As more and more pharmaceutical companies are lowering distribution margin to save cost, a conflict between pharmaceutical companies and distributors is left unresolved. Although the two parties are continuing to negotiate on appropriate distribution margin, they end up only confirming their unyielding stances.

Recently, a number of Korean and global pharmaceutical companies have reportedly notified their distributors the decision to reduce the distribution margin. Pharmaceutical companies are asking for the distributors’ understanding of the drug pricing reduction and the sales environment getting harder. However, distributors are rejecting the companies’ demand as they are also struggling with distribution cost constantly rising.

Pharmaceutical company ‘A’ has notified all distributors that it would lower the distribution margin of two items by 1%p, respectively. The company A has accordingly lowered the margin from past January, but the negotiation is still open as the distribution industry is complaining the two items take up a significant part of their gross profit.

A pharmaceutical company ‘B’ has notified its distributors that the discount rate on the financial expense provided for cash transaction would be adjusted. Besides the distribution margin, the company B has been providing some discount on the financial expense depending on the transaction period, but the company is to lower the discount rate. The distributors, which most of them have been paying in cash, are saying the financial expense discount rate reduction is basically a reduction in distribution margin.

The distribution industry’s concern of the trend has heightened when sources reported two other pharmaceutical companies are planning to lessen the margin. The industry is also mentioning of a possible collective action against the pharmaceutical companies when the last two of them make an official notice.

◆Pharmaceutical company and distributor in their fight for survival

For distributors, pharmaceutical companies lowering distribution margin is detrimental, because the distributor’s overall cost of shipping and operation would be unchanged regardless of the lessened margin.

An associate of a distributor pointed out, “The current distribution margin isn’t even that high, considering the shipping, labor and logistic costs are constantly surging. The distributors dealing with pharmacies would have to give up on their businesses, if the margin is lowered.”

Nevertheless, pharmaceutical companies argue distribution margin reduction is unavoidable due to the worsening sales scene. The companies are enduring increased production cost and the government's drug pricing reduction as well as the increased distribution cost.

A pharmaceutical company insider commented, “The company has to inevitably adjust distribution margin due to the growing loss from the government’s pricing reduction initiatives and rising production cost. By conducting preliminary negotiation and adjustment, the company is in process of fine-tuning the distribution margin, legitimately.”

Currently, the two conflicted parties have not settled on an agreement, yet. Taking into account the margin reduction directly affects profits and survival of both pharmaceutical companies and distributor, the conflict would not be resolved so easily.

◆ Individual drug company vs. distributor organization

Besides the actual conflict, pharmaceutical companies feel pressured by the whole distribution industry organization opposing against the distribution margin reduction. Centering Korea Pharmaceutical Distribution Association (KDPA), other pharmaceutical distributor related organizations have joined their forces. But drug companies point out it is inadequate for an organization to interfere with a deal between individual companies and distributor.

Regarding the issue, KDPA claims an intervention by an organization is inevitable, because a number of pharmaceutical companies are lowering the margin and an individual distributor is a no match against a pharmaceutical company on a negotiation table.

President Cho Sun-hye of KDPA criticized, “Distributors have not demanded drug companies to raise distribution margin when distribution cost is increased. It is hard to accept the drug companies’ logic of blaming drug pricing reduction when they do not raise distribution margin with increased operating profit.”

“And we want to ask if burdening distributor with reduced margin is reasonable when everyone in the whole society is struggling with the COVID-19 outbreak,” the president added.

A pharmaceutical company associate, who requested to remain anonymous, said “Due to the outbreak, many of pharmaceutical companies are experiencing a steep drop in sales and they are hectic trying to overcome it.” The associate emphasized the companies are reviewing various means to save costs besides the distribution margin.

“Compared to multinational companies, Korean companies are providing relatively handsome distribution margin. The companies are considering all options to save costs, including distribution, production, labor and others. Hopefully, the distribution industry can understand the situation and would try to settle on a reasonable agreement,” the associate noted.