China Healthcare Overview

An Overview of the China Healthcare Market Presented by Michael Zakkour Contact: Michael Zakkour, principal Technomic Asia [email_address]

China Healthcare – a sector in transition
Healthcare used to be guaranteed under the old State-owned enterprise system but that social safety net has gone away as the economy has privatized
Four factors will drive the growth of China healthcare:
GDP Growth: As GDP increases, health spending as a percent of GDP will also increase, at a higher rate (>13%) than GDP (~8%), driven by middle class consumers willing to spend more on healthcare.
Urbanization: The urban population in China will increase by about 150 million over the next ten years, and these people will have greater access to quality care, driving up underlying demand.
Lifestyle Shift: Middle class and urban consumers tend to consume more calories of meat and fat, driving up incidence of “modern” chronic diseases such as hypertension, diabetes, and heart disease.
Demographic Shift: The population over 50 will increase by about 100 million over the next ten years, and these people will have greater need for healthcare.
China has a challenge on their hands … how to care for the health of over 1.3 billion people.

Age-shift in China 0 20 40 60 80 100 120 140 Population in millions Age 0-4 10-14 20-24 30-34 40-44 50-54 60-64 70-74 80+ 1978 2008 There will be 181 million people aged 65+ in China by 2020, more than the entire population of Russia, 25% of the world's total elderly The high savings rate in China – average 35% of total income – is attributed, in part, to people’s concern over being able to afford healthcare for their parents and themselves Source: China Statistics Yearbook; Euromonitor, Technomic Asia analysis

China Healthcare vs the U.S. China has seen explosive growth in their healthcare sectors. However, there is still additional room for growth compared levels in the US. Historical Healthcare Expenditures: China & the U.S. $ (billions) Source: WHO World Health Statistics 2009, China and India Ministries of Health; Technomic Asia analysis Healthcare Overview – China & the US China US Healthcare annual growth +20% 6.9% Public/private sector control 90% /10% 10% /90% Beds per 1,000 population ~2.30 ~3.60 Basic health insurance penetration ~30% ~84.7%

China Healthcare Share of Wallet Source: China Statistical Yearbook; McKinsey; Technomic Asia analysis Transportation and communication Recreation and education Personal items Household Items Housing and utilities Healthcare Apparel Food items Healthcare expenditure in China is estimated to double in the next two decades in terms of its percentage of a consumer’s total spending. Government reform and tremendous domestic demand will drive increased consumer spending from 2009. Evolution of the Chinese Consumption Portfolio Today Discretionary Semi-Necessity Necessity

Large urban hospitals are overused, resulting in unnecessarily high number of patients per doctor and costs per patient.
Instead of quality patient care, excessive market-orientation creates incentives for over-prescription and overutilization of services.
<10% of hospital income comes from the government, with the rest coming from fees; >44% from drug sales alone.
Unit: USD Allocation of Urban/Rural Healthcare Resources (2006) Gov’t. Spending Per Person Physicians Per 10,000 People Hospital Beds Per 10,000 People Source: Ministry of Health, McKinsey and Company, Technomic Analysis China Healthcare: Rural/Urban China healthcare is characterized by inefficient allocation and use of healthcare resources between rural and urban areas – 80% of government health expenditures go to urban areas, even though only 45% of the population lives in urban areas.

Chinese Medical Institutions Source: China Ministry of Health; Technomic Asia analysis There nearly 289,000 medical institutions in China in 2008, of which 19,700 were hospitals. Clinics perform only basic outpatient services, while community health centers do limited diagnosis & testing. Chinese Medical Institutions (2008) ■ Grade III ■ Grade II ■ Grade I ■ Ungraded 66% 25% 7% 2% 5% 29% 16% 50% Hospitals 19,701 China Hospital Ownership (2008) <10% >90%

Hospital Utilization Grade III 9,934 1.471 billion 79 million Utilization of Graded Hospitals (2008) Source: Ministry of Health, Technomic Analysis China’s core issue in providing healthcare services is that the top hospitals – Class III – are the fewest in number but care for a disproportionate volume of patients. Grade II Grade I The Chinese government will be investing heavily in Class II hospitals to improve the level of service and make them more attractive places to seek treatment

Challenges for Foreign Companies in China Healthcare
Quality and pricing tiers – while the Class III hospitals will spend on imported equipment, the real growth opportunities are in Class II hospitals where quality and pricing expectations are a bit lower.
Complex purchasing procedures – State-owned hospitals typically work through a bidding process to purchase medical equipment and pharmaceuticals and suppliers need to work with distributors who have access to this process.
Fragmented distribution – no distributor in China healthcare has nationwide access and suppliers must work with many distributors to get broad yet effective coverage. There may also be
Many competitors – there are many Chinese suppliers (over 3,000 pharmaceutical companies and over 10,000 medical device manufacturers) flooding the market, most of them sub-scale but with strong footholds in very local markets.
Complex and “flexible” regulatory environment – medical equipment and pharmaceuticals need to go through a complicated and often-opaque regulatory process that takes significant time and guanxi (relationships) to navigate
While the high growth rate in China healthcare – over 20% annually – is attractive, foreign companies need to pay close attention to several key features of China’s healthcare markets

Foreign Investment Trends in China Healthcare
Know your customer – gather deep market intelligence on who your target market is … what they want, how much are they willing to pay, how they purchase.
Refine your target market – and find the distributors most able to get you to those segments. Don’t contract with a distributor without knowing just where they are strong and where they are weak.
Know your competitors – you will always have Chinese competition … they will often have “good enough” products, good pricing and will typically have very good relationships among the buyers.
Think “acquisition” – more and more, foreign companies are looking to acquire companies already in the market, gaining access as well as speed to market. This is particularly successful when trying to penetrate the Class II hospital market.
Foreign companies are doing several things to give them their best chance of success in penetrating the China healthcare market…

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China Healthcare Overview

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