Global Growth Markets whitepaper “Reforming the …...demand for medical devices, mobile health,...

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Global Growth Markets whitepaper

“Reforming the Dragon” China healthcare market opportunities

1-Nov-14 By Pete Read and Josephine Loo [email protected] +44 773 986 5080

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Whitepaper: China healthcare market opportunities © 1-Nov-14

A broad look at China’s healthcare sector and the market opportunities for international companies

Image: China Daily

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2 Contents


Introduction 3 Market opportunities 4 Health spending advancing 6

Urbanisation and rural improvement 8 Longer life expectancy and aging 11 Healthcare reform continues 13 Growth in the medical devices market 16 Rapid expansion in mHealth 18 The world’s second largest pharma market 20

About Global Growth Markets 24

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Whitepaper: China healthcare market opportunities

“Reforming the Dragon” China healthcare market opportunities

Introduction

© 1-Nov-14

Important note This report is provided as is, free of charge and without any warranty or guarantee. Global Growth Markets accepts no responsibility for errors or omissions, or for any loss or consequential loss arising as a result of decisions taken based on its contents.

©2014 Global Growth Markets. All rights reserved. This report is copyright, however individual pages or portions thereof may be copied referencing “Global Growth Markets” or “www.ggmkts.com” as the source.

Global Growth Markets is a healthcare market information provider helping international companies succeed in their chosen growth markets. Based in the UK and Singapore, we work with our specialist research consultants around the world and a carefully selected Advisory Panel to produce accurate market data and reliable insights.

For further information please see the Global Growth Markets page at the end of the report, contact the author or visit www.ggmkts.com.

China's huge healthcare market is seeing strong growth as health spending advances. The combination of urbanisation and improvements in care provision in rural areas is creating many opportunities for both domestic and international companies.

The aging population is imposing demands on a stretched healthcare system, which is rapidly changing and adopting technology as healthcare reform continues. But much more development is needed to improve both access and affordability.

This whitepaper provides a broad look at China’s healthcare sector and some of the market opportunities for international companies that the current phase of rapid change offers.

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A wide range of opportunities is arising from seismic structural shifts

Market opportunities

© 1-Nov-14

Strong growth in overall demand as China's health spending advances Urbanisation combined with improvements in rural areas is creating opportunities. An aging population is imposing increasing demands on the healthcare system. Healthcare reform continues, but more is still needed to improve access and affordability.

Medical devices market to grow by almost 20% per year. Rapid expansion expected in the mobile health market as major players get involved. China expected to become world's second largest pharmaceuticals market in 2015.

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Staying focused and ensuring delivery are critical for international players

Market opportunities

© 1-Nov-14

Reforms boosting technology Reform in public healthcare, especially with regard to modernisation of hospital standards and processes, is driving a strong increase in demand for medical devices, mobile health, and software and IT targeted at medical institutions.

Potential for well-priced drugs China's pharmaceutical market is expected to become the world's second largest in 2015. Opportunities exist through developing economies-of-scale in production of generic drugs to combat pricing controls, and a strategic focus on first-to-market or innovative drugs that will enjoy premium pricing.

Hospital investment opening up New regulations in 2014 opened up China's hospital sector more clearly to FDI and the opportunity to invest in 100% foreign-owned hospitals, as a huge push to expand the healthcare provider infrastructure continues. The seven cities and provinces in which 100% ownership will be allowed are Beijing, Tianjin, Shanghai, Jiangsu, Fujian, Guangdong and Hainan.

Many more carers needed The country lacks millions of nursing home employees to cope with the size and demands of its aging population. The Ministry of Civil Affairs plans to train six million more caregivers by 2020. Opportunities exist in the development of elderly care facilities as well as the training of caregivers and nursing staff.

Twin challenge: Focus and deliver China's healthcare market breaks down into high-end and low-end segments across both urban and grassroots locations, each presenting issues as well as opportunities.

The challenge for multinational companies is to target the right investments and products for the right markets within the country, delivered through effective networks. This will increasingly be achieved through innovation, as well as collaboration with local companies in the form of partnerships, JVs and acquisitions.

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Lots of potential for higher healthcare spending, driven by demographic change

Health spending advancing

© 1-Nov-14

Growth drivers The forecast for China’s healthcare industry is more than rosy, with an already huge market expected to continue on a growth path, driven by economic growth, urbanisation, longer life expectancy, a rising middle class and an aging population.

GDP and per-capita spending China's GDP growth in 2013 was 7.7% and the IMF projects 7.4% growth in 2014, making it one of the world’s fastest growing economies, despite its huge size – even compared with other emerging markets such as India, where GDP growth was ‘only’ 4.4% in 2013. The current levels of healthcare spending in China leave a lot of room for expansion. [1] World Bank

United States USD8,000

Brazil USD870

China USD186

Per-capita healthcare spending[1]

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Healthcare spending to rise 10% annually, as government builds domestic industry

Health spending advancing

© 1-Nov-14

Highlights of China’s the 12th Five Year Plan (2011-15)

Push for consolidation Medical devices •  Develop eight to ten large medical device groups with

annual sales of >RMB5bn (USD8.2 bn). Pharmaceutical manufacturing •  Develop five or more manufacturers with sales >RMB50

bn (USD8.2 bn) and 100 companies with annual sales >RMB100 bn (USD16.4 bn).

•  Encouraging M&A. Pharmaceutical distribution •  Develop one to three large distribution groups with

sales >RMB100 bn (USD16.4 bn). •  Increase market share of retail pharmacy chains to 65%.

Targeted product development •  Medical devices suitable for grassroots markets. •  Locally-produced equipment to replace imports. •  Specific drugs, eg. for diseases increasing in

prevalence, such as diabetes, cardiovascular, cancer. •  Modern variants of TCM. •  Innovative chemical products.

Healthcare expenditure Public health expenses were USD468 bn in 2012[1], a 20% increase from the previous year, but still accounting for less than 6% of GDP. China will generate healthcare market opportunities worth USD500 bn in 2014-15.[1] China's health expenditure is expected to reach USD1 tn in 2020,[2] making up 7.7% of GDP by then. This implies a CAGR of almost 10% up to 2020.

[1] China Ministry of Health; [2] McKinsey

China: Total healthcare spending

2011 2012 2020

390 468

1,000

USD billion[1] [2] % GDP

� 5.3% � 5.7% � 7.7%

+10% average annual increase

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Large scale urbanisation is creating huge city markets for healthcare

Urbanisation and rural improvement

© 1-Nov-14

Urbanisation The rapid rate of urbanisation is driving growth in demand for healthcare in China at the same time as putting huge pressure on its already weak healthcare system. About 54% of China’s population of 1.4 billion lives in cities,[1] compared with 80% in developed countries. To try and aid economic growth, the government is setting targets under the National New-type Urbanization Plan (2014-20) for further urbanisation. The aim is to reach a rate of 60% by 2020. This will continue to create huge urban markets for healthcare of all types.

It is easy to forget how large a market we are talking about. China’s largest city is Shanghai with a population of about 22 million – making it easily the size of a not-so-small country.

[1] Chinese Academy of Social Sciences

China already has five cities with a population of >10 mn: Beijing, Tianjin, Shanghai, Shenzhen, Guangzhou. •  India has only three, and the US

has just two.

•  China also has 14 cities with population >5 mn.

•  Its urban population is >700 mn.

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The need to improve care is also bringing investment to thousands of rural locations


© 1-Nov-14

Rural developments Meeting healthcare demands in the urban areas will already be a huge challenge for the country. But at the same time the government is aiming to improve healthcare in rural areas and at ‘grassroots’ level, creating opportunities for companies there.

While health spending is much higher in urban areas, the share of spend of rural areas is now increasing.

Rural health investment 300 new county level

hospitals

1,000 new town level health centres

13,000 new village clinics

…by 2020

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Competition is intensifying at both ends of the market


© 1-Nov-14

Competitive developments As a result of this investment competition will increase in both the rural and urban markets. Domestic companies are trying to move up the value chain and sell higher quality products in urban markets.

Foreign companies are venturing beyond first- and second-tier cities to tap into the grassroots market through lower-end products.

Patient monitoring equipment

Moving up-market

China’s Edan Instruments is moving away from its entry-level product origins by developing a product portfolio that includes relatively high-end patient monitors, fetal monitors and ultrasound equipment.

Looking for volume International player Philips Healthcare has been able to gain market share by venturing into lower-priced segments of the patient monitoring market in China, through its acquisition of local company Shenzhen Goldway in 2008.

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Longer life expectancy and aging are putting stress on the healthcare system

Longer life expectancy and aging

© 1-Nov-14

Demographic changes Rising per capita incomes, in urban areas certainly but also increasingly in rural locations, are driving demand for higher quality healthcare, and creating a huge market of individuals who are living longer lives on richer diets.

Epidemiological impact The downside of these positive developments is an increasing incidence and prevalence of diseases characteristic of the first world – for example diabetes, cardiovascular disease and cancer. The impact of increased life expectancy and China’s one child policy has now also created the problem of a large and rapidly growing elderly population, most of whom are likely to find it difficult to access and/or afford care as time proceeds.

[1] International Diabetes Federation; [2] Chinese Academy of Social Sciences

China’s population over 64

2013 2050

123

Million people[2] % total population

� 9%

330

� 25%

92 mn diabetics in China[1]

Increase of 207 mn

elderly

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Children struggle to look after their elders, and facilities for aged care are lacking

Longer life expectancy and aging

© 1-Nov-14

Effects of the one child policy China’s one child policy has created a typical family profile that places great strain on families, with four grandparents, two parents and one child: the so-called 4-2-1 problem. •  Many children and grandchildren are unable to meet their own

living costs in addition to paying for care for the grandparents.

•  Care homes and financial schemes to help the aged pay for their own cost of care are largely at the pilot stage in China.

Access is another serious problem: •  There is currently no long term care or homecare system.

•  There are insufficient nursing staff to deal with the number of aged people.

•  China currently only has 25 care beds per 1,000 senior citizens.[1]

[1] Ministry of Civil Affairs; [2] Global Demographics Ltd

Recent changes in the policy

Although the urban one child policy started to be relaxed in 2013 this will only have a very limited positive effect on aging. This is because the current age profile of the population means the number of women of child-bearing age is destined irrevocably to fall by a third over the next 20 years, regardless of any new policy initiatives.[2]

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Reforms have encouraged private hospitals and allowed foreign investment

Healthcare reform continues

© 1-Nov-14

Foreign investment in hospitals In 2014 Premier Li Keqiang announced that reforms would focus on giving more play to market forces and strengthening public health care services. China's State Council announced plans to relax limits on foreign investment in hospitals, by “reducing restrictions on foreign ownership in medical JVs and collaborations”. China had already started allowing FDI into its hospital sector in 2011, but in a limited manner, and foreign investors have been cautious.

The first wholly foreign-owned hospital in China was piloted in the Shanghai Free Trade Zone in 2014. [1] Global Growth Markets Hospital Demographics Database; Ministry of Health;

National Health & Family Planning Commission; China Hospital Association

[2] Level III = hospitals with 500+ beds, providing higher level health services, specialist education and research; Level II = regional hospitals with 100-499 beds, providing integrated community health services and some research and education functions; Level I = township hospitals and community clinics with <100 beds

Public and private hospitals in China

2008 2013

No. of institutions[1] 24,605

Private

Public[2] Level III

Level II

Level I

9,723

1,756

6,700

6,425 4,989

6,780

1,192

6,751 +44%

+15% +47%

-1%

+29%

19,712 +25%

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Reforms aim to open the drug market and address infrastructure imbalances


© 1-Nov-14

Pharma For pharmaceutical companies, inclusion in the authorised drug list offers the chance to sell in the mass market, but price controls mean margins may be squeezed.

The NEDL drugs include cardiovascular and cancer drugs, TCMs and 200 children’s drugs and vaccines.

Providers Private hospitals solely owned by foreign investors will be allowed in Beijing, Tianjin, Shanghai, Jiangsu, Fujian, Guangdong and Hainan. Investments may be wholly owned or via M&A, but only investors from Hong Kong, Macau and Taiwan may set up TCM facilities.

Healthcare reform – some highlights

Pharmaceutical supply •  The Essential Drug List (EDL) of 300 price

controlled drugs was expanded to 520 in the updated National Essential Drug List (NEDL) in 2013.

Healthcare infrastructure •  Providing more aid and strengthening public

healthcare in Central and Western China to close the gap with East China.

•  Improving healthcare infrastructure and services at grassroots level, including setting up of thousands of new facilities (see p9).

•  Improving public healthcare infrastructure and systems, including modernising hospital standards and processes.

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More reforms are needed to improve access and affordability for patients


© 1-Nov-14

Health insurance reforms China launched its latest healthcare reform plan in 2009, and has since spent USD480 billion on reforms. Achievements include bringing health insurance coverage to 95% of the population even though coverage does not currently run deep. Access and affordability remain problems (see chart).

Some groups within China still lack coverage, for example, the disabled in rural areas.

“High out-of-pocket expenses remain a major problem, the rates for reimbursement are far too low and the insurance covers only a narrow range of conditions,”

…says Dr. Gry Sagli of the Institute of Health and Society, University of Oslo, who researches poverty and disability in China.

[1] Horizon Research, 2013

China: Views on health insurance % survey respondents[1]

Healthcare is expensive

Cost of healthcare is higher than in 2009

95%

It’s difficult to arrange to see a doctor

More difficult to see a doctor than in 2009

81%

87%

57%

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China’s USD35 bn medical device market will more than double by 2020

Growth in the medical devices market

© 1-Nov-14

[1] Global Growth Markets

[2] Includes consumer devices such as sphygmomanometers and wearables; [3] Mainly from the US, Europe and Japan

China: Medical devices market[2]

2013 2020

Sales value, USD bn[1]

~20% average annual growth

35

85

Imported[3]

Domestic

Medical device demand China's medical devices market has been lucrative for foreign players and should to continue to offer strong potential. The market was worth almost USD35bn in 2013, with growth of at least 20% per year expected, driven by hospital infrastructure expansion as well as escalating technology adoption.

Domestic vs imported supply While foreign companies dominate the high-end segment, with the bulk of supply coming from imports, this market is now becoming saturated. International companies are looking for ways to tap into the higher volume mid- and low-end segments.

Another fly in the ointment for foreign players is the official policy announced in Aug-14 to encourage public hospitals – in particular the high-spending and influential Level III institutions – to buy home-grown brands.

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Foreign players must adapt to compete with rising local medtech brands

Growth in the medical devices market

© 1-Nov-14

Foreign manufacturers are realising that relying solely on their competitive advantage in the high-end will not be sufficient to sustain profitable growth longer term.

M&A One route to tapping the low-end market is through acquisition of local companies to gain both suitable products and instant lower-tier city and rural distribution networks.

Product development Some manufacturers are also looking at how to develop their product portfolio strategically. For example, GE Healthcare is developing low-end products for local production at its six manufacturing facilities around China.

In-China-For-China At GE Healthcare, the majority of new product development for the China market is currently focused on lower end products, to be produced in China rather than imported. GE calls this approach “In-China-For-China”.

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Rapid expansion in the mobile health market, to >USD2 bn by 2017

Rapid expansion in mHealth

© 1-Nov-14

Systemic challenges Although China has expanded health insurance, it still faces the challenge of service delivery. Despite extensive investment and developments, the healthcare system and infrastructure still have severe limitations, and there is a major workforce shortage.

Tech solutions One way to mitigate these problems is through technology. China's healthcare industry is expected to invest USD5.4 bn in IT in 2017, a sharp increase from under USD3 bn in 2012.[1] Mobile technology – so-called mHealth – is already helping to bring patient care to rural areas, and mHealth IT is being explored and piloted as part of the current reforms.

The MoH says it will allow online retail of certain drugs by the end of 2014. And many large hospitals have started to adopt clinical data centres, and mobile doctor, nursing and admin systems. [1] IDC; [2] GSMA; [3] iiMedia

With 1.2 bn mobiles in 2013[2] for 1.4 bn people, China’s potential for mHealth is huge, and annual growth rates of up to 50% are foreseen.[3]

% market value[2] [3]

United States

China

10%

23%

Share of global mHealth, 2017

Japan 8%

USD 23 bn

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China’s major tech firms are entering the mHealth market

Rapid expansion in mHealth

© 1-Nov-14

mHealth players Chinese tech volume players are taking an interest:

•  China Mobile, with >800 mn users, is involved in a range of mHealth initiatives from primary care to disease management.

•  Alibaba’s Alipay service – which has >100 mn mobile users –allows subscribers to register at hospitals, pay for services and check clinical test results with their device.

•  Tencent’s WeChat has, crucially, integrated its new hospital payment service with the health insurance system.

•  Yihaodian is the first e-commerce site to sell drugs in China.

Other firms, including smaller players such as Dnurse and Lepu Medical, are working on pilots and trials with hospitals and government bodies across a broad front, including cloud systems, online diagnosis, mobile video consultation, many areas of tele-health, and mobile health apps.

“State-owned enterprises… are being sidestepped surprisingly fast by entrepreneurial ventures that are truly innovating.” …says Charles Hsu of Crosswave Management, who helps Western companies such as IBM enter China’s healthcare market.

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China’s pharmaceutical market is growing twice as fast as the US market

The world’s second largest pharma market

© 1-Nov-14

[1] US Council on Foreign Relations; [2] US National Bureau of Asian Research; [3] JP Morgan

Pharmaceutical market growth China is already the world’s third-largest market for pharmaceuticals, with annual sales of over USD70 bn.[1] The market is growing at 15-20% per year, twice the rate seen in the US, meaning China is on track to become the second-largest market globally in 2015 – a massive leap from 10th place in 2002. China's market for OTC and branded generic drugs will rise to USD370 bn by 2020.[2]

Four main life science clusters are developing

China: Life science clusters

Northeast Beijing, Tianjin, Liaoning, Hebei, Shandong

And companies are setting up bases in biotech parks, eg. •  Shanghai Zhangjiang Hi-Tech

•  Suzhou BioBay

South Shenzhen, Guangzhou

Central West Chongqing,

Chengdu, Xi’an, Wuhan

Central East Shanghai, Suzhou, Taizhou, Hangzhou, Nanjing

% market value[3]

Top five distributors

More than 13,000 other distributors 72%

28%

China: Pharma distribution fragmentation

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Drug innovation and quality are improving, and prices are closely controlled


© 1-Nov-14

In 2013, the National Reform & Development Commission announced price cuts averaging 15% for 400 varieties of drugs in 20 different categories.

Quality standards Government policies are encouraging the development of innovative drugs, and regulations are helping to improve quality and safety standards in pharma manufacturing, for example through new GMP guidelines.

Pricing control However, as part of reforms to make healthcare more affordable for the population, the government is continuing to exert control over drug prices. This is squeezing margins for pharma companies, causing them to adopt various strategies to remain profitable (see p22).

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Pharma companies are innovating and integrating to maintain margins


© 1-Nov-14

Getting around price controls Companies are looking at developing innovative drugs or first generics that are not subject to price controls. Regulations introduced in 2013 allow a premium of up to 30% for drugs that are first-to-market or have a clinical differentiation (eg. the delivery mechanism). This benefits local players such as Simcere and Sihuan Pharm that focus on such areas.

Reducing production costs Both local and foreign companies are trying to reduce production costs for price-controlled drugs, to maintain margins.

•  Foreign companies are localising production by collaborating with Chinese partners.

•  Some domestic companies, eg. Wuxi AppTec, are integrating horizontally or vertically to try and achieve economies of scale.

Pharma company strategies

Vertically integrating

Wuxi Apptec has expanded from synthetic chemistry to include integrated drug discovery and pre-clinical services in its business model.

First-to-market Local companies Simcere and Sihuan Pharma have made it part of their strategy to focus on first generics that are not subject to price controls.

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Image: China Daily

For further information, please contact: Pete Read [email protected] +44 773 986 5080

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24 About GGM: Helping companies succeed in challenging healthcare markets

Our directors have been researching, analysing and advising on emerging healthcare markets since 1992.

• Healthcare technology

We are commercial intelligence professionals who believe reliable data and insights give you the confidence to succeed in challenging markets.

Based in the UK and Singapore, we work with specialist in-country research consultants around the world and a carefully selected Advisory Panel of senior doctors, hospital managers and other experts.

• Healthcare services

• Related industries

• Pharmaceutical and biotech

www.ggmkts.com [email protected]

Talk to us to find out how we can help you succeed in challenging growth markets

Pete Read CEO United Kingdom

[email protected] +44 773 986 5080

Morris Lee Managing Consultant Singapore

[email protected] +65 9741 3998

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