Unlocking Growth in China Challenges and Opportunities Yehong Zhang, PhD, MBA, Country Manager, IMS Greater China
China: A Country of Great Change Nanjin Road 1980 Nanjin Road 2004
China: A Country of Great Change 1980 2004
China is projected to be the 7th largest pharmaceutical market in the world by 2010 Estimated Market Size for Ethical and OTC Drug at ex-factory level excluding TCM (US$ Billions) 1997 Top 12 2000 Top 11 2005 Top 9 2010 Top 7 1. USA 103 1. USA 151 1. USA 256 1. USA 381 2. Japan 47 3. Germany 18 4. France 17 5. Italy 10 6. UK 9.4 7. Brazil 8.9 8. Spain 5.7 9. Canada 4.8 10. Korea 4.0 11. Argentina 4.0 12. China 3.7 Source: IMS Health Forecast updated as of March 2005 2. Japan 58 3. Germany 17 4. France 17 5. UK 11 6. Italy 11 7. Spain 7.0 8. Brazil 6.7 9. Canada 6.3 10. Mexico 5.8 11. China 5.0 12.Argentina 4.0 2. Japan 68 3. Germany 34 4. France 31 5. UK 22 6. Italy 20 7. Spain 15 8. Canada 14 9. China 13 10. Mexico 8.3 11. Turkey 7.2 12. Brazil 7.0 2. Japan 81 3. Germany 45 4. France 35 5. UK 29 6. Italy 29 7. China 28 8. Spain 21 9. Canada 18 10. Mexico 12 11. Korea 11 12. Turkey 11
J class will still be the largest category followed by A, C and L classes in 2010, with L class the fastest growing US$ Mil 8,000 PERCENT 20% 6,000 15% 4,000 10% 2,000 5% 0 ATC A ATC B ATC C ATC D ATC G ATC J ATC L ATC M ATC N ATC R All Others 2005 2010 CAGR (05-10) 0%
GDP growth is a good predictor of healthcare spending GDP per capita vs. Healthcare Expenditure per capita (PPP) $4,000 Health Expenditure per capita $3,500 R 2 = 0.9116 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 CHINA INDIA BRAZIL MEXICO RUSSIA $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 GDP per capita CANADA GERMANY FRANCE ITALY UK SPAIN ROK Source: WHO
Diagnosis, treatment and compliance gaps are significant implying both opportunities and challenges Patient Population (millions) 30 25 20 15 10 5 0 Prevalence Osteoarthritis Diagnosed 32% diagnosis rate 80 70 60 50 40 30 20 10 0 Prevalence Depression Diagnosed 5% diagnosis rate 140 120 100 80 60 40 20 0 Prevalence Hypertension Diagnosed 44% diagnosis rate Approximate Prevalence and Diagnosis Rates for OA, Depression and Hypertension in China
Another case in point: cancer Theoretical Impact China Cancer Prevalence Rates China Cancer Expenditures 20 16m 800 763bn People (X1,000,000) 10 4.5m 13.5m Expenditures (x$1,000,000,000) 700 600 644bn 9% of GDP 5% of GDP 0 2005 2020E 2030E 500 2020E 2030E
Healthcare in China is Complex and Challenging Funding Insufficient and inequitable Healthcare Delivery Inefficient and inequitable Poor quality Misaligned with the needs of the majority of the population No separation of prescribing and dispensing Hospital market dominates with 80% share Pricing and Reimbursement Process complicated and non-transparent Unilateral cost containment measures focused on price control Regulatory Enforcement not effective Too many organizations with multiple inter-dependencies
The market is fragmented; there are more than 17,000 hospitals in 650+ cities Hospitals Classified by Bed Size 800+ beds 180 500 to 799 beds 654 200 to 499 beds 2,860 100 to 199 beds 3,606 10,544 <100 beds 17,844* hospitals City Classified by Administration Level 4 275 375 Municipality Level Prefecture level County level * Ministry of Health 2002 statistics
As with other earlier stage economies, consumers are paying the bulk of the bill for healthcare 7% 6% 5% Percentage of Total GDP Spent on Healthcare in China Total Health Expenditures 2002: $60 Billion Public Expenditure 4% 3% 2% 1% 40% 60% Private Expenditure 0% 67% 66% 1998 1999 2000 2001 2002 Percentage of Total Healthcare Spend that is out -of-pocket 65% 64% 63% 62% 61% 60% 59% 58% 1998 1999 2000 2001 2002 Healthcare is becoming a more important issue for China, and out -of-pocket expenditure is growing with it Source: WHO
The aging population presents many challenges RMB (Billions) 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Accumulated Surplus Accumulated surplus growth BMI Fund Surplus (based on income growth rate) 40% 35% 30% 25% 20% 15% 10% 5% 0% 3.1 Employed enrollees 3 2.9 2.8 2.7 2.6 2.5 2.4 2001 2002 2003 2004 2005 Demographic trend projection Number of employed enrollees per retiree enrolled in the BMI
The Chinese Healthcare Reform Agenda 1. Admitting failure, central leadership identified it as a pillar in building a harmonious society. 2. Continuing effort to institutionalize the anti commercial bribery initiatives 3. Affirm the public-goods nature of healthcare and the government s financial and moral obligation to promote a just and equitable healthcare system. 4. Likely focus on the following areas: - Continuing investment in building the infrastructure to bridge the urbanrural divide - Better enforced and more transparent regulations (GMP, Registration, GSP etc..) - Multi-tiered funding mechanism combining tax-based government fund, social insurance and private insurance - Universal access to basic healthcare services and essential drugs and services development - Healthcare delivery system reform to address efficiency and priority - Value for money and cost containment
Implication to the industry 1. Increasing government funding beneficial to long term development of the market. 2. Pharmaceutical market growth at more sustainable level 3. Multinationals will pick up additional market share in the short term as local competitors adjust 4. Community and primary care focus could free up fiscal space at the special and general hospital level 5. Need to structure portfolio according to the emerging payer structure. 6. In Sales and Marketing, new interaction models are emerging that optimize ROI. 7. In Pricing and Reimbursement, value-based proposition should be prepared as the government begins to focus on value for money.
Four Ps drive success in China 3. Price and policy advocacy 1. Picking the right portfolio 2. Penetrating the right cities and institutions 4. People, Leadership and Execution
Market research is mission critical.. It must bridge the gap from simple research to true insight-based strategic recommendation. The methodologies must be adapted for segmentation, particularly along the following dimensions: Geographical (3 Tier 1 cities vs the rest) Economic strata (Urban vs the bottom of the pyramid) Portfolio (Rx vs OTC as an example) It must work with the government and other stakeholders to create a sustainable environment by addressing issues such as privacy, legal status and transparency. Promote the development of a class of market research professionals with high levels of standards and dedication. Use technology to leapfrog existing conventional models.
Launch success is possible in China even with all the complexities and challenges. 18 USD Million 16 Key Successful Factors for the success 14 12 10 8 6 4 2 Pre-launch marketing Brand level investment Pricing & reimbursement strategy Segmentation & targeting Single line team promotion Patient compliance Performance tracking and reinforcement 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16 Q17 Q18 Q19 Q20 Q21 Q22 Q23 Q24 Q25 Q26 Q27 Q28 Q29 Q30 Q31 Q32 HEPTODIN GSK COZAAR MHU DIOVAN NVR PLAVIX SG9 FEMARA NBJ GLIVEC NVR HERCEPTIN ROC NEXIUM AZN ZELMAC NBJ SIMULECT NVR ZOMETA NVR IRESSA AZN BARACLUDE SSB Source: IMS CHPA 4Q06
Picking the right portfolio Determine the strategic objective in quantifiable terms Projecting the likely future direction of therapy areas in China. Design a Profitable long-term China Portfolio? Balance in-licensing and tail management Know and model what is the investment required in building a successful brand in China Brand ROI? Benchmark and model portfolio performance throughout the lifecycle. * Quality market research is critical to determining the composition of the China portfolio. It is also a necessary condition for the optimal life-cycle management of the products contribution.
Penetrating the right cities and institutions Analytically determining the optimal cities for your brands (top 100 cities) Define the realistic investment plans required to build top brands (top 100 cities). What does it take to build a mega-brand and what is the return (sales, SOV etc) on brand investment activities. Developing a robust plan to tactically drive city expansion and institutional targeting based on therapeutic potential throughout the vast geography. For specialty products, are you targeting physicians who are high prescribers? Use distribution and partnership to your advantage. Use the interplay between retail and hospital channels to your advantage. * Market research is again mission critical in driving penetration and segmentation especially in a country where good quality data is in short supply both in depth and scope.
The key issue in China remains balancing resource investment against profitability Currently Covered Cities Go Broader New Cities Go Deeper Existing Hospitals Growth and optimization Best-practice benchmark Targeting & profiling SFE and tracking systems New customers Identification process New Depts./ physicians/ indications Target City Selection Which cities and how many Potential by city tier to determine target cities Potential of each target city Attractiveness of the city How to penetrate into new cities New Hospitals Potential of new accounts Entering the account and what structure to use Who are the key prescribers? Which hospitals and how many -What sales force structure? -What products to focus on?
Pricing and Policy 3. Industry s raison d etre? - A healthy and innovation-driven pharmaceutical industry is important to China and her citizens. But that promise can only be fulfilled in partnership with policy makers. Focus on healthcare and not price evidence and valued based pricing. Proactively build the infrastructure (in data and methodology) in HEOR. Help the government address major systemic issues such as: - Private payer structure - Separation of prescribing and dispensing - Improving regulatory efficiency and transparency - Public health threats - Access to healthcare at the Bottom of the Pyramid * The need for market research in this aspect is profound as it directly influences the government decision makers in setting policies which will ultimately impact the sustainability of the healthcare environment in China.
In summary, China is a market of great opportunity but also major challenges. Given the past performance and the future forecast of 15-18%, China is a key future market Leaders are investing significantly in this area, now is the time to move to build a competitive advantage For market research, this presents tremendous challenges and the associated opportunities. In a data-poor country such as China, market research, if done well, provides the strategic insight that ensures the success of execution. For market research community, there is also an exciting opportunity to adapt existing models to the complexities of China and in the process help shape and perfect the market research environment.
Thank You