Healthcare in China Entering uncharted waters Healthcare Healthcare in China Entering uncharted waters September 2012 2 Preface The Chinese government is committed to their capabilities, and aspire to strategic improvement of the healthcare system and alliances and international expansion. development of the healthcare industry Insurance companies and healthcare as clear strategic priorities. Reforms providers are also beginning to benefit from the announced in 2009 set the ambitious goal government’s resolute steps towards opening of providing universal access to effective, up the market. By allowing private companies safe, and low-cost healthcare by 2020. to play a larger role, the government will enable The 12th Five-Year Plan, issued in March a significant inflow of new entrants who are 2011, encourages innovation throughout eager to tap into the primary opportunities in the biomedical industry, broadly defined as health insurance, private hospitals and clinics, covering pharmaceuticals, vaccines, medical and in the services such as healthcare IT that products and traditional Chinese medicine. underpin them. Its designation as a ‘strategic industry’ leads to government support through significant Many of the ingredients are in place for flows of public funds and favorable policy- the continuation of strong growth of the changes, many of which have yet to be healthcare sector. We believe however that conceived and articulated. These various the path ahead will be more challenging, policies will offer extensive opportunities for reflecting the ambition and the scale participants in every sector of the industry. of the transformation under way. In the words of vice-premier Li Keqiang, China’s Spending on healthcare for the China’s healthcare system has entered ‘uncharted vast population is on a fast track to reach waters’. While healthcare reform has had $1 trillion by 2020. Multinational companies notable successes, such as the expansion recognize the commercial opportunities of insurance coverage to 95% of the and have made China a strategic priority: for population, there are some real issues many pharmaceutical and medical products to resolve. Serious questions about the companies, the country is now a ‘top-three’ funding of healthcare and the role of public market in terms of revenue contribution, hospitals have yet to be settled; there are and even number one for absolute uncertainties relating to the recognition and revenue growth. These companies are protection of intellectual property; tensions establishing manufacturing sites and R&D may arise in simultaneously developing a centers, along with field-forces comprising low-cost healthcare system and promoting sales representatives numbering in the significant investment in innovation. In the thousands. Decision centers with regional commercial sector, the ‘uncharted waters’ or even global mandates are starting to be include increasing pricing pressures, relocated to China. For domestic players, intensifying competition, the fragmented the government is keen to see national and uneven market-access environment, champions emerge, and is encouraging and the fundamental challenges to business Chinese companies to consolidate, upgrade models that these upheavals demand. Healthcare in China Entering uncharted waters 3 Nonetheless, China’s healthcare sector pharmaceutical and medical products remains a remarkably positive story. In markets; the continuing transformation this report—Healthcare in China: Entering of the healthcare service system; and the uncharted waters—McKinsey & Company’s challenges facing industry players that are Greater China Healthcare practice offers a building up their capabilities. diversity of perspectives on this substantial, We hope you will find this report an interesting complex and important domain. This window through which to survey one of the compendium of articles is organized into great healthcare stories of our time. three main themes: opportunities in the Franck Le Deu Rajesh Parekh Claudia Süssmuth Dyckerhoff Partner, Partner, Partner, McKinsey & Company, McKinsey & Company, McKinsey & Company, Shanghai Shanghai Shanghai 4 Contents Preface .......................................................................................................... 2 McKinsey & Company Greater China Healthcare Practice Leadership ............ 6 Overview Healthcare in China: ‘Entering uncharted waters’ ..........................................11 Franck Le Deu, Rajesh Parekh, Fangning Zhang, and Gaobo Zhou Opportunities in the pharmaceutical and medical products markets Big Pharma in China: Time to rethink the commercial model ......................... 29 Bing Chen, Franck Le Deu, and Jin Wang A six-point plan for launching new pharmaceutical products in China ........... 39 Bing Chen, Franck Le Deu, and Jin Wang Modern perspectives on traditional Chinese medicine ................................. 49 Bing Chen and Jin Wang Pills, potions, and potential: The consumer healthcare opportunity in China ............................................ 59 Rajesh Parekh, Felix Poh, and Ari Silverman Taking the best shot at China’s vaccines market ........................................... 69 Yinuo Li, Li Ma, and Rajesh Parekh Tailwinds but with turbulence: The outlook for China’s medical products industry ........................................ 81 Lifeng Chen, Yinuo Li, Rajesh Parekh, and Jin Wang From imitation to innovation in medical products: The ascent of China’s local players ............................................................... 91 Lifeng Chen, Yinuo Li, Rajesh Parekh, and Fangning Zhang Healthcare in China Entering uncharted waters 5 Transformation of the healthcare service system Top-down architectural framework for China’s public hospital reform: An interview with Mr. Rao Keqin, a thought leader on the reform .................. 103 Yinuo Li and Li Ma Private hospitals in China: Connecting the dots ...........................................113 Alexander Ng, Claudia Süssmuth Dyckerhoff, and Florian Then Private health insurance in China: Finding the winning formula .....................125 Alexander Ng, Claudia Süssmuth Dyckerhoff, and Florian Then Seeing healthcare reform through physicians’ eyes: Highlights from McKinsey’s 2012 physician survey ..................................... 133 Yinuo Li, Li Ma, and Claudia Süssmuth Dyckerhoff Building up capabilities Pharmaceutical R&D in China: Placing the winning bets on innovation ......... 145 Laura Nelson Carney, Jeremy Teo, and Fangning Zhang Debunking the myths about R&D talent in China ......................................... 155 Laura Nelson Carney, Keith Lostaglio, Jeremy Teo, and Fangning Zhang Regionalization: Lessons from pharmacos that have ‘tasted the crab’ ......... 165 Tian-Cho Chu, Ari Silverman, and Gaobo Zhou China’s digital healing .................................................................................175 Cindy Chiu, Chris Ip, Ari Silverman, and Florian Then About us .................................................................................................... 182 6 McKinsey & Company Greater China Healthcare Practice Leadership Rajesh Parekh Jin Wang Partner – Shanghai Partner – Shanghai Claudia Süssmuth Ari Silverman Dyckerhoff Partner – Shanghai Partner – Shanghai Franck Le Deu Yinuo Li Partner – Shanghai Partner – Beijing Healthcare in China Entering uncharted waters 7 Bing Chen Jeremy Teo Associate Partner – Associate Partner – Shanghai Shanghai Laura Nelson Carney Gaobo Zhou Associate Partner – Associate Partner – Hong Kong Hong Kong Alexander Ng Contributors to the articles in this volume also Associate Partner – include: Lifeng Chen, Cindy Chiu, Tian-Cho Chu, Hong Kong Chris Ip, Keith Lostaglio, Li Ma, Felix Poh, Florian Then and Fangning Zhang 8 Healthcare in China Entering uncharted waters 9 Overview 10 Healthcare in China: ‘Entering uncharted waters’ Healthcare in China Entering uncharted waters 11 Healthcare in China: ‘Entering uncharted waters’ Franck Le Deu, Rajesh Parekh, Fangning Zhang, and Gaobo Zhou China’s healthcare sector continues to develop at an astonishing rate. The nation’s healthcare spending is projected to grow from $357 billion in 2011 to $1 trillion in 2020. Across key categories, from pharmaceuticals to medical products and consumer health, China remains one of the world’s most attractive markets, and is by far the fastest-growing of all the large emerging markets. It is not surprising that multinationals are flocking to take advantage of the opportunities, but long- term success for all participants is by no means assured. Although we remain optimistic about the overall outlook for the healthcare market in China, we believe it will become more difficult for multinationals to compete. We expect a clearer separation between winners and laggards, and late entrants could face a struggle to achieve real traction. At a high level of analysis, three themes will shape China’s healthcare market in the coming years: the continuation of economic and demographic trends, further healthcare reform, and the policies articulated in the government’s 12th Five-Year Plan (FYP). Some of these forces will have positive implications for multinational companies, for example, improvements in infrastructure, the broadening of insurance coverage, and significant support for innovation. Some of them will have negative implications, for example, pressures on pricing, and the rise of local champions. In some situations the forces come into direct opposition,