2009 China Healthcare Reform Moving Beyond Reading Of The Tea Leaves

McKinsey Greater China Healthcare

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


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

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”.

6

Key elements
of the reform

McKinsey Healthcare

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

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

McKinsey Healthcare

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

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.

McKinsey Healthcare

12

Implications of the reform:
opportunities and threats

McKinsey Healthcare

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

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

McKinsey Healthcare

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

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

McKinsey Healthcare

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.

McKinsey Healthcare

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

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

McKinsey Healthcare

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)

2009 China Healthcare Reform Moving Beyond Reading Of The Tea Leaves

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