McKinsey Greater China Healthcare


China’s Healthcare Reform:
Moving beyond
reading of the tea leaves
McKinsey Greater China Healthcare




July 2009




China’s Healthcare
Reform: Moving beyond
reading of the tea leaves

Ar...
4




    Introduction
McKinsey Healthcare
China’s Healthcare Reform: Moving beyond reading of the tea leaves                                    ...
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    Key elements
    of the reform
McKinsey Healthcare
China’s Healthcare Reform: Moving beyond reading of the tea leaves                                    ...
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    What the reform aims to change
    The Chinese government has prioritized five initiatives for the healthcare re...
McKinsey Healthcare
China’s Healthcare Reform: Moving beyond reading of the tea leaves                                    ...
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     have to continue to invest in ensuring hospital level listing, effective management
     of bidding/tenders at...
McKinsey Healthcare
China’s Healthcare Reform: Moving beyond reading of the tea leaves   11
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     Implications of the reform:
     opportunities and threats
McKinsey Healthcare
China’s Healthcare Reform: Moving beyond reading of the tea leaves                                    ...
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     have been circulated, the exposure amongst leading pharmacos to drugs on EDS
     ranges from 20 per cent to 6...
McKinsey Healthcare
China’s Healthcare Reform: Moving beyond reading of the tea leaves                                    ...
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     Shenzhen and Dongguan, are much more advanced in this respect as well as
     implementing policies that help ...
McKinsey Healthcare
China’s Healthcare Reform: Moving beyond reading of the tea leaves                                   1...
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     Planning to win
McKinsey Healthcare
China’s Healthcare Reform: Moving beyond reading of the tea leaves                                    ...
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     Exhibit 7: Example scenarios for market evolution of hypertension
     Exhibit 7: Example scenarios for market...
McKinsey Healthcare
China’s Healthcare Reform: Moving beyond reading of the tea leaves                                    ...
22
McKinsey Greater China Healthcare
July 2009
Designed by Greater China Newmedia
Copyright © McKinsey & Company
www.mckinsey...
2009 China Healthcare Reform   Moving Beyond Reading Of The Tea Leaves
2009 China Healthcare Reform   Moving Beyond Reading Of The Tea Leaves
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2009 China Healthcare Reform Moving Beyond Reading Of The Tea Leaves

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Perspective on the healthcare reform in China and implications for pharmacos

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Transcript of "2009 China Healthcare Reform Moving Beyond Reading Of The Tea Leaves"

  1. 1. McKinsey Greater China Healthcare China’s Healthcare Reform: Moving beyond reading of the tea leaves
  2. 2. McKinsey Greater China Healthcare July 2009 China’s Healthcare Reform: Moving beyond reading of the tea leaves Ari Silverman Amie Chu Yehong Zhang Franck Le Deu Yinuo Li Rajesh Parekh
  3. 3. 4 Introduction
  4. 4. McKinsey Healthcare China’s Healthcare Reform: Moving beyond reading of the tea leaves 5 China’s eagerly anticipated healthcare reform has finally been introduced, and it comes with the promise of a hefty investment into the healthcare system. As the reform implementation gets underway, executives at pharmaceutical companies (pharmacos) are trying to understand the specific implications for their own business and how they should think about changing their strategy/ plans for China. While there are open questions about the reform implementation at the local level, we believe the direction is now relatively clear, and pharmacos should move beyond the ‘reading of the tea leaves’ that has occupied China healthcare observers for the past few years. The reform points to some interesting new opportunities for pharmacos, as well as some real challenges to their core business. At the same time, reform will not change many of the fundamental drivers of the Chinese pharmaceutical market — and as such, it is important that executives at pharmacos do not get ‘distracted’ by the reform. As executives position their companies to succeed in the changing environment, they need to ensure that their organization stays focused on day-to-day execution and continue to build the core capabilities required for a winning pharma business in China1. In this paper, we lay out the key elements of the Chinese healthcare reform, identify four areas of opportunities and related threats for pharmacos, and outline how pharmacos can best plan to win in the new environment. 1 For more details please refer to the earlier publication from McKinsey & Company titled “Driving Growth in Turbulent Chinese Pharmaceutical Market – Part 2”.
  5. 5. 6 Key elements of the reform
  6. 6. McKinsey Healthcare China’s Healthcare Reform: Moving beyond reading of the tea leaves 7 In early 2009, China’s State Council announced the long-awaited and much- debated healthcare reform. The initial announcements have been followed by a serious of policy documents that describe in greater detail how the various agencies plan to carry out the implementation. Most recently in late July, the General Office of the State Council has issued the specific 2009 implementation plan along with specific metrics. The plan promises RMB 850 billion (approximately USD 125 billion) of incremental government spending by 2011 to support the healthcare reform. There are still unresolved questions around the truly incremental part of the announced investment, especially as less than half of the planned funding will come directly from the central government. However, even under a conservative scenario, we believe government healthcare funding will grow at 20%+ a year over the next few years, providing a solid foundation for sustained growth in healthcare consumption in China (Exhibit 1). Two-thirds of this amount will go towards funding rural and urban insurance schemes (often described as “demand side funding”), while the government will allocate the remaining amount primarily to infrastructure, public hospital subsidy and public health (“supply side funding”). Such sizeable investments in infrastructure will also create opportunities in areas beyond pharmaceuticals, including medical devices/equipment, and hospital IT. Exhibit Even under a conservative scenario, government healthcare Exhibit 1:1: Even under a conservative scenario, government healthcare funding will grow atat 20+% a year funding will grow 20+% a year Government healthcare spend RMB billions 33% 683 533 2/3 of the financing 17% will go to the demand Moderate case1 384 250 side 178 229 156 Local government will shoulder 60% of the burden, while central will shoulder 40% 21% Focus is on rural and 500 “grassroots” Conservative +17% 420 infrastructural case2 341 229 250 investment 156 178 2005 06 073 08 09 10 2011 E 1 Assuming RMB 850 bn budget is incremental to 2008 healthcare expenditure level 2 Assuming RMB 850 bn reform budget is incremental to the 2008 government appropriation to healthcare institutions (estimated as 137 bn in 2008) 3 Boost in spending in 2007 driven by significantly higher central government investment in insurance and hospital subsidies SOURCE: MoH; analyst reports
  7. 7. 8 What the reform aims to change The Chinese government has prioritized five initiatives for the healthcare reform plan in the next three years: Expand basic medical insurance programs: The reform will provide wide medical insurance coverage to more than 90 per cent of Chinese people through Urban Employee Basic Medical Insurance (UEBMI) for urban workers and retirees, Urban Resident Basic Medical Insurance (URBMI) for urban residents and New Rural Cooperative Medical Scheme (NRCMS) for rural residents. Towards this goal, the government has set a specific target of 390 million people covered under the two urban insurance schemes by the end of 2009, as well as set a coverage goal for NRCMS at 90% or higher. In addition, the reform will raise premiums, as well as scope and percentage of reimbursable expenses; though in the near-term, patient out-of-pocket will continue to be a major source of healthcare expenditure (currently at approximately 45% of healthcare expenditure. Establish national essential drug system: The government will establish a national Essential Drug System (EDS) to meet basic needs for treatment and prevention of diseases and to ensure drug safety, quality and supply. Soon to be released, the Essential Drug List (EDL) will contain drugs covering all major therapeutic areas (from infectious disease to cancer), as well as Traditional Chinese Medicine (TCM). All government-owned primary healthcare institutions will be required to stock and prescribe EDS drugs. These drugs will also enjoy a higher reimbursement rate. Specifically, the government has set a goal of implementing EDS in 30% of urban communities and counties by December 2009, including the implementation of provincial-level centralized online public bidding and purchasing, and zero mark-up for EDS drugs. Develop primary healthcare services system: The reform aims to improve medical care at the grassroots level. In rural areas, it calls for the construction of 2,000 county hospitals by 2011 to ensure that each county has at least one hospital that meets the county-level standards. In addition, plans call for constructing/ refurbishing approximately 30,000 township hospitals. In urban areas, the government will construct about 3,700 urban Community Health Centers (CHCs) and 11,000 Community Healthcare Stations. While the government has not mandated compulsory primary care as a gatekeeper to more specialized services in hospitals, many local agencies are piloting incentives that encourage patients to visit primary care institutions. These include selling drugs to patients at low or no mark-up and higher reimbursement rates for drugs. To further promote use of its primary care facilities, the government will make significant investment to upgrade the quality of skills and infrastructure in the new primary care system, such as generalist training programs, and training linkages between Class III hospitals and county hospitals. Provide equal access to public health services for urban and rural residents: Part of the budget allocated to the healthcare reform will be used for funding basic public health services, including establishment of standardized health records, routine health screening, chronic disease management, infectious disease control, and an expanded national immunization program. Further, the
  8. 8. McKinsey Healthcare China’s Healthcare Reform: Moving beyond reading of the tea leaves 9 government will improve infrastructure for specialized healthcare institutions such as mental institutions, along with both pediatric and women’s centers. Accelerate public hospital reform: The Chinese government will launch pilot reforms in public hospitals that aim to reduce hospital reliance on margins from drug sales, eventually separating prescription of medicine from dispensing. Today, hospitals are dependent on revenues from drug margins to sustain their operations, but in the future, government will aim to offset this revenue loss through increased service fees and subsidies. Public hospital funding mechanism is arguably the core and central issue of China’s healthcare system today, however, given the various forces at work, we believe this will be the most difficult part of the overall reform and will take the longest to implement. What the reform will not change The reform will not play out as a large disruption that fundamentally alters the market overnight, but will change the nature of the market over time as policies are interpreted and piloted at provincial and local levels. In the mid term, patients will still have large out-of-pocket expenses, big hospitals and big cities will remain the core markets for MNC pharmacos, and companies will have to continue to address market access barriers at multiple levels. Significant out-of-pocket spending: While insurance subsidies will increase, coverage will be limited in the near term, in particular for outpatient treatment. For both URBMI and NRCMS, initial focus has been on covering inpatient treatment with co-pays that generally range from 30 to 65 per cent. Outpatient treatment coverage has often been excluded in the past, though recent government announcements suggest a push to fix this gap in coverage. Large urban cities will continue to be the core market: While much of the healthcare reform investment in insurance and infrastructure will focus on lower tier markets, there will also be significant investment to upgrade care provided in urban centers and expanded insurance for urban residents who are not covered by UEBMI. We believe lower tier markets will grow at a faster rate due to the influx of the new investment, but major urban centers will continue to experience strong growth in absolute value terms. Big hospitals will continue to be the key channel: Government has long targeted urban CHCs to lay the foundation for a primary care system and divert non-acute patient flow from over-stretched Class III hospitals. However, it also recognizes that it will take time for CHCs to play a big role as primary care centers. The withdrawal of an earlier policy enforcing mandatory CHC visits for initial diagnosis of common and chronic diseases to qualify for favorable reimbursement suggests recognition of the challenges involved, in particular on the upgrading/ training of the medical staff working at CHCs. As a consequence, big hospitals will continue to be the key channel for pharmacos in the short term. Barriers at multiple levels will continue to constrain market access: Healthcare reform implementation is unlikely to change the complex, multi-tiered market access barriers that pharmacos need to navigate in China. Companies will
  9. 9. 10 have to continue to invest in ensuring hospital level listing, effective management of bidding/tenders at multiple levels, listing of recently launched drugs on reimbursement drug lists, and overall price management. As such, pharmacos need to ensure that they do not take their eyes off their strategy and priorities that have driven strong growth over the last few years. Companies will need to continue to expand and improve their sales force and marketing efforts (e.g., improved segmentation and targeting, lower turnover, better local marketing capabilities), enhance their capabilities and investments in market access (e.g., reimbursement listing, tendering and hospital listing), as well as upgrade their distribution and channel management practices. What are the uncertainties in the reform implementation? Despite the significant momentum in the last few months, there is still uncertainty in three areas: the “next level” of policy setting, pace of implementation, and how the implementation varies by geography. For example, in policy setting, while the final EDL list is expected soon, the government has yet to announce key details of the policy, including pricing, tendering mechanism, distribution, reimbursement levels, and compulsory usage proportions. In terms of implementation pace, while we may ascertain clues from the current implementation paths of provinces, it is not clear how aggressively government agencies will push at the central and local levels and how some reform levers will be prioritized over others. This will depend, to a large degree, on funding capacity at the local level as well as the availability and deployment of well-trained personnel to administer the various infrastructure roll-outs and reimbursement schemes. Finally, all this activity will vary tremendously by geography; both across city tiers as well as across provinces. These uncertainties often lead a company to defer actions until there is even greater clarity on implementation path. We believe this is a mistake. Given the complexity and heterogeneity of the healthcare reform implementation, uncertainties and confusion will continue to abound. Companies that wait for the proverbial dust to settle before acting will lag behind those who are comfortable in operating with a greater level of ambiguity and have already started to take actions to seize the new opportunities and mitigate new threats.
  10. 10. McKinsey Healthcare China’s Healthcare Reform: Moving beyond reading of the tea leaves 11
  11. 11. 12 Implications of the reform: opportunities and threats
  12. 12. McKinsey Healthcare China’s Healthcare Reform: Moving beyond reading of the tea leaves 13 Fundamentally, the various elements of reform should provide a positive stimulus to the growth of the pharmaceutical market in volume terms. Improvements in insurance as well as in care delivery will lead to higher diagnosis, treatment and compliance rates. Pricing picture, on the other hand, is less clear. While increased insurance will provide patients with the ability to afford higher-cost drugs, the implementation of EDS will shift the mix towards consumption of lower-cost drugs. In addition, there is high likelihood that the government will further tighten price control for a broader category of drugs as it gets more involved in providing insurance. Overall, the reform implementation is likely to further sharpen the division of the Chinese pharmaceutical market into two broad segments: “Innovative/Premium” segment drugs that are prescribed largely in urban hospitals, most on the Reimbursement Drug List (RDL) and thus partially reimbursed through UEBMI and URBMI; and “Volume” segment drugs that will be used largely in CHCs and rural primary care institutions, listed and supplied through the Essential Drug System (Exhibit 2). While specific opportunities and threats will be highly dependent on a given company’s product portfolio, competitive position, and risk appetite, there are four broad areas that we believe pharmacos should evaluate as they think about implications of the reform for their own business plans in China. EDS – a double-edged sword? Implementation of an effective EDS system has the potential to have major impact on the industry. While there are clearly uncertainties around the impact of EDS (in particular, on the size of the final molecule list and how quickly patient flow will increase outside big hospitals), companies would be wise to think through the potential risks to their business under several scenarios, as well as the opportunities to participate in the much broader “volume” segment of the market. Based on certain provisional lists that Exhibit 2: Reform will likely sharpen the division of the Chinese pharmaceu- Exhibit 2: Reform will likely sharpen the division of the Chinese tical market into market into two broad segments pharmaceutical two broad segments Drug supply Medical insurance Medical provision “Innovative/Premium” Private insurance segment drugs, prescribed largely in Non-reimbursable Urban Hospitals urban hospitals, products partially reimbursed BMI: Basic Medical through UEBMI and Insurance for Urban URBMI Employees and Urban Residents Products on RDL Urban CHCs “Volume” segment drugs, used largely in RCMS: Rural Co- CHCs and rural operative Medical primary care Scheme institutions, listed and supplied through EDS Rural healthcare Products on EDS institutions Assistance NOTE: RDL: Reimbursed Drug List, EDS: Essential Drug System, TCM: Traditional Chinese Medicine, BMI: Basic Medical Insurance, RCMS: Rural Cooperative Medical Scheme, CHC: Community Health Center
  13. 13. 14 have been circulated, the exposure amongst leading pharmacos to drugs on EDS ranges from 20 per cent to 60 per cent of total sales (Exhibit 3). Pharmacos with a large portion of revenues from drugs that end up on EDS could see a significant loss of potential revenues if prescription volume shifts to CHCs, and they are not able to compete with low-priced products in the EDS tenders. Further, having a competing molecule on the EDS will impact competitive dynamics. Pharmacos with access to low cost manufacturing (ideally China-based) could consider competing in the volume segment, for their own but also for the broader list of EDS molecules. This would enable them to significantly expand access to the broader Chinese pharmaceutical market with a new business model that relies less on heavy investment in sales and marketing. However, pharmacos would need to manage the price risks as successive tenders may make the opportunity unsustainable, as well as ensure robust supply base, and scale-up Government Affairs (GA) and commercial capabilities to win provincial tenders. Focus on micro-markets to gain competitive differentiation in execution: Local reform implementation will further exaggerate local differences making “micro-market” execution a key competitive advantage. Many pharmacos have already implemented some form of regionalization model, often aggregating several provinces and placing critical capabilities in regional offices (e.g., local marketing, GA), and empowering them to tailor execution to local needs. Going forward, companies will need to further improve their ability to tailor their approach based on the local direction of reform implementation. Exhibit 4 shows an example of the different implementation paths taken by Zhejiang and Yunnan provinces in the last two years— Zhejiang has focused on drug pricing pilots and Yunnan on insurance coverage and hospital reform. We observe this variation across China as provinces have now collectively launched over 250 experimental healthcare reform pilots (Exhibit 5). Beyond province-level differences, we often see very different paths adopted by cities within a province. For example, in Guangdong province, the provincial capital Guangzhou is slow to develop new CHCs, while the other two major cities, Exhibit 3: EDS exposure amongst leading pharmacos ranges from 5-40% Exhibit 3: EDS exposure amongst leading pharmacos ranges from 5-40% of sales based on current provisional list list of sales based on current provisional DISGUISED MNCS MNCs with significant sales from EDS drugs, 2008 Proportion of total sales on EDS draft Percent 45 40 G 35 J 30 I E 25 C 20 D 15 H F 10 K A 5 0 0 100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 Sales of drugs on EDS RMB millions SOURCE: MoH; Industry data
  14. 14. McKinsey Healthcare China’s Healthcare Reform: Moving beyond reading of the tea leaves 15 Exhibit 4: Different implementation paths taken by Zhejiang and Yunnan Exhibit 4: Different implementation paths taken by Zhejiang and Yunnan Zhejiang Yunnan Insurance coverage expanded to rural areas of Red River Hani and Yi ethnic group autono- Insurance mous region coverage Began to provide medical insurance and increase the basic living allowances standard to the disabled in urban areas Local prices adjusted for 21 different medicines sold Zhejiang Price Bureau disclosed maximum retail price for 1,002 Chinese traditional patent Drug medicines pricing Drug prices reduced at village and town clinics (including county clinics and community health service organizations) Maximum retail price disclosed for 161 drugs, with average price drop of 30% 2 community hospitals in Ningbo began to Unified bidding and delivery of drugs pilot zero price markup implemented in Xuanwei. New RCMS Hospital management office set up to approve prices reform Hospital pharmacy trusteeship implemented, including cancellation of 10% increase of drug price Strengthened promotion of maternal and Public child healthcare, effectively prevented health giving birth at home SOURCE: McKinsey reform pilot database; press search Exhibit 5: Reform implementation will be uneven due to differences in pace, Exhibit 5: Reform implementation will be uneven due to differences discipline and funding among provinces in pace, discipline and funding among provinces Large number of ongoing pilots (over 250) at varying levels of implementation; as of April 1, 2009 EXAMPLE Summary of pilots Location Pilots Location Pilots Number Shanxi Online drug bidding Heilongjiang Hospital trusteeship Category of pilots Examples Gansu DRG in selective Jilin No deductibles for ER diseases Liaoning Special insurance Coverage 6 Expand coverage Ningxia Include TCM into during unemployment of regional RDL NRCMS Define drugs to be included in provincial RDL Pricing 49 Price cutting Location Pilots Hospital pharmacy trusteeship Anhui Cut average drug prices by 5% Online drug bidding Jiangxi Experiment DRG Reimburse- 91 DRG system in system ment selective disease Zhejiang Price-cut up to 30% for categories 161 drugs BMI expanded coverage BMI insurance upgrades Location Pilots Location Pilots Public 50 Expand vaccine Sichuan Online drug bidding health portfolio for Chongqing DRG application in Hainan Online drug bidding children selective hospitals Guangdong NRCMS management Public 47 Separation of by Private insurance hospital Qinghai Apply DRG in hos- prescribing and Shenzhen Coverage of catas- reform pitals covered by dispensing trophic diseases NRCMS SOURCE: McKinsey reform pilot database; press search
  15. 15. 16 Shenzhen and Dongguan, are much more advanced in this respect as well as implementing policies that help encourage patient flow to shift to CHCs (e.g., full funding support from government for zero mark-up on drugs in CHCs). Similarly, we see wide variation across cities in a given province on how they fund URBMI insurance programs, the way public hospital reform is being encouraged and how well prepared they are for implementation of EDS. Pharmacos can gain a competitive edge with a deep and granular understanding of local markets, and addressing the local market-specific dynamics by tailoring their activities (e.g., sales force targeting, GA priorities, tendering strategy) accordingly. We acknowledge there will always be a tension between keeping things simple and clear enough to ensure robust execution, and a tailored approach that, while appears good on paper, may be difficult to execute in China. Successful pharmacos in China will learn how to get this balance right as they adapt to the changing healthcare environment. Adapt your go-to-market model to follow the new patient f low: Efforts to encourage patients to seek primary care outside of big hospitals have accelerated over the past few years. While at an aggregate level the number of CHCs has grown quickly (Exhibit 6), the shift in patient flow has lagged behind. However, we have observed that in many cities (largely top tier cities with sufficient local funding), the additional investment in infrastructure, greater incentives for patients to visit CHCs and improvement in quality of medical staff is beginning to make a real impact on patient flow. In addition to the shift in top tier cities towards CHCs, the reform will also lead to faster growth of patient flow in lower- tier cities and rural areas compared to the top tier cities. For pharmacos with primary care/chronic therapy drugs, CHCs can be a complimentary channel to their existing hospital-focused sales efforts. Exhibit 6: Incentives to promote CHCs will further drive patients to seek Exhibit 6: Incentives to promote CHCs will further drive patients to seek primary care outside of big hospitals primary care outside of big hospitals Patient volume will be further driven by Number of CHCs has grown quickly incentives to promote CHCs Number of CHCs “Zero-markup” policy for Subsidize drugs drug price CHCs sell to patients at hospital purchase price and 3,704 get margin subsidy from local +32% 3,160 government 2,077 1,128 1,382 GP training at Class III 692 753 GP doctor hospitals training Standardized GP training for 2002 03 04 05 06 07 2008 new medical school graduates Many CHCs in the past were a Upgrade CHC facility Facility ‘reclassification’ of Class I/II hospitals upgrade Latest reform announcement specified 3,700 urban CHCs to be constructed Include CHCs into BMI between 2009 and 2011 Insurance treatment and reimbursement coverage SOURCE: MoH Hospital Database 2004-07, China Health Statistical Yearbook 2005-08
  16. 16. McKinsey Healthcare China’s Healthcare Reform: Moving beyond reading of the tea leaves 17 Recognizing the potential, some pharmacos have already started targeting CHCs for visits by their sales force. However, there is a real risk that CHCs will end up primarily prescribing low cost drugs. Under that scenario, for most MNC pharmacos, the CHC channel will, at best, be a distraction. Companies, therefore, need to objectively assess their portfolio and ability to compete in CHCs and lower tier cities before making a significant investment to target the ‘new channels’. Re-examine expanded set of acquisition options: Historically, MNC pharmacos have approached acquisitions of Chinese pharmaceutical companies with caution. Implementation of reform is leading many to reassess this position. From an industry structure perspective, the reform is likely to kick-start consolidation of the local pharmaceutical industry. If MNC pharmacos are truly interested in participating in the ‘volume’ segment of the market, a local company acquisition or partnership is likely essential. On top of providing access to an expanded set of molecules, it would provide a base for low cost manufacturing as well as potential advantages in the bidding process. In addition to the ‘volume’ market, MNC pharmacos can substantially expand their presence in the broader branded generics segment through an acquisition that helps them overcome some of the access barriers (e.g., hospital listing of one local and one MNC brand per molecule). While the list of potential acquisition targets is long, the real challenge is in executing a deal that creates value for the pharmacos. Value destruction can happen through loss of sales revenue from aligning commercial practices, departure of critical talent in the acquired company, and quick erosion of inherent advantages of being a local company (e.g., low cost base, preference in local bidding). Companies need to go in with eyes wide open on the potential challenges and ensure they have the management team in place with sufficient experience in acquisitions in the Chinese context.
  17. 17. 18 Planning to win
  18. 18. McKinsey Healthcare China’s Healthcare Reform: Moving beyond reading of the tea leaves 19 As companies think through potential strategies to win in the evolving environment, they also need to pay close attention to capabilities. We would like to highlight four priorities that pharmacos should consider. Revisit portfolio/brand planning with a scenario based mindset: Given the uncertainties in the reform implementation, companies need to develop a handful of scenarios that frame their brand and portfolio planning, and test the robustness of their brand strategies under these scenarios. Let us illustrate this using an example for Hypertension therapies in China. Exhibit 7 shows three possible scenarios for the Hypertension market evolution driven by the major elements of reform. Companies can then quantify the likely changes in the market under each scenario and test the robustness of their existing strategy. Exhibit 8 shows a possible output of this model indicating the core channels and geographies of the Hypertension market under each scenario. The important part is not the precise quantification of any particular scenario, but rather to make sure the brand team has thought through possible scenarios and has in place a systematic way to track how reform implementation is playing out, and has contingency plans prepared for alternate scenarios. Explore modified sales & distribution model to penetrate new channels: Profitably targeting the primary care channels (e.g., CHCs), and the fast-growing lower tier cities/rural areas will require companies to explore changes to their current sales and distribution model. Companies need to explore a less frequency-intensive model with greater focus on medical education events that target a larger number of physicians. The role of reps targeting the primary care channel may need to evolve to handle a larger number of products compared to the effectively single-product reps one sees today in large Chinese hospitals. In addition, pharmacos need to evolve their relationship with distributors to pursue the new channel opportunities. Success will require creating broader strategy partnerships with a small number of distributors who can effectively reach the lower tier cities/rural areas and provide strategic help in managing the tenders that are likely to be prevalent in the primary care channels. Revamp Government Affairs to manage increasingly complex market access challenges: Pharmacos should reevaluate the scale of resources they have in GA, the deployment across regions/cities, and the mandate they give to their GA organization. Historically, most GA organizations have been sub-scale compared to the size and complexity of the Chinese pharmaceutical market. To win in the evolving environment, companies will need a proactive GA organization that is able to systematically track and monitor the various elements of the reform, and is capable of helping the commercial organization draw the right insights about implications for the business. In addition, we believe there is a big opportunity for pharmacos to help shape how local authorities interpret and implement the various elements of the reform. However, to do this effectively will require an upgrade in both the size and the capabilities of the GA organization. Get internally organized to pursue business development/acquisition opportunities: All major pharmacos have a business development (BD) department in China and have spent significant energy in the past few years looking for deals. However, there has been very little to show for this effort. As companies take a fresh look at potential BD opportunities, a critical element before
  19. 19. 20 Exhibit 7: Example scenarios for market evolution of hypertension Exhibit 7: Example scenarios for market evolution of hypertension ILLUSTRATIVE Scenario 1 2 3 “EDS drives hyper- “Lower tier drives “Limited impact” tension treatment” significant growth” Accelerate shift CHCs will account for CHCs will account for increasing share of increasing share of of patient flow patient volume patient volume toward CHCs Healthcare reform evolves at a slow pace with limited Major product listed on Major product listed on impact EDS and drives EDS and drives Impact of EDS increased hyper- increased hyper-tension No elements of reform become tension treatment rates treatment rates Key forces mandatory in near- Impact of lower term Insurance coverage Lower tier infra- and rural structure and cover- tier coverage and infrastructure evolve age investment drive infrastructure slowly and have increase in lower tier limited impact market access and treatment affordability Limited price cuts for Price pressure for Price pressure on Increase price anti-hypertension EDS-listed product EDS-listed products, pressure products and gradual elimi- nation of innovative category Exhibit 8: Speed and emphasis of reform implementation will lead to Exhibit 8: Speed and emphasis of reform implementation will lead to different hypertension market development scenarios different hypertension market development scenarios ILLUSTRATIVE Core market Secondary market Limited/no presence Scenario 2 Scenario 3 Current anti- Scenario 1 “EDS drives hyper- “Lower tier drives hypertension market “Limited impact” tension treatment” significant growth” Rural Geography Tier III Tier II Tier I Class Class CHC/ Retail Healthcare reform EDS drives treatment Lower tier infrastructure III II Class I evolves at a slow pace affordability and coverage invest- with limited impact CHCs become the ment drive increases in Channel lower tier market access No elements of reform place for hypertension become mandatory in diagnosis, treatment and treatment near-term and refills affordability EDS further drives treatment affordability
  20. 20. McKinsey Healthcare China’s Healthcare Reform: Moving beyond reading of the tea leaves 21 getting started is to ensure solid internal alignment on the strategic rationale for pursuing a BD deal in China, as well as agreement on the parameters under which a deal is acceptable to the company (e.g., minority stake deals, level of effort required to bring commercial practices in line with global standards). In our experience, it is the lack of alignment between the local, regional and headquarters that leads to the premature end of many business development opportunities in China. *** Healthcare reform will play a central role in the evolution of the pharmaceutical market. While there are open questions about exactly how implementation will happen at the local levels, no pharmaco with leading ambitions in China can ignore the potential opportunities and the threats that the reform presents for their business. Successful companies will find the right balance between a razor- sharp focus on near-term execution, and pursuing few strategic initiatives that help them capitalize on the reform. The authors would like to thank our colleagues in the McKinsey Greater China Healthcare practice for their contributions to this paper. For additional information contact: Ari Silverman (ari_silverman@mckinsey.com) Amie Chu (amie_chu@mckinsey.com) Yehong Zhang (yehong_zhang@mckinsey.com) Franck Le Deu (franck_le_deu@mckinsey.com) Yinuo Li (yinuo_li@mckinsey.com) Rajesh Parekh (rajesh_parekh@mckinsey.com)
  21. 21. 22
  22. 22. McKinsey Greater China Healthcare July 2009 Designed by Greater China Newmedia Copyright © McKinsey & Company www.mckinsey.com

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