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Fewer distributor layers will lead to better transparency, increased compliance and smaller distributor margins, thus reducing medical product costs. Now is the time for medical device manufacturers to review their go-to-market strategy.
For more than a decade, a two-invoice system for medicine and medical devices has been widely debated in China. Throughout my time here in Asia, I have always kept up with this discussion and was excited when regulators officially announced in January their plans to go ahead with the new system.
The two-invoice system, which involves the issuing of the manufacturer's invoice to the distributor followed by the distributor's invoice to the hospital, will undoubtedly bring about a new way of doing business for medical device suppliers in China.
The use of the new system is timely, particularly with regulators looking to contain healthcare costs and tighten compliance. The country’s medical technology (MedTech) distribution landscape - with an estimated 180,000 distributors - could do with a transformation to its distribution cycle, which covers a wide spectrum of logistics, financial and commercial activities.
The new policy will simplify the supply chain as it limits the number of invoices generated and cuts out many unnecessary distribution layers. By allowing a maximum of two invoices between a manufacturer and the hospital, each manufacturer/importer will sell to a distributor and that distributor will sell directly to hospitals, eliminating multi-tiered distribution.
The program commenced with a pilot phase in selected cities and provinces with provincial adaptions and exceptions. For the pharmaceutical sector, the system will be tried out in public hospitals in 200 cities across 20 provinces including among others Fujian, Anhui, Hebei, Shaanxi, Ningxia, Qinghai, Sichuan, Chongqing, Hunan and Hainan.
As for the medical devices sector, the authorities have identified five provinces for trials including Shaanxi, Hubei and Fujian with nine more provinces expected to follow suit this year. However, owing to the complexity of medical device products, the full implementation of the new system for these products would likely take a longer time.
Besides, it is still not sure whether the roll-out of a two-invoice system for MedTech will follow the same pattern as it did with pharmaceutical distribution. If so, what will the prevailing model look like?
The new two-invoice system will significantly impact China’s healthcare industry in the years ahead. It can effectively reduce the circulation of healthcare products from manufacturers to the hospitals. Not only will it improve the efficiency, transparency and reduce distribution costs, but it will also ensure medication safety and provide a more conducive method towards the supervision of healthcare products.
In addition, I feel that the new approach can help to improve product quality. After the implementation of the two-invoice system, it will be necessary to make some substantial adjustments to the original business structure and the choice of distribution routes.
As the government is expecting the structure to be fully implemented in public hospitals across the country by the end of 2018, healthcare brand-owning companies need to swiftly act to reshape their distribution process to comply with the new policy. Medical device manufacturers must change their route-to-market, channel structures, pricing, profit margin and compliance management.
For example, our DKSH China colleagues, have recently helped a major client to comply with the two-invoice policy. By rethinking the route-to-market to 2,000 hospitals and reducing the number of invoices along the value change, we could ensure that the client is compliant with the two-invoice policy and is well-prepared for future growth.
I foresee that most healthcare manufacturers and suppliers in China are in favor of adhering to this new system. However, they would likely refer to an experienced business partner such as DKSH to help them optimize their routes to market and to be fully compliant with the policies of the two-invoice system.
What are your questions or concerns about the implementation of the two-invoice system in China?
Harvey Yeap oversees Business Development for DKSH’s Medical Device and Diagnostic clients across Asia.