The pharmaceutical market in China continues to grow rapidly, projected to reach $1.9 trillion by 2020. Key drivers of growth include an aging population, rising rates of chronic diseases due to lifestyle changes, and improved healthcare access and insurance coverage. While China represents a major opportunity, multinational companies face challenges from increasing cost containment pressures, regulatory hurdles, and a recent anti-corruption probe. To succeed, companies will need new business models that address these realities.

1. THE PHARMASIA SUMMIT REPORT – CHINA 2013:
In Search Of New Growth Models
For Big Pharma In China

2. ACKNOWLEDGEMENTS:
Lead Writers: Gaobo Zhou, Tina Hou, Daniel Liu and Li Ma, McKinsey & Company
Editor: Dai Jialing, PharmAsia News, Elsevier Business Intelligence
Managing Editor: Tamra Sami, PharmAsia News, Elsevier Business Intelligence
Project Manager: Kim Gordon, Elsevier Business Intelligence
Design: Gayle Rembold Furbert and Jean Marie Smith, Elsevier Business Intelligence
Strategic Oversight: Franck Le Deu, McKinsey & Company; Jimmy Zhang, PhD, MBA,
BayHelix; Steve Yang, PhD, BayHelix; Joshua Berlin, Elsevier Business
Intelligence
For questions or comments about this report, please contact:
Joshua Berlin, Head of Emerging Markets, Elsevier Business Intelligence,
at j.berlin@elsevier.com.
copyright© 2013 Elsevier Business Intelligence

3. INSIDE:
4
5
7
14
23
31
40
41
45
Implications And Path Forward
For Sustainable Growth
68
69
OCTOBER 2013
Introduction
About Us
Executive Summary
Overview Of Market Trends
The Cost Containment Drive
The Innovation Imperative
Conclusion
Appendix I - Glossary
Appendix II - PharmAsia Summit
Survey Results
PharmAsia News Free Trial Offer
In Search Of New Growth Models For Big Pharma In China
3

4. Introduction:
China represents an enormous opportunity for the pharmaceutical
industry given unmet medical needs, demographic changes (e.g., an aging
population, adoption of Western lifestyles) and government support, including
China’s health care reform, which has extended basic medical insurance to
virtually all of the country’s 1.3 billion citizens.
At the same time, affordability barriers, complicated and lengthy regulatory
and reimbursement pathways and a recent drive to improve compliance
present unique challenges to multinational and domestic companies alike.
In addition, China is changing. From faster growth in smaller cities to
potentially more severe pricing pressure on off-patent medications, traditional business models are challenged and new strategies are required to
succeed and maintain growth.
While support for biopharma innovation is a major government goal, so
is curbing health care cost. How can pharma companies collaborate and
thrive in this environment? To gain a better understanding, Elsevier Business
Intelligence and BayHelix, organizers of the PharmAsia Summit, worked
with McKinsey & Company, Knowledge Partner to the Summit, to survey
and interview industry executives on new R&D and commercial models
for China.
Presented in this report are findings from our study, and analysis that indicates transformation in China is likely to disrupt current business models.
We hope these insights can be of help as you formulate strategies for China
in 2013 and beyond.
Steve Yang, PhD
Jimmy Zhang, PhD
Joshua Berlin
Franck Le Deu
Chairman
PharmAsia Summit
Organizing Committee
Chairman
BayHelix Group
Head of Emerging Markets
Elsevier Business Intelligence
Partner
McKinsey & Company
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
4

5. Executive Summary:
What a difference a year has made…Since the release of the McKinsey & Company
report, “Healthcare in China – Entering Uncharted Waters,1” just 12 months ago, the following events took place: The Ministry of Health (MoH) became the National Health and
Family Planning Commission (NHFPC) and changed leadership. The State FDA (SFDA)
was given more authority and renamed as China FDA (CFDA). The government moved
forward with the deepening of the health care reform, with an updated Essential Drugs List
(EDL) that added many molecules important to multinational pharmaceutical companies
(MNCs).2 In addition, 2013 is the first full year that the new government led by Xi Jingping
and Li Keqiang is establishing its priorities and policies. While there are expectations that
the party leaders may use the party congress in November to align and roll out new macro
level policies, we have already seen some broad stroke initiatives (such as the establishment of a free trade zone in Shanghai).
Importantly, China’s pharmaceuticals market grew by another 20%, to reach $70 billion
in 2013 at ex-manufacturer price, with some sub-segments (e.g., oncology) or channels
(e.g., county hospitals, Tier 3 cities) expanding at a much faster pace. A few MNC drugs
approached the $500 million mark in revenue, highlighting that before too long the largest
MNC drug in China could achieve the famed blockbuster status of $1 billion.
In addition, several high-profile transactions took place such as a joint venture between
Amgen Inc. and BetaPharma Inc.3 and a deepening of the relationship between Simcere
Pharmaceutical Group and Bristol-Myers Squibb Co.4, while another venture between Pfizer
and Zhejiang Hisun Pharmaceutical Co. Ltd. moved to operational status. MNCs doubled
down on innovation, with direct investments in R&D facilities, but also with more creative
development partnerships to bring drugs to market such as those seen between Ascletis
Inc. and Roche, and AstraZeneca PLC’s MedImmune division and WuXi PharmaTech Inc.5
Early signs of Chinese innovation were visible, for example with the global co-development
and commercialization collaboration between BeiGene Co. Ltd. and Merck KGaA for an
internally developed, second-generation BRAF inhibitor called BeiGene-283.6
Finally, compliance has taken center stage, as the government has launched a wide-ranging probe impacting MNCs, local pharma companies and health care providers.7
“Healthcare in China – Entering Uncharted Waters” available at McKinseychina.com.
For definitions of key China acronyms/terms used in this report, see our Glossary of Terms in Appendix I.
3
“To Jump Start China, Think Commercial: Amgen Ties Knot With Beta Pharma For Vectibix,” PharmAsia News,
May 10, 2013.
4
“Three Times The Charm? BMS Ties Up With Simcere To Commercialize Orencia SC In China,” PharmAsia News,
June 14, 2013.
5
”B-Harmony: WuXi And MedImmune Establish JV To Seize Biologics Growth In China,” PharmAsia News, Sept. 1 , 2012.
1
6
“Surge In Partnerships And Licensing In China Highlights Need For Greater Flexibility,” PharmAsia News, June 19, 2013.
7
“Putting GSK’s China Bribery Crisis In Context,” PharmAsia News, July 18, 2013.
1
2
OCTOBER 2013
In Search of New Growth Models for Big Pharma in China
5

6. In this seemingly constant flow of both positive and challenging market developments, it
is helpful to step back to look at the big picture. The contrast is striking. On one hand,
China offers a huge untreated population, clear commitment by the government to address
health care as a social and economic priority, the promise of a more consumer-oriented
economy, and significant investments by multinationals across the value chain, leading
to visible returns. On the other hand, the day-to-day reality of China reveals frustrating
market-access conditions, rising pricing pressure and cost-containment measures that put a
significant share of MNC portfolios at risk, increasing local protectionism, and underlying
compliance risks now visible to everyone.
In this report, developed in the context of the 2nd edition of the PharmAsia Summit
Shanghai, organized by BayHelix and Elsevier Business Intelligence, with McKinsey &
Company as Knowledge Partner, we summarize some perspectives on key trends impacting the market as well as their implications for MNC participants.
We do not seek to provide answers to all questions. Rather, we provide a temperature
check, reflecting insights from a survey of 50 industry leaders based in China, as well as
our own perspectives.
About The PharmAsia Summit Industry Leader Survey:
A
s part of the effort to prepare this report, McKinsey launched a targeted survey
of senior pharmaceutical industry executives. In total, more than 50 executives responded to the survey, ranging from regional leaders, country general managers,
VPs and directors across commercial, medical and R&D functions.
The survey was designed to gather perspectives on a range of topics covering trends in the
Chinese health care market and strategic moves to tackle challenges and capture opportunities. The survey was conducted before news broke about China’s anti-corruption probe.
Specifically, the survey was structured around four topics:
•
•
Perspectives on China’s increasingly cost conscious market-access environment;
•
Perspectives on China’s push for innovation and the R&D environment; and
•
OCTOBER 2013
Overview of market trends and their influence on industry decisions;
Strategic implications on what it takes to win.
In Search of New Growth Models for Big Pharma in China
6

7. In Search Of New Growth Models
For Big Pharma In China
SECTION 1: OVERVIEW OF MARKET TRENDS
China’s pharmaceutical market has been on a great run, growing at 21% CAGR over
the past five years. In a recent joint forecast developed by McKinsey and the China
Pharmaceutical Association (CPA), the China pharmaceutical market is projected to continue
growing around 17% annually through 2020, approaching RMB 1.9 trillion in retail sales
(~RMB 1.2 trillion in ex-manufacturer sales) (Exhibit 1). Sang Guowei, chairman of CPA,
recently commented that “China’s pharmaceutical market is projected to surpass the U.S. as
the largest in the world post-2020.”8 Regardless of the final number, most experts agree that
China will become the second-largest pharmaceutical market by 2020, and ultimately the
largest one in the world.
Exhibit 1
2020 CHINA PHARMACEUTICAL MARKET FORECAST
CAGR 2012-2020
China’s pharmaceutical market forecast,
retail price (base case)
Base-case
scenario
RMB Trillion
High-growth
scenario
Low-growth
scenario
1.9
17%
18%
15%
0.1
11%
14%
6%
12%
14%
10%
1.6
1.0
0.6
0.8
Hospital
0.5
Grassroots medical
institutions
<0.1
0.1
0.1
0.1
0.2
2012
Retail
2015
2020
SOURCE: CPA; McKinsey analysis
8
OCTOBER 2013
Keynote speech by Sang Guowei during the 15th Annual Meeting of the China Association of Science and
Technology, May 25, 2013.
In Search Of New Growth Models For Big Pharma In China
7

8. McKinsey/CPA China Pharmaceutical Market Forecast Methodology:
W
e recently developed an integrated forecast for the China pharmaceutical market, in partnership with CPA. Our forecast of the China pharmaceutical market
was conducted across three segments: hospitals, grassroots facilities, and retail.
We built an integrated market model linked to underlying drivers of the market at
geographic and segment levels, including patient flow, spend per capita, pricing and
drug usage trends, etc.
•
Hospital: Segmented into 15 sub-markets by city tier (1/2/3/4/county) and hospital Class (III, II, I). The hospital segment is expected to remain the largest segment
till 2020 with a 17% growth rate, compared with 22% CAGR from 2008-2012.
Due to Basic Medical Insurance (BMI) budget control, the growth rate of the hospital market in Tier 1 and 2 cities is expected to slow down to 12% and 16%
respectively, compared with 17% and 24% from 2008-2012. The tier 3, 4 and
county market will maintain strong growth momentum at 18%+ CAGR through
2020. Class III hospitals will continue to outgrow the overall hospital segment
and account for 70% of the hospital market by 2020. Class I hospitals, including
private hospitals, will also grow at a healthy 18% CAGR driven by recent government policy support for the private hospital sector.
•
Grassroots facilities: Segmented into Community Health Centers (CHC) and Township Health Centers (THC). CHCs are expected to maintain historical growth momentum at 19% CAGR, driven by continued government investment and increasing
treatment of chronic disease under CHC management. Growth trajectory of THCs
will decrease slightly from 4% in 2008-2012 to barely 1% in the next few years.
•
Retail: Expected to maintain 12% growth from 2012-2020. The channel shift from
the hospital market to the retail segment is not expected to happen until hospital
funding reform achieves real impact.
This growth has been driven in large part by a fast-growing patient population that now has access to basic government health insurance. For example, the breast cancer incidence rate per
100,000 urban female residents grew from 36 to 519 between 1998-2007, childhood asthma
patients grew from 1.1% in 1990 to 3.0% in 2010,10 and Alzheimer’s disease patients increased from about 3.8 million in 2000 to 5.6 million in 2010.11 While some of the growth can
be attributed to improved disease tracking, other more fundamental growth drivers, such as
an aging population, adoption of western lifestyles, environmental factors and related causes
have contributed to growth in disease prevalence. Diseases also have been undertreated in
the past and experienced visible improvements in treatment rates in recent years. For example,
of the 200 million people with hypertension, 25% were managed in 2002, with rates rising
Chinese Journal of Preventive Medicine, 2012 Aug; 46: 703-7.
China Journal of Pediatrics, 2003 Feb; 41(2): 123-7 and result announcements from the 3rd nation-wide survey on
prevalence of asthma in urban children (Prof. Chen, Yuzhi).
11
Lancet, 2013 June; 381: 2016-23.
9
10
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
8

9. to 33% in 2013. Similarly, the number of patients with end-stage renal disease on dialysis
increased from 70,000 in 2007 to 200,000 in 2011.
Treatment options have also expanded with improved patient access to targeted therapies
and biologics. For example, between 2010 and 2012, the proportion of rheumatoid arthritis
patients treated with biologics doubled from roughly 3.5% to about 7%, and HER2 testing for
breast cancer patients increased from 65% to 75% from 2010-2012. In addition, patients in
lower-tier markets significantly improved their access to health care, creating corresponding
growth segments that are expected to fuel market expansion in the medium term. Similarly,
pharmaceutical sales growth in tier 2/3 cities have outpaced the market, driving their share
of the total market from ~55% to ~60% in just four years (Exhibit 2).12
MNCs have benefited from this impressive growth demand with a significant change in the
scale of their operations in China (Exhibit 3). China is playing an increasingly important role
to the global business of MNCs. On average, China sales of the top 10 MNC pharmacos accounted for 3.8% of their global business in 2012, up from 3.0% just a year earlier (Exhibit 4).
Exhibit 2
KEY DRIVERS OF CHINA PHARMA MARKET GROWTH
Significance of key trends in driving near term pharma market growth
(1- not significant at all, 7- most significant)
Distribution of scores 6 and 7
Trends
6: Very significant
Shifting demographics and growing
disease prevalence
7: Most significant
34%
Disease awareness and improving
diagnostics
46%
48%
Improving insurance coverage
30%
Improving health infrastructure and
access in lower-tier markets
20%
20%
12%
38%
Favorable policy support to innovation
Trends related to
demand growth
are key drivers of
market growth
28%
16%
Rise of local innovation
22%
6%
20%
Improving innovation infrastructure
and R&D talent pool
8%
SOURCE: McKinsey PharmAsia Summit Survey
12
OCTOBER 2013
For further evidence of the pace of development of the market, refer to the McKinsey-CPA report (included on the
PharmAsia Summit flash drive), July 2013 edition, which provides a detailed analysis of the development of the
oncology market in a sample of leading hospitals.
In Search Of New Growth Models For Big Pharma In China
9

10. Exhibit 3
FROM 2005 THROUGH 2012, THE SCALE OF COMMERCIAL PERFORMANCE IN CHINA
INCREASED SIGNIFICANTLY
The top 10 pharma
multinationals added close
to $10 billion in sales in
seven years
Eighty-five brands exceeded
$50 million in sales
compared with eight only
seven years ago
Cumulative sales of top ten
pharma multinationals
(prescription drugs only)
USD billion
12.3
Distribution of size of major
prescription-drug brand
Number of brands
The largest prescriptiondrug brand is approaching
$500 million in annual sales
Annual sales
USD million
490
85
11
34
X4.8
+9.8
4$
0
2.5
8
6
2005
2012
2005
110
2012
2005
(Heptodin)
0
2
2012
(Plavix)
Exchange rate: USD:RMB=6.15
Rev. > $200 mn
Rev. $100 - 200 mn
Rev. $50 - 100 mn
SOURCE: RDPAC; press search; McKinsey analysis
For some companies, Novo Nordisk AS for example, the figure is already much higher, and
for many others China is now a key contributor to absolute value growth in global revenues,
a trend facilitated by ongoing pricing pressure in Europe and the U.S., as well as patent cliffs
at many companies. In our survey of pharma industry leaders, more than 90% said China is
already a top five global strategic priority and 65% said it would be among the company’s
top three global strategic priorities in five years.
With the rise of China’s importance for global pharmaceutical companies, change is also
taking place as the industry faces headwinds from government policies and pilot programs
aimed at controlling the cost burden to the health system. In our survey, industry leaders highlighted the three most important factors that could hinder industry growth as:
1) Lack of or delayed reimbursement for innovative drugs (two to five years for drugs to
be listed post-launch);
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
10

11. Exhibit 4
CHINA INCREASINGLY IMPORTANT FOR THE GLOBAL PHARMACOS
China Rx sales as a proportion of global Rx sales for the top 10 MNC pharmacos in China
Percent
10.8%
2011
8.8%
2012
8.4%
7.9%
5.7%
4.1%
4.1%
3.8%
3.3%
2.8%
MNC1
MNC2
MNC3
MNC4
2.6%
MNC5
3.2%
2.7%
MNC6
3.1%
2.4%
MNC7
2.6%
2.3%
MNC8
3.0%
2.0% 2.0%1.9%
1.6%
MNC9
MNC10
SOURCE: RDPAC; press search; McKinsey analysis
Average
of top 10
2) Fragmented tenders and intensifying pricing pressure; and
3) Slow registration process for new products (average five- to seven-year delay compared to international markets, with some exceptions and expectations that this gap
will decrease).
To address the complexities associated with a market that increasingly emphasizes both
cost control and drug innovation, pharmacos have begun to shift their strategies. The shift
is driven largely by the shape of each company’s portfolio in China. For MNC pharmacos,
on average 70-80% of their portfolios still consist of off-patent products that are particularly
sensitive to cost-control measures (Exhibit 5).
In the past five years, “expanding sales forces to increase coverage and deepen penetration” and “introducing innovative products into China” have been the most important drivers
for pharmaceutical companies’ growth. Moving forward, given intensified cost pressure and
push for innovation, executives see “introducing innovative products into China,” “strengthening the organization,” (e.g., investing in a winning talent strategy and strengthening organizational capabilities) and “exploring new commercial models” as most important to sustain
growth momentum (Exhibit 6).
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
11

12. Exhibit 5
MOST MNC PHARMACOS RELY HEAVILY ON NON-PATENTED PRODUCTS IN CHINA
China revenue contribution between patented and non-patented products, 2012
RMB Mn, %
Patented
products
6%
13%
16%
18%
19%
19%
21%
32%
34%
70%
94%
Non-patented
products1
87%
84%
82%
81%
81%
79%
68%
66%
30%
MNC1
1
MNC2
MNC3
MNC4
MNC5
MNC6
MNC7
MNC8
MNC9
MNC10
Products that never had patent protection in China or lost patent protection
SOURCE: RDPAC; press search; McKinsey analysis
Exhibit 6
INNOVATIVE PRODUCTS AND COMMERCIAL MODELS ARE INCREASINGLY RELEVANT IN COMPANY
STRATEGIES, SALES FORCE EXPANSION BECOMING LESS IMPORTANT
Success factors in driving pharma company growth (average score)
(1- not significant at all, 7- most significant)
Strategies to drive growth
Past five years
Significant change
in ranking or remain important
Change in ranking
of significance
Next five years
Introducing innovative products
5.8
Investing in a winning talent strategy
5.0
Strengthen organization capabilities
6.5
5.2
Adopting new commercial models
5.7
Expand footprint with local BD
4.3
Entry into new product segments
3.9
Organization restructuring
3.9
1
5.1
5
5.0
4.3
Expand portfolio with local BD
4
5.3
6.1
No change
5.4
5.0
Expanding sales force
2
5.5
4.3
Government partnerships
1
1
4.7
4.1
3.8
1
1
1
SOURCE: McKinsey PharmAsia Summit Survey
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
12

13. In summary, we see a market that from a demand stand point will continue to expand at a
fast pace and create very significant opportunities for industry participants offering the right
mix of products and services. This may be best illustrated by the recent upward revision of
the estimate of diabetic and pre-diabetic populations in China. The latest study published on
September 4, 2013, in the Journal of the American Medical Association, suggests that 114
million Chinese are diabetic, adding in one swoop roughly 20 million potential patients to
treat to the burden of the government, and putting the prevalence rate at 11.6%, ahead of the
U.S.’s rate (Exhibit 7 ). It is however a market that is becoming more difficult to navigate, not
less, and where scale – for example breadth of portfolio and depth of capabilities – increasingly becomes a competitive advantage.
Exhibit 7
FAST GROWING DIABETES EPIDEMIC
Recently released data indicate that prevalence of diabetes
now exceeds that of the U.S.
1
Significant, fast growing
burden for the Chinese health
care system, with ~114
million people with diabetes,
and up to 490 million with
pre-diabetes;
2
Market of critical importance
for MNCs that have
aspirations for global
leadership in diabetes;
3
Estimation of prevalence rate in China
Need for China-focused R&D
to better understand the
disease in the Chinese
population and to potentially
develop tailored drugs.
Percent
11.6
11.3
9.7
5.5
2.8
19941
1
2
3
4
5
6
20002
2007- 083
20106
U.S. 20114,5
National Diabetes survey, among aged 25-64, by WHO 1985 criteria (Pan, XR, et al, 1997).
InterAsia survey, among aged 35-74, by American Diabetes Association (ADA) 1997 criteria (Gu, D, et al, 2003).
China National Diabetes and Metabolic Disorders Study, among aged 20 above, by WHO 1999 criteria (Yang, WY, et al, 2010).
Prevalence among >20 years old Chinese Americans is estimated at ~11.7%.
Released by ADA in 2011.
Released by JAMA in September 2013; prevalence in adult population (18 years old and above).
SOURCE: Press releases; McKinsey analysis
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
13

14. SECTION 2: THE COST CONTAINMENT DRIVE
The vision for the government’s health care reform, which kicked off in 2009, is clear and
compelling – provide universal, quality access at low cost by 2020. What is not as clear
though is whether the financial implications of this bold commitment have been fully comprehended by all stakeholders, particularly in the face of rapidly evolving epidemiologic trends.
While China has continuously achieved fast economic development during the past decade, it also faces a significant
increase of health care burden and a slowing economy, albeit
Chinese patients still have
at a still enviable annual rate of ~7.5%. On average, heath
very limited access today to the
care spend has grown faster than economic growth in the last
newest and most advanced
five years. This gap between economic growth and health
therapies of MNCs, such as
care growth is a positive trend given the low starting point,
targeted therapies for cancer
and it will likely persist for a period of time as the government
or immune disorders.
ramps up access. The government has set the target for health
care spending at 7-7.5% of GDP by 2020. Although this is
a meaningful increase from China’s historical level, currently
around 5.6%, it is still much lower than ratios prevailing in developed countries, such as 12%
of GDP in France, and 18% of GDP for the U.S. Further, the per capita spending will remain
low, even by 2020 (i.e., $710 versus $5,130 on average in Western Europe, and $12,237
in the U.S.) at projected value. This low target, in relative and absolute terms, implies the
need for the Chinese government to find innovative ways to provide care, to make trade-offs
in budget allocations, and to significantly improve the overall efficiency of the health care
system. This is all the more critical as China is still at an early stage of emergence of its health
care burden, and decisions made in the next few years will have long lasting consequences.
Chronic diseases will be a major driver of the country’s health care burden, and treatment already accounts for 68% of total health care spending.13 It should be no surprise then that National People’s Congress Vice Chairman, and former Minister of Health, Zhu Chen, referring to
the progress of the health care reform, said,:14 “Facing old problems [huge population base,
relatively under-developed basic health care infrastructure] and the new problems [explosion
of chronic disease prevalence], we need to establish an effective and cost-efficient health care
system with universal access to the whole nation; otherwise, we will face an even heavier burden
10 years down the road due to the explosion of complications of chronic diseases.”
At the other end of the spectrum, Chinese patients still have very limited access today to
the newest and most advanced therapies of MNCs, such as targeted therapies for cancer
treatment or immune disorders. Patients rely on their ability to pay out-of-pocket and patient
assistance programs (PAP) for access. Providing central or provincial government-funded reimbursement on a broad basis for these drugs would have a significant impact on budgets.
Further, the government will likely need to take a more active role in rebalancing the financial
mechanisms of public hospitals, a source of many tensions.
Not surprisingly then, policies and industry practices are increasingly in place to implement
“cost effective” elements of health care reform, and have been undertaken by various stakeholders in the market, including payers, providers, and regulators. The implementation of
those measures, ranging from EDL expansion to diagnosis-related group (DRG) pilots, cost
capitation and various drug-level containment measures, is moving at different speeds and
with different models at the provincial level, influenced by local conditions. For example,
“Toward a Healthy and Harmonious Life in China: Stemming the Rising Tide of Non-Communicable Diseases,”
The World Bank, July 2011.
14
Speech at the China Hospital Development Forum in June 2013.
13
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
14

15. Shanghai’s local government has been at the forefront of cost-containment measures, reacting to a deficit in its BMI scheme. As a result, the growth of the pharma market in Shanghai
slowed dramatically compared to the national average, despite higher income per capita,
with significantly higher generic substitution taking place.
Our survey of industry leaders shows that among the five top factors preventing the industry
from faster development, three relate to “cost containment,” including “fragmented tenders
and intensifying pricing pressure,” “public hospital reform,” “EDL expansion and erosion
of non-EDL market in large hospitals.”15 We will discuss the other two “delayed and lack of
reimbursement for innovative drugs” and “slow registration process for innovative products”
in the next chapter (Exhibit 8).
Intensifying pricing pressure
Pricing pressure has been intensifying during the past years, driven by multiple factors.
NDRC (retail) price cuts have affected some therapeutic areas almost every year over the past
15+ years, with each time impacting products’ retail prices by 10-20% (sometimes up to
30-40%) for off-patent products, and 5-10% for innovative products. Going forward, NDRC
Exhibit 8
MARKET ACCESS AND PATIENT ACCESS HURDLES EXPECTED TO HINDER PHARMA MARKET GROWTH
Statistics of scores indicating the significance of each trend hindering growth
(1- not significant at all, 7- most significant)
Distribution of scores
Trends that hinder growth
Average score
6: Very significant
Delayed and lack of reimbursement
for innovative drugs
7: Most significant
46%
Fragmented tender and intensifying
pricing pressure
26%
Slow registration process for
innovative products
38%
24%
EDL expansion and erosion of
non-EDL market in large hospitals
44%
Lack of effective commercial approach
to sufficiently serve broad market
5 .9
24%
38%
Growing competition from cheap
alternative drugs hindering adoption
of innovative/quality products
6 .0
48%
46%
Public hospital reform (e.g., Zero markup,
DRG, total budget control)
24%
30%
5 .6
16%
5 .0
20%
4%
6 .0
5 .0
cost containment factors
4 .8
SOURCE: McKinsey PharmAsia Summit Survey
15
OCTOBER 2013
“In China, A Province’s Drastic Price Cut Model Is Being Modified To Fit A Nationwide System: A Look At The
Anhui Model,” Pharmasia News, April 7, 2011.
In Search Of New Growth Models For Big Pharma In China
15

16. price cuts are expected to continue and bring down products’ retail prices, probably with
more focus on controlling prices of off-patent originator drugs.
Tendering is another key factor intensifying pricing pressure for manufacturers. Since Anhui province’s “double-envelope” model for EDL tenders first emerged in 2010, several other provinces
followed suit and fierce pricing erosion started, especially for generic products with multiple
manufacturers. This resulted in unsustainable profitability for manufacturers, especially local ones.
This price-driven tendering model also threatened product quality and led to supply shortages for
some low-priced products in certain provinces. To correct this situation, the State Council issued a
notice in March 2012 to focus on quality first in tenders rather than price alone.
Going forward, we expect to see more “quality” elements incorporated into the tendering process to lessen pricing pressure. For example, Jiangsu province has separate evaluations based
on quality categories, while Shanghai adopted a model that awards a higher overall score
based on 63% for quality, 7% for reputation and service and 30% for price. More remarkably,
Anhui unveiled its county hospital tender in 2012 using separate evaluations for different quality categories and applying 60% for quality in the overall score. Leading local companies and
MNCs will benefit from this trend of greater focus on quality, and will face less head-to-head
competition from low-priced products.
Application of international reference pricing (IRP): In April 2012, NDRC requested MNCs
to provide prices of their products in 10 markets and NDRC visited some of the 10 countries
to learn about their pricing policies. Were IRP to be adopted in a way that directly compares
prices with other countries, prices of MNC products, especially off-patent products, could see
significant cuts. However, implementation of IRP could still be years away, and modalities of
implementation could mitigate the actual impact.
Application of reimbursement-based pricing: NDRC recently disclosed the intention to adopt
reimbursement-based pricing as one measure to narrow the price difference between MNCs’
off-patent originators and local generics. With the defined reimbursement cap for one molecule, any gap above the cap would be paid out-of-pocket. This approach, compared with
the current “reimburse by percentage” method, will increase pricing pressure on MNCs, especially if local generics pass bioequivalence testing, as required by the government by the
end of 2015. We expect the government to start exploring this pricing approach, with pilots
at small scale (both at geography and at product level) in the next year or two.16
Accelerating public hospital reform
Currently, public hospitals, which represent the vast majority (close to 90%) of health care capacity, operate with insufficient direct subsidies from the government. As a result, physicians
in China are paid much less than their Western peers, a source of tension for the system.
In addition, hospitals are paid under a fee-for-service model, which incentivizes hospitals/
physicians to potentially over-prescribe medical tests and drugs, and hospitals traditionally
apply a markup of up to 15% at captive pharmacies so are also potentially incentivized to
prescribe more expensive treatments.
Payment scheme reform has been identified as the breakthrough point for public hospital
reform and a key mechanism to better control health care costs. Since the new health care
reform started in 2009, NDRC and MoH have begun pilots in 40 cities to explore different
models. Since then, multiple models have emerged, including DRG, pioneered by Beijing;
capitation, represented by grassroots institutes of Miyun and Pinggu counties in Beijing; total-
16
OCTOBER 2013
“China Drug Price Reform Takes Shape: Price Ceilings Out, Reimbursement Caps In,” PharmAsia News,
Aug. 27, 2013.
In Search Of New Growth Models For Big Pharma In China
16

17. budget-control, exemplified by Shanghai and Zichang county in Shaanxi province; and a
mixed model, such as in Zhenjiang in Jiangsu province. Despite these pilot programs, most
experts believe the government will eventually need to increase funding for public hospitals
if it wants to address the root cause of the current situation.
Despite the fact that payment scheme reform is still at an early stage, piloting initiatives have
demonstrated significant impact on the pharmaceuticals market. As discussed earlier, Shanghai’s total budget control is a good example that has led to a slowdown of growth. Our survey
also shows that industry leaders think “reimbursement budget control” poses the biggest challenge to the industry among reimbursement policies in the next five years (Exhibit 9). The fact
that the Shanghai market’s volume growth did not change significantly indicates substitution to
lower-cost drugs. In hospitals with brand-specific controls, the negative impact on controlled
brands could be significant due to the high price of selected products.
2012 EDL expansion
The Essential Drug System (EDS) is identified as one of five priorities to support the government’s overall objective to establish a universal basic health care system providing
safe, effective, convenient and low-cost health care services. The 2012 EDL expansion
(released on March 15, 2013, but referred to as the 2012 EDL) is one step toward a standard and comprehensive EDS targeted by the government for 2020.
Due to the potential impact (both positive and negative) that the EDS has on the industry, the
2012 expansion and its related policies have been actively debated by industry players. Although the 2009 EDL already created much discussion, in the end, with the notable exception
of Merck Sharpe & Dohme (MSD)’s decision to pilot a broad EDL push with Zocor (simvastatin),
MNCs overwhelmingly managed to contain any impact. This will likely change in the near term
with the latest expansion of the list.
Exhibit 9
TOUGHEST CHALLENGE FROM REIMBURSEMENT POLICIES IN THE NEXT 5 YEARS
Number of votes on the 1st, 2nd and 3rd toughest challenge from reimbursement policies in the next 5 years
# of votes (total votes in bold)
Challenges
Reimbursement budget control policies
9
Long updating cycle for National
Reimbursement Drug List
15
14
Lack of reimbursement for innovative drugs
10
Limited scale and slow development
of private health insurance
7
14
12
11
38
11
13
Toughest
37
34
1 2 10
Top challenge
Limited scale of implementation of
catastrophic disease insurance
2
3
2 7
2nd toughest challenge
3rd toughest challenge
Easiest
SOURCE: McKinsey PharmAsia Summit Survey result
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
17

18. McKinsey/CMA Collaboration on Clinical-pathway Based Hospital Cost Analysis
A
lthough experience has been gained
through various pilot programs,
payment scheme reform is far from
completed. Fundamentals, such as clinical pathways, hospital cost analysis and
patient-treatment records, have to be in
place to support more systematic reform.
To establish one of those key stepping
stones, McKinsey and the China Medical
Association have formed a partnership on
clinical pathways-based cost analysis on
county hospitals (Exhibit 10). Results from
the first stage of the project on three diseases helped establish a cost-analysis model
for future roll outs to other diseases and
revealed limitations in the current pricing
system of hospital services (Exhibit 11).
Exhibit 10
CLINICAL-PATHWAY BASED HOSPITAL COST ANALYSIS
MODEL IS CRITICAL BASIS FOR PROGRESSING HOSPITAL
PAYMENT SCHEME REFORM IN CHINA
Payment scheme reform
Fundamental of
payment
scheme reform
Exploration
of DRG model
Clinical pathway-based
cost analysis system
Cost analysis
methodology
Clinical pathway
Exhibit 11
COST ANALYSIS ON CEREBRAL INFARCTION IN A COUNTY HOSPITAL IN SHAANXI DEMONSTRATES THAT
HOSPITAL REVENUE IS LOWER THAN REAL COST
RMB
# of activities
Cost per activity
Physicians Nurses
7.4
hours
25
hours
94
42
Exams
CT+
MRI
Other
imaging
…
…
…
383
496
432
Beds2 Management
cost
Medicine1 Consumables
…
1906
…
10.8
day
10.8
day
19
43
482
463
1,906
Activity based
cost
1,036
383
496
482
206
6,106
4,545
-26%
432
701
Physicians Nurses
Rev. from patients3
Gaps btw. Rev.
and cost
1
2
3
Exams
CT+
MRI
ManOther Medicine Consumables
Hospital’s Hospital’s
revenue
imaging
agement cost
Direct
cost from cost
bed2
76
108
563
856
288
1906
554
194
0
4545
- 89%
- 90%
47%
72%
- 33%
0%
15%
- 6%
- 100%
- 26%
Including cost of pharmacy
Including utility, maintenance cost
Including out-of-pocket payment and payment from insurance
Areas where real
cost is undervalued
SOURCE: Hospital financials; interviews with physicians and nurses; McKinsey analysis
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
18

19. Our survey shows that 62% of executives predict the impact to their business from the EDL
will be mostly negative, and that volume upside will be offset by price pressure and will favor
local companies. Thirty one percent believe the EDL will not have a significant impact, and
only 7% consider EDL expansion more of an opportunity than a challenge.
There are four major changes in the 2012 version of the EDL:
• Significant increase of the range of the list and exposure for MNCs: EDL coverage increased from 307 molecules to 520 (for Western drugs the EDL expanded from 205 to 317, and for traditional Chinese medicines (TCM) it expanded
from 102 to 203), with broader disease coverage, including cancer, blood
diseases and psychiatric disorders, and broader patient group coverage,
such as drugs for women and children. Among 520+ products of R&D-based
Pharmaceutical Association Committee (RDPAC) member companies, the
number of products on the EDL more than doubled, from 56 to 126, representing 30% of total current revenue after expansion. Ten of the top 50 products of
RDPAC member companies were newly added to the list. Examples include top
off-patent products like Sanofi’s Plavix (clopidogrel), Novo Nordisk’s Novolin
(human recombinant insulin), Bayer AG’s Glucobay (acarbose) and Pfizer Inc.’s
Norvasc (amlodipine). Companies with the highest exposure will have up to
60% of their revenues directly or indirectly impacted by the EDL (Exhibit 12).
• Broader implementation: The central government mandates broader EDL usage
not only in grassroots institutes, but also in Class III and Class II hospitals, which
are the core market of leading industry players. The EDL market will increase, but
Exhibit 12
2012 EDL INCLUDES SIGNIFICANTLY MORE MNC PRODUCTS
Revenue1 exposed to EDL2
RMB billion
100% =
2.6
9.8
2012 EDL
7.7
2.7
3.1
7.0
9.5
5.7
MNC 4 MNC 5
MNC 6
MNC 7
MNC 8
6.4
12.0
2009 EDL
3.5
7.6
Not on EDL
6.7
1.6
2.3
Average 30%
MNC 1
1
2
MNC 2 MNC 3
MNC 9 MNC 10 MNC 11 MNC 12 MNC 13 MNC 14 MNC 15
Rx only.
Theoretical EDL exposure, including revenue from all dosage forms of the molecules listed on EDL .
SOURCE: RDPAC; press search; McKinsey analysis
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
19

20. FORECAST OF EDL MARKET
T
here are still many uncertainties affecting the EDL market development. Depending on how several major swing factors evolve, McKinsey has projected three EDL
market scenarios by 2020: The EDL market, including both national EDL and provincial EDL, will account for 30%, 34%, or 41% of the total pharma market by value
in a “constraint scenario,” “base scenario” or “accelerated scenario,” compared with
27% currently. The major swing factors affecting growth of the EDL market include: how
intensive the pricing pressure will be; whether funding and insurance to cover the new
EDL will be sufficient; whether volume-price linkage will be realized in tenders; how fast
the progress of hospital payment scheme reform will be (so as to incentivize hospitals to
use cheaper EDL products); how much flexibility local government will have to expand
provincial EDLs; and whether there will be another major EDL expansion by 2020.
at the same time, the Reimbursement Drug List (RDL) market in large hospitals may
be negatively impacted. More than 10 provinces, such as Chongqing, Hebei,
Liaoning, and Zhejiang, have already published EDL-usage requirements for
hospitals. Most of them follow requirements set by the central government on EDL
revenue share (by value), e.g., 100% in grassroots hospitals, no less than 20-30%
in Class III hospitals, no less than 40% in Class II hospitals and no less than 50%
in county hospitals that are participating in reform pilots. Compared with the current EDL usage, estimated at 10-15% and 27% NEDL and PEDL respectively by
value share, the impact is expected to be significant in terms of both expanding
the EDL market and negatively impacting the non-EDL market, if the requirements
are enforced.
Some stakeholders doubt the effectiveness of the mandate without sufficient supporting mechanisms in hospitals, but we believe the stringent government requirements will take effect to some extent because the heads of public hospitals in
China, unlike hospital CEOs in most markets, act partially as government officials,
and consider fulfilling government requirements as one of their priorities for career
development. At the same time, with fast improving IT infrastructure in hospitals,
drug sales information will become more transparent, which will facilitate better
monitoring and regulation of EDL implementation. In other markets, e.g., recently
in Thailand, a strong linkage between cost-containment mechanisms, incentives of
hospital directors and improved IT infrastructure has led to drastic results.
• Changing tendering model: There is an emerging tendering model that links EDL and
RDL tenders. A company losing an EDL tender (or deciding not to participate in the
EDL) will automatically lose the RDL tender altogether, or products bid as RDL must
follow the price of winning EDL products at the same quality level. Hence, participating in the EDL market becomes a must if there is broad tender linkage, and understanding how to participate effectively in the EDL market becomes a critical issue.
Multiple provinces, including Beijing, Fujian, and Jiangsu, have already adopted
this linkage model. If it turns out to be widely adopted, strategic questions for
manufacturers will change from “whether to participate” to “how to participate,”
i.e., what are the right pricing strategies, and how to adjust commercial models
to capture the volume upside.
• Balancing between cost and quality factors: While industry players start to endorse heightened “quality” requirements in tenders, confirmed by Beijing tender
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
20

21. Strategic Questions Related To The EDL
W
hen looking closer at the EDL impact on each company, business leaders usually focus on the products listed on the EDL, but overlook the impact of their non-EDL products facing EDL competition, especially competition from other MNCs. They should
ask themselves the following strategic questions under the above two different scenarios.
For EDL products, pharma companies need to consider:
What happens if we participate in the EDL?
– What price is necessary to win the tender?
– What is the expected volume upside, including how many provinces do we
expect to win; in which provinces can we still participate in the NRDL when
losing EDL tenders?
What happens if we don’t participate in the EDL?
– What would be the pricing points to maintain to participate in the NRDL?
– How much revenue currently comes from grassroots institutes? Can we afford
to lose the EDL market?
– How much of our market in large hospitals will switch to EDL after broader
implementation is required?
– In which provinces will we lose the RDL market if we don’t participate
in the EDL?
For non-EDL products with EDL competition, pharma companies need to consider:
What are the implications facing products with competition from EDL products?
– How much volume could potentially be lost competing with EDL products in
different channels?
– What is the impact on price? How much price reduction is needed to remain
competitive?
Is there an opportunity to participate in the EDL?
– In which circumstances should we pursue provincial EDLs (PEDLs)?
– What capabilities do we need for a PEDL play? (e.g., PEDL listing, tendering)?
– What price is necessary to win PEDL tenders?
– What is the expected volume upside?
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
21

22. results in May 2013, Guangdong’s recent tender policy still focuses more on
price and casts uncertainty about which way the industry will go in terms of the
long term “quality-price” balance.17
In response to the new EDL expansion and related policies, while 15% of respondents still
don’t have a clear strategy, 29% plan to decrease investments in products on the national
EDL by adopting lower-cost commercial models and tools; 29% of respondents will maintain
investments, but shift resources across channels or geographies and strengthen market-access
capabilities; 17% of respondents will increase investments to drive penetration in lower-tier
markets, hoping the volume uptake will mitigate price reductions; and 8% will decrease investments and ramp down commercial efforts (Exhibit 13). The range of responses illustrates
the degree of uncertainty that still surrounds the EDL.
In summary, we see an environment where pricing pressure and cost-containment measures
are likely to take deep roots and increasingly impact the market, as central and provincial
governments figure out what mechanisms work best. The upside for MNCs is a market that
will behave in a more transparent way, and where volume growth could accelerate from
current trends. However, it implies a need to fundamentally redesign the business model, for
example with stronger market-access capabilities, and more dynamically change allocation
of resources across the portfolio and across functions to support brands with the best growth
prospects and shift resources away from the ones under severe or moderate pressure.
Exhibit 13
MAJORITY OF EXECUTIVES EXPECT EDL TO HAVE NEGATIVE IMPACT TO THEIR BUSINESS, AND LESS THAN 20%
PLAN TO INCREASE INVESTMENT FOR EDL PRODUCTS
How do you view the impact of the 2012 version
EDL on your business?
How will you manage your products on NEDL?
Views on EDL impact
Investment plan for EDL products
Percentage
Percentage
Others
Positive impact
To be determined
7%
15%
2%
Decrease: lower-cost
commercial model
29%
31%
Increase
17%
62%
8%
No significant
Impact
29%
Negative Impact
Decrease:
ramp down
Maintain
SOURCE: McKinsey PharmAsia Summit Survey
17
OCTOBER 2013
“New Guangdong Model Sets Dangerous Precedent For Next Round Of Drug Tenders,” PharmAsia News, May
29, 2013.
In Search Of New Growth Models For Big Pharma In China
22

23. SECTION 3: THE INNOVATION IMPERATIVE
China’s R&D is at a crossroad. Starting with the 12th Five-Year Plan, China has upgraded
biomedical as a strategic industry, a priority likely to carry on in the 13th Five-Year Plan and beyond. Resources are flowing, infrastructure is being built and world- class scientists are flocking
back to the mainland, attracted by the research conditions and the potential for value creation.
Most industry players believe China can grow into a strong global contributor by 2025, and
sustain an active local R&D ecosystem in which China-based centers of multinationals and
Chinese companies make meaningful contributions to innovation in the form of new molecules
brought to market. Before China becomes a source of global
innovation though, MNCs are busy trying to shorten the launch
timelines of their innovative products in China, sometimes with
Launching a new product
local partners to support local development path options. They
requires a painstaking listing
do this in an environment fraught with challenges, where retenprocess at the hospital level, and
tion of talents and integrity of data management are real conaccess to reimbursement can take
cerns. This section of the report covers three key topics related
years, if ever secured.
to innovation: 1) the critical importance for MNCs to accelerate
the introduction of their more innovative global products in China, as cost-containment measures create significant exposure
on mature brands; 2) the emerging trend of China-specific development deals with local partners to accelerate and strengthen pipeline development; and 3) the challenges of conducting
R&D in China, and options for mitigating risks.
Critical importance of introducing global innovative products in China
Across the industry, China portfolios are highly dependent on off-patent/mature brands
that command a premium price versus local generics, but are coming under increasing
pricing and cost-containment pressure. This “mature products dependency,” has historical
and market access-specific reasons. Going back 10 or even a few years ago, MNCs did
not systematically prioritize China as part of their global development plans. As a result,
and given local data requirements and time-consuming steps for approval, many important
drugs reached China only recently, with gaps of five to seven years versus global launch
dates. Beyond those delays in launch dates, MNCs have had to contend with adverse
market-access conditions for innovation. Launching a new product requires a painstaking
listing process at the hospital level, and access to reimbursement can take years, if ever
secured (the NRDL was last updated in 2009 and the current consensus is that the next
update will likely occur in 2014). As a result, new product launches cannot materially impact a large company’s performance, unlike in the U.S. or Japan for example. This is best
illustrated by the “freshness index” of the top 10 MNCs in China, defined as contribution
to sales from drugs launched within the past five years. In this analysis, we calculated the
contribution to total revenues of the products launched on the market since 2008. The average comes out at 5%, with a range of 1-8% (Exhibit 14).
However, our survey reveals that MNC executives anticipate the situation to evolve quickly, as drugs launched in the last five years will see their contributions rise significantly by
2020, and pipelines will deliver positive contributions as well, supported by a healthy
flow of more timely new product introductions. Portfolio shapes will therefore look quite
different by 2020 for most companies. The freshness index of MNCs’ portfolios in China
is expected to double from 5% today to 13% in 2018, according to our survey. Collectively, total contribution from patented drugs will grow from 23% today to 39% by 2018.
Off-patent originator products are expected to shrink significantly from 77% today to 61%
of the portfolio due to generic competition and continued price cuts by NDRC (Exhibit 15).
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
23

24. Exhibit 14
DRUGS LAUNCHED SINCE 2008 CONTRIBUTED ONLY 1%-8% OF TOP MNC
PHARMACOS’ REVENUE IN 2012
2012 top MNC pharmaco revenue (Rx only)
RMB billion; percentage
12
6
7
8
10
8%
8%
7%
6%
5%
7
4%
6
3%
3
1%
10
1%
Drugs launched
since 2008
8
1%
Drugs launched
before 2008
Top 5 New
Products
92%
92%
93%
94%
95%
96%
97%
99%
99% 100%
Avastin
(Roche)
Temodal
(MSD)
Dynastat
(Pfizer)
Sutent
(Pfizer)
MNC MNC MNC MNC MNC MNC MNC MNC MNC MNC
6
7
4
5
2
3
1
9
10
8
Xarelto
(Bayer)
SOURCE: RDPAC; McKinsey analysis
Exhibit 15
PIPELINE DRUGS EXPECTED TO CONTRIBUTE TO 13% OF MNC SALES BY 2018,
COMPARED WITH 5% TODAY
Sales contribution from different drug categories
Percentage
100%
5%
100%
13%
New drug launched
within past 5 years
26%
Other patented drugs
launched 5+ years ago
18%
49%
39%
28%
21%
2013
Non-EDL off-patent originators
2018
EDL drugs (2012 version)
SOURCE: RDPAC; McKinsey PharmAsia Summit Survey
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
24

25. It remains to be seen if the transition to innovative, patented products will be fast enough
for all MNCs to generate sustainable growth given the downside risks on mature/offpatent drugs.
Emerging trend of local partnerships for China-specific development
The last 18 months have witnessed a significant increase in the volume of development deals
between MNCs and local companies. What is particularly interesting is the range of options
being pursued by MNCs, from partnering with leading local companies (e.g., BMS with Simcere) to partnering with companies that were formed only recently (e.g., Roche with Ascletis)
(Exhibits 16 and 17 ).
Not surprisingly then, our survey reveals that “forming partnerships with local R&D companies” is the number one lever that MNCs plan to pull to improve their R&D operations in
China. The main goals for local collaborations are to accelerate development of late-stage
pipelines and identify potential opportunities to tap into “white spaces” in portfolios and
platform capabilities (Exhibit 18). Clearly, we are in a “proof-of-concept” phase, as MNCs
tend to partner assets that have been deprioritized globally or present a lower downside risk.
We believe though that through the mid/long term, more strategic partnerships will emerge.
Exhibit 16
MNCS ARE INCREASINGLY PARTNERING WITH LOCAL COMPANIES ON R&D DEVELOPMENT
Examples
non-exhaustive
Time
Description
Jun. 2013
Co-develop and commercialize BMS’ Orencia for RA
May 2013
Established JV with Beta Pharma to develop and commercialize
Amgen’s Vectibix
May 2013
Global licensing, co-development, and commercialization agreement for
pre-clinical second-generation BRAF inhibitor called BeiGene-283
Apr. 2013
Ascletis licensed China rights for development, manufacturing and
commercialization of a Phase II HIV candidate from Janssen
Sept. 2012
Established JV to develop, manufacture and potentially commercialize
AZ’s experimental RA antibody MEDI5117
Dec. 2011
AZ in-licensed Phase I oncology molecule from Hutchison
Medipharma for global development & commercialization
Dec. 2011
Roche out-licensed pre-clinical diabetes asset to Hua Medicine for
global development
Dec. 2011
Co-develop BMS’ pre-clinical CVS compound BMS-795311 with
Simcere retaining marketing rights in China
SOURCE: RDPAC; press search, McKinsey analysis
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
25

26. Exhibit 17
CASE STUDY - ROCHE-ASCLETIS COLLABORATION ON DANOPREVIR IS A GOOD
ILLUSTRATION OF A GROWING INDUSTRY TREND
Danoprevir
Interferon (IFN)-based danoprevir
triple therapy has demonstrated high
cure rates in patients with genotype
1b, the predominant genotype of
the virus in China
HCV, innovative molecule
discovered by InterMune with
global rights acquired by
Roche in 2010
Danoprevir is also being
investigated as part of an
IFN-free combination, with
an ongoing Phase II study
Rationale for strategic
collaboration
“Best of both worlds”intent
Owns global rights to
danoprevir
Fully localized development,
including manufacturing
Defines IFN-based danoprevir
triple TPP
Accelerated speed to market
relative to traditional
development approach
Grants exclusive license to
Ascletis to manufacture,
develop and register danoprevir
in Greater China markets
Shared input on
development strategy
Responsible for clinical
development and regulatory
affairs activities leading to
approval by CFDA of
defined TPP
Leverage other strategic
partners to complement own
capabilities for accelerated
development
Leverage Roche
commercial platform
Roche and Ascletis will
collaborate for the clinical
development and the commercialization of danoprevir
Responsible for formulation
development and
clinical/commercial supply
Sharing of some costs
SOURCE: Roche; interviews
Exhibit 18
MAJOR GOALS FOR LOCAL COLLABORATION ARE TO OBTAIN FASTER REGULATORY
APPROVAL AND SPEED UP DEVELOPMENT BY TAPPING INTO EMERGING INNOVATION
Respondents’ rating of value add from local partnership
(1- not significant at all, 7- most significant)
Potential faster
regulatory approval
Speed in innovation
Innovation capabilities
Lower development costs
18%
9%
23%
27%
41%
27%
32%
27%
23%
36%
23%
32%
36%
18%
23%
5%
1 ~ 4 - not significant
5 - significant
6 - very significant
7 - most significant
SOURCE: McKinsey PharmaAsia Summit Survey
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
26

27. Challenges of conducting R&D in China and risk mitigation factors
Though industry players expect an accelerating contribution from their innovative portfolios,
today, R&D in China is still at its nascent stage, with both external policy/market challenges
and internal challenges in the years to come.
“Lack of innovation-rewarding regulatory environment” and “lack of R&D talent” are recognized as the biggest external challenges. New drug approval lead time is an important
indicator of a rewarding regulatory environment. In the past five years, the average gap
between the first major market and China approval was five to seven years. For the 56
new molecules successfully launched in the U.S. during 2006-2012 from the top 12 MNC
pharmaceutical companies, 17 experienced six-plus years of launch delays in China. As an
example of the hurdles to overcome, China still requires local data for registration, and a
typical new Clinical Trial Application (CTA) takes about a year to be approved by CFDA.
However, in fairness to the Chinese regulators, part of the delay can be traced back to
questionable registration strategy choices applied by MNCs. Many companies recognized
late the growth potential of China, and did not include China in global trials, leading to
additional delays in submission of registration files in China. On average, market access is
delayed for roughly five to seven years for new launches in China compared to the U.S. CFDA
has been improving its capacity and capabilities to address the issues of slow registration/
approval (e.g., reorganization of the Center for Drug Evaluation, development of detailed
approval pathways, etc.) with some help from industry.18
Regulatory Reforms To Encourage Drug Development
CFDA released “Guidance on deepening the drug review and approval reform to further
encourage new drug innovation” in February 2013. The main goals of the guidance are:
•
Accelerated review for registration applications for innovative drugs
– Encourage innovation based on clinical value;
– Adjust strategy for evaluation of clinical trial applications for innovative drugs: the
clinical trial application will focus on understanding of current medical treatment,
new clinical value of the innovation, and protocol design to address these; and
– Optimize process for innovative drug evaluation, such as allowing submission of
amendments during IND stage and enhanced communication from early phases.
•
Develop supporting measures
– Revision of drug registration regulation;
– Improve technical guidance system;
– Optimal allocation of review and approval resources;
– Encourage drug registration outside of China; and
– Improve transparency of drug review and approval, as well as coordination
within CFDA across departments.
18
OCTOBER 2013
“CFDA Aims For Bigger Staff, More Power For Provinces As Cabinet-Level Agency,” PharmAsia News, April 17, 2013.
In Search Of New Growth Models For Big Pharma In China
27

28. In the next five to 10 years, R&D leaders we surveyed expect lag time for new product
launches in China (compared to the U.S./EU) to improve marginally by one to two years.
Some leaders were more optimistic, aiming to shave three to four years off the lag time
(Exhibit 19). The consensus was that the mid-term target should be to launch prioritized
products in China about two years after global approval.
Internally, “difficulties to recruit and retain R&D talent” and “volatility and changes in commitment from global swinging levels of investment to China” are ranked as the most critical
challenges. Heads of R&D in China report acute challenges in hiring management-level employees with sufficient scientific and leadership experience. The most difficult challenge of
all is finding the right R&D general managers and functional leaders for China: individuals
who can lead large teams effectively from discovery through late-stage clinical trials under a
variety of organizational structures from solid line to a matrix organization. They must also
drive great science, manage recruiting, and at the same time deal with the regulatory and
cultural complexities of China. Recruitment and retention are growing ever more difficult and
costly for MNC pharmaceutical companies, especially for experienced managers and senior
scientists. Many top graduates prefer to join Chinese companies, where the pay is comparable and the career opportunities and cultural fit are superior. Concerns about global’s
commitment to China are twofold. On the salient level, an important indicator of global support is R&D investment. As the R&D investment cycle is much longer than that for commercial
operations, global’s consistent commitment is critical to ensure successful discovery and development. However, the real challenge to R&D heads is changing positioning of China R&D
in the global picture. To many MNC pharmaceutical companies, despite heavy investment in
China R&D, the positioning of “In China for China” vs. “In China for Global” is still not clear.
Despite the challenges, MNCs are attracted to conduct R&D in China as the “large market
potential makes China too big to ignore.” The number of RDPAC member19 R&D centers in
Exhibit 19
LAUNCH GAP IS EXPECTED TO MARGINALLY SHRINK BY 1-2 YEARS IN THE MID TERM
Industry players’ perspective on launch gap evolution
100%=25 respondents; percentage
Significant
improvement:
lag shrinks by
3-4 years
80%
20%
Marginal
improvement:
lag shrinks by
1-2 years
SOURCE: McKinsey PharmAsia Summit Survey
19
OCTOBER 2013
In total, RDPAC has 38 MNC members, as of May 2013.
In Search Of New Growth Models For Big Pharma In China
28

29. China has quadrupled over the last decade from seven to 30, providing high-quality employment opportunities for some 3,000 scientists and clinicians, 80% of whom hold advanced
degrees at the Master’s level or higher. In the next five years, MNC pharmaceutical companies will continue to invest in R&D in China, with annual spending CAGR of 15%, according
to RDPAC. In 2012, RDPAC released a white paper titled “Building an innovation driven
pharmaceutical industry in China.” The white paper focuses on RDPAC member companies’
commitment and impact on the development of China R&D, and suggestions on leapfrogging
into the future.
According to our survey, MNCs see several important levers to improve R&D operations in
China (Exhibit 20).
Beyond partnerships for local R&D, industry players identified “improvement in people development programs, and focus on China-prevalent disease and ’In China for China‘approach”
as the biggest levers to improve their R&D operations in China.
Improve people development programs. Innovation comes with people. Today Chinese
students represent at least one-third of biology major graduate students in the U.S. Many
of them are coming back to China to join the academic world or pharmaceutical industry, bringing back innovation brainpower and rendering another reason for MNCs to
strengthen R&D in China. MNCs must keep investing to develop a compelling employee
value proposition that provides strong reasons for top R&D talent to join and stay. This
includes four elements: an engaging job, an exciting company reputation, an energizing culture, and effective talent-development programs. Beyond this, MNCs need more
programs to mold and develop new hires fresh from leading Chinese universities. Such
Key Recommendations From 2012 RDPAC White Paper -“Building An Innovation Driven Pharmaceutical Industry In China”
Regulatory
•
Shorten clinical trial application review timeline;
•
Open up policies on Phase I trials for new drugs manufactured outside of China;
•
Harmonize processes and requirements to International Conference of
Harmonization (ICH) standards;
•
Establish Marketing Authorization Holder system for regulatory approval.
Reward for innovation
•
Timely broad market access that enables patients to benefit from new drug therapies;
•
Reasonable pricing that rewards innovation and ensures drug quality and safety;
•
Tax credits for R&D to encourage innovation.
Intellectual Property Rights (IPR)
•
•
Better integrating drug regulatory approval process with patent enforcement;
•
OCTOBER 2013
Reducing ambiguity of product definitions;
Ensure pharmaceutical IPRs are safeguarded with adequate penalties for infringement.
In Search Of New Growth Models For Big Pharma In China
29

30. Exhibit 20
FORMING PARTNERSHIPS WITH LOCAL R&D COMPANIES IS BIGGEST LEVER TO
IMPROVE R&D OPERATIONS IN CHINA
Percentage of respondents who agree or strongly agree on big levers to improve R&D
operations in China
Percentage
Form partnerships with local R&D companies
88%
Target China-prevalent diseases and
government priority
75%
Better talent management to recruit
and retain top R&D talent
75%
Manage external innovation,
e.g. collaboration with academic
75%
Cultivate high caliber CROs
63%
SOURCE: McKinsey PharmAsia Summit Survey
programs should introduce new hires to the corporate culture, teach them the drug discovery process, provide English training they need, and develop their management and
leadership skills.
Focus on China-prevalent disease and “In China for China” approach. Increasingly, R&D
centers are focusing on diseases with a high prevalence in China, such as liver cancer and
gastric cancer, though the decision to concentrate on these diseases should be carefully
considered given the competitive intensity in such areas. Furthermore, companies should
consider whether a R&D center will develop drugs for sale only in China (developing local solutions for local needs based on local standards), or develop products for the global
market and be held to approval requirements from the U.S. and Europe as well as those in
Asia. Many diseases with a high prevalence rate in China also have high prevalence rates
in Japan and other Asian countries. Such “local” insight gained from research in China can
therefore be applied to other Asian countries as well. “In China for China” suggests a certain
degree of focus and priority, yet should not become a constraint on the potential impact of
R&D efforts in China.
In summary, we see a China pharma market that increasingly is transitioning to innovation
in response to government incentives and pricing pressure on off-patent medications. In the
short term, MNCs are likely to accelerate China launches for global pipeline products and
increase partnering with local companies for China-specific development. Over the long
term, MNCs must continue to invest in people development programs to recruit and retain
top R&D talent while focusing on scientific areas of differentiation, such as diseases with a
high prevalence in China and/or greater Asia.
OCTOBER 2013
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30

31. SECTION 4: IMPLICATIONS AND PATH FORWARD
FOR SUSTAINABLE GROWTH
In the “Healthcare in China – Entering Uncharted Waters” report, published in September
2012, McKinsey & Company identified eight principles for sustainable growth in China
(Exhibit 21). Our conclusion after this tumultuous year is that the principles still hold true.
Without revisiting all of them in detail, we highlight the following principles for sustainable
growth: 1) Have a through-cycle mentality; 2) Tailor business models to better address market
needs; 3) Step up engagement with central and local governments to shape the environment;
4) Double down on the role of innovation; and 5) Seek out bigger, bolder partnerships.
Have a through-cycle mentality
In recent years, leading MNC pharmacos have significantly increased their commitment to
the China market. Many have made this clear through their investor communication, holding
sessions focused on China operations and their strategy and growth prospects.
Big Pharma’s commitment to the China market is based on continuous outstanding performance
amidst relative difficult conditions in other key markets, which has turned China into an important
sales contributor. China already represents more than 5% of AstraZeneca’s global sales, and the
percentage is as high as 8% for Novo Nordisk. Several big pharma have moved global functions and senior leadership to China to further drive performance. Bayer, for example, relocated
the headquarters of its global primary care business to Beijing and AstraZeneca established a
global clinical operations hub in China. AstraZeneca has the head of its International Operating Unit (commercial) and the head of Asia and Emerging Markets iMed (research and early
development) both based in Shanghai, and Sanofi decided to base its head of Asia in China.
Exhibit 21
EIGHT PRINCIPLES FOR SUCCESSFUL GROWTH
Adopt a “second home market” mindset
Step up engagement with central and local governments to shape the environment
Tailor business models to better address diverse market needs
Drive operational improvements to sustain the economic model
Double down on the role of innovation
Seek out bigger, bolder partnerships
Invest in attracting and developing top talent, and building capabilities that
are relevant to China
Have a “through-cycle” mentality
SOURCE: McKinsey’s “Healthcare in China - Entering Uncharted Waters” report
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
31

32. The most recent developments in the China market–including the unfolding compliance investigations, and new behaviors by hospitals, such as restricting access to sales representatives–
will provide a real “acid test” to those commitments. The market could experience a significant slow-down in the second half in 2013, and several companies are at risk of missing their
budget targets. Beyond this, up and coming senior managers,
traditionally competing for roles in China, could now see a
rotation there in a very different light. We expect that some
Many diseases with a high
companies will reconsider development plans for China, both
prevalence rate in China also
from an R&D and a commercial standpoint. Ultimately, the
have high prevalence rates in
market’s potential will likely remain strong enough to continue
Japan and other Asian countries.
to attract greater investments. We do believe though that the
depth of commitment to China will be increasingly influenced
by factors external to China and specific to companies, including flow of new products to bring to market (impacting range of opportunities outside of
China), degree of global exposure to patent cliffs (driving short-term ability to invest), fit of
China disease profile with overall portfolio and R&D focus, and ultimately, risk appetite of
the top management team. In the short term, ensuring that top company talents continue to
be assigned to China should remain a priority.
Tailor business models to better address market needs
As the market continues to quickly expand in several directions – broader portfolio, new
channels, new cities – MNC pharmacos increasingly have to figure out where they should
put their incremental investment dollars and how they should compete in those different segments. For example, many are taking a serious look at the lower-tier market, which consists
of customers beyond big cities and big hospitals. The lower-tier market is gaining attention
because growth from the core market has been slowing down in Tier 1 cities. In contrast, the
lower-tier market will be a key growth driver for the China pharma market, and is expected
to grow faster than the overall market in the next few years.
For most MNCs in China, our survey indicated that the number one goal today is still to maximize the topline. That picture is fast evolving though as companies are putting more weight
on reaching healthy operating income ratios (Exhibit 22). As part of the effort to expand the
topline, MNCs are expecting to increase the number of hospitals covered by their dedicated
sales representative by 38% (Exhibit 23).
As alluring as the lower-tier market may look, it is not an easy one to crack. MNCs have
tried many different commercial models to tackle the challenge. Sanofi, for instance, established a full-fledged department to explore opportunities in the lower-tier market. It prioritizes
therapeutic areas already present in county hospitals, such as cardiovascular with Plavix,
and currently has over 200 staff members. MSD established a joint venture with local player
Simcere to expand its portfolio and leverage Simcere’s capabilities in lower-tier markets.
Novo Nordisk uses a light-touch model for the lower-tier market and launched a mentorship
program to cultivate key physicians.
The most commonly piloted models are traditional sales forces, partnerships with distributors
and remote physician education. Among the different models that have been tried, the most
effective ones are traditional sales forces and dedicated organizations. But in the next three
years MNCs are more likely to use partnerships with distributors and remote physician education, as pressure on margins intensifies (Exhibit 24).
The lower-tier market question is just one illustration of strategic questions that MNCs need
to answer when formulating their strategies for the mid/long term. Overall they need to develop a sharper perspective on “where and how to play,” based on portfolio, expectations
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
32

33. Exhibit 22
MNCS EXPECT A REBALANCING BETWEEN MAXIMIZING TOPLINE AND ACHIEVING
HEALTHY OPERATING MARGINS
R espondents’ rating of significance of different financial management goals
Distribution of scores
Financial management goals
Maximize topline
34%
5%
To d a y
59%
2%
Maximize operating margin
(percentage)
44%
27%
24%
5%
Maximize topline
12% 15%
22%
51%
3-years
from now
Maximize operating margin
(percentage)
not significant
significant
24%
22%
very significant
22%
32%
most significant
SOURCE: McKinsey PharmAsia Summit Survey
Exhibit 23
NUMBER OF CORE HOSPITALS COVERED WILL INCREASE BY 38%, WHILE PROPORTION OF SALES FORCES
COVERING CORE MARKETS WILL DROP SLIGHTLY
Estimated number of core hospitals1 covered and portion of sales force that covers core hospitals
Average number of core hospitals covered
Number of hospitals
Portion of sales force that covers core market
Percentage
~4,600
69%
62%
+38%
-10%
~3,300
Today
1
In 5 years
Today
In 5 years
Defined as hospitals in tier 1 and 2 cities
SOURCE: McKinsey PharmAsia Summit Survey
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
33

34. Exhibit 24
MOVING FORWARD, MNCS ARE MORE LIKELY TO USE PARTNERSHIPS WITH DISTRIBUTORS AND REMOTE PHYSICIAN
EDUCATION TO COVER THE BROAD MARKET
Commercial model to
cover broad market
# of companies that adopt
this model today
Partnerships with distributors
27
Remote physician education
# of companies that will use
this model in 3 years
27
E-detailing
29
28
19
24
Traditional sales force
36
Low-cost reps (service reps)
23
23
Partnerships with local companies
22
14
Dedicated organization structure
and resources for lower tier market
22
24
Call center/inside sales
20
17
Partnerships with contract sales
organizations (CSO)
16
20
17
SOURCE: McKinsey PharmAsia Summit Survey
for returns and existing capabilities. MNCs should develop a product-level granularity and
forward-looking view on potential by channel. They should decide on the appropriate boundaries of the potential they want to cover, and adapt the reach model based on projected
economics (Exhibit 25).
Step up engagement with central and local governments to shape the environment
Being able to shape the market and differentiate from competitors is key to achieving longterm leadership. Companies are pursuing a range of initiatives in that direction, displaying
increasing creativity and willingness to put real investments behind market-shaping efforts.
Structurally, to stay closer to customers, some MNCs have established regional organizations.
Bayer, for example, established regional offices in Beijing, Shanghai, and Chengdu, each
with P&L ownership. MSD has organized its business in China into 10 regions, based on a
city cluster view of the market, to address the uneven pace of development and policy implementation at the local level.More recently, Roche established a West Region structure, with a
goal to provide more focus on broader China, and Eli Lilly & Co. moved to a BU structure to
better integrate market development efforts.20
Among key functions, Medical Affairs has seen a dramatic increase in role and size. Most
leading MNCs now have teams of Medical Science Liaisons (MSLs) on-board, helping to
drive medical guidelines and shape prescribers’ understanding of treatment benefits. We see
20
OCTOBER 2013
For further insights into this topic refer to “Regionalization – lessons from those who have tested the crab,”
by McKinsey & Company, September 2012.
In Search Of New Growth Models For Big Pharma In China
34

35. Exhibit 25
FOR EACH BRAND OF A GIVEN COMPANY, GEOGRAPHY/CHANNEL FOCUS NEED TO BE CLEARLY DEFINED
Key external and internal
considerations (examples)
■
■
■
■
Geography and channels
Geography
Distribution of demand for
drugs varies significantly
from therapeutic area to
therapeutic area
Channel
Stronger growth momentum
in lower tier geographies
(e.g., Tier 3 and 4 cities, county
hospitals) than in Tier 1 cities
While relatively small today,
CHCs and retail channels have
potential to benefit from patient
flow shifts driven by new policies
There are natural limits to
the potential of sales force
expansion – based on
productivity requirements,
operational complexity, etc…
Class
III/IIA
Prefecture city
Big city/
big hospital
County city/county
“Lower-tier market”
Class
IIB/I
CHC
Retail
Top 50
51- 286
Geography/channel focus are
different by brands
Larger
county-level
city
Mid/small
county
city/county
SOURCE: McKinsey analysis
this as a positive development for the market, but one not absent of real challenges, including
the ability to recruit sufficiently qualified medical affairs specialists, and the need to impose
a shift in mindset in organizations to support the increasing role of Medical (e.g., allocation
of budget, clarity on the role of Medical).
MNCs have also been increasingly active in shaping the market and addressing the marketaccess hurdles for expensive treatments. For example, to make its breast cancer therapy Herceptin (trastuzumab) affordable to a wider population, Roche has created a funding scheme
together with Jiangsu province.21 The government will reimburse 70-75% of the first six doses
of Herceptin, and the Herceptin PAP from the Cancer Foundation of China (a partner of Roche)
will donate up to eight doses for free for patients who purchased the first six doses. Roche has a
dedicated team working on the scheme, which covers a population of over 40 million people.22
In 2012, Baxter Corp. partnered with the Chinese National Institute of Hospital Administration
under an endorsement from the Ministry of Health to address the awareness, access, and affordability challenge of peritoneal dialysis in the rural end-stage renal disease (ESRD) patient
population. Baxter helped to develop treatment guidelines in rural areas by sharing international best practices. The company also provided patients with financial support and invested
in logistics systems to expand distribution scope (Exhibit 26).
”Roche Looks To Improve Market Access In China Through Patient Assistance Programs, Reinsurance,” PharmAsia
News, Sept. 12, 2012.
22
”How Pharmas Can Help Private Health Insurers Achieve A Larger Role In China,” PharmAsia News, May 7, 2013.
21
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
35

36. Exhibit 26
CASE STUDY ON MARKET SHAPING INITIATIVE – BAXTER FLYING ANGEL EXAMPLE
Challenges of promoting
peritoneal dialysis in rural
ESRD patient population
Awareness: Limited PD
endorsement policy, lack
of patient education
programs
Access: Shortage of
PD-trained nephrologists,
inadequate PD centers,
lack of operation guideline, insufficient coverage
of distribution network
Affordability: Limited
government funding,
low affordability of
co-payment
Baxter launched the “Flying Angel” program with MOH in 2012 to address these challenges
Train nephrologists and nurses in Class I/II
and county hospitals
Pilot launched
in January 2013
in six provinces
Invest in logistics system to expand distribution scope
Support treatment guidelines design by sharing
global best practices
Draft treatment guidelines in rural areas
Conduct hospitals certification of PD treatment
Subsidize RCMI patients through lowering
co-payment ratio
SOURCE: MoH, Baxter, press search; McKinsey analysis
At a more tactical level, Novo Nordisk has built a specialized team dedicated to running
diabetes education programs. The programs are customized to the requirements of patients,
physicians, and hospitals. With continuous education efforts, Novo Nordisk has earned
high brand recognition. Moving forward, MNCs will need to continue to take active roles in
shaping the development of the market, in particular working closely with central and provincial-level governments to shape policies and unlock access to their drugs. Beyond ideas
and resources, this will require a significant step-up in capabilities, a much more integrated
and dynamic approach to allocating resources, and the ability to foster more collaboration
between the various key external stakeholders.
Double down on innovation
To further drive growth in the future, MNCs need to accelerate portfolio shift toward innovation. The demand for China innovation has been increasing as there are still many Chinaspecific unmet needs. More importantly, the ecosystem for innovation in China has improved
greatly due to a more favorable regulatory environment, expanded talent supply and capability, and improved infrastructure.
Leading pharmacos have invested significant R&D resources in China to establish R&D centers and support regional and global trials. However, historically China has not been the
R&D focus for MNCs. As a result, they have experienced long gaps between global and
China launches. From 2006 to 2012, MSD launched eight new molecules in China and all
had a launch gap of over two years. In the same period, Pfizer launched 12 new molecules
in China, and only two molecules had gaps of less than two years.
OCTOBER 2013
In Search Of New Growth Models For Big Pharma In China
36

37. The situation is gradually changing as MNCs are including China in more and more global
trials (Exhibit 27). However, the impact on the market will take time, as MNCs continue to
“pay” for not including China in global clinical trials earlier.
In fact, given the timelines for registration in China and the slow uptake of products once on
the market, prioritizing China over other programs or markets requires adopting a strategic,
long-term view that runs contrary to traditional decision models. It also requires building
clearer alignment between headquarters and Chinese operations on the trade-offs of doing
development in China, and building trust at all levels, re-enforced by explicit mechanisms
(e.g., scorecards, key performance indicators). It remains to be seen how the recent R&Drelated negative news coming out of China for several MNCs will impact the broader trust
equation between HQ and local affiliates.
Exhibit 27
NUMBER OF PHASE III TRIALS INVOLVING CHINA
Phase III trials in which China participates - 2011-131
non-exhaustive
Total Ph III
global trials2
26
24
15
10
22
16
37
2
China in
Global trials
1
5
1
2
1
0
1
1
1
China in
regional trials
3
1
3
0
1
1
1
1
1
3
2
3
1
MNC 1
Biologics
1
7
China local trials
Small Molecule
5
MNC 2
MNC 3
1
MNC 4
1
MNC 5
MNC 6
MNC 7
Each count represents one molecule*indication combination; if a molecule has multiple trials for the same
indication,it is viewed as one count; includes all Phase III trials registered after Jan. 1, 2011.
2
Involves patients from U.S. and other countries, excluding withdrawn, suspended and terminated trials.
1
SOURCE: RDPAC; press search; McKinsey analysis
OCTOBER 2013
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37

38. Seek out bolder and bigger partnerships
To address challenges of both portfolio and coverage, MNCs have established partnerships across the value chain from research to development, manufacturing, distribution,
and sales (Exhibit 28). The main goals of the partnerships and M&A deals are to enrich
portfolios, expand commercial coverage in lower-tier markets, and strengthen government
relationships (Exhibit 29).
Upstream, Bayer, for instance, established the Tsinghua-Bayer Innovative Drug Collaborative
Research Center to expand its focus in biomedical research over three years.23 MSD invested
in a fund managed by Cenova Ventures to incubate innovation. MedImmune, the global
biologics arm of AstraZeneca, and Wuxi AppTec formed a joint venture to develop and commercialize a novel biologic drug. Lilly provides a particularly compelling example, with the
Lilly Asia Ventures model, which has invested in the last few years in several promising local
companies, including Beta Pharma Inc. and Innovent Biologics Inc.24
Exhibit 28
MNCS ARE INCREASINGLY MAKING USE OF JVS AND PARTNERSHIPS, ACROSS THE VALUE CHAIN
Research
Development
Manufacturing
Distribution, sales and
marketing
Product development partnerships
SOURCE: Literature search; McKinsey analysis
23
24
OCTOBER 2013
”BMS Dives Deeper Into China With First Discovery Partnership,” PharmAsia News, May 17, 2012.
”Lilly Asia Ventures And Fidelity Boost Innovent Biologics Investment To Deepen Exposure To China’s Biologics
Market,” PharmAsia News, Nov. 23, 2012.
In Search Of New Growth Models For Big Pharma In China
38

39. Exhibit 29
MAJOR GOALS FOR M&A AND PARTNERSHIPS ARE TO ENRICH PORTFOLIO, PENETRATE LOWER-TIER
MARKETS, AND STRENGTHEN GOVERNMENT RELATIONSHIPS
What do you see as major goals of M&A/partnerships in China today?
% of votes
Goals of M&A/partnerships
% of votes
To enrich portfolio
71%
To expand commercial coverage in lower-tier markets
69%
To strengthen government relationships, e.g., for benefit
on potential faster approval process and market access
61%
To get access to local manufacturing capacity
To strengthen R&D capability
20%
10%
SOURCE: McKinsey PharmAsia Summit Survey
Downstream, Amgen established a JV with Beta Pharma to commercialize a colorectal cancer targeted therapy Vectibix (panitumumab). BMS and Simcere joined efforts to develop
Orencia (abatacept) in China. MSD inked a JV deal with Simcere to expand portfolio and
commercialization in lower-tier markets. Pfizer established a partnership with local distributor
Jointown Pharmaceutical Group Co., Ltd. in 2011.25 The strategic cooperation agreement
grants Jointown distribution rights to Pfizer products and controlling rights on distribution
channels outside Pfizer’s existing target markets including lower-tier cities and rural areas.
Pfizer also established a JV with Hisun in 2012 to manufacture and market branded generics in China. The JV is “up and running” with 1,500 employees and revenues in the $700
million range.26
Clearly, the next few years will see a continuation of this partnership trend, and most likely an
acceleration. MNCs realize that “they cannot do it all alone” and that access to specific capabilities, or sharing of risks, is necessary to capture their full China potential. Entering China
for companies “late to the party” will contribute to additional deal flow, with the Amgen-Beta
Pharma JV a prime example. New local companies will emerge and position themselves as
partners of choice for MNCs, while established local companies will continue to mature and
become increasingly attractive as potential partners. For MNCs, success in developing partnership strategies will rest on the caliber of individuals driving the partnership agenda, their
ability to develop a compelling vision for the role of partnerships in the broader China strategy, and to align key headquarters stakeholders on the R&D and commercial side behind the
vision, for what remains inherently a “high-risk, high-reward” environment.
25
26
OCTOBER 2013
”Pfizer Teams With Distributor Jointown To Delve Deeper Into China’s Rural Markets,” PharmAsia News, Sept. 9, 2011.
”Pfizer Looks To Ramp Up Branded Generics Via MOU With China’s Hisun,” PharmAsia News, June 2, 2011.
In Search Of New Growth Models For Big Pharma In China
39

40. CONCLUSION
In conclusion, China represents a unique opportunity for the pharmaceutical industry. The
demographics are undeniable: huge unmet needs, aging society, adoption of Western lifestyles, and a commitment by the government to increase access and support innovation. But
real challenges exist, and they have become more acute over
the past year. From rising pricing pressure and increasingly complicated cost-containment measures to a government
Our industry survey
drive to improve compliance, traditional business models in
indicates that “reimbursement
China are under pressure, and new strategies are needed to
budget control” will pose
capture growth and profitability.
the largest challenge to
Increasingly, government policies are converging around
reimbursement policies in China
“cost effective” elements of health care reform. EDL expanover the next five years.
sion and pilot programs ranging from DRG to cost capitation
point to a market straining to provide access to 1.3 billion
citizens who are now covered by some variance of public
insurance schemes. Looking ahead, hospital payment reform and application of international
reference pricing could have a significant impact on product portfolios, particularly off-patent
medications, which currently represent 70-80% of multinational revenues in China. Perhaps
it is not surprising then that our industry survey indicates that “reimbursement budget control”
will pose the largest challenge to reimbursement policies in China over the next five years.
These changes and others will require pharmaceutical companies to rethink traditional business models in China. Importantly, our survey points to a recognition that innovative drugs
are required to differentiate portfolios in China and maintain premium pricing. Industry executives will accelerate the introduction of global innovative products, working with their
China R&D units and increasingly with local partners that can help speed China-specific development. MNCs will also focus on China-prevalent diseases, and will need to improve talent recruitment and retention efforts. Many challenges will remain, from extended regulatory
review times to complicated market-access requirements. Companies will need to increase
engagement with central and local governments to help shape the market, collaborating on
new schemes that increase affordability and outreach. And bolder and bigger partnerships
will be needed to capture the vast opportunity and minimize risk. After all, no company can
do everything in a market as large, complex and dynamic as China. Without a doubt the
next 12 months will prove as eventful as the past 12 months. We look forward to those developments and to sharing additional insights with industry leaders.
OCTOBER 2013
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40

41. APPENDIX I:
Glossary
OCTOBER 2013
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42. BMI
CFDA
China Food and Drug Administration. An agency under China’s State Council
in charge of quality supervision, regulatory oversight and product approvals
for pharmaceuticals, medical devices and food. Formerly known as SFDA, it
was an agency under the Ministry of Health until it became independent in
March 2013 (http://eng.sfda.gov.cn).
CHCs
Community Health Centers. China primary care institutions that offer basic
medical and public health services. They are regarded as the basic network for
medical treatment and public health surveillance in China. As of 2011, there
were 32,812 community health centers in China.
CMA
Chinese Medical Association. A non-profit registered academic and commonwealth corporate body voluntarily formed by Chinese medical science and technology professionals. Established in 1915, CMA now has 84 specialty societies
under its umbrella, covering all medical fields. The mission of CMA includes uniting
and organizing medical professionals and implementing the principle of science,
technology and health care of the State (http://www.cma.org.cn/ensite).
CPA
Chinese Pharmaceutical Association. A national organization of pharmacists
and pharmaceutical scientists with a mission to represent and serve pharmacy
and pharmaceutical sciences development in China. Founded in 1907, CPA
has nearly 3,000 senior individual members and 35 group members (http://
www.cpa.org.cn).
CTA
Clinical Trial Application. An application that sponsors must file with China
FDA before conducting clinical trials in China. Clinical trials may not start in
China until regulatory approval is received (http://eng.sfda.gov.cn/WS03/
CL0769/61659.html).
EDL
NEDL
PEDL
Essential Drug List/National Essential Drug List/Provincial Essential Drug List.
A list developed by the Ministry of Health that includes drugs most commonly
prescribed in Chinese hospitals. The NEDL was last updated in March 2013,
expanding to 520 drugs, up from 307 drugs in the 2009 version. In addition to
the national list, many provincial governments include additional drugs in their
provincial EDLs. EDL drugs are subject to retail price ceilings set by NDRC, and
are procured via centralized provincial tenders that further slash prices.
EDS
OCTOBER 2013
Basic Medical Insurance. A public insurance plan that aims to cover all Chinese
citizens by providing basic medical service. The insurance system consists of
three government insurance programs: Urban Employee Basic Medical Insurance (UE-BMI) launched in 1998 for employees in cities; Urban Residents Basic
Medical Insurance (UR-BMI) for unemployed citizens in cities since 2007; and
New Rural Cooperative Medical Scheme (NRCMS/NCMS) for 800 million
citizens in rural areas since 2003.
Essential Drug System. One of five key elements of health care reform in China,
the EDS provides 100% reimbursement under government insurance for the
most common treatments in China (which are listed on the EDL). The system requires hospitals to eliminate the traditional 15% drug markup at the pharmacy.
As the government has pushed usage of essential drugs in community health
centers, and more recently public hospitals, multinational companies have tried
to keep their products away, given greater pricing pressure.
In Search Of New Growth Models For Big Pharma In China
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