"The Medicine Is Not Available at Our Pharmacy"...The 'Absolute Power' Dinosaur Wholesaler Swallowed Market Competition [The Bright and Dark Sides of the Pharmaceutical Distribution Market]①

Complex Pharmaceutical Distribution Structure
Wholesalers with Oligopolistic Power
Industry Imbalances and Side Effects Emerge

Editor's NoteFew people know how a single pill of medicine, which we casually encounter and take, comes into our hands through such a complex route. The pharmaceutical distribution system is structured as 'manufacturer → primary wholesaler (or nth wholesaler) → hospital/pharmacy → consumer,' but especially around the 'wholesale' stage, the interests and hierarchies within the industry are intricately intertwined, causing consumers to suffer indirect damages without realizing it. Although there are about 4,400 wholesalers (according to the Ministry of Food and Drug Safety), only a handful of companies dominate the market. Given this situation, market imbalances and side effects have become constants. The path to innovation in the pharmaceutical distribution market, entangled with the government, pharmaceutical companies, distribution industry, and care institutions, is long and arduous. Asia Economy sheds light on the realities and hidden aspects of the pharmaceutical distribution structure that consumers find difficult to understand and seeks desirable development measures.

①For Whom Are the 'Distribution Giants'?

②Will the Online Platform-Driven Paradigm Shift Shake the Market?

③"Digital Transformation and Transparency Enhancement Are Needed for Reform"

"We don't have this morning sickness medicine."

Last month, at a pharmacy in downtown Seoul. Ms. Im, a woman in her 30s suffering from severe morning sickness, went to a pharmacy in Seoul to purchase the morning sickness medicine prescribed by her obstetrician but was told this by the pharmacist and had no choice but to sit down in despair. It was difficult for her to drag her heavy body and wander around looking for another pharmacy. The pharmacist, who called several pharmaceutical wholesalers on Ms. Im’s behalf, only repeated, "Even if we order now, it will take about a week for the medicine you are looking for to arrive."

Why was this medicine not available at that pharmacy? Ms. Im’s experience starkly reveals the hidden side of the pharmaceutical distribution structure that ordinary people are largely unaware of. According to the pharmaceutical and distribution industry on the 16th, the medicines we encounter at pharmacies are almost uniformly delivered from pharmaceutical companies to pharmacies or hospitals through pharmaceutical wholesalers. When a pharmacy or hospital orders medicine from a wholesaler, the products produced by the manufacturer are delivered to the orderer via the primary wholesaler, and sometimes a secondary wholesaler.

This pharmaceutical distribution network is based on offline sales organizations. To order medicine, pharmacies must either call sales representatives directly or access individual online applications (apps). Even then, if the stock of medicines at individual wholesalers cannot be confirmed, multiple calls or running several apps are necessary. Because of this distribution process, consumers have to wander around various pharmacies or wait several days to find the medicine they want. Compared to the quantitative growth of the domestic pharmaceutical market, the supply and demand procedures are still considered backward.

This complex structure has been established since about 30 years ago. In 1994, the government legislated the principle of 'unified pharmaceutical distribution.' This was to allow pharmaceutical companies to focus on research and development (R&D) without worrying about distribution by stipulating that only specialized distribution companies handle the supply of medicines. At that time, many pharmaceutical companies managed distribution directly, which not only hindered their focus on R&D but also caused problems in medicine management due to arbitrary distribution methods.

Even after the abolition of the unified distribution principle in 2010, wholesalers’ influence remains strong. Due to the separation of prescribing and dispensing, hospitals and pharmacies must manage inventory according to prescriptions, requiring frequent deliveries of many varieties in small quantities. This makes it difficult for manufacturers to deal directly with hospitals or pharmacies. As a result, wholesalers have expanded their position by emphasizing logistics efficiency. The unified distribution rate, which was only 23% before 1994, steadily increased to 91% as of 2021.

The problem lies in the oligopolistic structure rooted in this trend. Currently, there are about 4,700 pharmaceutical wholesalers in Korea, but the top 10 'giant companies,' accounting for only 0.2%, hold about 70% of the total market sales (approximately 25 trillion won), which is about 18 trillion won. In particular, some companies, including GeoYoung, the largest pharmaceutical wholesaler in Korea, operate dozens of logistics centers and their own delivery networks nationwide.

While advantages such as wide delivery networks and diversity of handled items exist, this oligopolistic structure is criticized for causing market imbalances and side effects. The principle of 'market competition,' where companies bring and sell as many preferred medicines as possible, is overwhelmed by the 'economies of scale' established by wholesalers, especially large wholesalers. This explains the experience of struggling to find certain medicines that are usually purchased without problems at a nearby pharmacy and are well-known and widely used but are unavailable at another pharmacy near one’s workplace.

Meanwhile, small and medium wholesalers have been reduced to subcontractors or supplementary networks for large wholesalers. Some wholesalers compete to supply hospitals even at negative margins. The CEO of a small wholesaler in the metropolitan area said, "We sign contracts with hospitals even at a loss and make up for the loss with other products," adding, "Due to the oligopolistic and low-margin structure of a few companies, the quality of pharmaceutical distribution is deteriorating, which is concerning as it will lead to consumer harm."