China is a rapidly evolving healthcare market. However companies that take too macroscopic approach to projecting growth, disregarding the more granular trends across drug categories, risk facing a gap between assumed and actual portfolio growth. To address this gap, companies have a variety of options, ranging across levels of difficulty and the degree of transformation necessary. Download the paper to learn more.

1. TM
Growing pains
China’s new pharma realities, and the necessity of an
informed strategy in bridging the gap between assumed
and realized growth.
Matthew Guagenty
Vice President, IMS Consulting Group, Asia Pacific & China

2. Growing pains
China is a rapidly evolving healthcare market, growing in
both size and complexity. However, companies that take too
macroscopic an approach to projecting growth, disregarding
the more granular trends across individual drug categories,
risk facing a gap between assumed and actual portfolio
performance. To address this gap, companies have a variety
of options, ranging across levels of difficulty and the degree
of transformation necessary. And while there is certainly
no `one-size-fits-all´ solution, action is mission-critical to
successfully adapting and thriving in China.
I. setting the stage
At first glance, China would seem to be a world of never-ending opportunities for pharmaceutical companies –
where forward movement means upward growth for anyone able to get a slice of the pie. And in truth, the
numbers are impressive. China’s pharmaceutical market is currently the third largest in the world, estimated at
USD 80 billion at the end of 2012*. If one were to expand the market’s scope to include both consumer health
medicines and Traditional Chinese Medicines (TCM), China may be much closer to the number two medicines
marketplace than we recognize.
However, it is important to remember that China is a balancing act, and such numbers are not the outcome of
unilateral escalation but rather the result of both upward momentum and downward pressures. True, the pharma
market is expanding, but that expansion is not uniform and what means tremendous growth for some may mean
only moderate growth or even decline for others. Variations in opportunity and growth across geographies,
therapy areas and drug categories, combined with a maze of regulations and government policies, all represent
significant forces at play – forces that demand action, not assumption.
And so a deep dive into the intricacies of China’s healthcare environment ultimately delivers the conclusion that,
especially for multinational companies (MNCs), taking too macroscopic an approach to growth projections and
disregarding the more granular trends across individual drug categories will invariably create a gap between
assumed and actual portfolio performance. Indeed, following targets that are guided or based on the overall
average performance of the market can certainly lead to a shortfall; after all, by definition, half of the players in the
market will deliver below average performances.
But there is no `one-size-fits-all´ solution to this challenge. How companies address this gap depends on a variety
of factors, including their appetite (or ability) for change and/or transformation, and their understanding of what
actions are necessary to capturing success in China.
In this paper, we will outline the key components that make China such a unique market, and highlight three examples
of strategies – expansion into generics, alliances/partnerships, and new fields of play – that can help bridge the gap and
enable a sustainable return on investment.
*IMS Market Prognosis, 2012
2

3. Growing pains
II. Understanding the gap between assumed and actual growth
The theory that there is an impending gap between assumed and actual portfolio performance for MNCs in
China was born from a largely theoretical exercise that aimed to find an answer to a not-insignificant question:
“To what extent is the typical China Pharma MNC player facing top-line revenue growth pressure, and how big is
this issue?” In order to determine the answer, IMS Health teams reviewed the average business mix of the top ten
MNC pharmacos in China (based on the IMS China Hospital Pharmaceutical Audit). After pooling their portfolios’
performances into one “hypothetical company”, we split revenue into three buckets:
•
•
•
Off-patent originators (OPOs)
Patent-protected products (PRx)
Generics and over-the-counter medicines (Gx & OTC)
By indexing all of them to 100, the relative contribution of each bucket to the overall mix of business could be
clearly represented.
The task, then, was to apply a series of top-line growth assumptions (see Figure 1) for each of these three
segments in order to quantify real expected change – both for the individual segments and for the business at large.
It’s worth, here, to take a minute to discuss some of the macro growth assumptions on our hypothetical MNC.
1. We grew the overall business at 15% per annum to represent the average market growth we conservatively
expect over the next few years.
2. We did not explicitly account for future product launches in the PRx bucket. The growth in this bucket is
except for using elevated growth in this class of products based on aggregated historical growth rates and
our own proprietary projections.
3. Our assumptions include in-line mature patented products and new ones as a blend. The Gx and OTC
segment is very small and while we applied healthy growth for both, it made little difference based on the
top MNC pharma profile.
It was in the OPO segment, the off-patent originators, where we started to see the risk. Running a series of
analogs over more than a dozen OPOs and other branded MNC products that made significant price changes,
we estimated growth over the next three years at -2%. The reason for this drop is two-fold: On the one hand, we
are assuming the government’s pricing pressures on OPOs will continue, thus steadily reducing premiums; on
the other hand, we are going to see unit volume benefits due to these price reductions. This inverse relationship
between price and volume will result in modest annual declines in this segment.
The resulting gap necessary to achieve the 15% market growth stands prominent if these assumptions hold true.
The average MNC might face up to a 17% gap in top-line growth if it cannot manage the transitional impacts of the
pressures it faces – particularly in its OPO business.
Potential gap between assumed and actual portfolio growth
152pts
15%
CAGR
3-year
100pts
3
24
+29
+1
in GX & OTC
Portfolio
in PRx
Portfolio
in OPO
Portfolio
-4
+26
(17%)
GAP
26
4
53
GX & OTC
PRx
OPO
73
2012 Current state
Figure 1
69
2015 Future view
3

4. Growing pains
III. A complicated story
While an understanding of the `bigger picture´ is always important, in order to successfully manage this gap,
diving into the detailed drivers of growth is a must. In China, geographic, sociological and governmental
intricacies all come together to produce a market environment that is increasingly challenging to navigate.
Geographic and Demographic Diversity
Managing the health of 1.4 billion people, spread across 9.5 million square kilometers and 34 provinces/regions is
no small or simple task. Not only is China faced with myriad cultures and customs, must also manage a massive
disparity of wealth, ranging from areas such a Tianjin, which in 2012 boasted a GDP per capita of over
USD 15,000, to the remote provinces such as Tibet and Yunan with a GDP per capita of less than USD 4,000*.
What does this mean for pharma companies looking to manage portfolios and strategies across what is
tantamount to a multitude of sub-countries? For one, building market share relies on both breadth and depth;
portfolio diversity, resource allocation and growth strategies across the value chain must address a wide range
of market conditions, infrastructure challenges and even personal attitudes toward healthcare. In addition,
strategic plans need to ensure they don’t fall victim to the common China assumption that growing bigger
necessarily means growing stronger. Facing such a variety of geographic and demographic conditions requires
not just a more proactive but perhaps a more innovative growth plan than anywhere else in the world.
Access/Reimbursement
For pharma companies, especially MNCs, navigating China’s complex reimbursement system is the key to
capturing – or forfeiting – widespread market access. At the center of the system is China’s Essential Drug List
(EDL), which outlines a complete set of medicines that receive relatively high levels of reimbursement by the
government. The list, which just underwent a milestone expansion in 2012, covers most major disease areas,
and is (not surprisingly from a price perspective) dominated by local companies and generics. Inclusion in this
list opens the door to the full spectrum of China’s pharmaceutical market,but tends to be a volume-driven
model for growth at generics-level pricing.
Strategic plans need to ensure they don’t fall victim to the common China
assumption that growing bigger necessarily means growing stronger.
While the EDL provides a solid foundation of products for which price and reimbursement is set, there is also
the National Reimbursement Drug List (NRDL) and the Provincial Reimbursed Drug Lists (PRDL). The NRDL
provides varying levels of reimbursement for an expanded list of products beyond that of the almost-fullyreimbursed EDL. The NRDL also provides for partial reimbursement for drugs deemed innovative or valuable
enough in fighting certain diseases that are in the best interest of the healthcare system and the patient
population. Gaining access onto the NRDL is a lengthy and not always straight-line process for MNC and
domestic companies alike. The PRDLs are a variant of the NRDL, and usually include a slightly expanded
portfolio of drugs beyond the NRDL, deemed important by the provinces for their indigenous populations.
With this complex, multi-tiered system comes exposure to significant price pressures. At the national level,
we have witnessed therapeutic area level price cuts annually over the last decade. At the provincial level,
heterogeneous tendering systems place direct price pressure on the most common molecules, leaving
competitors trying to outbid one another. And if that is not enough, there are even hurdles at the hospital
level, where companies may have to engage in hospital listing processes in order for their product to be
available in the in-house pharmacy.
There are few, if any, markets where such successive layers of listing, tendering and bidding must be successfully
navigated even after a product has been approved by the country’s governing drug agency.
* National Bureau of Statistics of China
4

5. Growing pains
Hospital Revenue Models
Until recently in China, a hospital is largely reliant on its ability to both prescribe and fulfill medicines in order
to fund operations, with mark-ups from drugs being a major source of revenue. Therefore, the government’s
stated objective to wean hospitals off pharmaceutical drug mark-up model, and to enforce a separation between
prescription and fulfillment, signifies a fundamental shift in how the provider market will operate in the future.
Such a shift is the source of significant concern for pharmacos; not only is the implementation difficult to
forecast (though pilots are running in Shanghai and Beijing already), it also implies a completely different
approach to provider-side economics, and subsequently a new business model altogether. Doctors, however,
will continue to be an important stakeholder in the prescribing process, if not the most important one.
Of the three forces above, it is the shift in revenue models that represents the swing factor in our future-view
analysis. However while we anticipate that it will push the OPO businesses to relatively neutral growth, how well
these changes gain traction, and in what time frame, is harder to predict.
5

6. Growing pains
IV. Strategies for success
And so MNCs in China face a complicated reality: growth is mandatory, but choosing the right strategy for
moving forward heavily depends on being able to address this complicated, and sometimes contradictory,
market environment. It also depends on the degree of willingness to invest in difficult and/or transformative
processes, which in turn means an honest and thoughtful appraisal of internal capabilities and support, current
(and future) brand equity, portfolio sustainability and, of course, appetite for change.
Depending on your business model, there are a number of ways to address the gap, three of which are:
1. Expand into the Generics market, which, given the pricing
and access intricacies of the Chinese market, is an obvious –
but not necessarily assured – path.
More
New
Fields
of Play
Difficulty
Generics
Strategy
Less
2. Develop strategic partnerships or alliances with local
manufacturers and/or distributors, leveraging their
market knowledge, geographic access and R&D capabilities
to strengthen market entry opportunities.
Strategic
Alliances
Transformation necessary
More
3. Most boldly, expand your business model into wholly new
fields of play. Such expansions could be made at the delivery
level (e.g. mobile health and diagnostic ventures) or at the
business model level (e.g. moving into the insurance space).
Of course, these paths are neither mutually exclusive nor collectively exhaustive, and companies are challenged
with gathering the necessary insights, both on the market and on their own business, to make the best, most
viable decision possible.
Companies are challenged with gathering the necessary insights,
both on the market and on their own business, to make the best,
most viable decision possible.
It is also worthwhile mentioning that the best investments, regardless of the strategy chosen, will be the ones
that satisfy both unmet need and government agenda. In other words, the opportunity presented by recognizing
unmet needs in the population should be qualified by whether or not that need is a government priority.
Investment outside this intersection can be riskier and have a longer pay-off period.
Unmet
healthcare
need
Optimal Government
Agenda
Investment
6

7. Growing pains
Option #1: Embracing Generics
Interest in the potential of the generics space is not a new idea in China. Today the country boasts over 7,000
local, regional or national pharmaceutical product manufacturers, the vast majority of whom play in this ultracompetitive market. Their focus may vary – from branded generics to ‘me-too plus’ versions of generics - but
while the business model is uniform, the opportunity may not be.
Generics – Big Business, Small Margins?
WCM Rx Sales Value1(MAT 2Q08 – MAT 2Q12, Bn USD)
WCM Rx Sales Volume1(MAT 2Q08 – MAT 2Q12, Bn Counting Units)
+17%
+18%
+27%
+26%
134
74%
MAT
2Q08
215
253
+11%
+14%
295
+23%
+20%
26%
169
74%
MAT
2Q09
522
74%
MAT
2Q10
74%
MAT
2Q11
MAT
2Q12
MAT
2Q08
CAGR
6%
94%
94%
MAT
2Q11
MAT
2Q12
625
74%
94%
769
969
874
94%
MAT
2Q09
94%
MAT
2Q10
CAGR
PRx & OPO
+22%
PRx & OPO
+16%
Gx
+22%
Gx
+17%
Figure 2. Source: 1. IMS CHPA MATQ2 2012. WCM = Western Chemical Medicine
One allure of generics is the potential to capture opportunities in a variety of disease areas; companies with a
broad portfolio of products to treat chronic conditions, for example, will benefit from growing demand as the
government places more emphasis on tackling chronic diseases and as more patients gain access to treatment.
Branded generics in particular are poised to be an area of opportunity, as MNCs strive to meet the growing demand
for low-cost alternatives to off-patent brands. These products also satisfy the brand-conscious preferences of
Chinese consumers, who are likely to equate big name familiarity with quality and efficacy.
However, the reality is that the allure of premium names and pricing is not likely sustainable in the long term;
pricing pressures from the government, keen to reduce costs, will likely precipitate a unit price decline of these
drugs. In fact looking at the past 5 years, we are already starting to see an incremental decline in the growth rates
of both sales volume and value (see Figure 2).
“Me-too plus” versions of generics offer a slightly more sustainable outlook, though they require first-mover
advantage in addressing a particular market/disease need. Firms with ‘me-too-plus’ generics are also often
afforded favored bidding and tendering status, allowing for differentiated pricing and coverage on national
drug lists. It should be noted, though, that national agencies are seeking to close down some of this activity.
Following a generics strategy would certainly be simpler to implement than some other solutions to the gap
problem. With the robust R&D facilities and capabilities available to most MNCs, quickly developing generic
products should be relatively straightforward. Any new generic products could be folded into existing portfolios,
offering synergy with supply chains and thus not requiring a huge amount of structural transformation.
However, generics do not necessarily offer an instantaneous solution, as it could take several years from inception
to the marketing of any new generic offering from an MNC. Threats from local competitors are also a key force;
with greater China market know-how and lower production costs, they will compete heavily on price and, in the
longer-term, squeeze market prices down.
7

8. Growing pains
Option #2: Developing Strategic Alliances & Partnership Opportunities
Many MNCs navigating the vast complexities of the Chinese market are doing so by exploring various forms of
deals with domestic companies. While this is also not a new idea, it certainly has gathered speed in recent years.
Along with allowing portfolio diversification, these expansions allow MNCs to leverage the market expertise and
local supply chains of leading domestic manufacturers. This, coupled with the financial might and portfolios of the
MNCs, could mean significantly deeper market penetration for both parties.
Deal distribution (%) across the value chain in China (Jan 2011- Feb 2013)
Discovery
Development
Manufacturing
Distribution
Sales &
Marketing
31%
23%
22%
15%
5%
4%
Discovery
Why?
Development
Development/
Manufacturing
Commercialisation
To overcome
cultural and
business hurdels
Distribution Sales & Marketing/
Commercialisation
To benefit from
local regulatory
expertise
To negotiate
complex distribution
channels
Source: IMS Consulting Group “Deals in Emerging Markets”, C. Rink
8

9. Growing pains
This option is certainly more difficult to implement than a pure generics strategy, as finding the correct partner
who can complement existing portfolios and capabilities is not an easy task. There is also the possible issue of
workforce integration and ensuring that the production standards of any acquired/partnered company meet
those of the MNC. Furthermore, with the threat of greater regulation, and the dwindling number of attractive,
suitable partners still available, this strategy will be increasingly difficult to pursue and could constrain the
ongoing feasibility of pursuing such a strategy.
Example: Pfizer
Pfizer is a good example of a large, strong MNC developing strategic relationships with local firms to create a
multi-pronged approach to inorganic growth. In 2012, the company agreed to a joint venture with Hisun in a
move to access both Hisun’s generic drug portfolio and its capacity to produce and commercialize branded
generic medicines at low cost. Over the years, Pfizer has also established strategic partnerships with two other
local players to access the entire value chain and set up a strong foundation for future growth and expansion:
•
•
Jointown Pharmaceutical Group, one of the largest distributors in China, to distribute Pfizer products in
markets outside of China’s big cities
Shanghai Pharmaceutical (Group) Co Ltd, to register, distribute and eventually sell Pfizer products in China
9

10. Growing pains
Option #3: Branching Out Into New Fields of Play
As the above, more conventional, strategies are beginning to encounter increased competition and obstacles,
and with technology and research in China moving forward at such an astounding pace, MNCs are beginning to
think ‘outside the box’ by developing alternative strategies to keep ahead of the game. Of course, such innovative
ideas, while offering the possibilities of huge rewards, are the most difficult to implement. Not only is this level of
creativity and foresight challenging, but there is an increasing rarity of attractive, applicable spaces not occupied
by competitors.
Innovative strategies also invariably entail significant internal transformations in order to create the capacity to
incubate and execute any new ideas or technologies, often at large costs and with no guarantee of future results.
These strategies also usually mean moving into areas in which there is a lack of expertise, resulting in an imbalance
of skills and an over-reliance on partnering firms.
The options presented here are certainly not “Band-Aids” for a short-term growth issue, but they can be mediumto longer-term planks on which companies can build sustainable growth.
Mobile technology - Taking health care into the future
Mobile health (or mHealth) applications are at the forefront of the more innovative developments in the
healthcare sector, continually adopting new technology and transforming how people view healthcare in
markets around the world. mHealth is currently in use across emerging markets, spanning the entire healthcare
continuum, from drug validation and patient diagnosis, to aftercare, mental health monitoring and health education.
And with over 1.1 billion mobile phones currently in use in China, and over 300 million 3G users, the mHealth
potential is clear*.
China Wireless News, Jan 3, 2013. (www.chinawirelessnews.com/2013/01/03/11699-china-had-over-1-1-billion-mobile-phone-users-by-november-2012)
TechAsia.com - (www.techinasia.com/china-now-has-over-300-million-people-using-3g//14C43AE4-F02B-4698-A7E8-D609AE56BFF6)
10
*

11. Growing pains
Two of the ways in which this technology could be harnessed by MNCs and incorporated into Chinese business
plans include:
1. Diabetes and insulin monitoring – The diabetes market in China is expected to grow at a rate of 16.8% over
the next ten years, fuelled by rapid demographic and lifestyle changes*. Looking to other health markets
around the world, this will likely offer increasing opportunities for MNCs. In recent years, both Bayer and
Sanofi have developed innovative, lifestyle-centric mobile technologies to monitor glucose levels in patients.
2. Barcode scanning – Counterfeit products are an issue across almost every industry in China, and
pharmaceuticals are no different. The authentication and verification of drugs prior to use is a
significant area of need within the healthcare space. In fact, the foundation is already in place: in
Guangdong province, a new system has been developed that leverages a central database of unique codes
matched to individual drug packaging. Accessible via a smartphone app, the database allows consumers to
verify the authenticity of their prescription before use.
The opportunities implicit in this technology are significant, from better understanding patient behaviors,
to increasing compliance through third-party patient management or medicine reminders. Barcode
technologies can drive better patient education and preventative medicine initiatives, both critical
priorities for China.
Diagnostics – Creating synergies across portfolios
As China continues to prioritize preventative treatments in their medical reform initiatives, diagnostic
services are poised to be a significant player in the expansion of both market access and new product
opportunities. Indeed large MNCs are already exhibiting signs of interest; Roche has announced it will
invest $310 million in diagnostics in China over the next few years. Abbott is also expanding the diagnostic
arm of its business with 30+ new diagnostic product launches granted SFDA clearance in China in 2012 alone.
Diagnostics offer an intriguing opportunity for portfolio synergy within larger MNCs, and a presence across
a broader piece of the patient journey. For example, for complex issues such as breast cancer, diagnostics
capabilities allow for earlier patient interactions (e.g. screenings) and then more targeted, appropriate
treatments later in the disease cycle.
Naturally, as companies expand their activity across the patient’s journey, they likewise expand their opportunities
for market access. An excellent example can be found in Roche’s efforts to increase HER2 testing and build
robust patient access programs, which have both had a significant impact on Herceptin’s access across China.
Creating your own demand – solving the affordability gap
Although China is experiencing a phenomenal expansion of its middle class, the reality is that many drugs are
still prohibitively expensive; cancer drugs, for example, can cost up to 10 times the average Chinese worker’s
annual income and, as a premium medication, are not included on any reimbursed drug list.
The answer, for those companies with the capabilities and the appetite for expansion into wholly new business
models, can be the development of partnerships such as the one Roche struck with Swiss Re. In 2012, Roche
agreed to partner with a compatriot Swiss insurance provider Swiss Re, the second-largest provider of
reinsurance in the world, to see if such an approach to China would work. While Swiss Re will benefit from
Roche’s understanding of cancer treatment and prevalence rates, Roche will leverage Swiss Re’s knowledge of
insurance to expand additional health insurance coverage to segments of the Chinese population. Swiss Re will
partner with local domestic insurance companies, including China Life, to sell the resulting policies, which will
supplement public insurance and cover more expensive drugs such as Herceptin.
IMS Health analysis and forecasts
*
11

12. Growing pains
V. Wrapping up
China is one of the healthiest pharmaceutical markets in the world when viewed through the lens of growth.
However, as we have demonstrated here, this growth is by no means uniform and it is not without its challenges
and risks. To survive, and thrive, in this market going forward means embracing the intricacies and proactively
addressing those dynamics that make China truly unique. For MNCs, the imperatives are clear:
•
Change is coming, but rather than fighting that change, MNCs have the opportunity to use the momentum,
coupled with real market intelligence, to shift their business forward
•
Tomorrow’s success stories will be built on strategies that recognize both the upward and the downward
pressures on the Chinese Pharma market - don’t get blinded by macroscopic figures!
•
A spectrum of strategies, from core bolt-ons to new fields of play, are real options for MNCs who want to be
proactive in managing pharma’s “growing pains” in China
12

13. About the Author
Matthew Guagenty is currently Vice President of
IMS Consulting Group, Asia Pacific & China.
He has over five years in the pharma industry, and another twelve in healthcare
consulting.
Matthew’s focus over the last seven years of management consulting has been
advising clients on growth strategies and new commercial approaches for both
newly launching and established brands. Most recently he has been evolving the
thinking around launch success in China and supporting the development of product
growth strategies and tactics across Asia Pacific.
TM
IMS Consulting Group (IMSCG) is the world’s leading business advisor for the healthcare and life sciences
industries, and one of the top consulting firms in Asia-Pacific. Strategically positioned in five hubs across the
region – China, Japan, Singapore and India – IMSCG combines global presence and local expertise to push the
frontiers of healthcare and, ultimately, achieve a vision to “Influence the Future of Global Health.”
Extracting critical analytics and insights from a wide range of data, from customer behavior to global trends
and local markets, teams across Asia are able to give clients crucial visibility into the dynamics of their industry.
And with IMSCG’s ability to not only anticipate change, but proactively plan for it, clients are able to confidently
navigate current issues and prepare for future trends.
IMS Consulting Group has transformed the way investment decisions are evaluated and implemented in Asia,
giving gives healthcare leaders the competitive advantage they need today, and the sustainable strategy
necessary for tomorrow.
A special thanks to Colin Prout, Hannah Law, Simon Choe and Lisa Wang for their contributions to this paper.
13

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