PERSPECTIVE PHARMA MARKET IN CHINA OVERVIEW 5 LATEST EVOLUTIONS OF THE CHINESE PHARMACEUTICAL MARKET 7 THE GENERICS EXPANSION AND THE CHALLENGE OF THE INNOVATION 13 PRICE PRESSURE 15 AN INCREASED ATTENTION TO COMPLIANCE 17 AUTHORS 18 CONTENTS
4 – 58.000 Bln dollars GDP andmore than 1,3 bln population:a few numbers that explainwhy China has represented“the place to be” for mostof the MNCs.
PERSPECTIVE PHARMA MARKET IN CHINA8.000 BLN DOLLARS GDP AND MORE THAN 1,3 BLNPOPULATION: A FEW NUMBERS THAT EXPLAIN WHY CHINAHAS REPRESENTED “THE PLACE TO BE” FOR MOST OF THEMNCS.THIS IS EVEN MORE TRUE WHEN TALKING ABOUT “BIGPHARMAS”. IN FACT, CHINESE HEALTHCARE MARKETACCOUNTS FOR ~400 BLN DOLLARS AND GROWS WITH ADOUBLE DIGIT RATE. SEVERAL PHENOMENA LET US FORESEEAN IMPRESSIVE GROWTH RATE OF THE PHARMACEUTICALMARKET ALSO FOR THE YEARS TO COME: IN PRIMIS, THEON-GOING REFORM MEANT TO ENSURE AN UNIVERSALINSURANCE COVERAGE. MOREOVER, THE EVOLUTION OF THEPOPULATION LIFE-STYLE, BECOMING RICHER, OLDER ANDMASSIVELY MOVING FROM COUNTRYSIDE TO MEGALOPOLIS:ALL CONDITIONS THAT INCREASE THE NEED FOR MEDICALCARE.WARNINGS ON HOW THE SCENARIO COULD NEGATIVELYEVOLVE FOR PHARMA AND HEALTHCARE MULTINATIONALSIN CHINA HAVE ALREADY BEEN HIGHLIGHTED. GENERICS,FOR INSTANCE, HOLD AN INCREASING SHARE OFTHE MARKET, REDUCING THE VALUE AT STAKE FORMULTINATIONALS. IN ADDITION, THE CONTINUOUS ROUNDSOF PRICE CUT THAT THE GOVERNMENT IS IMPLEMENTING INORDER TO REDUCE THE “COST TO PATIENT” ARE ESPECIALLYPENALIZING NON-LOCAL COMPANIES, WITH A TANGIBLENEGATIVE IMPACT ON MULTINATIONALS’ MARGINS.OVERVIEW
6 – 7HOWEVER, WHO THINKS THAT THE SCENARIO IS STABLEAND “CRYSTAL CLEAR” IS WRONG. THE GOVERNMENTIS INTRODUCING, ALMOST ON A DAILY BASIS, MEASURESTHAT COULD WORSEN THE LEADERSHIP POSITION THATBIG PHARMAS HAVE GAINED THROUGHOUT THE YEARSAND THE MANY INITIATIVES, PARTICULARLY IMPACTINGMULTINATIONAL COMPANIES, PLANNED DURING THE RECENTNATIONAL PEOPLE’S CONGRESS ARE JUST AN EXAMPLE.AS A MATTER OF FACTS, CHINA REMAINS “THE PLACETO BE”, BUT ONLY THE ONES WHO ARE ABLE TO ANTICIPATEGOVERNMENT INITIATIVES AND TIMELY INTERVENE WILLENJOY GROWTH IN SUCH AN INTERESTING MARKET.
PERSPECTIVE PHARMA MARKET IN CHINALATEST EVOLUTIONSOF THE CHINESEPHARMACEUTICAL MARKETWho thinks that the scenariois stable and “crystal clear”is wrong. The Governmentis introducing, almost on adaily basis, measures thatcould worsen the leadershipposition of Big Pharmas.A GDP of almost 8.000 billion USD witha double-digit annual growth, even ifwith diminishing marginal increase, anda population of more than 1,3 billionpeople: these are just few reasons whymultinationals of any sector have de-cided to invest massively in China sincethe early 90s.If China has represented the “place tobe” for companies of all sectors, this iseven truer for Pharma and HealthCarecompanies. Let’s consider the marketdimensions, for example. The Health-Care expenditure, accounting 121 billionUSD in 2004, was worth 386 in 2011:this means an average annual growth of18,1% versus much more limited growthsin mature markets.Numbers that can explain the rush ofPharma multinationals to China. Butthere is more than this. These numbersalso explain why the turnover of BigPharmas in the Chinese market acquiresa growing relative weight in their port-folios.In fact, China is expected to becomeone the top 3 countries for revenues ineach Pharma companies, mirroring theposition achieved as 3rd top HealthCaremarket in the world. This appears evenmore evident when comparing the rev-enues growth rates of these companiesamong different countries: in a periodof stable or limited growth, turnoverin China is experiencing a double-digitgrowth.Such a trend seems to be overwhelm-ing. The HealthCare market, which isexpected to reach 1.000 billion in 2020,is encouraging the Pharma giants notonly to be present, but also to massiveinvest in China.An example is Bayer HealthCare, target-ing to grow more than 60% in Asia by2015, pulled by the Chinese market,accounting for more than 50% in theregion. On the other hand, Astrazenecais rethinking its global presence andconsolidating its business over threepoles: one of these, together with Lon-don and Wilmington, will be in China,and particularly in Shanghai. Moreover,more than 20% of the Group hiringsin 2011 was performed in the Chinesemarket.
HealthCare expenditure evolution in China, USA and Europe2004-2011, USD billionCAGR 2004-2011 (%)20041211.8611.0182005 2006 2007 2008 2009 2010 2011138 157 184 231 279 3183861.9881.0862.1211.1732.2541.2382.3601.3162.4511.3882.5471.4032.6461.4802004 2005 2006 2007 2008 2009 2010 20112004 2005 2006 2007 2008 2009 2010 201118,1%5,2%5,5%Note: exchange rate RMB/USD as of March 2013; EU includes EU 15 countries.Source: China Statistical Yearbook 2012, OECD, Value Partners analysis.
PERSPECTIVE PHARMA MARKET IN CHINAThe drivers of this growth, and of thestrategic decisions that multination-als are taking consistently, are thesocio-economic projections and someinitiatives launched by the ChineseGovernment. The Pharma multination-als, leveraging on their stable structuresand on a consolidated presence in thecountry, can meet their strategic targetand enjoy the growth potential exploit-ing some phenomena:• A population who is getting richerand a number of perspective re-forms aiming at better-balancing thedistribution of the income. In fact,the average income per capita isexpected to grow by 7% on averageevery year from 2012 to 2015. And,more than that, wealth is going to bebetter distributed amid the popula-tion, who will be able to get easieraccess to medical care, increasingper capita HealthCare expenditure.Zheng Xinli, vice president of the“China Center for InternationalEconomic Exchanges”, has recentlydeclared that the Government’s firstpriority is to expand the middle-class.On February the 3rd 2013 the Coun-cil of State released a preliminaryreform plan, whose details are notavailable yet, according to which “amore balanced income distributionstructure is expected to drive upresidents’ consumption rate by 10 to15 percentage points, which means anexpansion of more than 1,1 billion USDof consumption goods and services,that can help to improve people’sliving standards”• A population who is getting older. Inthe past three decades, a dramaticincrease in life expectancy and asevere application of the “only-childpolicy” prompted the greatest de-mographic transition in the world. Asa result, by 2050 about 30% of thepopulation will be over 60, againsta world average of 22%; more andmore people will need for medicalcare• A massive urbanization process.About 70%, or 200 million people,of the rural labor will move to citiesin the next 20 years, shifting tothe industrial and service sectors.Together with a social and culturalimprovement, the impressive changein life style will contribute to thediffusion of some typical “well-beingdiseases”. For instance, cardiovascu-lar diseases, the first death cause inChina according to the New EnglandJournal of Medicine, are mainlycaused by diabetes, whose incidencegrows as life styles and food habitschange and become “metropoli-tan”. Or other pathologies, such asrespiratory diseases and cancer, useto spread with pollution, nowadaysthe most recognized and discussedproblem affecting Chinese metropo-lis as Shanghai and Beijing
Big Pharma growth evolution by regionRevenues growth 2011 vs 2010, %0%7%11%-4%2%-11%8%3%7%17%34%38%15%50%Source: 2011 annual report, Value Partners analysis.-2% -2%
PERSPECTIVE PHARMA MARKET IN CHINA• A HealthCare reform aiming atguaranteeing a basic assistance tothe whole population. Thanks to theHealthCare reform implemented since2009, more than 95% of Chinesepeople has now some form of Health-Care coverage, even if basic and witha strong variance depending on theprovince of origin. But the Govern-ment initiatives continue following thisdirection. The latest on March the 1st,when the Council of State declaredthe intention to create a fund, fi-nanced jointly by the Government andpublic donations, meant to guaranteea medical coverage for chronic orserious diseases even to those peoplewith no possibility to afford necessarytreatments, also through the diffusionof hospitals / primary assistance cent-ers in the rural areasThe Council of State declaredthe intention to create a fund,meant to guarantee a medicalcoverage for chronic or seriousdiseases even to those peoplewith no possibility to affordnecessary treatments, alsothrough the diffusionof hospitals in the rural areas.Despite these dynamics, it is not a mys-tery that the boundaries multinationalscan operate within are getting tighterand tighter also in the Chinese market.This is due to the growing incidence oflocal producers on one hand, as well asto the regulatory environment, becom-ing more and more severe especiallytowards foreign operators.Also the new Government seems to bekeeping the momentum: during the re-cent NPC (National People’s Congress),held within March the 4th and the 6th2013, in fact, a series of priorities andreforms was announced, highlightingonce again the intention to reduce the“cost to patient” as to allow more andmore people to receive medical care. Insuch a circumstance, in order to achievetheir strategic targets, multinationalsmust definitely rethink their model ofpresence in the medium-long term,considering in particular three elementsthat are shaping the Chinese Health-Care market: the generics expansionand the challenge of innovation, theprice pressure and an increasing atten-tion to compliance.
Generics vs. brandend market share by hospitals typeMarket share (volume), %, 201044% 56%6%AAA Hospitals68%32%31%AA HospitalsSource: Asian Journal of Social Pharmacy, Value Partners analysis.BrandedGenerics Weight on total hospitals70%30%63%A Hospitals
PERSPECTIVE PHARMA MARKET IN CHINA1Hospitals in China can beof three types:- A, primary hospitals = smallhospitals offering primaryassistance mostly in the ruralareas;- AA, secondary hospitals =medium-sized hospitals offeringservices of general medicine;- AAA, tertiary hospitals = bighospitals offering specialistservices at a regional or nationallevel and represent specializedresearch centers.Besides, a fourth hospitalcategory exists: the 3AAA, morespecialized tertiary hospitals.2SKU=Stock Keeping Unit, theminimum unit of a product typethat can be bought.The Chinese HealthCare market isalready dominated by generics, whoseshare is expected to grow even furtherin the future. China, in fact, counts morethan 5.000 Pharma companies, about98% of which produces generic drugs,representing ~63% of the total sales.The driver of local generic producers’success against multinationals, togetherwith a looser and more aggressive com-mercial behavior, is a very competitiveprice, up to 10 times lower compared toforeign companies. Lower prices repre-sent the key success factor, especiallyin a market where 95% of the hospitalsis second- and third-tier, while AAA1hospitals’ number is expected to remainmarginal also in the years to come.Furthermore, some reforms introducedby the Government in the past yearssupported the generics expansion.Among these, the regulation preventinga hospital to buy more than two SKUs2of the same molecule: in this way, fora matter of price, at least one productout of two, even in AAA hospitals, isgeneric.Or even, the review of the patent law:starting May 2012, the Governmentof Beijing can issue licenses for theproduction of generic versions of drugswhose patent has not yet expired incase of “national emergency or anoma-lous circumstances of public interest”.This strategy, common to many de-veloping countries, has already beenadopted by other countries in Asia, suchas India and Thailand.But these initiatives do not seem to beover. For instance, during the last NPCemerged crystal clear the intention ofthe Government to reduce the benefitsthat Pharma multinationals still enjoy:even if patents have expired, in fact,they still benefit from a premium price,up to 10 times higher than the relevantgeneric drug’s price. The NDRC, theauthority controlling, among others, theprice of drugs in China, announced aseries of price cuts especially meant tosqueeze margins of these drugs catego-ries.In a market increasingly imbalancedtowards generics, where the regulatorymechanism aims at reducing even fur-ther multinationals’ room, multination-als themselves will have to struggle inorder to find new competitive strategiesto keep sustainable businesses in China.Following, for instance, the example ofPfizer and Merck, that have recently setup joint ventures with local manufactur-ers for the production of generic drugs.At the same time, innovation will becrucial going forward in order to keepprice superiority, in a context wheredeveloping new molecules is becomingtougher and tougher.THE GENERICS EXPANSIONAND THE CHALLENGE OF THEINNOVATION
Price cuts implementation resultsDrug Price index (on retail price)*Note: * includes all drugs in China.Source: IMS, Credit Suisse Market Report, Value Partners analysis.CAGR 2000-2011 (%)2000 2001 2002 2003 2005 2006 2007 2008 2009 2010 20112004-3,5%140129123 122115109105101 101 1019994
PERSPECTIVE PHARMA MARKET IN CHINAPrice pressure in China is already con-siderable and will even increase in thefuture, not only because of the competi-tion with generics, but also because ofcontinuous cuts imposed by the Govern-ment. In this scenario, all the companies,multinationals in particular, will have toreview their cost structure, as to guaran-tee the sustainability of their business.Since 2000 to date, three different pricecut rounds have been implemented bythe NDRC, involving more than 2.000drugs and medical devices. The lastround, started in 2010, impacted severaltherapeutic areas, from antibiotics(March 2011) to contrast media products(January 2013).The general aim is to lower the “costto patient” of medical care; also in thiscase, however, multinationals were af-fected by the hardest cuts.Once again, Government’s initiativesare not over. At the very beginning of2013 a new price cut, belonging to thethird wave, was announced. Accordingto the Government declarations it willconcern 20 drugs, such as breathingremedies, and the cut entity will be 15%on average, with peaks of 20% for moreexpensive (branded) drugs.Going forward, price pressure is des-tined to increase even more. Recently,a new mechanism for maximum retailprice setting has been announced anddiscussed: retail price will not exceedthe ex-factory price of more than 25%.The regulator has already required toall the manufacturers to provide theiraverage ex-factory prices, in order tostart the evaluation of the impact of theinitiative and decide if, when and how itwill be implemented.The impact of these maneuvers, espe-cially for multinationals, will be huge; inorder to minimize the negative effectof this latest price cut, the definition ofnew strategies for distribution man-agement will be crucial. As well as thedevelopment of innovative solutions toguarantee effective cost structures.PRICE PRESSURESince 2000 to date, threedifferent price cut roundshave been implementedby the NDRC, involving morethan 2.000 drugs and medicaldevices.
16 – 17However, price pressure is not only dueto Government cuts. For example, asa trial, some hospitals in Beijing andShenzhen have already eliminated the15% mark-up on drugs, that has histori-cally represented hospitals’ main sourceof funding. This initiative is only partiallycounter-balanced by the increasedcosts of medical visits. This representsan important transition: drugs are in factmoving from a profit center to a costcenter in the hospitals’ perspective.This kind of initiative is already routinein other Asian countries, such as Korea,and could represent the pilot for a widerintervention with the aim of making hos-pitals’ P&Ls clearer and less dependenton drug sales, that, according to NPC’sMarch announcement, will be imple-mented by 2015 in all Chinese hospitals.Besides an increased price pressure,this initiative, if implemented through-out China, would significantly impactthe entire Pharma and HealthCarebusiness to hospitals. For instance,hospitals are likely to reinforce or evendevelop their own distributors in orderto compensate the lost profits, remark-ably changing the value chain and itsdynamics.Some hospitals in Beijingand Shenzhen have alreadyeliminated the 15% mark-upon drugs, that has historicallyrepresented hospitals’ mainsource of funding.
PERSPECTIVE PHARMA MARKET IN CHINAFurther initiatives in the regulatorysphere will force Pharma companies tore-shape their organization as to adaptto the new context and, at the sametime, to review their model of presence.In particular, attention to corruptionis becoming one of the Government’sfocal point. Over the last years, someactions to reduce this plague have beenadopted: for example, a maximum limitfor “presents” to doctors and hospitalschiefs has been introduced.During the last NPC, the topic wasdiscussed again and indicated as ashort-term priority. In particular, refer-ring to the bidding mechanism, that isorganized at provincial level in China.According to the committee members,it is urgent to change the system that,organized in this way, “has resulted inmany bribes and corrupted activities”.Therefore, commercial organizations willhave to review their business models,stopping the old usual “entertainment”to doctors and hospital managers infavor of more transparent procedures.Furthermore, the organizational struc-tures and processes will need to bereviewed, and the compliance to bereinforced, as to face stricter Govern-ment controls.In a nutshell, for Pharma multinationalsChina still represents the “place to be”,in the very present as well as for futuredevelopment plans, even if context isgetting tighter both from a competitiveand regulatory perspective. However,according to the latest reforms, onlythose who will be able to anticipate theGovernment measures and to timelyintervene will enjoy the growth poten-tial of such an interesting market.AN INCREASED ATTENTIONTO COMPLIANCE
DANIELA SCARAMUCCIAPartner, Milan Officedaniela.firstname.lastname@example.orgVALENTINA GORGOGLIONEAssociate, Milan Officevalentina.email@example.comMAURIZIO MINELLIAssociate, Hong Kong Officemaurizio.firstname.lastname@example.orgAUTHORS