China’s new two-invoice system in pharma distribution

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China has launched the “two-invoice” system in drug distribution on a trial basis, aiming to improve transparency in drug prices and eliminate excessive profit margins associated with multi-tier distribution models. This is the first time Chinese regulators have officially launched the two-invoice system, which had been debated for more than a decade. The system is expected to be fully implemented in public hospitals across the country by the end of 2018.

China’s new two-invoice system in pharma distributionThe two-invoice system – the issuing of the manufacturer’s invoice to the distributor followed by the distributor’s invoice to the end customer (the hospital) – has important implications for pharmaceutical companies doing business in China. Such companies may have to adjust their business model, for example: (1) engage more first-tier distributors to ensure geographic coverage by restructuring second- or third- tier distributors as first-tier distributors; (2) sell drug products directly to hospitals with the assistance of qualified logistic service providers; and (3) review pricing strategy including strengthening internal marketing function or outsourcing the promotion and marketing function.

The two-invoice system will also impact large Chinese pharmaceutical distribution companies, which may acquire smaller operators to broaden their geographic coverage and improve their logistics service capabilities. Meanwhile, contract sales organizations (CSO) may find their services in demand for the provision of sales and promotion services to pharmaceutical companies.

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Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Danian Zhang (Shanghai) at: danian.zhang@bakermckenzie.com

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