Pharma-distributor 'margin war' heats up again

Janssen Korea notifies a 2%p margin reduction…Korean pharmaceutical companies join in

The distribution industry collectively protests as a group, as seen in the cases of GSK·Handok

"Even 1%p reduction significantly affects the business taking account of commissions·labor fees…survival is at stake"

The pharmaceutical industry and distribution industry are in conflict over profit margins.

 

Janssen Korea reportedly notified its training companies of a 2%p reduction in margins and continuing negotiations with individual companies.

 

Some domestic pharmaceutical companies are implementing margin reductions starting this year.

 

Pharmaceutical companies are citing sluggish sales, drug price reductions, and increasing debt ratios as background for these margin cuts.

 

However, the distribution industry is showing strong resistance, claiming that if they bear labor costs, delivery fees, and other commissions, they will incur losses with every transaction.

 

Domestic and foreign pharmaceutical companies announce margin reductions

According to industry sources on June 13, VivaCell Biotechnology recently officially informed its distributors of a plan to lower sales discount rates.

 

According to the official letter, the company will reduce the sales discount rate from the current 4% to 3% of the cash collection starting in July.

 

The pharmaceutical distribution industry interprets this as a strategy to cut margins.

 

The distribution industry is expressing concern that numerous pharmaceutical companies are implementing margin reductions this year.

 

Indeed, Korea Pharma, Kolon Pharm, and Ahn-Gook Pharmaceutical have also announced plans to lower their distribution margins this year.

 

Recently, the global pharmaceutical company Janssen Korea joined in.

 

Janssen Korea notified its trading partners that it would pursue a 2%p reduction from existing margins.

 

The distribution industry asserts that while some pharmaceuticalcompanies have attempted margin adjustments of around 1%p due to declining profitability, it's rare for a company like Janssen to pursue a reduction as significant as 2%p.

 

The distribution industry has expressed strong objection, particularly because this measure was announced without prior discussion or consultation with the distribution industry.

 

The distribution industry immediately began to protest, demanding negotiations through their association.

 

They assert that if Janssen Korea negotiates with individual companies, it's highly likely to result in a mere notification.

 

However, Janssen Korea maintains that negotiations with individual companies are appropriate, given the varying contract terms and scale of trading partners, rather than with the association.

 

In this regard, Janssen Korea is reportedly conducting individual negotiations with companies starting this week.

 

Industry leaders, including Korea Pharmaceutical Distributors Association Chairman Park Ho-young, are expressing a strong commitment to respond, stating, "The association will reflect on its member companies and strive to eliminate factors threatening the pharmaceutical distribution industry." Margin narrowing and conflict increasing...the endless tug-of-war between pharma-distribution

Margin rate reductions are ongoing conflict issue between the pharmaceutical and distribution industries.

 

Pharmaceutical companies push for lower margins, while distributors try to prevent them.

 

The recent decision by Janssen Korea to cut margins, in particular, signals a potential escalation of this conflict, as the distribution industry mounts a strong backlash.

 

The association recently agreed that Janssen's margin cut threatens the very existence of the distribution industry.

 

In fact, this is the first time in several years that the issue of pharmaceutical companies' distribution margins has been formally placed on the association's agenda, highlighting the severity of the current situation.

 

The distribution industry began direct confrontation, including demonstrations against pharmaceutical companies, years ago.

 

In 2013, the association held collective protests, including one-person demonstrations against Handok, demanding an increase in distribution margin rates.

 

At the time, the association emphasized that a 5% margin, as proposed by Handok, made distribution unfeasible and strongly advocated for additional margins.

 

In 2014, the distribution industry requested a margin increase from GSK, citing deteriorating business conditions, leading to another conflict.

 

They stressed the necessity of a margin increase to cover credit card fees and labor costs, among other expenses, and threatened to refuse to handle GSK products if their request was not met.

 

However, the conflict was temporarily resolved in October of the same year when the Korea Pharmaceutical Distributors Association and GSK agreed on a margin increase.

 

Since then, the distribution industry has engaged in discussions and negotiations with pharmaceutical companies regarding margin reductions, aiming for mutual growth.

 

However, in the case of Janssen Korea's recent margin cut, they are adopting strong opposing stance.

 

The distribution industry refutes the pharmaceutical companies' calls for mutual growth, asserting that their very survival is at stake.

 

Indeed, the gross margin rate for the pharmaceutical distribution industry has been on a continuous decline.

 

The gross margin rate is a key indicator used to measure distributors' profitability before deducting all expenses, including labor costs and selling, general, and administrative expenses.

 

While the exact margin pharmaceutical distributors earn from purchasing drugs from manufacturers is not precisely known, they generally consider gross profit, the opposite of cost of goods sold, as their margin.

 

A comparison of the gross margin rates of 55 pharmaceutical distribution companies with over KRW 100 billion in sales last year showed an average of 6.2%.

 

The margin rate, which was 7.1% in 2020, recorded 7.0% in 2021 before entering a downward trend.

 

A closer look by sales bracket reveals that companies with annual sales of over 500 billion KRW had an average margin rate of 6.6% last year.

 

The highest margin rate recorded in the last five years was 6.8% in 2023, failing to exceed 7%.

 

Companies with sales between KRW 200 billion and KRW 500 billion also saw their margin rates decline.

 

Their average margin rate last year was 7.4%, the lowest in the past five years.

 

Notably, excluding Korea Medix, which operates under a CSO (Contract Sales Organization) model and had a margin rate of 43.9%, the average for this group sharply drops to 5.8% based on last year's figures.

 

The average margin rate for companies with annual sales between KRW 100 billion and KRW 200 billion has also been decreasing each year.

 

Their average margin rate last year was 6.4%, a 0.2 percentage point increase from 2023, but it has remained at an average of 6.3% over the past five years.

 

The pharmaceutical distribution industry believes that current margin rates make survival difficult, considering credit card fees, labor costs, delivery fees, and returns.

 

An official from the pharmaceutical distribution industry said, "The continuous decrease in margin rates is attributable to the pharmaceutical companies' declining sales.

 

Pharmaceutical companies are responding to losses incurred from drug price reductions by reducing margins for pharmaceutical distributors.

 

If margins continue to decrease, small and medium-sized distributors simply cannot survive." Adding, "It's a situation where pharmaceutical companies advocate for mutual growth while the distribution industry asserts its right to survival.

 

A compromise needs to be found, but relationships between trading partners must also be considered.

 

The proliferation of distributors and CSO companies has intensified competition, making excessive return orders and aggressive labor cost expenditures issues that also need careful consideration.

 

However, it is an undeniable fact that operating businesses is not easy with the current margin rates."