Beyond Mainstream e c ar e " ain" h t h c ng A l o v alu e For each stakeholder With each offer component HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE Perspectives on commercial model innovation for multinational pharma companies april 2014 think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE THE BIG 3 1 China's pharmaceutical market can be viewed as a multi-layered puzzle in which different players exert influence on key components of the value chain. p. 4 2 We believe that these patient-oriented initiatives are more of an enabler for long-term success than they are short-term revenue generators. Nonetheless, they must be actively considered from a PR angle as well as for the purposes of gaining access to patient databases. p. 9 3 We believe pharmaceutical companies can pursue a series of initiatives to help address key stakeholder concerns along the value chain. A sensible combination of these initiatives will enable companies to not only erect competitive barriers that are difficult to replicate, but also potentially capitalize on discontinous growth. p. 12 "Innovative models in patient management" p. 10 2 Roland Berger Strategy Consultants think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE The changing stakeholder landscape in China's pharmaceutical market behooves pharmaceutical companies to revisit their commercial strategies and go-to-market approaches. Along the value chain, the evolving needs of hospitals, physicians, private payors, retail chains, distributors, patients, and government entities present opportunities and challenges. There are already emerging models of innovation all along the value chain, although it remains to be seen which players can mold these stand-alone innovation models into a winning formula for the long term. Companies must prioritize these different initiatives based on their own strategic vision, existing gaps, and core capabilities. Roland Berger Strategy Consultants 3 think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE 1 Part A. Overall context and framework for strategic evaluation China's pharmaceutical market can be viewed as a multi-layered puzzle in which different players exert influence on key components of the value chain. Unsurprisingly, the government (whether as payor or provider) exercises the highest degree of control. Major hospitals come in at a close second. Patients, on the other hand, have been virtually left out of the equation thus far, despite the efforts of multiple healthcare reforms. a We believe, however, that the market is at a point of "discontinuity". Many fundamental changes are afoot due to a variety of socioeconomic, political, and commercial factors. Pharmaceutical companies can ill-afford to look at the market through static lenses and must gain a thorough understanding of the destabilizing systemic factors at play. Most importantly, we believe that a reexamination of market gaps and opportunities is necessary. This reexamination should take place through a three-dimensional lens, starting with stakeholders and proceeding along the "product" value chain (pharmaceuticals, devices, and services) and eventually the "care value chain" (registration, pricing, tendering, listing, distribution, prescription, treatment, etc.). By identifying "hotspots" within this framework, pharmaceutical companies are able to prioritize a set of initiatives that are feasible and will bring long-term competitive advantages. B A Map of various stakeholders and their respective influence Conceptual framework of stakeholders' impact Key stakeholders Hospital government Payor Distributor Pharmacy Physician Patient Registration Pricing 4 RDL / EDL Tendering Hospital Distribution Prescription listing Roland Berger Strategy Consultants Healthcare chain think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE B Roland Berger's three-dimensional framework for exploring commercial model gaps and potential for innovation Analytical framework for exploring innovative business models C AL EV AR UE C AD DR ES SE D ST AK EH OL DE R IN HA nt me al n r ve or Go Pay Di ib str r u t o m ac y n t r cia ien ysi Ph a Pat Ph Products OFFERING Prescription Distribution Hospital listing Tendering RDL / EDL Pricing Registration Ho t spi Devices Services High impact Medium impact Low impact Comments Each dimension can be explored and combined with the two others to form a long list of innovative business models For each stakeholder Along the "care value chain" Roland Berger Strategy Consultants With each offer component 5 think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE 2 Part B. Summary of key stakeholders' needs and market gaps 1. Hospitals A Private hospitals are rapidly proliferating in China, driven by a combination of factors that include demand for better healthcare ser vices and loosening government control. The government has launched a series of initiatives to encourage the participation of private capital in hospitals. 1) State Council Guiding Document No. 40 (2012) encouraged the establishment of private hospitals with the participation of foreign capital 2) Beijing issued 18 initiatives in 2012 and a detailed guiding document in 2014 to encourage investment in private hospitals 3) Several cities are carrying out multi-location practice pilot programs A Notably, while private hospitals have historically been restricted to "peripheral" therapeutic areas such as dentistry and cosmetic surgery, they are increasingly establishing a presence in highly profitable areas traditionally dominated by large Class 3A hospitals (Wuhan Yaxin is one such example). While we have yet to witness many successful examples of foreign players or large integrated private hospitals, we believe this is a matter of time, especially if potentially "gamechanging" mechanisms such as DRGs are systematically introduced. Even at this early stage of the game, there are already examples of pharmaceutical companies sowing the seeds of change within private hospitals. For example, to capture opportunities in private 6 Private hospitals on the rise Hospital service volume [services provided] 2.5 bn 127.3 m 90% 89% 80% 10% 11% 20% 2012 (outpatient services provided) Roland Berger Strategy Consultants 2012 (inpatient services provided) 2015E Public Private think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE hospitals, in 2010 GE Healthcare initiated the "Go Blue" project, in which around three hundred sales reps systematically covered private hospitals and set up KA teams. Other companies have set up "goodwill" cooperation models with hospitals that provide training in areas such as inventory management and prescription practices. 2. Physicians For physicians, improving call efficiency and compliance level is increasingly important in today's market. We find that as their schedules tighten and sales rep calls come under closer scrutiny, physicians are less likely to further engage with pharmaceutical companies in traditional ways. For pharmaceutical companies, efficient doctor coverage is key in today's market. New media is a relatively recent addition to sales reps' toolkits as part of an overall innovation of coverage models. Pharmaceutical companies could also leverage thirdparty platforms to achieve better coverage efficiency. There are already a number of examples, including 丁香园 (www.dxy.cn), which has led the way in creating an online community for physicians and also acts as a prescription assistant. Gooddoc (好医生) has created a platform to help doctors recruit targeted patients, and pharmaceutical companies such as AstraZeneca have already adopted the use of iPads during sales reps' daily calls to enhance efficiency and closed-loop marketing in China and the U.S. 3. Payors Commercial insurance, boosted by significant latent demand and concrete government policy support, is on the rise. In the 12th Five-year Plan, the government stated its intention to "vigorously develop all types of health insurance, such as supplementary medical insurance, sickness insurance, and disability income insurance products." In addition, regional governments are collaborating with commercial insurance companies to improve coverage of critical diseases. Nonetheless, challenges remain. Data suggest that insurance companies' current profitability in pure healthcare insurance is low or even negative. This is mainly due to a high loss ratio driven by moral hazard and adverse selection. In addition, insurance companies' control over providers is low and auditing procedures are not robust. We believe, however, that the market is poised to continue growing strongly since latent demand is significant. Current commercial healthcare insurance penetration is estimated to be a mere 10%, with commercial insurance of critical diseases only 0.5%. B U n s u r p r i s i n g l y, p a r t n e r s h i p s b e t w e e n pharmaceutical companies and health insurance companies are on the rise, Swiss Re, and PICC signed a joint agreement to provide cancer insurance in China starting in November 2012; their insurance customers are expected to number 12 million in 2013-2014. We believe that, with continued strong growth of commercial health insurance and government pressure on drug pricing, health insurance companies will increasingly become an important strategic partner for pharmaceutical companies. 4. Government (registration, tendering, pricing) On the registration side, we believe that the drug approval processes will be further accelerated, especially for locally-developed innovative drugs and generic drugs that fall into four specific categories: drugs in short supply in clinical practices, high priced drugs, drugs with low accessibility, and drugs targeted at special groups such as pediatrics and rare diseases. For pharmaceutical companies, it is important to assess the pros and cons of local innovation and registration versus importing. Increasingly, foreign players are looking at the innovation and manufacturing of Class 1.1 "in China for China" products. MerckSerono, for example, has partnered with local company BeiGene for oncology drug R&D and registration to gain cost advantage and speed up the local registration process. Roland Berger Strategy Consultants 7 think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE On the tendering side, we see three trends. First, a new wave of EDL bidding, especially in Shandong, Qinghai, and certain other locations, places more emphasis on drug quality. Second, there is an increasing prevalence of "purchase with volume." Lastly, EDL minimum prescription percentages are being reinforced, leading to increased EDL market potential. For pharmaceutical companies, this means that in addition to growing EDL market potential, there are unique opportunities to apply proof test strategies in different markets with varying tendering practices. For pricing, we observe a trend of downward pressure punctuated by three points. First, price limits are becoming stricter in the bidding process in locations such as Guangdong and Qinghai. Second, a few provinces are considering eliminating the "originator" category or putting it in the same category as high-quality generics. Lastly, the implementation of bioequivalence tests will provide a strong rationale for eliminating preferential pricing for originator brands. For pharmaceutical companies, this may mean that conducting pricing and "willingness to pay" studies will become more important, particularly for originator brands and new launches. In addition, PAP schemes may be used to facilitate the entry of certain products into the RDL. For example, in 2011, Roche cooperated with the Cancer Foundation of China when it launched Herceptin to run a charity program that donated eight cycles of Herceptin following the commercial purchase of six cycles. The initiative facilitated Herceptin's listing in the Jiangsu Province RDL. 5. Pharmacies Pharmacies face systemic challenges. In particular, elimination of price mark-ups in hospitals is already beginning to erode pharmacies' price competitiveness. To counter these challenges, pharmacies are exploring innovative ways to cooperate with pharmaceutical companies and enhance customer loyalty. For example, direct to consumer (DTC) schemes 8 involve cooperation with pharmaceutical companies to sell new, innovative drugs in the process of facilitating the collection of critical patient/customer data for future reference. In addition, more pharmacies and MNC pharmaceutical companies are jointly exploring in-store promotion and patient education activities. Roche and Sinopharm have been actively collaborating in this area, with Roche selecting Sinopharm to carry out its DTC business by virtue of their extensive network and strong government relationship. The two have also been exploring the launch of PBM (pharmaceutical benefit management) initiatives at the pharmacy level to efficiently identify and retain customers. Overall, DTC, PBM, in-store promotion, and phar macist tr aining are useful tools that pharmaceutical companies can leverage to boost business coming from pharmacies. Still, a careful evaluation of the potential relationship (and conflicts) with their hospital business is necessary. 6. Distributors We believe that distributors can play a profound role in ensuring availability and reach in the broader market. Increasingly, we have seen distributors extending their traditional business models up- and downstream. Novel business models are being explored, such as centralized procurement and drugstore trusteeship in hospitals. Beyond distribution itself, POS promotion and market access support from distributors are increasingly popular given how hot the topic of coverage and sales upside is in the broader market. For pharmaceutical companies, this represents great opportunities. MSD, for example, has been active in setting up partnerships to leverage distributor capabilities, covering approximately 4,000 points of sale in non-core regions as well as gaining access to around 400 third-party sales reps. In essence, distributors are a potentially powerful ally with broad reach up- and downstream. For pharmaceutical companies, co-promotion with Roland Berger Strategy Consultants think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE distributors in non-core points of sale can be considered with an evaluation of returns on investment. 7. Patients While we do not believe that significant investment in a patient-centric model will yield large-scale benefits in the short term, patients are nonetheless at the core of China's healthcare service "gaps". Keeping their needs in mind will ultimately become a key enabler to a long-term winning strategy. We are already witnessing the emergence of various patient-oriented initiatives, which can be broadly be broken down into three categories with increasing levels of institutional complexity. These are: 1) Patient education: Various education programs and disease knowledge and management programs at points of care 2) DM programs: Construction and expansion of patient databases through clubs, activities, and seminars 3) New technology: Automatic disease feedback mechanisms, Weibo/Wechat education on diseases, etc. C We believe that these patient-oriented initiatives are more of an enabler for long-term success than they are short-term revenue generators. Nonetheless, they must be actively considered from a PR angle as well as for the purposes of gaining access to patient databases. B Commercial insurance status and trends Emerging commercial insurance High-end commercial insurance Commercial insurance Supplementary health insurance Basic medical insurance Current status Trend Increasing coverage of middle class consumers High-end commercial insurance Commercial insurance A minor role in healthcare system, only 3% of national medical expenses in 2010 Commercial insurance will comprise 5% of national medical expenses by 2020. This increase will depend on policies and model innovation Supplementary health insurance Pilot partnership programs between gov't and commercial companies in some cities (e.g. Zhanjiang) More cooperation between government and commercial insurance Roland Berger Strategy Consultants 9 think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE C Innovative models in patient management Degree of institutional complexity Low Patient education: Treatment 2.0/2.1 Physician education Healthy heart care package Booklet Leverage current resources to change physician messaging with appropriate content 10 DM programs TV series Anzhen hospital CHC Medicine box with alarm Booklets contain key disease & treatment info, FAQs, and pages to record patients' medication and BP levels Also includes a medication box with alarm Film lecture series by KOL, hospital waiting room screenings of films and TV programs Roland Berger Strategy Consultants Expand the patient database program by linking seminars to patient clubs and activities. The key aim of this program would be focused on proactively visiting patients and inviting them to be part of the club's management think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE High DM programs CHA Professionals could be an alternative to physicians Technology New media offerings Leverage SMS/Wechat messages, websites, apps, and even Weibo to educate patients Roland Berger Strategy Consultants Hardware The apps in particular could have many functionalities rolled into one, including disease & treatment info, FAQs, daily records, automated customized feedback, and even possibly remote monitoring 11 think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE 3 Part C. Summary of potential initiatives and thoughts on prioritization We believe pharmaceutical companies can pursue a series of initiatives to help address key stakeholder concerns along the value chain. A sensible combination of these initiatives will enable companies to not only erect competitive barriers that are difficult to replicate, but also potentially capitalize on discontinous growth. A non-exhaustive list of initiatives may include the following: 1) Take advantage of increasingly advantageous policies in local innovation, for example developing Class 1.1 drugs in China 2) Set up a subsidiary for local registration and manufacturing of generic products (e.g. Novartis Sandoz) 3) Set up a JV with local pharma companies for R&D and registration For hospitals For government tendering 1) Help hospitals with training in inventory, performance management, and other areas 2) Send in commercial teams to set up private hospital KA teams 3) Set up a hospital investment entity to participate in private hospital investment 1) Set up a tendering strategy and intelligence team. Enhance government affairs team's competency 2) Contribute international expertise and support the government in research and analysis of tendering mechanisms For physicians 1) Facilitate the adoption of new technologies in communication between sales reps and physicians 2) Leverage new media in physician engagement efforts, e.g. physician communities, training, and patient recruitment 3) Conduct joint research and provide other academic support to physicians For payors (both public and private) 1) Partner with governments (especially those with healthcare fiscal surpluses) in patient assistance programs to get listed on the BMI/complementary BMI 2) Run PPP (public-private partnership) trial programs in healthcare insurance For government registration 12 For government pricing 1) Introduce generic versions of products, either by oneself or in a JV with local pharmaceutical companies 2) Set up a government lobbying mechanism to gain influence in listing on EDL/RDL For pharmacies 1) Co-develop PBM and DTC programs to increase customer loyalty 2) Explore pharmacy promotion and education activities to achieve sales upside For distributors 1) Partner with distributors on co-promotion in non-key markets 2) Explore potential opportunities in online drug sales, hospital drugstore trusteeship, etc. Roland Berger Strategy Consultants think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE For patients 1) Empower patients and patient communities and strengthen engagement through disease management and new media 2) Facilitate communication and interaction between physicians and patients The key is to identify and prioritize these initiatives to form a coherent set of strategic initiatives. This set of initiatives will be vastly different for each company. Roland Berger suggests a three-layered framework for developing a strategy that systematically examines strategic foundations, potential commercial levers, and organizational enablers. A There are potential themes to pursue. For example, a "patient-centric" model may focus on the service aspect and therefore involve more interactions with physicians, pharmacies, technology providers, and patients themselves. Alternatively, a "government partner" model may involve significant efforts in a "in China for China" innovation model, close interaction with governments in notable public initiatives, and possibly an extension into the provider space in certain therapeutic areas. Determining the model that is most appropriate will require a multitude of inputs, from an assessment of China's role within the company's global context, to an estimation of the degree of congruence between existing assets and strategic imperatives. There is no "right" solution, but carefully choosing the battlefield and molding different strategic levers into one congruent whole will be critical. Organization A Retail Strategic framework Guiding questions Physicians Medical access Medical affairs PaPatient tient Payors Hospitals Sales Marketing Partners Gov't Processes Inner circle: Commercial strategy GUIDING QUESTIONS What are the characteristics of our portfolio? Who are our target customers and key stakeholders? What are our value propositions for the target segments? ● Middle circle: Commercial model What are the key elements of our commercial going-to-market model? How should we configure our assets to align with our commercial strategy? What does the investment return profile look like? ● ● ● ● ● Roland Berger Strategy Consultants Framing circle: Organization and processes How should we organize internally? What are the key functions and processes that support our commercial model and enable our strategic thrusts? What resources and capabilities are required towards that end? ● ● ● 13 think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE Summary China's pharmaceutical market has entered an era of "discontinuity." Increasingly, stakeholders find it no longer to possible to operate under traditional models. All along the value chain, providers, regulators, payors, pharmacies, and doctors face pressure to make fundamental adjustments to the status-quo. It is therefore imperative that pharmaceutical companies identify "hotspots" in the market and align 14 their own visions, ambitions, and existing capability sets to the Chinese market. This should be done first through a systematic examination of the strategic context in China, followed by a holistic prioritization of stakeholder needs. It should then be facilitated by a systematic build-up of internal capabilities and the establishment of an ef fective organizational infrastructure. Roland Berger Strategy Consultants think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE About us Roland Berger Strategy Consultants Roland Berger Strategy Consultants, founded in 1967, is one of the world's leading strategy consultancies. With around 2,700 employees working in 51 offices in 36 countries worldwide, we have successful operations in all major international markets. Roland Berger advises major international industry and service companies as well as public institutions. Our services cover all issues of strategic management – from strategy alignment and new business models, processes and organizational structures, to technology strategies. Roland Berger is an independent partnership owned by around 250 Partners. Its global Competence Centers specialize in specific industries or functional issues. At Roland Berger, we develop customized, creative strategies together with our clients. Our approach is based on the entrepreneurial character and individuality of our consultants – "It's character that creates impact". Tablet version Further reading Links & likes Download our KIOSK App ORDER AND Download www.think-act.com To read our latest editions on your tablet, search for "Roland Berger" in the iTunes App Store or at Google Play. Download the Kiosk App for free. Stay tuned www.twitter.com/BergerNews Like and share www.facebook.com/Roland BergerStrategyConsultants Light Footprint Management: Leadership in times of change iTunes Store www.rbsc.eu/RBKiosk Google Play www.rbsc.eu/RBAndroid A consensus is emerging that the business environment has become too volatile, complex and unpredictable for conventional management approaches to handle. In his latest book, Charles-Edouard Bouée suggests that companies can learn how to survive and thrive in the new world from recent developments in military doctrine and a new approach to business management emerging in China. Travel Retail in Asia Roland Berger Strategy Consultants released its latest THINK ACT booklet, which explores the changing face of Chinese tourism and how leading brands are also changing to stay ahead of the game in travel retail. Chinese outbound tourism is still at an early stage of development, but with China's middle class doubling in size between 2010 and 2020, upward pressure on outbound travel and consumer spending will remain high for years to come. As Chinese tourism changes, so will brands begin to adjust to the new travel retail environment. Wechat Weibo www.think- act.com Roland Berger STRATEGY CONSULTANTS 15 think act HOW TO ADAPT IN CHINA'S EVOLVING PHARMA LANDSCAPE Publisher Roland Berger Strategy Consultants www.rolandberger.com.cn infochina@rolandberger.com.cn Beijing 20/F, Tower A, Gateway Plaza, 18 Xia Guang Li, Dong San Huan North Road, Beijing, China, 100027 Tel :+86 10 8440 0088 Shanghai 23/F, Jing An Kerry Centre, Tower 1, 1515 Nanjing Road West, Shanghai, China, 200040 Tel: +86 21 5298 6677 Hong Kong 16/F, Nexxus Building, 41 Connaught Road, Central, Hong Kong Tel: +852 3757 9480 Taipei 37/F, Taipei 101 Tower, 7 Xinyi Road, Section 5, Taipei, Taiwan, 110 Tel: +886 2875 82835 If you have any questions, please feel free to contact us: TONY TANG, PRINCIPAL Tony.Tang@rolandberger.com Guangzhou 10/F, 8 Middle Linhe Road, Guangzhou, Guangdong, China, 510620 Tel: +86 20 2831 7508 This publication has been prepared for general guidance only. 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