China’s bewildering and costly MedTech distribution landscape is ripe for reform. Roughly 180,000 distributors—more than ten times the number of public hospitals and pharma distributors—conduct a wide array of logistical, financial, and commercial activities in multitier networks. Many generate high margins, attracting the attention of regulators looking to contain healthcare costs and tighten compliance.
After a decade of discussions about regulating channel margins, the State Council is now taking action, implementing a “two-invoice system” for pharmaceutical distribution that will roll out nationwide in 2018. The new rules will allow a maximum of two invoices between a manufacturer and hospital—each manufacturer will sell to a distributor and that distributor will sell directly to hospitals, eliminating multitiered distribution.
The rationale for the change is simple and compelling: fewer distributor layers will lead to more transparent, and eventually smaller, distributor margins, more compliant business conduct, and in time a consolidation of the distributor landscape. So far, the rules are geared toward pharmaceuticals—few announcements or policies explicitly mention MedTech—but MedTech pilots are under way.
Will the rollout of a two-invoice system for MedTech follow the same pattern it did in pharmaceutical distribution? If so, what will the prevailing model look like? The answers may vary across segments of medical consumables and devices, but the two-invoice system will have a significant impact on all medical-device manufacturers across their businesses. Many will need to make changes in route to market; channel structures; the roles and responsibilities of manufacturers, distributors, and other service providers; pricing, margin, and P&L structure; and compliance management.
Building on discussions with leading MedTech companies in China, this paper provides an update on the status of the two-invoice system’s implementation, its likely evolution, and the implications for medical-device companies.