China and the New Harbingers of ChangeJan-Willem Eleveld, Vice President, Consulting & Services, Asia Pacific

CHINA: THE SOLE FIRST-TIER COUNTRYClearly, China has surfaced as a dominant market. According to the IMS Health Market Prognosis of October 2009, Chi-na’s CAGR09-13 is now projected at 23-26%, a forecast predicated on a number of factors.

To begin with, there’s the robust founda-tional economy, with economists predict-ing an 8% GDP growth over the next five years. Demographics are also at play; between 2010 and 2020, some 180 mil-lion additional people will be added to the ranks of those past the age of 50. Chronic diseases, correspondingly, are on the rise—with the number of diabetics rising to 40

million and the number of obese tripling in the past eight years, among other con-cerning conditions.

Sweeping healthcare reforms further drive China’s rapid ascendancy. By 2011, 90% of the population will be covered by in-surance. At the same time, the Chinese will have access to a far greater number of healthcare centers, as China continues its program to strengthen primary care and rural healthcare services. Finally, China has taken important steps to improve its intellectual property protection policies so as to encourage innovation and implement better patent oversight.

By 2011, China will rank as the third larg-est pharmaceutical market in the world, after the United States and Japan and ahead of Germany, France, Italy, and Spain. By 2009, its hospital market had already topped USD $25 billion, recording a 27% year on growth. Its second and third tier cities, meanwhile, are demonstrating even faster rates of growth. And while generics continue to dominate the market—taking a 61.4% of the market share in 2009—newly patented products are also leaving their mark, increasingly gaining share from a huge and rapidly growing absolute value market.

What We Know

In late 2006, IMS named Brazil, Russia, India, China, Ko-rea, Mexico, and Turkey to its first-ever list of seven “pharmerg-ing markets.” These were countries growing at twice the world market average. Countries in which each market was forecasted to grow more than 7.5% CAGR06-11. Countries expected to represent 12% of the world’s pharmaceutical market by 2011 and to contribute some 20% of all global growth between 2006 and 2011. Ours was a bold assertion—a declaration made with the full understanding that time presses forward and the future is never quite what yesterday thought it might be.

Recently IMS revisited those pharmerging markets in light of the global recession and other powerful developments. In both Mexico and Brazil, governmental price pressures have decelerated these formerly robust pharma markets. In Ko-rea, we’re seeing higher-than-elsewhere GDP per capita. The healthcare market in China, for its part, continues to accel-erate, reflecting continued economic growth and increased reforms funding. We take a close look at the phenomenon in this paper.

THE NEXT WAVE OF PHARMERGING MARKETSThe new world has prompted us to re-define the pharmerging markets —to slot seventeen countries into three tiers. China, with its $8 trillion GDP and pro-jected $40 billion incremental pharma market value growth (2008-2013), is the sole occupant of the first tier. In the sec-ond, we’ve placed Brazil, Russia, and In-dia—countries with 2008 GDPs of be-tween $2 and $4 billion and incremental pharma market value growth (2008-2013) of between $5 and $15 billion. The thir-

teen countries in the third tier—begin-ning with Venezuela and ending with the Ukraine—are all countries in which the 2008 GDP was less than $2 trillion and the incremental market value growth from 2008-2013 is projected to be between $1 and $5 billion. We haven’t just been looking at the mar-ketplaces, of course. We’ve been looking at how large pharmaceutical companies are performing in these markets. Our analyses revealed that the top 15 multinationals are

currently deriving just 9.4% of their sales from pharmerging countries, despite the fact that these markets account for 17% of the overall world market.

UNDERSTANDING THE RESIDUAL CHALLENGESAs the sole first-tier pharmerging country benefiting from numerous reforms and a growing healthcare infrastructure, China has become a central area of interest and activity for multinationals from all around the world.

Still, those who venture into China, must take into account a number of emerging issues and residual challenges. Despite the headway that has been made, both acces-sibility and affordability continue on as top concerns. There are, for example, just 3.8 health professionals and 3.1 beds for 100 people in China, resulting in waiting times of close to two hours for every six minutes a patient has in contact with an actual physician. The situation is particu-larly difficult in the rural areas, where 54% of China’s population receives just 22.5% of the health spend.

New services and new technologies have resulted, not surprisingly, in escalating costs. Out-of-pocket expenditures are now 18 times more expensive than they were two decades ago—an important sta-tistic given that 45% of total health ex-penditure is a personal contribution. A full 35% of urban households and 43% of rural households find it frankly difficult to afford treatment.

The government’s ambitious healthcare reform plan, a three-year investment ini-tiative of RMB850 billion announced in 2008, is designed to address the twin chal-lenges of affordability and accessibility. The plan stands on five platforms: basic medical insurance that will cover 90% of the population by 2011; an essential drug system that will go into place by 2011; a strengthened primary healthcare service that will overhaul existing resources, oper-ational mechanisms, and financial systems; an equitable public health system that will

What We Think

Tier 1 1 China 8 40B+

Tier 2 2 Brazil 2-4 5-15B 3 Russia 4 India

Tier 3 5 Venezuela* 12 Thailand <2 1-5B 6 Poland 13 Indonesia 7 Argentina 14 Romania 8 Turkey 15 Egypt 9 Mexico 16 Pakistan 10 Vietnam 17 Ukraine 11 S. Africa

Tier 1 Countries 2008 GDP1 Incremental pharma ($Trillion) market value growth2

from 2008-13 ($ Billion)

Source: 1 IMF GDP PPP in 2008; 2IMS Market Prognosis Oct 2009, * For Venezuela, pharma value added is 5B+ but mainly attributed to unusual inflation and currency changes. Countries in the table are arranged in descending order of incremental market value growth

Top 20 Global corp China market performance

Sanofi-Aventis

Pfizer/Wyeth

AZ

BI

Takeda

TevaAbbott/Solvay

GSK

J&J Lilly BMS

OtsukaDaiichi

Novartis

MSD/SP

Eisai

Novo Nordisk

Bayer

% C

AGR

2004

-9 (

Chin

a)

% 2009 Revenue from China US CorpEuropean corp

Japanese corp

China CAGR 04-09 (20.93%)

China share of world market (3.08%)

Source: IMS Data, June 2009

60%

50%

40%

30%

20%

10%

0%0.0% 0.5% 1.0% 2.0% 3.0%1.5% 2.5% 3.5%

Size of bubble = 2009 China sales

improve capabilities to manage public health issues; and a public hospital reform program that, following some early piloting of reforms, will be rolled out more extensively beginning in 2011.

Complex and well-considered, China’s re-form framework is designed to ensure that major gaps are addressed and that major issues are owned by the appropriate governmental departments, as illustrated in the chart.

Pharmacos must also, of course, keep their eye on the National Drug Reimbursement List, though being on the list is not the sole determinant of a drug’s journey throughout the Chinese healthcare system. Other fac-tors—the product’s targeted disease area, the threat of generics, the patient co-payment level, the competitive threat, the PDRL list-ing prior to the NDRL, the price cut, the investment and execution from the company, and the product’s clinical efficacy—all influ-ence a product’s potential uptake within the market. Thus, pharmacos must prioritize their investments according to the strategic focus and size of the potential gain from the NDRL.

IMPERATIVES FOR SUCCESSHaving maintained an active presence in China for the past many years, IMS strongly

believes that the critical success in this rap-idly evolving market is local adaptability. It’s about picking the right portfolio, building the right commercial model, setting the right pricing and market access strategies, and getting the right people to execute the right things well—all ideals, we recognize, but all imperative.

Successful pharmacos in China excel at building the right structure and capabilities. They match local demand with their own value propositions. They build the right sales and distribution models to strike the right

balance between depth and breadth. They recognize that it all begins with aligning the portfolio with high-growth opportunities.

Our advice, therefore, is straightforward. Act fast, because the competition is intensifying. Take the time to understand the market re-alities, and recognize that they are changing rapidly. Differentiate your self with a clear and distinct value proposition. Tailor your portfolio, clinical development, and com-mercial models to local needs. Execute your strategy and tactics under the leadership of a talented, and knowledgeable.

What We Can OfferAt IMS, we’ve not just been monitoring China for years; we’ve been applying our unique evidence-based consulting approach and therapy area depth to emerging client opportunities.

Our current research focuses on critical areas for the pharmaceutical industry: new com-mercial models, launch readiness, pharmerg-ing markets, and the value of medicines. As the only major professional consultancy ex-clusively dedicated to the pharmaceutical and healthcare industry, we offer proven expertise in commercial strategy as well as leading-edge methodologies and approaches designed to solve the most complex business issues. We’re

at work, every day, improving decision sup-port, reducing pperational costs, and increas-ing flexibility. We use best practice approaches; enable faster and better insights through use of more granular data; and drive global quality, consistency and standardization.

Our Consulting & Services teams include thought leaders with expertise in industry issues, business processes, and therapies. We interpret information, analyze risks, and un-cover opportunities. And, we deliver essential services that enable our clients to use our of-ferings effectively and confidently.

Our thought leaders, meanwhile, offer deep insights into the healthcare environment and the implications for the pharmaceutical in-dustry, globally, regionally, and locally. Pres-ently, our Thought Leadership team is help-ing to position IMS as the leading provider of market insights for the pharmaceutical and healthcare industries—and as clients’ partner of choice. We are the organization widely recognized, in other words, for its reliable brand: IMS. Intelligence. Applied.

For more information, please contact Jan-Willem Eleveld, VP of Consulting & Services in Asia-Pacific (jweleveld@sg.imshealth.com) or write us at info.sg@sg.imshealth.com

IMS HEALTH® SINGAPORE • Regional Office • 10 Hoe Chiang Road • #23-01/02 Keppel Towers • Singapore 089315Tel: 65-6227 3006 • info.sg@sg.imshealth.com • www.imshealth.com/pharmerging

PrimaryTarget

SecondaryTarget

Key focus

RelevantGov’t Dept.

• Increase insurance coverage

• Lower drug price

• Build a primary care services sector

• Ensure to meet basic medication needs

• Change profit-driven operation model of current public hospitals• Reduce out of

pocket pay by patients

• Widen patient access to different kinds of mediations

• Improve efficiency of healthcare system

• Reduce basic drug prices

• Optimize healthcare resources & improve the management

Affordability Affordability Affordability

Affordability AffordabilityAccessibility Accessibility Accessibility

Accessibility Accessibility

1Medical

Insurance

2Drug Price

Control

3Primary

care Dev.

4Essential

Drug

5Public Hosp.

Reform

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