Chasing Opportunity at the County Level: The New Growth Area for China s Pharmaceutical Market

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Damon Wilkins
6 years ago
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1 Chasing Opportunity at the County Level: The New Growth Area for China s Pharmaceutical Market December 2015

2 The promising county level pharmaceutical market As the world s fastest-growing pharmaceutical market, China attracts immense global attention for its rapid economic growth. However, the market has recently slowed due to challenges from government pressure in regard to cost containment and anti-corruption. Analysts have scaled down their growth estimates from last year, and this trend could continue. Is the China growth engine is really decelerating though? Earlier this year, PwC conducted a study and found that by dividing the China market into multiple city tiers by economic scale, the county segment not only shows great potential but is also poised to become the most important driver of growth in the decades to come. The growth is coming from the countylevel, located in more than 1,700 counties and sometimes known as tier 6 and 7 cities. This market bears great opportunities, but also carries unique challenges. Thanks to healthcare reform, county-level healthcare institutions, e.g. People s Hospitals, have been improving their infrastructure around capacity and technology. Many of these county-level even exceed the standards of Class II, benchmarking Class III. The quality of the county-level ones has attracted more patients from rural and township counties because of the lack of basic healthcare service back home, further boosting the prosperity of county-level. Currently, this segment has maintained a healthy growth rate of 20 to 30 percent in the past few years. Considering the macro environment changes, the growth rate of the countylevel market segment will persist at more than 20 percent while the total China market may slow down to 10-15%. The county will fuel the future growth of this sector, and understanding the competitive landscape in this market will help MNC s to drive their future business strategies in China. Currently, the market size of tier 6 and 7 cities is estimated at around RMB 200billion. We reached this number by estimating drug spending across hospital sizes and types in each county, multiplied by the number of counties (1700). Going forward, in light of the saturation of tier 1 and 2 cities, the government will continue to expand its healthcare coverage at the county level. The county segment is expected to become the largest sector of China pharmaceutical market and will fundamentally change the current configuration. (See figure 1 below) Figure 1: Chinese pharmaceutical market structure changes ( ) Market Segment Tier 1 and Tier 2 city market Tier 3 Tier 5 city market Tier 6 and Tier 7 city market 2012 Top City Community City County level Community County level Rural health centre 2020 Top Mid-scale Community health centers County/Rural healthcare system Maket Share ~30% 20~25% ~45% 35~40% ~25% 40% Tier 1and tier 2 cities Tier 3 to tier 5 cities Tier 6 and tier 7 cities City Hospitals Market Classification* Market Share Community Hospitals City Hospitals County Hospitals Community Hospitals Village Clinics County Hospitals, ~ 160 billion Village Clinics Top ~ 30% 20-25% Mid-scale Community health centers County/rural healthcare system ~45% 35~40% ~25% ~40% Note: *The market is hospital market including community and urban health centres; retail drug store market is not included 2 Chasing Opportunity at the County Level:

3 The Challenges of Market Entry Aside from the attractive market size and growth rate, prescription behavior has also drastically diversified and improved. Though antibiotics continue to dominate the market with a more than 50% share, cardiovascular and oncology products occupy an increasingly large share as well. In terms of the drug composition structure, Rx and branded generics account for roughly 30 percent. Demand for products from MNCs and their partners have also achieved inroads into this market. PwC s research shows that only a few domestic manufacturers have approached this tier 6 & 7 market directly, accounting for less than 10 percent of the market share. Apart from the activity surrounding products on China s Essential Drug List (EDL), the market is monopolized by general dealers and distributors. Part of the issue is a knowledge gap. Many hospital leaders and healthcare professionals have expressed the desire for additional academic education. Academic promotion has been rising in recent years, but still far from enough, says one dean from a county hospital. Sales representatives from MNCs seldom come, or they disappear after one visit. Further study reveals that the complexity and unique characteristics of the market have hindered MNCs from pursuing it. Most companies struggle with understanding entry barriers including affordability, policy, understanding of healthcare professionals needs and the requirement for a different channel model. 1. Low affordability: Generally speaking, the income and consumption level are relatively low in the country and rural areas. Although healthcare reform has nearly achieved a full coverage, the county system primarily uses the new rural co-operative medical scheme, which in reality, serves only 70 percent of the insured population. The system s limitation regarding the funding, reimbursement and medical care constrain the market access for portfolio products. (See figure 2 below) Figure 2: Comparison of different tier cities affordability (2012) 100% 90% ~10% ~5% ~15% ~2% 10-15% Others* Self-pay 80% 15-20% 70% 60% ~10% ~40% 50% ~20% 60-70% 40% 30% 20% 10% 0% 30-40% 10-15% ~25% ~5% 10-15% Tier 1 and 2 Tier 3 and 4 Tier 6 and 7 NCMS** Urban citizen Urban employee *Others indicates various payment methods, such as commercial insurance and business reimburesment **NCMS = New rural cooperative medical system China medical insurance Chasing Opportunity at the County Level: 3

4 2. Significant policy impact: While Chinese healthcare reform prioritizes the development of county-level, it also is enforcing strict market restrictions. First, public are required to control their overall drug consumption percentage for those at the county level, this percentage is the lowest at less than 40 percent of total hospital revenue. Meanwhile, with the release of the Essential Drug List (EDL), the Ministry of Health requires institutions of different tiers to reach specified proportions of EDL usage, a task that is harder to execute in large compared with in county-level ones. Currently, EDL usage hovers between 10 to 20 percent and is expected to exceed 20 percent (see figure 3). Figure 3: Basic drug usage and EDL implementation in of different levels Targeted essential medicine usage (out of total drug consumption) for different institutions, with regard to new EDL policy Class III Class II Basic medical institutions 20-30% 40-50% % Current essential medicine usage (out of total drug consumption) for different institutions 40% 30-40% 10-20% ~16% Class II and III average County regulation County average Pilot 4 Chasing Opportunity at the County Level:

5 Additionally, healthcare reform has stipulated a zero mark-up policy for public, which impacts these institutions revenues. PwC s research shows that the overwhelming majority of county-level health institutions has adopted this policy or alternatively relies on central pharmacy management to cope with these challenges. 3. Differentiated demands from healthcare professionals: Many foreign manufacturers believe that the compliance risk rises in this market and that healthcare professionals have academic needs that are tough to meet. As such, compliance becomes a key concern. The doctors have quite clear academic requirements, and the demand has not been satisfied, reflected one company s leadership after visiting a large number of at the county level. 4. Need for a feasible commercial channel model: Agents and big distributors are the primary channels through which to sell products to county-level, due to any single hospital s small sales volume. Nonetheless, logistical challenges abound. The successful operations of any drug manufacturer will require more than just simple adaptations of tier 1 and tier 2 sales models but actual innovation, to take account of the differences in this market. Figure 4: Zero medicine mark-ups and centralized pharmacy trusteeship in various markets (2013) Percentage of adopting the zero medicine mark-up policy and centralized pharmacy management execution management execution Tier 1&2 cities 10-20% Zero medicine mark -up ~10% Centralized phamacy management Tier 3-5 cities 20-30% Zero medicine mark -up 10-20% Centralized phamacy management Tier 6&7 cities 80-90% Zero medicine mark -up ~80% Centralized phamacy management Chasing Opportunity at the County Level: 5

6 Key factors for a successful model The medical market of tier 6 and 7 is very large, and PwC believes it is important for both local players and MNCs. Especially for MNCs, growing this segment may be key to steady growth in China over the next few years. MNCs may have a competitive edge that includes sophisticated sales models, top sales management and sales effectiveness tools, strong product portfolio and R&D capability. These advantages enable MNCs to perform well in the premium market. However, it may be difficult to adopt the current business model to conquer the challenges of the county market. Some players are still struggling with a feasible model after failures for various reasons. Consequently, pharmaceutical companies intent on pursuing this business opportunity will need to conduct in-depth analysis on the characteristics and factors affecting the tier 6 and 7 markets, devise a commercial and distribution model in line with the needs of market operations and make strategic developments based on the nature of market enterprise. 6 Chasing Opportunity at the County Level:

7 Chasing Opportunity at the County Level: 7

8 For full details on how we can help, please visit If you would like to continue the conversation, please contact our team. Mark Gilbraith PwC China and Hong Kong Health, Pharmaceuticals and Life Sciences Leader Shanghai +86 (21) Jia Xu PwC China Consulting Partner, Pharmaceuticals and Life Sciences Beijing +86 (10) The information contained in this publication is of a general nature only. It is not meant to be comprehensive and does not constitute the rendering of legal, tax or other professional advice or service by PricewaterhouseCoopers Management Consulting (Shanghai) Limited ( PwC ) PricewaterhouseCoopers Management Consulting (Shanghai) Limited. All rights reserved. PwC refers to the China member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details.

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