1. 1 8 i n s i g h t n ov e m b e r 2 0 1 4
B Y ANDREW CHEN AND JOHN LIN
healthca re
A PwC study
reveals
significant
opportunities
for pharma-
ceutical
companies at
county-level
hospitals in
China
Editor’s note: This article is part of a short series
from PwC. Given recent developments regarding
the pharmaceutical industry in China, this piece
looks at whether the China pharmaceutical
market is still attractive.
A
s the world’s fastest-growing
pharmaceutical market, China
a t t r a c t s i m m e n s e g l o b a l
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 programs.
Analysts have scaled down their growth
estimates from last year, and this trend could
continue. However, earlier this year, a PwC study
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 county-level
hospitals, located in more than 1,700 “basic”
county level cities (Xian Ji Shi) which we also
define 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
In Counties,There’s
Room for Growth
County hospitals are ripe with opportunities for drug companies. Pictured here is Jingdong Hospital in Luannan county,
Hebei province.
shutterstock

2. n ov e m b e r 2 0 1 4 i n s i g h t 1 9
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 percent share, oncology and
cardiovascular products occupy a relatively large
share as well. These are mostly OTC products,
where Rx and branded generics account for
roughly 30 percent. Though small, the demand
for MNC and MNC-JV products has achieved
considerable scale as well.
PwC’s research shows that only a few
domestic manufactures have approached this
Tier 6 and 7 market, accounting for less than 10
percent of the market share. Beside usage of
products on China’s Essential Drug List (EDL),
the market is monopolized by general dealers,
individuals and distributors. Part of the issue is a
knowledge gap. Many hospital leaders and
healthcare professionals (HCP) have expressed
the desire for additional clinical education on
the therapeutic usage of the drugs to understand
the efficacy and benefits to patients. Further
study reveals that it’s the complexity and unique
characteristics of the market that have hindered
MNCs from pursuing the pharamecutical
market. Most companies struggle to understand
entry barriers including affordability, policy,
HCP needs and the requirement for a different
channel model.
Low affordability
Generally speaking, income and consumption
level are relatively low in rural areas. Although
healthcare reform has provided nearly full
coverage, the county system primarily uses the
new rural cooperative 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 market access for portfolio products.
Policy impact
While Chinese healthcare reform prioritizes
the development of county-level hospitals, it also
infrastructure around capacity and technology.
Many of these county-level hospitals even exceed
t h e s t a n d a r d s o f C l a s s I I h o s p i t a l s ,
benchmarking Class III hospitals. The quality of
the county-level hospitals has attracted more
patients from rural and township counties
because of the lack of basic healthcare services
back home, further boosting the prosperity of
county-level hospitals. Currently, this segment
has maintained a healthy growth rate of 20 to 30
percent over the past few years.
Considering the macro environment changes,
the growth rate of the county-level market
segment will persist at more than 20 percent
each year, while the total China market may slow
down to only 10 to 15 percent. The county
hospitals 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 around RMB200 billion. Our research
indicates that government hospitals typically
boast more than 500 beds and an annual drug
procurement budget of about RMB60 million.
More advanced institutions with revenue in
excess of RMB200 million with 1000-plus beds
may have a drug procurement budget upwards
of RMB100 million. Based on the configuration
that each county has one People’s Hospital, one
traditional Chinese medicine (TCM) hospital
and one women and children’s health center,
PwC estimates that the average drug value size is
approximately RMB100 million per county via
these hospitals.
The drug consumption volume from the
1,700 county hospitals compounded with local
clinics and community health stations is
estimated at RMB200 billion, accounting for a
quarter of the entire China pharmaceutical
market. 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 the Chinese
pharmaceutical market and will fundamentally
change the current configuration.
“Understanding
the
competitive
landscape in
this market
will help
MNC’s to
drive their
future business
strategies in
China.”

3. 2 0 i n s i g h t n ov e m b e r 2 0 1 4
enacts strict market restrictions. First, public
hospitals are required to control their overall
drug consumption percentage—for those at the
county-level, this percentage is at less than 40
percent. 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 hospitals
compared with in county-level ones. Currently,
EDL usage hovers between 10 to 20 percent and
is expected to exceed 20 percent.
Additionally, healthcare reform has stipulated
a “zero mark-up” policy for public hospitals in
Tier 6 and 7 cities, impacting these institutions’
profits. PwC estimates that about 80 percent of
county-level health institutions have adopted
this policy or central management to cope with
these challenges as alternatives.
Differentiated demands from HCPs
Many foreign manufacturers believe that the
compliance risk is rising in this market and that
county-level HCPs have clinical education needs
that are tough to meet. As such, compliance
becomes a key concern. “The doctors have quite
clear clinical education requirements, and the
demand has not been satisfied,” says one
company leader after visiting a large number of
hospitals at the county-level. “The support of
such academic requirements on the content is
key to penetrating this market but overshadowed
by compliance concerns.” Moreover, the program
needs to be re-engineered considering the HCP
knowledge gap and the dynamic regulatory
requirement to meet county-level hospital needs.
Need for a feasible model
Agents and big distributors are the primary
channels through which to sell products to
county-level hospitals, due to any single
hospital’s small sales volume. Nonetheless,
logistical challenges abound. The successful
operations of any drug manufacturer will require
more innovation than just simple adaptations of
Tier 1 and Tier 2 sales models.
The medical market of Tier 6 and 7 is
attractive, and PwC believes it is important for
Mickey:
Please
use
a
box
around
and
light
gray
color
background.
Tier 6&7 cities market size estimation (2013)
PwC

4. n ov e m b e r 2 0 1 4 i n s i g h t 2 1
local players and especially for MNCs. This
segment will be the main driver for steady
growth in China over the next few years. MNCs
have huge advantages including a sophisticated
promotion model, top sales management, strong
product portfolio and R&D capability. This
competitive edge enables MNCs to perform well
in the premium market. However, it may be too
difficult to translate their existing business
models to conquer the challenges of the county
market. Some of the first companies in this
market are still struggling to develop a feasible
business model after failing due to various
reasons.
Consequently, pharmaceutical companies
intent on pursuing this burgeoning business
opportunity will need to conduct in-depth
analysis of the characteristics and factors affecting
the Tier 6 and 7 markets, devise an innovation
model in line with the laws of market operations
and make strategic developments based on the
nature of market enterprise. PwC has analyzed
and identified some practical elements for success
and suggests manufacturers integrate them into
their enterprise strategy and tactics before
working out their market entry model. In next
issue, we will discuss more about how some of the
companies have successfully executed these
innovative models to meet the new market and
compliance requirements.
Andrew Chen is China Med Tech Leader in the
PwC Management Consulting Shanghai office. He
can be contacted at andrew.cy.chen@cn.pwc.
com. John Lin is a Senior Manager in the PwC
Management Consulting Shanghai office, and can
be contacted at john.j.lin@cn.pwc.com