Tackling the Essential Drug List (EDL) Challenge: Navigating the Changes and Planning for Success


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L.E.K.'s Helen Chen presented at the European Union Chamber of Commerce in China on September, 3, 2013. Learn more about tackling the essential drug list (EDL) challenge by viewing her presentation.

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Tackling the Essential Drug List (EDL) Challenge: Navigating the Changes and Planning for Success

  1. 1. The materials contained in this document are intended to supplement a discussion with L.E.K. Consulting. These perspectives are confidential and will only be meaningful to those in attendance. iKbKhK=`çåëìäíáåÖ=iáãáíÉÇI=cäççê=PQI=`fqf`=pèì~êÉI=NNSU=k~åàáåÖ=oç~Ç=tÉëíI=pÜ~åÖÜ~á=OMMMQNI=`Üáå~ íW=USKONKSNOO=PVMM===ÑW=USKONKSNOOKPVUU===ïïïKäÉâKÅçã September 3, 2013 Auckland Bangkok Beijing Boston Chicago London Los Angeles Melbourne Milan Mumbai Munich New Delhi New York Paris San Francisco Shanghai Singapore Sydney Tokyo Wroclaw Tackling the Essential Drug List (EDL) Challenge: Navigating the Changes and Planning for Success
  2. 2. CONFIDENTIAL L.E.K. Consulting is a leading global strategy firm with extensive experience in life sciences Global Capability MedTech Experience & Expertise  22 offices worldwide, including 2 in China  Founded in 1983 in London; 15 years in China  1000+ consulting professionals; 100+ partners  Advised 20% of largest 200 companies globally  Highly differentiated from peer consultancies in analytically driven decision-making  Leading advisor to life sciences companies around the world with over 2,300 engagements; advised the top-5 medical device companies, top-5 biotechs and top-10 pharmas  More than US$120B in transactions in life sciences  Awarded Healthcare Sector Adviser of the Year 2010 by Acquisitions Monthly, Consultant of the Year at the 2011 Health Investor Awards, Management Consultant of the Year 2012 by Independent Healthcare  Other honors include Unquote” British Private Equity Awards Specialist Due Diligence Provider of the Year 2012, City A.M. Professional Services Firm of the Year 2011, The Queen’s Award for Enterprise: International Trade 2007  On the ground capabilities and experiences in China; over 50 projects each year in China life sciences and medical devices Introduction 1 Chennai Sao Paulo Seoul
  3. 3. CONFIDENTIAL Industry trends and evolution Policy analysis and response Growth opportunities analysis Strategic planning Therapeutic area diversification Sector diversification International expansion Portfolio planning and strategy Innovation strategy Outsourcing strategy Whitespace opportunities Shareholder value creation Target screening & identification - companies - products - partners Bidder screening and identification Vendor due diligence Commercial due diligence Fairness opinion Litigation support Negotiation & term sheet support - deal terms analysis - dynamic valuation tools Post-merger integration Market sizing and segmentation Product evaluation - attribute testing - target profile development - market share assessment - performance thresholds - revenue forecasting - financial modeling (NPV) - scenario and sensitivity analysis Competitive positioning Pricing and reimbursement Launch planning Commercialisation options Sales force optimization Brand management Lifecycle management Global expansion Corporate strategy Product & franchise strategy Transaction support* Note: * Transaction types include: M&A; partnerships (discovery, development, commercial); joint ventures; divestitures / spinoffs; and royalty monetization Performance improvement - relative cost position - business processes - turnarounds - organization and design - operational effectiveness - measurement & incentives Cost reduction - overhead / SG&A - inventory optimisation - sourcing and procurement Supply chain management - role of technology - planning and execution - alignment with channels - globalization - distribution / cold-chain mgmt Operational excellence Our clients call on us to address key strategic issues and deliver value-creating growth Introduction 2
  4. 4. CONFIDENTIAL National Essential Drug List (NEDL) is China’s official guide of basic medicine. Last version of NEDL was published in 2009 and was recently updated in 2013 as the “2012 version” China EDL discussion Source: NHFPC, L.E.K. analysis Number of NEDL drugs (2009, 12) 0 100 200 300 400 500 600 Chemical and biologics TCM 2012 version 520 Added drugs 213 2009 version 307 Number of drugs EDL: The list of most basic drugs in China Firstly published in 2009 Updated in 2013 (2012 version EDL) Each province is allowed to modify list as the provincial EDL (PEDL) Purchase menu for grass root health institutes and guidance for hospitals All EDL drugs are in national reimbursement list (Class A or B) Separate provincial tender for EDL used in grass roots institutes (e.g. CHCs) 3
  5. 5. CONFIDENTIAL Antineoplastic and psychiatry are the focus of recent NEDL update while most TAs broadly have added some drugs Note: * Total number of drugs added varies slightly from previous table due to categorization adjustment; ** The segment is new in 2012 list; ^ Includes analgesic, anti-pyretic, anti-rheumatology, and anti-gout Source: NHFPC, L.E.K. analysis China EDL discussion (1) 000 11111 222334444 6 7 9 1011 17 26 -5 0 5 10 15 20 25 30 Number of drugs Vitaminand minerals Ophthalmology Water, electrolyte,and acid-basebalance Biologic Birthcontrol Immunesystem Medicineused indiagnosis Anti-parasites Anti- inflammation^ Anaesthesia Anti-allergy Ear,nose andthroat Dermatology Nervoussystem Obgyn Detoxication Urologysystem Respiratory system Cardiovascular system Digestive system Hormoneand endocrine Anti-microbe Bloodsystem Psychiatry Antineoplastic** Number of new EDL drugs* (2009, 12) 26 22 21 43 24 24 34 8 9 12 18 5 10 7 7 11 3 4 5 7 10 8 4 1 62012 EDL 4
  6. 6. CONFIDENTIAL After the 2009 NEDL, each province modified and published their own provincial EDL 2009 2012 Ningxia Anhui Fujian Hubei Hebei Inner Mongolia Shaanxi Shanxi Henan Jilin Liaoning Guangxi Xinjiang Guangdong Jiangsu Jiangxi Hainan 2010 Q3 Source: Provincial Health Bureau, L.E.K. analysis Q4 H1 H2 H1H1 H2 2011 National Zhejiang Sichuan Tibet Shandong Yunnan Shanghai Chongqing Qinghai Guizhou Gansu Heilongjiang Hunan China EDL discussion H2 Beijing Tianjin Provincial EDL timeline Whether and when will the provinces update their new PRDL after the 2012 version NRDL? The guidance from NHFPC is that provinces should not largely modify the list this time 5
  7. 7. CONFIDENTIAL Many MNCs’ blockbusters are added in 2012 version NEDL although some of them have already been listed in PEDL of a number of provinces 00 44 16 18 19 20 21 0 5 10 15 20 25 Number of provinces Oxaliplatin, Sanofi (Eloxatin) Quetiapine, AZ (Seroquel) Ipratropium Bromide, BI (Atrovent) Clopidogrel, Sanofi (Plavix) Nifedipine slow release, Bayer (Adalat) Valsartan, Novartis (Diovan) Omeprazole, AZ (Losec IV) Amlodipine, Pfizer (Norvasc) Acarbose, Bayer (Glucobay) Number of provincial EDL listing among 31 provinces (2013) Source: IMS, China Licensed Pharmacist, Provincial EDL Tender websites, Provincial Health Bureaus, L.E.K. analysis China EDL discussion 2010 Sales (Millions of RMB) 7501,150 4201,8807007501,150 80 170 6
  8. 8. CONFIDENTIAL China’s pharmaceutical environment poses challenges to EDL drugs China EDL discussion Challenge to EDL National to-patient price cap Continuing brand power Maintain volume in Level 3 and 2 hospitals Competition in provincial tender  Cancellation of independent pricing status causes significant price cut of originators  NDRC ceiling price cuts of both generics and originators are expected to continue  But the price cut is only applied to EDL drugs National to-patient price cap  EDL tender is so challenging in most provinces for MNC players, because price is one of the most important factors in EDL scoring system  However, MNC could avoid head-to-head competition with domestics in EDL by participating policy-favored RDL tendering in provinces where OPOs have a separate group Provincial tender  The mandating of EDL drug usage in hospitals does not automatically mean that MNCs will lose share  But in several provinces that stipulate that drugs on the EDL are not eligible for RDL tendering, MNC EDL drugs do risk their volume in the higher level hospitals Maintain volume in Level 3 and 2 hospitals  MNCs continue to enjoy strong brand preference in hospitals, and can leverage their brand and the quality associated with the brand to support higher-priced products once they have won tenders and are listed in hospitals Continuing brand power Challenges to EDL drugs Source: L.E.K. interviews and analysis 7
  9. 9. CONFIDENTIAL Lower price ceilings of independent drugs took place not only for EDL drugs or MNC originators 0 10 20 30 40 Percent of price cut Price cut of independent pricing drugs from 2006-07 period to 2010-13 period Source: NDRC, NHFPC, L.E.K. analysis Besides price cut, we identified 42 products, both originator and domestic, have their independent pricing status cancelled. Only 15 of the 42 were on the EDL. But how to prevent future pricing cut? MNC originators not in NEDL MNC originators in NEDL Domestic drugs China EDL discussion 8
  10. 10. CONFIDENTIAL The most aggressive independent pricing cuts mainly happened in urology, digestive, cardiovascular, nervous system and blood system therapeutic areas 6 889 10 10 10 11 16 23 0 10 20 30 40 Percent of price cut Water, electrolyte,and acid-basebalance Anaesthesia Anti-allergy Respiratorysystem Psychiatry 10 Obgyn Ear,nose andthroat Anti- inflammation* Medicineused indiagnosis Immunesystem 12 Hormoneand endocrine 12 Vitaminand minerals Bloodsystem 17 Nervoussystem 17 Cardiovascular system 18 Digestivesystem 20 Urologysystem Average price cut of independent pricing drugs from 2006-07 period to 2010-13 period by therapeutic areas Note: * Includes analgesic, anti-pyretic, anti-rheumatology, and anti-gout Source: NDRC, NHFPC, L.E.K. analysis China EDL discussion 1 9 6 9 4 1 27 4 4 3 1 2 9 2 2 2 2 Number of drugs having price cut Average price cut Range of price cut 9
  11. 11. CONFIDENTIAL Drugs on NEDL appeared to have only slightly higher price cut than non-EDL drugs Source: NDRC, NHFPC, L.E.K. analysis China EDL discussion 15 11 24 40 0 10 20 30 40 50 60 EDL drugs Non-EDL drugs Percent of price cut Price cut of independent pricing MNC drugs from 2006-07 period to 2010-13 period Price cut of mass generic drugs from 2006-07 period to 2010-13 period 23 25 58 50 0 10 20 30 40 50 60 Non-EDL drugs Percent of price cut EDL drugs 10
  12. 12. CONFIDENTIAL Many MNC OPO products maintained their independent pricing status even after getting on the EDL, and increased their share China EDL discussion Note: * Based on sales value and volume within SIPI (Shanghai Institute of Pharmaceutical Industry) sampled Level 3 and 2 hospitals of 22 cities Source: Shanghai Institute of Pharmaceutical Industry, NDRC, L.E.K. analysis Examples of MNC drugs in 2009 NEDL Listed in 2009 NEDL Independent pricing was canceled Independent pricing remained Slight price drop (<10%) Large price drop (>10%) Slight price drop (<10%) Largely price drop (>10%) Independent pricing status Hospital purchase price drop Losec (omeprazole) capsule, AstraZeneca Example MNC brand Market value share within molecule 2009-12* Price change 2009-12 Zocor (simvastatin) tablet, MSD Mandibao, (glipizide) tablet, Pfizer Rytmonorm (propafenone) tablet, Abbott (7%) (43%) (6%) (22%) 28% to 1%, decrease by 27 share points 61% to 71%, increase by 10 share points 82% to 90%, increase by 8 share points 48% to 62%, increase by 14 share points 11
  13. 13. CONFIDENTIAL MNC pharmaceutical companies are much better recognized in China Very familiar Recognition of MNC and other pharmaceutical companies (N=220) 2.62.7 4.24.2 1.91.9 2.6 3.9 1 2 3 4 5 Rating Zhejiang Huahai Shenzhen Zhijun Jiangsu Hansoh EisaiTakeda Yangzijiang NovartisSanofiAZGSKMSDPfizer MNC Other companies Not very familiar Source: L.E.K. survey and analysis China EDL discussion 12
  14. 14. CONFIDENTIAL Products of MNCs appear to bring higher satisfaction to physicians Source: L.E.K. survey and analysis Physician’s satisfaction with Losartan products (N=132) 3.1 3.3 3.3 3.3 4.0 3.0 3.0 4.0 3.3 1 2 3 4 5 Unknown domestic brand Zhejiang Huahai Yangzijiang Chongqing Kerui Chengdu Hengrui Sandoz Unknown imported brand Beijing Wansheng MSD (Cozaar) MNCs Domestic Very unsatisfied Very satisfied 3.4 2.5 3.4 3.5 3.0 3.0 5.0 4.0 4.1 1 2 3 4 5 Level 3 hospital Level 2 hospital Very unsatisfied Very satisfied China EDL discussion 13
  15. 15. CONFIDENTIAL Historical sales record shows that MNCs have been maintaining or increasing share within Level 3 and Level 2 hospitals even if they entered the majority of PEDLs 0 20 40 60 80 100 11 121009082007 Percent Glucobay (Bayer, MNC brand) 2 domestic generics 0 20 40 60 80 100 2007 08 09 1210 11 Over 50 domestic generics Norvasc (Pfizer, MNC brand) Percent Market value share of acarbose brands* (2007-12) Market value share of amlodipine brands* (2007-12) Note: * Total sales value within SIPI sampled Level 3 and 2 hospitals of 22 cities Source: Shanghai Institute of Pharmaceutical Industry, L.E.K. analysis China EDL discussion 14
  16. 16. CONFIDENTIAL Under the status quo of EDL policy and actual implementation, the increasing target of EDL usage may not actually pose major threat to MNCs Source: Sichuan Health Bureau, NHFPC, L.E.K. analysis China EDL discussion Usage of EDL drugs as % of total pharma spending (2009-12, 13) 2013 national guide target Level 2 Hospitals: 40-50%; Level 3 hospitals: 25-30% Gap with 2013 target due to not strictly implemented Purchase through RDL tenders Increase due to EDL expansion itself Local targets during 2009-12 Level 2 Hospitals: 30-40%; Level 3 hospitals: 15-20% Potential increase of EDL drug usage Possible realistic target Will there be more strict implementation? Will EDL molecules that access the market through RDL still account for EDL usage? Close monitor is needed for policy trend 15
  17. 17. CONFIDENTIAL Provinces Time of announce- ment Eligible for RDL tender for county level and above hospitals Quality categorization in bidding of EDL tender Bidding mechanism of EDL tender Weight of pricing Threat to MNC in level 2/3 hospital market Guang- dong** Drugs with independent pricing May 2013 Yes None Comprehensive rating 90% Drugs without independent pricing No Jilin May 2013 Yes None “Two-envelope” for grass root institute tender N/A Comprehensive rating for Level 2/3 hospitals 30% Qinghai July 2013 No Yes “Two-envelope” N/A After the announcement of the 2012 NEDL, Guangdong, Jilin and Qinghai published their provincial tender rules for EDL drugs China EDL discussion Note: * Besides the official provincial tender rules, some provinces published purchasing rules for the transition period before announcing their official EDL tender rules; ** Guangdong proposed the draft in May 2013 for public review. It was stated to implement in July but has been implemented. For a drug in EDL, there is different policies depending on the drug’s independent pricing status Source: Provincial drug procurement centres, L.E.K. analysis Provincial tender rules for EDL drugs published after 2012 NEDL announcement* The provincial tendering rules are not uniform and need to be looked at one-by-one Least threatening Most threatening 16
  18. 18. CONFIDENTIAL Managing For EDL Success Source: L.E.K. survey and analysis Immediate Short term Least important Most important Initiatives to manage for EDL success Collect and analyze tender policy info Prioritize selective provinces Prioritize RDL tender Plan for the shifting volumes Attend EDL tender if policy is favorable Track, anticipate and adapt to regulatory changes China EDL discussion Monitor the CHC opportunity Identify provinces with favorable policy and participate. If winning EDL tender, focus on the CHCs with larger potential, explore the business model to tackle CHC markets Prioritize the initiatives to tackle the EDL challenge will be the key to success Decide whether or not to go for PEDL 17
  19. 19. CONFIDENTIAL Being listed in EDL causes risks to a MNCs’ OPO, yet creates opportunities if the company has capabilities to tackle grass root healthcare market Source: L.E.K. analysis China EDL discussion MNCs need to review internal capabilities and evaluate potential risks to decide whether or not to come forward to EDL listing Risks of NEDL/PEDL listing Advantages of NEDL/PEDL listing  Lose tender for a whole province if RDL tender is not eligible for Level 3 and 2 hospitals and the EDL tender policy is not favourable  If one EDL product trades independent pricing status or premium price for EDL listing, it will have less room to defend future price cut pressure  Being an EDL drug can expose a drug to Drug Quality Consistency Evaluation program  There is an opportunity to enter grass root healthcare market if the EDL tender policy is favourable. However, the company needs to have sales and access capability to cover the market  Fulfilling the increasing EDL usage requirement of hospitals may gaining preference of hospitals  Being NEDL drug does not necessarily mean losing independent pricing or much higher price cut 18
  20. 20. CONFIDENTIAL MNCs need to consider the potential scenarios and internal capabilities to prepare key strategies Source: L.E.K. analysis China EDL discussion Make scenarios of external factors Analyze internal capabilities Product penetration at different health institute levels within a province Channel coverage within a province Independent pricing status Pricing requirement to win EDL tender EDL drug usage policy Tender policy Scenarios/ parameters  Favor MNCs’ OPOs in EDL/ Not favor  Eligible for RDL tender for Level 3 and 2 hospitals  Mild price decrease is able to allow EDL tender win/ Large price decrease is required  Increasingly strict implementation/ The implementation remains unchanged  With independent pricing status/ without independent pricing status/ RDL product  Penetration among Level 3 and 2 hospitals and penetration among grass root health institutes  With access to grass root health institutes/ without channel access to grass root health institutes Examples of key strategies decisions to make  What if a provincial tender policy is not favorable?  What is the bottom- line pricing if going for EDL tender?  What if a product loses independent pricing?  How to take the share if competing MNCs’ molecules loses tender? The policy movements are relatively unpredictable. However, MNCs can use analytical tools to prepare key strategic decisions before the challenges or opportunities present themselves 19
  21. 21. CONFIDENTIAL With prepared strategies and mostly updated information, MNCs can decide the actions based on the situation Source: L.E.K. analysis China EDL discussion Situation examples Actions  Current penetration is still low in Level 3 and 2 hospitals. Little presence in grass roots healthcare institutes  Tender policy in the province does not favor EDL drugs and RDL tender is not eligible for EDL drugs  Competing MNC molecule is in EDL MNC drug is in RDL with competing molecule in EDL  Increase sales capability in the province to take share from competing EDL drug in Level 3 and 2 hospitals if the competitor loses tender  Not go for PEDL listing due to lack of capability in grass root healthcare market  Mature product in Level 3 and 2 hospitals. Mostly used for inpatients  Eligible for RDL tender for Level 3 and 2 hospitals MNC drug in EDL with favorable policy  Use RDL tender to access Level 3 and 2 hospital market  Not go for EDL tender to maintain price level  Mature product in Level 3 and 2 hospitals. Oral drug for outpatient use  Not eligible for RDL tender and harsh EDL tender rules, highly likely to lose tender for the whole province MNC drug in EDL with harsh policy  Deemphasize the provincial market by shifting the sales capability to other markets  Continue marketing activities to maintain the branding image within the market to prepare for the potential next round tender 20
  22. 22. CONFIDENTIAL 21 We are happy to further discuss market access, pricing and commercial issues to support your life sciences strategy and strategy activation China EDL discussion Examples of published insights on life sciences (2013)  Tackling China’s EDL Challenge: Navigating the Changes and Planning for Success, PharmAsia Newsletter  Expanding in China MedTech Market: Where To Go From Here, In Vivo  Customer Excellence: Business Model Innovation for MedTechs  Investing in Health, EuroBiz  Looking After China’s Elderly, China Business Review  Hospitals Adopt New Strategies to Boost Profitability, but Still Face Deep Challenges: A New Imperative for MedTech  Biopharma & Life Sciences Outlook 2013 Please email us at lekchina@lek.com to receive these articles, or Go to our website directly www.lek.com/China_Publications www.lek.com/medtech www.lek.com/life-sciences