[Pharmaceutical Distribution Market's Light and Shadow]③ "Reform Needed Through Digital Transformation and Transparency Enhancement"

Digital Transformation: The Key to Resolving Market Distortions

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 follows the structure of 'manufacturer → primary wholesaler (or nth wholesaler) → hospital/pharmacy → consumer,' and especially around the 'wholesale' stage, the equation of interests and dominance within the industry is intricately woven, causing consumers to suffer unnoticed damages. Although there are about 4,400 wholesalers (according to the Ministry of Food and Drug Safety), only a very small number of companies dominate the market. Given this situation, market imbalance 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 Must Lead to Reform through Enhanced Transparency"

The domestic pharmaceutical distribution industry has grown into a massive sector approaching 25 trillion won from a scale of 3 to 4 trillion won after the separation of prescribing and dispensing in 2000. Behind this steep growth lies a firmly entrenched offline-centered vested interest structure formed by a few oligopolistic companies, along with persistent issues such as lack of competition and innovation.

Maeng Ho-young, a former director at the Ministry of Health and Welfare with 30 years of experience in health and medical policy and a pharmacist by training, asserted in an interview with Asia Economy on the 16th, "The core issue is not distribution margins but the power relations among distribution entities and institutional imbalances." He believes that a structure where the government, pharmaceutical companies, care institutions, and wholesalers engage in dialogue and design systems together should come first.

Former Director Maeng pointed out, "Although the market has grown, the dominant-subordinate relationship structure has become entrenched, and there are almost no new distribution companies. The entry barriers are high, but the profit structure is low, so there is no reason to take risks. Ultimately, the concentration toward a few large distribution companies intensifies."

He explained that digital transformation could be a starting point to innovate such a distribution structure. By breaking away from the existing methods fraught with numerous problems and inefficiencies, it can create dynamism in pharmaceutical distribution and a healthy competitive structure within the market, ultimately creating a system more favorable to consumers.

However, Former Director Maeng emphasized, "The shift of pharmaceutical distribution to online is an inevitable trend of the times, but wholesalers should not remain merely in a logistics role." He explained, "In the end, changes and innovation measures must come from within the pharmaceutical distribution industry. These companies know best the essence of distribution, such as inventory storage, assortment preparation, and delivery."

Securing transparency in the pharmaceutical distribution process is also a crucial factor in refining the market. Problems such as information asymmetry caused by opaque information and a closed market structure, the formation of dominant-subordinate relationships, and rebate practices ultimately stem from a lack of transparency. Former Director Maeng expects that digitalization of the distribution structure can partially resolve these issues.

Through disclosure of distribution information and transparent management, market reliability can be enhanced while unnecessary distribution costs can be reduced, and digitalization can be a technical solution related to this.

Transparency of distribution information through digitalization is also directly linked to the activation of market functions. Former Director Maeng said, "If pharmaceutical distribution statistics and distribution analysis information are transparently disclosed, pharmaceutical companies, hospitals, pharmacies, and even consumers will be able to accurately grasp market conditions," adding, "This will ultimately lead to the formation of reasonable market prices, providing tangible benefits to consumers."

The case of Japan can serve as a good precedent for us. Japan has already introduced a 'Pharmaceutical Distribution Information Management Platform,' significantly enhancing transparency and safety in the pharmaceutical distribution process. This platform digitally connects manufacturers, wholesalers, hospitals, and pharmacies to efficiently perform real-time inventory management, track the movement of pharmaceuticals, and manage distribution expiration dates.