1 the risk revolution
TRANSCRIPT
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Building Bridges toInnovationDecoding the Big Slowdown;
Assessing Progress on Innovation
Shanghai, October 20-21 2015
CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited
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Decoding the big
slowdown
Contents
2015 in the mirrorAssessing progress
on innovation
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2015 in the mirror
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Last year we introduced the concept of China’s
potential “Bridges to Innovation”
Broken bridgeNarrow bridgeBroad bridge1 2 3
▪ Mature drugs have lastingstaying power and continue togrow beyond 2020
▪ China delivers meaningful andbroad step-up to reward of
innovation
▪ Mature drugs have stayingpower, but come understronger pressure and plateaubeyond 2020
▪ China delivers meaningful but
narrow reward for innovation,closely aligned with diseasepriorities
▪ Window for mature drugsstarts closing rapidly by 2020,earlier for some drugcategories
▪ Innovation remains heavily
constrained
▪ Self-pay market becomesmain viable segment
e-Health
▪ Each potential scenario has profound implications on market outlook andattractiveness for participants
▪ It will take some time before we know for sure which bridge we are walking on
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As of today, we would argue that we are on a Narrow bridge scenario
Narrow bridgeBroad bridge Broken bridge
Slowdown in Rx market(still growing though)
CFDA reform
13th Five Year Plan
CDI expansion
Delay in NRDL update
Pricing reform
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2015 in the mirror – 8 key trends worth understanding
Deals
7
Anti-corruption drive
2
Economic slow-down
1
China manufacturing2025
CFDA reform
5
Cost containment
6
e-Health
8
China innovation
43
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Slowdown of the economy is impacting many sectors, somemore dramatically than others
Construction Automobile Retail
Electricity consumption Luxury goods
1
SOURCE: McKinsey
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Large, low-cost, lower-skilled laborsupply $300
150m
Monthlysalary
Migrantworkers
Old
Lower-value,low-productivity export business model
with FDI
20% Annual export growth
Old
Cost-consciouswith lowersophistication(supply-drivenofferings)
50% Householdsaving rate
Old
4x Debt in2014 vs.2007
Debt-financedproperty andinfrastructure
investment
Old
50% Urbanpopulation(1978:18%)
Inflow into citieswith pollution,
real estateinflation, etc.
Old
China’s new normal – China is transitioning to a new growthmodel with less rapid but higher quality growth (1/2)
SOURCE: McKinsey
Previousgrowth
engine
1
Labor
5
Investment/debt
4
Urbani-zation
2
Consum-ption
3 Businessmodel
Model not sustainable
1
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More emphasis on soft thanhard infrastructureand deleveraging
More experienced, higher-wage work force, and moreentrepreneurship and jobcreation
Sustainable and equitablegrowth in smarter cities
Consumption-driven growthwith digitally informed anddemanding customers
Higher-value adding
activities (service and manufacturing)and mass innovation
China’s new normal – China is transitioning to a new growthmodel with less rapid but higher quality growth (2/2)
SOURCE: McKinsey
Previousgrowth
engine
1
Labor
5
Investment/debt
4
Urbani-zation
2
Consum-ption
3 Businessmodel
The success of companies in China will depend on how quickly they adapt tothe new normal
1
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Deals – Another year of heavy activity
+++
7
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“Internet+” aims to further fuel economic growth by
integrating Internet with traditional industries
Policy description Implication to healthcare stakeholders
▪ Encourage online healthcare service – Develop internet based healthcare services
and information exchange centers acrosshospitals (e.g., EMR and imaging records)
– Promote online registration, result checking,drug distribution and BMI payment
– Improve treatment outcome by adoptingprecision treatment and disease prevention
▪ Promote digital elderly care
– Set up digital community centers andenhance chronic disease management
– Adopt innovative products such as wearable
devices and remote monitoring devices tomonitor and track physical conditions
▪ Enhance e-commerce in healthcare
– Improve operational efficiency andprocurement process via e-commerceplatform
▪ Released in July 2015
▪ Mapped out development targets in 11 keysectors incl. healthcare, manufacturing,agriculture, energy, finance, logistics etc. byintegrating mobile Internet, cloudcomputing, and big data technologies
▪ Aims to build a new economic model and animportant driving force for social innovationby 2025
SOURCE: Lit-search; Government website; McKinsey analysis
8
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Many players – both small and large – are actively riddingthe e-Health wave
Example of players Digital giants Healthcare ITEntrepreneurs
Delivery
Personalcare
Accessibility
Distribution
Community
8
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In this complex context, we aimed to tackle two key themes
▪ Survey of 50hospital directors
▪ CPA market data upto July 2015
▪ China DrugInnovation Index –
survey ofinnovation leaders
(BayHelix)
▪ Interviews withindustry leaders
“Decoding the bigslowdown”
▪ What is really happening?
▪ What should we expect next?
▪ What are the implications?
“Assessing
progress on China
innovation”▪ Are measures for real?
▪ Who will pay for innovation?
▪ What are the implications?
1
2
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Decoding the big slowdown
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Decoding the big slowdown – How we went about it
Sources of insights
Latest NHFPCstatistics on
patient flowacross hospitalsegments
Hospital levelprescriptionsdata from ChinaPharmaceuticalAssociation
(CPA) up toJune 2015
Multiple
discussions withseniorexecutives in thepharma industry
Results from asurvey of 50hospitaldirectors acrosscity tiers
McKinsey marketperspectives
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China pharma market has experienced a marked slowdown in 2015
YoY sales growth of CPA sampled Class III/ II hospitals1, 2012-15 Q2Percent
SOURCE: China Pharmaceutical Association (CPA); NHFPC
1 679 sampled hospitals, including 468 Class III hospitals, 211 Class II hospitals2 2015 April and May data
6.3%
2015Q114 2015Q213
9.6%
12.4%
16.4%
2012
12.0%
9.8%Outpatient YOY growthPercent
8.2% 5.6% 3.9% 1.8%2
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Majority of TAs and top MNC brands are affected bythe slowdown
Growth comparison by TA (ranked by 2014 TA size)CPA sampled hospitals1
Growth comparison by Top MNC Brands (ranked by2014 sales)RDPAC reported sales
CV
CNS
Blood
Alimentary Tract and Metabolism
AI
Antineoplastic andImmunomodulating
12%
7%
8%
7%
9%
6%
9%
Sensory Organs
3%
Genito-Urinary System AndSex Hormones
Dermatologicals
19%
2%
Systemic Hormones 4%
Musculo-Skeletal 8%
Respiratory
8%
LIPITOR
GLUCOBAY
14%
18%
PLAVIX
8%
BETALOC
27%
7%
12%
22%
15%
24%
DIOVAN
NEXIUM
HERCEPTIN
LANTUS
CRESTOR
SULPERAZON
NORVASC
ADALAT
BARACLUDE
-7%
3%
PULMICORT
16%
BAYASPIRIN 8%
43%
16%
5%
15%
15%
18%
19%
15%
13%
14%
19%
12%
15%
39%
18%
14%
23%
19%
36%35%
22%
15%
28%
12%
13%
32%
27%
78%
2011-14 CAGR
2014H1-15H1 growth
1 679 sampled hospitals, including 468 Class III hospitals, 213 Class II hospitals
SOURCE: China Pharmaceutical Association (CPA); RDPAC
% f %
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Mature brands drive 78% of growth compared with 71% last year,suggesting an aging portfolio
SOURCE: Industry association; McKinsey analysis
1 By year of registration
2013-14 growth breakdown by brands launch year 1
RMB billions, %2015H1 sales contribution of top 3 brands%
75%
96%
85%
60%
53%
78%
100%
19%
14%
19%
50%
11%
20%
1%
11%
MNC 4
MNC 7 0%
MNC 6
0%
MNC 5 -3%
MNC 3
0%
MNC 1
3%MNC 2
6%
78%
< 5 years>10 years 5-10 years
63
42
57
42
50
62
44
51%2012-13 growth contribution from brands>10 years was 71%, suggesting an agingportfolio
N t j t i ff t th t f ti t fl h d li d t it
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4
8
10
7
12
4
6
34
17
8
7
15
24
10%
25%
20%
15%
5%
0
6
6
1310 1411
17
6
1208 09
10
2006
10
9
07 2015 Apr-May
2
2015Q1
Not just a price effect – growth rate of patient flow has declined to itslowest point in 10 years
SOURCE: NHFPC
1 Include hospitals and grassroots facilities
Patient flow1-YOY growthPercent
InpatientOutpatient
M MNC d l l f l th i l d ti t t
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Many MNCs and locals feel the pain; some leaders continue to grow atdouble digits
SOURCE: China Pharmaceutical Association (CPA); company financial reports; investor calls; literature search
2015 H1perfor-mance vs.2014 H1, %
2015 H1perfor-mance vs.2014 H1, %
Pharmaplayers
PharmaplayersQuotes from Q2 releases
+1MNCpharmaco2
Sales of mature productswere impacted bycompetition
+3MNCpharmaco3
A combination ofgovernment cost control onreimbursement, strict anti-graft campaigns, the rise oflocal player with cheaper products and the slowdownin distribution resulted in ourslowdown
+6Localpharmaco1
Industry continues toslow … lowest in 10 years
-5Localpharmaco2
Due to price control,increased production cost,and tender policy the wholeindustry is facing severechallenges
Quotes from Q2 releases
-5.4MNCpharmaco1
Chinese government is putting a lot of pressure onoff-patent originators. Thiswill be a big challenge for usin the short term
+25Localpharmaco3
Despite the negativeimpact from the government,we have achieved rapidgrowth by adapting thestrategy of innovation andinternationalization
+19MNCpharmaco
4
Pricing pressure will betight in China and we are
trying to achieve significantvolume reflex as a remedyfor the price drop
+16Localpharmaco4
Despite the slowdownof the overall pharmaceutical industry inChina, the strategy of leanmanufacturing and internet
marketing has lead tosuccess in 2015 1H
+11Localpharmaco5
Facing a challengingenvironment, we havemaintained moderately rapidgrowth through innovativemarketing method, industrialresource consolidation, etc.
Decoding the slowdown: Five key questions
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Decoding the slowdown: Five key questions
Where have patients gone?
How low couldprices go?¥
What does this
all mean forpharmacos?
What are thebright spots?
Who’s capturingthe volume?
Growth of public hospital patient flow has experienced markedWHERE HAVE THE PATIENTS GONE?
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Growth of public hospital patient flow has experienced markedslowdown this year
Public hospital patient flow (January to Mayof each year)YoY growth, %
SOURCE: NHFPC; interviews
4.7%
9.5%8.5%
12.0%
4.9%
8.5%
2012-2013
2013-2014
2014-2015
2012-2013
2013-2014
2014-2015
Outpatient Inpatient
Budget control policies limiting
hospital ability to
treat patients Anti-graft
campaign reducing
unnecessary visitsMore patients
going to retail
pharmacy for self-medication
Reduced
income for
healthcare due to
stock market crash
Hospitals
reaching saturation
Migrant workers
returning to rural areas
due to economicslowdown
Pharma executives hypothesesPublic hospital patient flow growthsignificantly slower than previous years
Patients
getting medical
advice through
mobile apps
Fewer patients
due to a warm
winter
Effects of hospital related policies and constraints are seen asWHERE HAVE THE PATIENTS GONE?
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Effects of hospital related policies and constraints are seen asthe primary driver to patient flow slowdown
How does YoY growth in outpatient flow
compare between 2015 H1 and 2014 H1?100% = 48 respondents
22%
Patients are less inclined to go to hospitalsdue to reduced disposable income
44%
Reduction of unnecessary return visitsof patients
33%
Fewer people getting sick
Patients choose to self-medicate moreby going to retail
Hospital capacity reaches saturationand has limited room to accommodatepatient growth
Hospitals less focused on increasing scale andpatient volume due to public hospital reform
61%
89%
44%
What is driving reduced patient flow growth?
% of top 3 drivers among respondents seeing slower growth
SOURCE: 2015 McKinsey hospital director survey; McKinsey analysis
Hospital related drivers most impactful to patientflow slowdown, suggesting no fundamental shift inunderlying demand
50%
25%
21%
29%
46%
29%
Slower
Faster
Same
100%
Tier 3 andbelow/ county(N=24)
Tier 1/2 city(N=24)
100%
Shift in hospital focus driven by BMI budget control and greaterWHERE HAVE THE PATIENTS GONE?
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Shift in hospital focus driven by BMI budget control and greateremphasis on service quality
Due to the BMI budget control policies, we are
simply not able to treat mor e patients
– Deputy hospital director, Class III hospital in
Kunming
▪ BMI budget control measures continue toexpand both in breadth and depth
– Most provinces have set targets for BMIcontrol since 2012 – Jiangsu plans to implement BMI budget
control to all cities/counties – Coverage of budget control in Shanxi
exceeds 80% among all Class II and IIIhospitals
▪ Hospital management focus switchesfrom capacity expansion to serviceimprovement – Multiple government announcements to
prevent “unnecessary” capacity
expansion
– Hospitals make service qualityimprovement a top priority
[2014] Document No.32 by NHFPC
[2015] Document No.45 by State Council
Hospital expansion was very common in the past
while recently central government no longer
encourage large hosp i tals to continu e to expand
– Government official in healthcare reform
We have no plans to add mo re beds in the next
few years . Top priority is to enhance quality and
service of selected departments and make them
national leaders
– Director of BMI affairs, Class III hospital in Shanghai
[2015] Document No.38 by State Council
SOURCE: Government website; expert Interview; McKinsey Analysis
Respondents from lower tier cities are more optimistic on futureWHERE HAVE THE PATIENTS GONE?
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Respondents from lower tier cities are more optimistic on futureoutlook for patient flow growth
How would you predict patient flow growth in 2016 H1 vs 2015 H1?100% = 48 respondents
SOURCE: 2015 McKinsey hospital director survey; McKinsey analysis
67%
29%
29%
42%
29%Same
Slower
Faster
Tier 3 andbelow/ county(N=24)
4%100% 100%
Tier 1/2 city(N=24)
Future increase in ho spi tal level patient
f low will be driven by capaci ty expansion .
When you look at the big picture, we expect a
relat ively stable grow th
– Deputy hospital director, Class III, Weifang
Growth of patient flow will cont inue to
s low down in 2016. Class III hospitals today
focus more on improving serv ice quali ty ,rather than just attracting more patients
– Head of Reimbursement. Class III, Shanghai
2015 has been a busy year on the pricing frontHOW LOW COULD PRICES GO?
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2015 has been a busy year on the pricing front
Nationalpricing
Reimburse-ment
Provincialtendering
Secondary pricenegotiation
I n c r e a s i n g l e v e l
o f f r a g m e n t a t i o n
2015 highlights
▪ National retail price cap removed for most drugs
▪ NDRC retains price monitoring and investigation authority
▪ Price for patented drugs to be set through “multi-party negotiation
mechanism”▪ Reimbursement based pricing piloted
▪ Price point collection initiated for international price referencing
▪ Highly transparent price reference across the country
▪ Provinces demanding aggressive tender price cuts
▪ Independent price category for off-patent originators at risk
▪ Hospital/group level price negotiation pilots ongoing
▪ Expanding scale of pilots in 100+ cities
▪ Lack of volume guarantee
¥
Most provinces expected to initiate tender the near term, many earlyHOW LOW COULD PRICES GO?
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Most provinces expected to initiate tender the near term, many earlymovers demanding aggressive price cuts
SOURCE: Literature research; GBI; McKinsey analysis
Tender in progress1Tender hasn’t started Finished 2015 tender 2
Anhui
▪“Double envelope” process
▪ City level “price-volume”
negotiation after provincialtendering
▪ Severe price cut across cities,e.g. average 17% price cut inBengbu
Hunan
▪ Two rounds of negotiation beforeanother two rounds of bidding
▪ Less than 50% of drugsaccepted negotiation
▪ Average price cut 10%-20%1 Includes provinces that have published tendering policies2 Guangdong has finished 2015 tender for reimbursed drugs, while tendering for non-reimbursed drugs is in progress3 No.7 document refers to <Guiding Opinion for Public Hospital Centralized Drug Procurement> issued by State council in Feb. 2015; No. 70 refers to
<Opinion of Public Hospital Centralized Drug Procurement> issued by NHFPC in June 2015
▪ Request 10-20% price cut aspre-requisite for participation
▪ Reference national lowest price▪ Separate groups for off-patent
originators and Gx
Zhejiang
Guangdong
▪ Third party online platform
▪ Monthly tendering▪ 2 quality layers and set the 5
lowest average price as the cap▪ Average price cut 5-10%
▪ First province to tender after
Document No.7 and No.703 werepublished
▪ Introduced transparent purchasing(price negotiation)
▪ Reference national lowest price
Beijing
Jiangsu
▪ Draft version for tenderingpublished in Sep. 2015
▪ Off-patent originators maypotentially be in same categorywith first-to-market Gx
¥
Downward tender price pressure likely to continueHOW LOW COULD PRICES GO?
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Downward tender price pressure likely to continue
SOURCE: GBI
2012-15 Indexed average provincial tendering price
2012 price = 100
80
85
90
95
100
105
110
142012 13 2015
2015 averageprice
2012 price = 100
2015 lowestprice
2012 price = 1009999
9696
9297
8892
8795
9090
8790
8383
EXAMPLES
¥
▪ Price trends vary across brands – selected brands chose to drop out of tender requesting fierceprice drop, in the process sacrificing some volume
▪ Greater downward price pressure expected in 2016 due to – Increasing transparency in tender price reference system – More provinces expected to initiate tender
Secondary price negotiation continue to expand, adding further priceHOW LOW COULD PRICES GO?
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y p g p , g ppressure on manufacturers
100
Hospitalpurchaseprice
85-95
Secondarypricenegotia-tion
0-15
Retailprice
Provincialtenderprice
5-15
Hospitalmarkup
100-115
Zero-markup hospitals nolonger enjoy15% marginon drug sales
Secondary pricenegotiation providessome margin relief
SOURCE: NHFPC; literature search; McKinsey analysis
Latest development
▪ 3 archetypes of secondary price negotiationsemerging
– City level volume based price negotiation forall public hospitals, e.g. Anhui, Liaoning, 21cities in Sichuan
– Hospital group purchasing organization,e.g., Ningbo, Shaoxing
– Individual hospital negotiations, e.g.,Tianjin, Shanxi, Hubei
▪ Zhejiang province took the lead to pilot profitattribution scheme, savings from pricenegotiation collected by local Bureau of Finance(BoF), and allocated to local hospitals
Indexed price waterfall (tender price = 100)
Context
¥
Several reimbursement pricing models being pilotedHOW LOW COULD PRICES GO?
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p g g p
SOURCE: Literature search; McKinsey analysis
Policy Overview Latest development in 2015
▪ Sanming Model
– Set the lowest Gx price as price forreimbursement (piloted for select drugs)
– The rest is out-of-pocket expense forpatients
▪ Chongqing Model
– Use average tendering price to set
reimbursement price – Select top 300 drugs (based on 2014
trading volume) in the pilot
▪ Shaoxing Model
– Use tendering price for each brand toset reimbursement price
– Anhui and Zhejiang provinces adoptsimilar model in 2015
▪ Pricing Bureau Chief conference on
October 27, 2014 suggestedreimbursement-based pricing beimplemented in 2015
▪ No official national guideline publishedto date
▪ Pilots start to emerge in differentprovinces with different
¥
Reimbursement pricing expected to promote usage of Gx given greater discrepancy inout-of-pocket expense for patients using originators vs Gx
Volume growth has not been holding up for many top moleculesWHO IS CAPTURING THE VOLUME?
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g g p y p
-5
0
5
10
15
20
Q215Q1
Q4Q3Q2Q413Q1
Q22012Q1
Q3 Q4 Q3Q2 14Q1
-5
0
5
10
15
2025
30
35
40
45
50
15Q1
Q4Q3Q214Q1
Q22012Q1
Q3Q2Q3Q2 13Q1
Q4 Q4
Price
Volume
YoY growth by quarter of volume and price forAcarbose, 2012 Q1-2015 Q2Growth rate by quarter, %
YoY growth by quarter of volume and price forAtorvastatin, 2012 Q1-2015 Q2Growth rate by quarter, %
CPA sampled Class III/Class II hospitals1
SOURCE: China Pharmaceutical Association (CPA); McKinsey analysis
Drop in volume rather than price is partly caused by pharmacos’ decision to “walk away” from
provinces with too aggressive pricing conditions
1 679 sampled hospitals, including 468 Class III hospitals, 211 Class II hospitals
In the battle for share, both MNCs and locals are able to winWHO IS CAPTURING THE VOLUME?
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9%
Local
14
10%
90%
12%
91%
2015
1H
8%
100
MNC
92%
100 100
1312
100
88%
2011
15%
85%
100100
59%
41%
48%
52% 47%
100
2011 12 13
100
53%
39%
MNC
Local
61%
2015
1H
14
100
39%
61%
100
Locals gaining volume share
# of Gx
Top 3 GxCompanies
15
▪ Shandong Qilu▪ Jiangsu Haosoh▪ Shanghai Chemo Wanbang
41%
14%
CAGR
2011-14%
MNC gaining volume share
77
▪ CR Saike▪ Yangtze River ▪ Dawnrays Pharma
5%
25%
CAGR
2011-14%
# of Gx
Top 3 GxCompanies
Amlodipine volume%
Pemetrexed volume%
SOURCE: China Pharmaceutical Association (CPA); McKinsey analysis
CPA sampled Class III/Class II hospitals1
1 679 sampled hospitals, including 468 Class III hospitals, 211 Class II hospitals
WHO IS CAPTURING THE VOLUME?Product attributes and organizational capabilities are key to capturing
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17%
81%
81%
31%
6%
69%
15%
Importance for preferred prescription% of hospital directors list as top 3 reasons, N = 48
volume
Good quality
Convincing clinical data
Low price/good reimbursment
coverage policiesOriginal drug with goodbrand image
Strong support on drug/TAinformation
Innovative communication
New drug with patent
SOURCE: 2015 McKinsey hospital director survey; McKinsey analysis
Product related attributes
Deep understanding of prescribermindset and emotions
Unique channel access, e.g., retail,digital
Extensive external collaborations,
e.g., distributor, government,ecosystem partners
Effective coverage and competitiveshare of voice
Market shaping capability
Organizational capabilities
Holistic offering keyto volume capture
Despite slowing growth, there are still bright spots in marketWHAT ARE THE BRIGHT SPOTS?
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E-health initiatives▪ Strong government
endorsement on e-health
e.g., Internet+ plan▪ Digital provide new
models to broadenaccessibility, improvehealthcare deliveryquality, and strengthenphysician and patientconnections
High potential onlinechannel▪ Online OTC sales only
USD 60 million in 2014but regulation on onlineRx sales would unlocksignificant upside
▪ County hospital, fastestgrowing segment in hospitalsector, achieved 28% CAGR2011-2013
▪ CHC market achieved 30%CAGR 2011-2013
▪ Brick-and-mortarretail channelkept ~9% growth
in H1 2015,on par with H1 2014
▪ Retail pharmacies becoming an increasingly importantchannel given access hurdles to hospitals
S
Growth potentialbeyond large
hospitals
Rising importanceof retail channel
New productlaunches
Digital-healthfrenzy, beginning of
a new S-curve
S
▪ 20+ innovative drugs launched since2013. Many with potential to changetreatment paradigm and become futuredrivers of the market
▪ CFDA reform underway – “tsunami oflaunches” coming
County hospital market experiencing strong growth momentumWHAT ARE THE BRIGHT SPOTS?
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7%
66%
Urban
393
County
144
27%25%
5.5%
70%
County
89
Urban
271
County
52
Urban
171
CHC
Hospital
4.5%
23%72%
2008 2011 2013
17%
22%
Hospital western medicine expense, 2008-2013 (latest available data)Billion RMB
SOURCE: MOH database; NHPFC yearbook
16%
19%
28%
CAGR CAGR
19%
28%
32%
Urban
hospital
Countyhospital
CHC
Accelerated growth incounty hospitals
further driven bygovernment financialand policy support (e.g.,MoF allocated $900+Mto support countyhospital reforms)
CHCs fast growth froma small base, importantto target cities withconcentrated marketpotential
Retail pharmacies becoming an increasingly important channel givenh ll
WHAT ARE THE BRIGHT SPOTS?
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access challenges
SOURCE: MOHRSS; MOC; expert interviews
Initialprescri-ption inhospitals
Twoprescri-ption
fulfillmentchannels
Patient self-pick up frompharmacies
Cold-chaindelivery to home/hospital
Case example: Victoza effectively leveragespharmacy channel to drive growth
Retail channel has been growing significantlyin the past few years
39322521
+11% p.a.
20112009 20132007
Revenue (at retail price) of retail pharmacies
in ChinaBillion USD
Pharmacy reimbursement coverage‘000s of pharmacies
284 288 272 265
168152136115
424 424
12112010
399+3% p.a.
433
2013
# of pharmaciesw/o reimbursement
# of pharmaciesw/ reimbursement
10%
CAGR,2010-13
-2%
Another breakthrough year for E-health in 2015WHAT ARE THE BRIGHT SPOTS?
NOT EXHAUSTIVE
H lth i f ti i id th i ti d t i i l t
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▪ Healthcare information service provider authorization moved to provincial gvt▪ State council issued Internet Plus plan in July 2015▪ Moving one step further in lifting the ban on online sale of Rx drugs▪ Linking remote healthcare to tiered treatment
▪ Fosun Pharma cooperates with Guahao.com on O2O strategy
▪ Pfizer teams up with Yuwell Medical on chronic diseasemanagement through online platform
▪ Shanghai Pharma partners with Wonders and JD.com for pharmae-commerce
▪ Sanofi cooperates with Google life science to treat diabetics
▪ PingAn insurance enters into E-health with PingAn Good Doctor
▪ Guahao.com USD 394mn in series D financing
▪ 111.com RMB 450mn in series C financing
▪ Haodf.com RMB 370mn in series C financing
▪ Huakang RMB 200mn in series B financing
▪ Baidu leverages big data capability, introduces robot assistant “Duer ”, “Baidu Brain”
▪ Ali Cloud Hospital went online; cooperates with Carestream on setting up onlineimaging platform; partners with CPIC for online health insurance service
▪ Tencent releases intelligent blood glucose meter ; publishes smart pharmacy plan tobuild one-stop online healthcare service platform through WeChat
E-health
Policy andRegulation
BusinessModel
Investment
BAT on themove
Recently launched products and new launches should bean engine of gro th
WHAT ARE THE BRIGHT SPOTS?
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an engine of growth
SOURCE: RDPAC; CFDA
Examples of recentlyapproved drugs
2011-2015 new launch products by RDPAC companiesMn RMB
NOT EXCLUSIVE
Examples
2,425
1,360
7251405
122011 13 2015E14
All productslaunched since2011 expected toaccount for only~2% of MNC Rxsales in 2015
# of newlaunches
3 4 19 1
▪ New approvals postMRCT rulesinterpretation
▪ Does not includeseveral indicationexpansions, e.g.Xarelto (SPAF),
Avastin (lung cancer)
Our perspectives on the big slowdownWHAT DOES THIS ALL MEAN FOR PHARMACOS?
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While price pressure and slowing volume growth both contribute to recent market slowdown, the latter seems to have played a bigger role in 2015
Slowing patient flow growth is not a result of changing underlying demand, but more likelyreflects shifting policies/ incentives and constraints at hospital level
Slowdown will likely continue in the near term as more provincial tenders are
announced and volume growth will take time to recover
Attractive areas still exist (e.g., lower tier markets, retail channel, digital health,regulatory); those able to capture new opportunities will have a clear competitiveadvantage
Changing market context has become a catalyst for organizational changes, e.g.,dynamics between local and HQ, greater emphasis on resource efficiency and productivity
Future winners will be those who can evolve their capabilities and strengths to fit the newmarket norm
Eight commercial imperatives for pharmacosWHAT DOES THIS ALL MEAN FOR PHARMACOS?
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Through cycle mentalitywith “topline corridor”
Resourceflexibility in faceof uncertainties
Dynamic pricingmodel to copewith pricingpressure
E-healthinitiatives todrive growth fromnew channels
1
2
5
36
7
8
Rigorous SFEfundamentals todrive productivitygain
Externalcollaboration toshape regulatoryframework
Granular miningof data for better
insights and decisions
4
Innovations toshape treatmentparadigm and themarket
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Assessing progress on innovation
China Drug Innovation Index (CDII) is the first holistic assessmentof China’s innovation ecosystem to be tracked annually
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of China s innovation ecosystem, to be tracked annually
Assess 5 key dimensions of China
innovation ecosystem▪ Policy, Funding, Capability, Local
innovation output, Level of integrationinto global
Calibrated against current U.S. levels(2014 US = 8 out of 10 points)
Aim to update annually to track progress
Approach
Sources of insightsSurvey of ~70members
10 quantitative metrics comparingU.S. and China on reported innovationindicators
Holistic view ofChina innovationecosystem relativeto that of the U.S.
Output
Where does China stand on drug innovation?
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McKinsey & Company 44|SOURCE: Source
Text
Where does China stand on drug innovation?
Momentum of China innovation accelerating over the last 12 months
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Jan 2015 March 2015 March 2015 June 2015
Epidaza, a global firstselective HDACinhibitor, launched inChina by Chipscreen
AZ and Wuxi AppTecJV filed clinical trialsapplication for MEDI-5117
Innovent and Lillyentered into a 10-year,~$450M collaborationon biologics
J&J Innovation andWuXi AppTec formedpartnership to fund/incubate high qualitystart-ups
July 2015
Beigene compoundBGB-283 received
CFDA IND approval,and CTA approval
Mar-Aug 2015
Zai Lab secured 4assets from deals with
3 MNCs – BMS, Sanofi,UCB
Sept 2015
Hengrui out-licensedex-China rights of
SHR-1210 to Incyte forup to ~$800M
Oct 2015
Innovent and Lillydeepened relationship
with up to $1bn deal todevelop 3 preclinicalanti-PD-1-basedantibodies
SOURCE: Press search
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So where does China stand today across5 key dimensions of innovation ecosystem?
Min Max
0 10Surveyscore
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y y
SOURCE: 2015 CDII Survey
score
Ave. ChinaScore = 4.2
Key insightsCDII scores
Access to funding less of an issue
Novelty of innovation is lacking.On the bright side, # of Class 1.1drug applications has increased at
CAGR 18% since 2010
Localinnovation
4Min
0 4.7
Max
10
Integration with global seen as aweak link in China’s innovation
ecosystem
Integrationwith global
5Min
0 3.6
Max
10
Regulatory environment faceschallenges but CFDA is planning
unprecedented reformsLack of reimbursementcontinues to be a key challenge
Min
0 3.1
Max
108.0
Overall infrastructure perceivedto be weaker than talentCapabilities3
Min
0 5.4
Max
108.0
8.0
8.0
Min
0
Max
108.04.0
Funding2
Policy1
Drug review and approval process very lengthy and seen as aweak link for China
POLICY
1
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Approval time for IND Approval time for NDA
14.6
11.69.6
11.6
1.01.01.01.0
>10X
201413122011
USChina
22.021.019.018.0
6.5
11.010.09.6
>3X
201413122011
USChinaMonths Months
Min Max
0 103.1 8Ave. China Score = 4.2
Effectiveness ofdrug review/
approval process
SOURCE: 2015 CDII Survey; DXY Insight 2014; CDER 2014 update
R&D leaders view regulatory process as a major barrier in current innovation ecosystem
Recently announced CFDA reform could potentially accelerateapproval timeline and boost innovation
POLICY
1
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pp
SOURCE: State Council; CFDA; Industry expert interviews; McKinsey analysis
Industry experts expect significant progress to be made in the next 2-3 years
Applicationtimeline
▪ Dedicated innovativedrugs review channel
▪ MRCT data will beaccepted to supportfiling
▪ Pilot MAH scheme
▪ Bio-equivalent testingchanged fromapplication tonotification
▪ Potentially unifiedapplication process
▪ Enforce originator asreference
Eliminatereviewbacklog
Improvequality ofgenerics
Encourageinnovation
Improvequality ofreview andapprovalprocess
Increasetransparencyof review andapprovalprocess
Reduce non-qualifiedapplications
▪ Self-audit byapplicants
▪ CROsinspection
5 pillars of Reform Review and Approval
System for Drugs and Medical Devices
国务院关于改革药品医疗器械
审评审批制度的意见
国发
2015
44号
Targetedresults
Generics applicationInnovative drugapplication process/requirement
▪ Eliminate allbacklog by2016
▪ Achievereview timetarget set outin regulationby 2018
2 3 41 5
Pricing and reimbursement policy remains a major barrierin the China innovation ecosystem
POLICY
1
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Examples of MNC andlocal drugs not on NRDL
Non-NRDL
500
50
NRDL
It is very challenging for
pharmacos to recoup R&D
investment if innovative drugs
cannot be listed on RDL. Oneof our cancer drugs is still not
listed on NRDL 8 years after
launch
– SVP of a leading
local pharmaco
Min Max
0 103.1 8
Ave. China Score = 4.2
Pricingand
reimbursement
Chinanew drug
launchreimbur-sementstatus(2011-2014)
SOURCE: 2015 CDII Survey; GBI; expert interview
▪ NRDL has not been updated since 2009, and no drug launched since is covered yet
▪ Going forward, pharmacos need to consider pricing/coverage tradeoffs, asgovernment will not cover everything at any price
Access to funding not perceived as a major hurdlefor pharmacos
FUNDING
2
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Start-up’s access to funding
Min Max
0 1085.9
Min Max
0 1086.6
Mature-co’s1 access to funding
Privatecapital
Min Max
0 1085.1
Min Max
0 1086.1
Govern-mentfunds
Debtfinancing
Min Max
0 1082.9
Min Max
0 1085.6
Ave. China Score = 4.2 Ave. China Score = 4.2
SOURCE: 2015 CDII Survey
1 Established company with commercial presence
Types of funding options for Chinese companies are limited, whereas in U.S. companieshave access to broad ecosystem of angel investors, VCs etc., … with creative funding
options
Total R&D funding has been rapidly growing, although stillat 1/8th of US investment level
% of US level
FUNDING
2
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+27% p.a.
2014
8.9
13
6.5 7.5
2010 11 12
4.83.4
2014
68
13
+1% p.a.
65
12
63
11
62
2010
66
NSF Pharma R&DVC
Funding for R&D
$Bn
Funding for R&D
$Bn VCNIH Pharma R&D
5% 8% 10% 12% 13%
% of US level
1 McKinsey Global Institute projection
SOURCE: 2015 CDII Survey; McKinsey Global Institute; China Investment 2015 – ChinaBio, STS.org; NSF annual report;NIH report; PWC Moneytree life science report; 2015 PhRMA industry profile
China R&D funding has grown at 27% CAGR in the past five years,and is expected to reach ~$25-30 Bn by 20251
Funding raised by Chinese innovation companies has been growing inpast 12 months; first wave of IPOs also coming up
FUNDING
2
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McKinsey & Company 53|SOURCE: Press search
Jan, 2015
Dec, 2014
Dec, 2014
Dec, 2014
Jan, 2015
May, 2015
Oct, 2015
Sep, 2015
Aug, 2015
May, 2015
$100M
$75M
$8M
$10M
$25M
$97M
$100M
$35M
$16M
$45M
Growing fund raising in innovation Recent IPOs from China Pharmacos
Oct, 2015
Jun, 2015
Oct, 2015
Capabilities and infrastructure still lagging US benchmarks,but with some promising potential
CAPABILITIES
3
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McKinsey & Company 54|SOURCE: 2015 CDII Survey
Discovery
Clinicaldevelop-ment
How wouldyou rate China’s overall
infrastructure for druginnovation today
Chemistry,Manu-facturing,Controls
How would you ratethe quality of R&Dtalent available inChina today?
Min Max
0 1084.9
Min Max
0 1084.6
Min Max
0 1085.0
Min Max
0 108
Ave. China Score = 4.2
4.6
Capabilities in basic research has gap to U.S.,particularly in quality
CAPABILITIES
3
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Publicationsin inter-national
journals
(‘000s)
+20% p.a.
2014
73
13
66
12
52
11
42
2010
35
269
+3% p.a.
201413
275
12
268
11
250
2010
242
Average
citations (#)
SOURCE: Thomson Reuters; InCite; Using Essential science indicators category (Immunology, Microbiology, Neuroscience& Behavior, Clinical medicine, molecular biology & genetics, Biology & biochemistry, Pharmacology & toxicology)
0.8 1.4
▪ China’s quantity of research is rapidly gaining momentum
▪ However, to improve quality, the academic community needs to clean uppractices of mediocre/me-too publications and enhance data integrity
China US
Chinese firms are building technology platforms to enableinnovation – BGI and genomics / DNA sequencing example
CAPABILITIES
Unique scale in genomics
3
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McKinsey & Company 56|SOURCE: Company website; annual report; news release; expert interviews
Unique scale in genomics
#1 in NGS field in China
16 Years in business
15 state of the art genetic
sequencing machines
Large database specific forChinese patients
#1
16
150
Ranked by Nature in 2014 as:
5th
of Top institutions inNature and Science
15th of Top institutions
5th
15th
Sequencing Platform
Mass Spectrometry platform
Computing platform
3
9 O r g a n i z a t i o n s
P l a t f o r m s
Managing director Wang Jun recentlyfounded a startup ShenZhen TanyuanTechnology Ltd. focusing on healthcarebig data
Chinese firms also actively contributing to improving globaldrug innovation model – Wuxi AppTec example
CAPABILITIES
3
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McKinsey & Company 57|SOURCE: Expert interview; company website
Large scale enabling 2,000collaborators globally
Start-upcompanies with
great ideas
Equipment
Key analytical
equipment of over50 percent
measured by 24x7utilization
Innovativecompanies withcapacityconstraints
Capabilityaugmentation
Facility
5 millions sq ft of
R&D andmanufacturing
Space 21 sites
Traditional Gxcompanies trying
to innovate
Virtual labInnovative engine
Man power
10,000 employees
globally4,000 synthetic,medicinal andprocess chemists
#1 CRO in Asia
CMC platform inspected byFDA
1st
cGMP biologics manufacturingfacility compliant with US, EUand Chinese regulatorystandards
1st
GLP preclinical laboratorydouble certified with an OECDcountry and CFDA
1st
GLP/GCP bio-analytical labthat passed FDA, OECD, andCFDA inspections
1st
CLIA-certified clinicalgenomics lab
1st
#1
1st in China:
4 Novelty and quality of innovation still laggingLOCAL INNOVATION
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McKinsey & Company 58|SOURCE: 2015 CDII Survey; expert interview
Min Max
0 1083.8
Min Max
0 108
Min Max
0 1084.2
Ave. China Score = 4.2
4.3Quality of R&D
Noveltyof innovativepipeline
Discoveryresearch
Clinicaldevelop-ment
Today majority of Chinese companies are focusing on “me-too” and “me-better”targets in drug R&D with few exceptions, such phenomenon is probably driven by
the fact that pharmacos need to establish credibility and demonstrate progress on
innovation. Going forward I hope these companies will also invest in new MOAs and
first-in-class as they build up R&D scale and capabilities
– China-based investor
Local PCT and IND applications are rapidly growing
LOCAL INNOVATION
4
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PCTpatentsfiled1
(#)
1 PCT: Patent Cooperation Treaty2 Class 1 applications in China; Commercial IND applications in the US
SOURCE: 2015 CDII Survey; PatentScope; GBI; FDA
INDapplica-tions2
(#)
China’s levels of PCT patent and IND applications still a fraction of that of U.S. (17% and 22%in 2014, respectively), however growth trajectory of both metrics has been strong
974
504
+18% p.a.
17356
+33% p.a.
20142010
5,8215,272
+3% p.a.
782601
+7% p.a.
2010 2014
While cross-border collaboration is increasing, participation inglobal trials has been limited due to recent regulatory hurdles
INTEGRATION WITH GLOBAL
5
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McKinsey & Company 60|SOURCE: 2015 CDII Survey; China Investment 2015 – ChinaBio; Thomson Reuters
# of global trials (#)
Cross-border dealson drug R&D (#)
Min Max
0 103.6 8
Ave. China Score = 4.2
Contributionto globalinnovation
Co-authorship withoverseas
researchers (‘000s)
China contribution by the numbers
4771
2014
-10% p.a.
2010
2613
+19% p.a.
76
27
+30% p.a.
Overall, survey participants believe that the outlook forChina innovation is promising
Wh l ill Chi l i l b l
Wh Chi ’ bi d i
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What role will China play in globaldrug innovation by 2025?
% of surveyed, N = 69
Majority of R&D leaders believe China could become a top-3 contributoror a solid 2nd tier player in global drug innovation by 2025
9%62%29%
Top 3 globalcontributor
Solid 2ndtier player
Struggling,focused onincrementalinnovation
What are China’s biggest advantages indrug innovation?
Strong government support, evidenced byrecently announced changes to acceleratedrug registration and approval
Sizable Chinese market attracts R&D
investments from both MNCs and locals
Proximity to leading drug R&D serviceproviders in China including CROs, CMOsetc.
Highly motivated Chinese companieseager to learn and play in global marketReference countries
Making the leap – what it could take
Pharma-coGov PE/VC¥
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¥
Opportunities for key ecosystem participantsKey hurdles / challenges
▪ Challenging regulatory
environment▪ Lack of mechanisms to
reward innovationConsider trade-off between pricing and reimbursement
Incorporate value evidence in clinical development plans
▪ Limited types of fundingoptions for start-ups
Allocate a proportion of government pension fund orsovereign wealth fund to VCs focusing on life science
Partner with promising startups in early stages
▪ Large talent pool withmixed level of capabilities
Encourage academic-private collaboration; urgeacademic to train “industry-ready” graduates
Attract and develop high-quality R&D talent
▪ Pipeline novelty andquality of R&D can be
enhanced Invest in innovative solutions that address China-prevalent disease areas (e.g., Lung cancer, liver cancer)
▪ Inclusion in global trialshas declined
Leverage new CFDA reforms to integrate China early oninto global development planning
Incentivize high-quality basic research (especially inBiology) to build cutting-edge expertise in select areas
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Finding the funds for innovation
“Finding the funds for innovation” becoming increasingly relevant
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“Who will pay for innovation” becomes an increasingly relevant question for pharma
industry, payors, policy makers and ultimately patients
Research & development RegistrationMarket access &commercialization
▪ Growth of mature drugs slowing down furtherexacerbates importance of innovative drugs
▪ Wave of new drugs expected to reach China
– MNCs launching waves of new drugs with highexpectations on uptake
– China innovation ecosystem has been improving,leading locals begun to develop and launch newdrugs
– CFDA reform expected to accelerate review andapproval of new drugs in coming years
▪ Patients increasingly demand access to new
drugs as affordability and awareness of optionsimprove
▪ Market rewards for innovativedrugs remain limited
– Fragmented and inefficientlisting & tendering processes
– Infrequent RDL/PRDLupdates with narrow
coverage
▪ Government spending onhealthcare remainsconstrained and focuses onproviding basic coverage
▪ Private health insurance still atnascent stage
Large number of innovative drugs expected to hit the market incoming years
Strong innovative pipeline with multiple planned new launches (examples)
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McKinsey & Company 65|SOURCE: GBI; lit search
Strong innovative pipeline …
129
284
70
83
34
IND1
367
NDA2
104
131
Pre-clinical1
2
1 Class 1.1 Chemical drugs and Class 1 biologics in CFDA2 Drugs in NDA review and drugs approved for NDA but not marketed (Jan 1 st, 2011-Oct 13th, 2015), including drugs in category chem-1.1, chem-3.1,
and innovative biologics
… with multiple planned new launches (examples)
Cadrofloxacin
Hemporfin
Nolatrexed
LocalMNC
Brand / product Company
NDA approved In NDA review
China faces clear constraints when considering rewards for innovation
Per capita healthexpenditure Total health expenditure
Healthcareexpenditure
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McKinsey & Company 66|SOURCE: WHO; World Bank
expenditureUSD
US
Japan
UK
China
3,965
9,150
3,600
370
Total health expenditureBn,USD
230
2,870
510
505
▪ Despite strong growth in past decade, China per capita healthcare spend stillsignificantly lagging behind developed countries
▪ Reward for innovation will be selective – government unlikely to support all innovativetreatments equally
17.1%
10.3%
9.1%
5.6%
expenditureas % of GDP
A set of levers could be considered to bridge the funding gap andreward innovation
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McKinsey & Company 67|SOURCE: NHFPC Yearbook; McKinsey Analysis
China healthcare spend byfunding source
$ Bn, percentage
40 34
35
36
2530
515209
2008
Social
PatientOut-of-pocket
Govern-ment
2013 2020
?
~1,000
?
?
On-going levers
Future possibilities?
Direct increased publicspend on innovation
5
Redeployment of savingsfrom price cuts of mature
drugs
6
Governmentreimbursement NRDL and CDI1
Selected localreimbursement
4 Self-pay market
3Patient AssistancePrograms (PAPs)
Outcome/value-basednegotiation
7Development of privatehealth insurance (PHI)
2
1 NRDL: national reimbursement drug list; CDI: critical disease insurance
1
Local governments have provided reimbursement schemeto a subset of innovative drugs – select examples
1
# of provincesDi
Locally negotiated
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McKinsey & Company 68|SOURCE: GBI; literature research; McKinsey analysis
1 Chronic myelogenous leukemia 2 Gastrointestinal Stromal Tumor
with PRDLDisease area reimbursement scheme
2Non-small celllung cancer
Qingdao
4Non-small celllung cancer
Zhejiang 3 cities (Qingdao, Zhuhai and Shenzhen
2Breast cancer 3 provinces (Zhejiang, Inner Mongolia,and Jiangxi)
8 cities
11Rheumatoidarthritis
Zhejiang Qingdao
12Non-small cell
lung cancer
2 provinces (Jiangxi and Zhejiang) Zhuhai
While more cities and provinces are starting to cover innovative drugs through PRDLor local negotiations, overall scale and scope of coverage remain limited
Acceleration of roll-out of Critical Disease Insurance program
Policy evolution Impact to date
1
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McKinsey & Company 69|SOURCE: Government official website; lit research; McKinsey analysis
y p
2007
2012
2014
▪ Piloted in all 31 provinces,covering ~700 million
population as of April.2015
▪ Actual reimbursement rate noless than 50% for OOP, andincreases with OOP expense
▪ ESRD example: NRCMS coverthe first 70% of expenses, thenCDI covers 50% of remainingexpenses
▪ CDI is now operated by privateinsurers in most regions
▪ “Guidance and
Definition ofCritical DiseaseInsurance” issuedby CIRC1 to setup a model policyof critical diseaseinsurance
“Opinions on ImplementingCritical Disease Insurancefor Urban and RuralResidents” jointly issued byMOH, MoLSS2, CIRC, etc. to
encourage cooperationbetween government andPHIs
▪ “Accelerate Developmentof CDI for Urban & RuralResident” issued by the
State Council, whichencourage PHI to provideCDI services and establishevaluation and supervisionsystem for expanding PHIcoverage
▪ “Guideline on Full Implementation ofCDI for Urban and Rural Residents”
released by the State Council in Aug. – CDI should benefit all urban and rural
residents covered in the nation's basic
health insurance by the end of 2015 – A relatively sound system for CDI will
be established by 2017
▪ CDI expected to befully roll-out soon andmay cover UEBMIparticipants as well(Pilots in some regionsalready)
▪ The reimbursementrate will increasegradually in future
Future outlook
2015
1 China Insurance Regulatory Commission2 Ministry of Labor and Social Security
CDI programs should expand
to the whole country by the end of
2015 to help financially challengedresidents
– Premier Li, Keqiang
Growth of China PHI marketUSD b
Private health insurance (PHI) is rapidly growing, providingsupplementary funding source
P i t ti l di
2
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USD, bn
SOURCE: CIRC; State Council; literature research; McKinsey analysis
13
18.213.7
2012
20.1
2015 H114
25.8+37%
Private payors actively expanding presence
Private payors are exploring new ways to
enhance access to data and improve riskassessment▪ Collaborate with providers
▪Invest in mHealth
▪ Invest in hospitals to become integratedmanaged care systems
▪ Manage BMI for local government
▪ Growth driven by favorable policies, e.g.,
– Increasing social capital
– Tax benefits
▪ PHI uptake still limited by
– Access to patient data
– Demand generation of target population
– Lack of bargaining power over providers
– Capability and talent
+
++
+
2% 2% 5% 7%
xx% PHI as % of total HC spend
Nanjing Gulou hospital
Patient Assistance Programs (PAPs) could help expand accessiblepatient pool
Nexavar Gleevec Iressa
3% of relevant patient pool coveredxx
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McKinsey & Company 71|SOURCE: China Charity Federation; literature search; McKinsey analysis
▪ Donation to poorestRCC and HCC
patients
▪ Donation to poorest 10%of CML & GIST patients
▪ Setup medical centers &disease consultinghotline
▪ Provide medicalassessment to patients
▪ Iressa Pan AsianStudy (IPASS)
clinical trials in 11cities in China
Charitydonation andclinical trials
▪ 3-month cap, after
which drugs are freefor life with provenefficacy
▪ Free for patients with
basic living allowences▪ 3/6-month cap, after
which free for rest ofyear
▪ 5-month cap for
NSCLC patients,after which drugs arefree for life
Program
▪ 20K patients▪ 25K patients
Impact
(by 2014)
▪ 39K patients
~10% <5% <10%
While beneficial to patients enrolled, PAPs only cover a subset of diseases andfraction of patients in need of innovative therapies; scaling up poses challenges
Self-pay segment could be further activated, leveraginglearnings from other markets
Increasing patient affordability & willingness to payInnovative ways to activateself-pay segment
4
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Increasingwillingnessto pay
SOURCE: National Bureau of Statistics; MGI; McKinsey analysis
1 Affluent (>36K USD annual household income), Mainstream (17-36K USD annual household income), Mass (10-17K USD annual household income),Poor (<10K USD annual household income)
2 Including all healthcare related spending across prevention, diagnosis, treatment and nutrition
Example
Learnings from other markets
▪ Partner with private banks and
consumer financingcompanies to provide loans topatients
▪ Short-term installments to helppatients manage cash flows
▪ Risk-sharing mechanisms to
mitigate patients’ perceivedrisk (e.g. on product efficacy)
24%
7%
26%
16%26% Healthcare2
Transportation andcommunication
Recreation, education
and culture
Others
Personal product
Consumption of New Mainstream by category, 2015
42.9
45.660.7
62.4
14.0 21.4
14.923.7
9.3
Poor
Affluent
NewMainstream
Mass
2025E
6.2
1.3
2020E
4.2
1.7
2015
2.7
2.3
Increasingaffordiblity
Consumption of urban households – By annual income1
Percentage, 100% = trillion USD
In India, Enbrel can be paidthrough installments of <$200to minimize cash flow disruption
for RA patients
Going forward, additional set of levers can also be explored
RationalePotentialimpact
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McKinsey & Company 73|SOURCE: McKinsey analysis
Rationaleimpact
▪Current healthcare spending accounts for 5.6%of GDP, lower than many developed market
▪ Increasing healthcare spend on innovativedrugs by 0.5% of GDP in 2025 couldtranslate into ~$20 Bn opportunity forpharma industry
Increase publicdirectspending oninnovative drugs
5 High
▪ Cost saving from reducing price of maturedrugs likely to be limited – estimated at $0.6-1.5 Bn per year
Redeploy savings ofprice cuts onmature drugs
6 Low
▪ Adopt Health Technology Assessmenttools/framework, where drugs with compellingclinical benefits could gain more commercialupside
Value-basednegotiation betweenpayors andpharmacos
7 Medium
In summary, narrowing the “paying for innovation” gap requires a
multi-pronged effort
T i t lti l f di
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A multi-prongedapproach
Better articulate the total economic and socialimpact of rewarding innovation, includingaddressing critical medical needs, creating a healthier
society and cultivate an innovative and strong industry
Tap into multiple funding sources, e.g.,▪ Increase government HC spend on innovative drugs
▪ Unleash Private Health Insurance market▪ Further activate self-pay segment
Not all innovation will be rewarded –
demonstrating the value of innovative drugswill be critical
Creative cross-sector partnershipsshould be explored (e.g., betweenprivate payors and pharmacos)
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Closing thoughts
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We are on a narrow bridge to innovation, with stilla high degree of uncertainty on outlook1
2 The going gets tougher; however there arestill tremendous opportunities to capture
3 The time to drive real change in business andoperating models is now
For more on China healthcare …
Our China healthcare leadership team (Partners and Associate Partners)
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Industry insights Collaboration with CPA
▪ Data driven periodic reports▪ TA specific deep-dive
(e.g., oncology, immunology)
iTunes Store –
“McKinsey on
China”
▪ How sick is China'spharmaceutical market?
▪ Will market forces revolutionizeChinese healthcare?
▪ What healthcare system can
China afford?▪ Will the next medical equipment
champion come from China?
▪ Obesity – How big willChina get?
www.mckinseychina.com
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2015
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