Pharmaceuticals

Mon, 08/23/2010 - 17:34

Shelly Zhang, chief financial officer (CFO) of China BCT Pharmacy Group Inc. talks to Interfax about the development strategy for the company's retail business and the effects of China's ongoing health care reform on the sector.

Shelly Zhang, CFO of BCT Pharmacy Group

Shanghai. August 19. INTERFAX-CHINA - China BCT Pharmacy Group Inc. is taking advantage of the new rural cooperative insurance scheme to increase its presence in retail drug markets in China's rural areas and small cities, Shelly Zhang, the company's chief financial officer (CFO), told Interfax in a recent interview.

Based in the Guangxi Zhuang Autonomous Region, BCT Pharmacy is engaged in pharmaceutical manufacture, distribution and retail. It achieved sales revenue of $136.1 million in 2009, up 25 percent year-on-year. Currently, the company's wholesale business generates about 70 percent of its total sales revenue, while its retail business contributes about 25 percent and its manufacturing business five percent.

"BCT Pharmacy aims to become a fully integrated pharma company. The expansion of China's drug retail market in rural areas will be an important growth driver," Zhang said.

The company currently has 137 drugstores, and plans to open more drugstores in Guangxi in the next two to three years, before expanding into neighboring provinces such as Yunnan, Sichuan and Guizhou, said Zhang.

"BCT Pharmacy is currently seeking suitable locations for new stores and targets for mergers and acquisitions (M & A) in Guangxi," she said.

BCT Pharmacy has been expanding its retail network this year, with the acquisition of a 30-store retail chain in March, an 18-store chain in April and another 11-store chain in May. It opened 12 new drugstores in July.

The company was also recently approved to open 30 drugstores in six counties of Guangxi's Liuzhou City which will be eligible to participate in the new rural cooperative medical insurance scheme, according to Zhang.

The new rural cooperative medical insurance scheme, part of China's health care reform, will extend inexpensive insurance coverage to China's rural areas. The annual government subsidy for each new rural cooperative medical insurance participant was RMB 80 ($ 11.78) in 2009, and increased to RMB 120 ($17.68) in 2010.

"The government can currently do little more than upgrade township and village clinics. The underdeveloped retail network in rural areas is creating a growth opportunity," Zhang said.

There is already intense competition in large cities among big chain drugstores such as Shenzhen Nepstar Chain Drugstore Co. Ltd. and Shenzhen Accord Pharmaceutical Co. Ltd. However, the retail market in rural areas has yet to heat up and BCT Pharmacy hopes to gain an edge by targeting the sector early on, she said.

Although rural drugstores mainly supply cheap generic drugs, profit margins are still acceptable due to low production costs, Zhang explained. At present, 30 percent of the products in BCT Pharmacy's drugstores are sold at a profit margin below 30 percent, 30 percent are sold at a margin of about 30 percent, and about 40 percent at a margin of over 50 percent.

"Our drugstores are also selling a dozen own-brand products under the Baicaotang trade mark with profit margins of 50 to 60 percent," she said.

It is widely believed that the essential drug system and zero markup policy will have a negative effect on pharmaceutical retail prices. However, Zhang maintained that the importance of drug sales as a source of income for grassroots medical institutions will make it difficult for them to undercut drugstores.

In addition, drugstores will still be able to compete with medical institutions on the price of products which are not on the essential drug list, further limiting the impact of the reforms on the sector.

According to Zhang, BCT Pharmacy expects its retail business to account for 60 percent of total sales revenue in five years, its drug wholesale business 30 percent to 35 percent, and its manufacturing business about 5 percent.

The company's wholesale network in China involves approximately 4,000 suppliers and 8,000 products. The company expects to win a greater number of exclusive contracts and improve its operational efficiency by investing in a state-of-the-art logistics center, which will include an electronic delivery and inventory system, as well as an e-commerce database.

"The logistics center may require an investment of over RMB 100 million ($14.71 million) which might be funded in part by our recent listing," Zhang said. The company raised $8.9 million through a listing on New York's Over-the-counter (OTC) Bulletin Board in 2009.

In 2008, the company acquired Guangxi Hefeng Pharmaceutical Co. Ltd., which manufactures over 20 drugs. Its flagship products are Yan Huang Lian injection for hepatitis, hydroxycamptotbecine injection, an anti-tumor drug, and levodopa injection, used to treat Parkinson's disease.

"We are currently trying to refine our production techniques and expand the market for our existing products," Zhang said.

The above expresses the personal opinions of the interviewee. Its publication in no way implies that Interfax shares the views expressed in the article.