performance metrics.Track and trace solu- tions, including bar code and RFID based solutions and data aggregation/ analytics support can also be targeted at specific micro markets like high end diagnostic/ICU devices. 3. How to win: What approaches will ultimately position distributors for success with manufacturers? Unlike in pharmaceuticals, winning in medical device dis- tribution requires focus on building a basic set of capabili- ties, the most important of which are hospital listing, sales support, and timely delivery. Distributors will first need to gain client’s confidence that they can manage sales efficiently and effectively across chosen geographies/ regions before ex- panding their offerings. Moreover, showing commitment towards capability building will require investments in training backed by tangible and sustainable results. Giving manufacturers the confidence that distributors can take on more strategic roles (e.g. sales and marketing) is important to help them (clients) re-think their current business model, which is veering towards increasing in-house capabilities across a range of non-core activities.
  • 14. 14 Matthew Guagenty Managing Principal, IMS Consulting Group, China MGuagenty@imscg.com Anthony Morton-Small Sr. Principal, IMS Consulting Group, APAC AMortonSmall@imscg.com For a deeper discussion on the distribution environment in China, contact one of the authors of this paper. IMS Consulting Group IMS HEALTH CHINA 25/F Haitong Securities Tower No. 689 Guangdong Road Shanghai, PRC 200001 Tel: +86 (21) 6363-0011 Email: info.cn@cn.imshealth.com www.imsconsultinggroup.com About IMS Consulting Group: Influencing the Future of Global Health IMS Consulting Group (IMSCG) is the pre-eminent global life scien- ces consultancy. Distinguished by our sector and client focus, interna- tional reach,world-class methodologies and unrivaled talent,we provi- de clients with Powerful Insights that inform Smarter Decisions. Within IMSCG, we have a bold vision -To Influence the Future of Global Health! Who we are: • 500+ specialist best-in-class consultants •Advising Life Science leaders on critical business issues with singular focus • Cadre of health/pharma-related backgrounds and advanced degrees Where we are: • Combining global reach with local market strength • Key hubs in London, NewYork, Shanghai andTokyo • Local experts on the ground in pharmerging markets -China, Brazil, India, Russia,Turkey, and more How we make the difference: • Maximizing product & portfolio value in every phase of the pharma lifecycle • Deep therapy-area and industry expertise • Passion for life sciences and commitment to clients Conclusion The healthcare landscape in China necessitates that manufac- turers and distributors forge winning strategic partnerships. There are four key stages in the evolution of strategic part- nerships: 1.Agreement of convenience:Bothpartiesinvolveddonot have a choice but to work with each other and have a short term benefit oriented approach. 2. Developing a partnership: Realization that working towards mutual benefits in the long term is beneficial to both parties involved. 3.Defining a common strategic vision:Clearalignmenton a win-win partnership model, with significant investments from both parties towards reaching the goal. 4.Mature strategic alliance:A clear and complimentary set of capabilities are established. We believe that in pharmaceuticals, the manufacturer-dis- tributor partnership has matured at stage two and several ini- tiatives are being taken to define a common strategic vision. Our research has clearly identified next steps required to fur- ther this partnership. However, in medical devices, manufacturers and distributors need to take concrete steps in developing a long term part- nership. Currently, the focus is still on entering into ‘agree- ments of convenience’, especially beyond Tier I cities.While policy impetus is currently not very strong, we have been able to identify how distributors can proactively commence building such a partnership, and hope our initial recommen- dations can help medical device companies and distributors move the needle towards ‘developing a partnership’ for mu- tual benefit going forward.