Pharmaceutical Logistics in the Asian Pacific Region
APAC Region is facing diverse market conditions depending on maturity of the market and political systems
- Pharmaceutical Logistics in the Asia Pacific (APAC) Region is facing diverse market conditions depending on the maturity of the market and its political system. © getty images
- To meet the requirements of customers and supply chain efficiency, only a limited number of locations is suitable to serve as a logistics hub. © CAMELOT Management Consultants AG
- Andreas Gmür, Camelot Management Consultants
- Sebastian Scherer, Camelot Management Consultants
The growing Asian markets have proven to be of utmost interest for the pharmaceutical industry. At the same time, logistics providers are facing diverse market conditions depending on the maturity of the market and its political system. The pharmaceutical industry in Australia requires different mechanisms than the structures in China. Also, logistics hubs in the region need to be defined strategically.
The APAC (Asia Pacific) region has led the worldwide pharmaceutical CAGR (Compound Annual Growth Rate) at 6.1% from 2015–2018, more than double that of the LATAM (Latin America) region and triple of the Western European region. This growth has been primarily attributed with the rising income, increased purchase power of the lower and middle social class, government spending and increased health awareness mainly in emerging markets such as India and China. GDP growth in countries like India and the Philippines are occurring at a 6–7% annually increasing overall healthcare expenditure. Moreover, factors such as the percentage of population over 65+ years and increased life expectancy have also played a major role in providing new business opportunities to the pharmaceutical industry within the APAC region.
Among Asia’s most attractive markets are China and India; with an expected GDP growth of 6.4% in China and a 7.4% in India from 2017 to 2019. Mature markets such as Japan and Australia show less expected GDP growth compared to the developing markets of Asia, however, exempt higher healthcare expenditure as a percentage of GDP leading to great opportunities for the pharmaceutical industry.
Asia’s Strong Generic Drug Competition
As a downside, with often large populations, underfunded healthcare systems and large distances, we see high disparity in delivery lead times within the developing Asian markets. For example, in India and Indonesia the logistics setup for major centers is relatively efficient, unlike for the rural regions logistics networks that are still undergoing development.
Another challenge for international pharmaceutical companies in Asia is the traditionally strong generic drug competition.
With China piloting a new bulk purchase price-cutting scheme, reportedly only 2 out of 31 contracts were landed by multinational pharmaceutical companies. After a brutal bidding round with price cuts up to 90%, 29 drugs will be provided by local firms. Furthermore, in other markets, there are tendencies for tighter control of drug prices, which is further restraining profits in the region.
For instance, Japanese National Health Insurance is reviewing drug prices annually nowadays; the 2018 review led to a 4.6% reduction in Japanese sales and the sector’s sales is assumed to fall by 30% until 2025. Likewise, the increased governmental spending on the healthcare sector in India is prompting public hospitals and medical care centers to use generic products to cut costs.
Diverse Local Markets Due to Political and Economic Differences
The logistics requirements for the region are extremely heterogeneous. The very mature markets, like Japan and Australia, require a highly efficient logistics setup. Although the country is also dealing with large distances, next day direct-to-pharmacy distribution service across Australia is standard. The focus for the developed markets for the upcoming years will be on innovation and patient specific logistics solutions for new therapies.
For the developing markets, the picture is yet more diverse. Both the Indian and the Chinese pharmaceutical markets are highly fragmented, with China having almost 13,000 distributors nationwide and India having almost 60,000 distributors.
“Last mile” logistics clearly create a challenge for manufacturers and importers to access the market. Distributors often rely on sub-distributors that lack pharma logistics know-how and/or are oblivious to the logistic requirements. This results in negative impacts on the pharmaceutical industry due to the sensitivity of the transported products. This issue is aggravated by the special weather conditions in the tropical and subtropical regions of Asia. During summers, the temperatures can reach up to more than 45 °C, requiring special care with temperature-controlled logistics. Unfortunately, many distributors lack the capabilities and/or the training to do so.
The year 2018, however, has shown major improvements within at least China’s distribution system. The government has been taking actions such as the Two Invoice System that requires there to be only one distributor between the manufacturer/importer and the medical care center/hospital (accounting for 70% of drug sales in China), to reduce the number of small distributors significantly. Moreover, China’s bigger distributors have been expanding through M&A. This consolidation will increase their capabilities in providing nationwide services to pharma manufacturers and importers. Major pharma distributors in both markets are now also providing pharmaceutical companies with suitable temperature-controlled logistics solutions and a nation-wide distribution service, thus, better access to markets and specifically rural areas of the countries.
Impact on Distribution Solutions
To compete with the price pressures from the government, customers, and generic products competition, pharmaceutical companies (mostly American and European) are prompted to cut transportation costs. Specifically, when discussing low value products with production facilities either in Europe or the America’s, transportation costs outbalance the costs of outsourcing production to local production facilities in the APAC region to minimize transportation. Setting up a local manufacturing or packaging site within a market has become an increasingly common practice within the Asian pharmaceutical industry. These facilities often meet demands of the local markets, as well as the neighboring countries. Another strategy is to combine the aforementioned approach with a local logistics service provider (LSP) for distribution.
Many pharma companies prefer to opt for the DC (distribution center) or Hub strategy, where production of goods (especially high value goods) are maintained in their original plant setup, and then shipped to the region to a regional DC. Inbound logistics is made easier if sent to a logistics hub within the region, where inventory can be stored in a regional DC. Moreover, the fluctuations in demand within each country can be better met at a lower cost, thus, reducing the need for repackaging and rework.
A prerequisite of this approach is the need to set up a regional distribution center (RDC) in a strategic location in terms of proximity to the market, but also, well-regulated environment with developed logistics capabilities and reliable logistic partners.
Regional DCs, which can serve as gateways to the market, can also serve as postponement points in different logistics hubs within the APAC region. Due to the disparities among the different countries in the region, specifically language differences and packaging requirements, some pharmaceutical companies are choosing to apply postponement strategies for secondary packaging within regional DCs to meet the APAC market demand. This provides supply chain flexibility and postpones the complexity of providing pharmaceutical products to the APAC region to the very final steps. The redressing of designated products is carried out at the RDC through adding country specific labelling and leaflets.
During the last couple of years, Singapore has been viewed as a logistics hub leader for the pharmaceutical industry within the APAC region. Around 80% of the world’s top 25 LSPs are operating and investing in their operations in Singapore, providing logistics solutions and customs facilitation to their pharma clients. Setting up a logistics hub in a developed country such as Singapore can provide pharmaceutical companies with various advantages within their supply chain, thus, enhancing product security, reducing damaged goods, the amount of controlling required, risks and distances to final markets, thus, lead times and order quantities.
Based on the demand-center of gravity, Taiwan, Hong Kong and Shanghai are locations we often encounter in our projects. Emerging new hubs in the APAC region from our perspective are Malaysia, where typically both operational and indirect-tax assessments present positive aspects for multinational pharmaceutical companies, and Vietnam due to its low wages, strategic location to China, improving infrastructure and business-friendly political environment.
It will be interesting to see how the situation in Asia evolves. Pharma companies are well advised to monitor these developments closely.