China One Country, Many Markets

1
China One Country, Many Markets

• May 7, 2007

2
Discussion Topics

• Key economic and demographic factors influencing
  the Chinese pharmaceutical market.
• Pricing and reimbursement in China
• Overall structure
• Impact of decisions by regional authorities
• Variation in access to care and ability to pay
  for branded Western pharmaceuticals between
  first- and second-tier cities and provinces.

3
Discussion Topics

• Key economic and demographic factors
• Pricing and reimbursement
• Access to care and ability to pay for branded
  Western pharmaceuticals

4
Chinas Pharmaceutical Market

• 9th largest in the world in 2005
• 12-21 billion for Western pharmaceuticals, 55
  billion including TCM and devices (PRC official
  estimates).
• Rapid growth
• Growth rate 19.4, from 2000-2005
• Forecast By 2010, 5th largest in the world
• Highly fragmented
• Over 4,000 Chinese pharmaceutical companies exist
  today
• Merger activity and attrition expected due to
  adoption of GMP standards

120 billion by 2020. The country will become
the worlds second largest pharmaceutical market
after the United States, predicts Biao Chen,
general manager of Sinopharma Group, a leading
domestic pharmaceutical company.
5
Key Economic Factors

• 4th largest economy in the world and fastest
  growing
• With annual growth topping 10, the Chinese
  economy is set to overtake the German economy by
  2009.

Source The Economist Intelligence Unit Ltd.,
April 2006
6
Key Economic Factors

• Increasing GDP will fuel additional healthcare
  spending
• The central government has pledged to spend 100
  million on healthcare reforms during the next
  five years.

7
Key Economic Factors

• Increasing household income is placing more and
  more people into the category where many branded
  Western medicines are affordable.

8
Key Demographic Factors

• Largest population
• With 1.3 billion people, China accounts for 20
  of the worlds population.
• Aging population
• By 2015, the percentage of the Chinese population
  aged 45 or older is expected to grow from 29 to
  37, or 518 million people.
• And by 2025, 43 of Chinas population will be
  age 45 or older and 14 will be age 65 or older.

9
Key Demographic Factors

• Urbanization leads to greater access to health
  care facilities and greater potential for
  household income.
• But, it also increases the risk of chronic
  diseases tied to an urban lifestyle.

9
10
Key Regulatory Factors

• Improved intellectual property law
• TRIPS compliance has reinforced the long-term
  likelihood that drug manufacturers will enjoy
  patent protection for their brands.
• Although multiple patent trials for various
  imported brands are still pending, the recent
  ruling in favor of Pfizers Viagra patent was a
  key decision.
• Ongoing healthcare reform
• Central one-payer model (UK or Germany) or
  market-driven?
• Increasing emphasis on building community
  healthcare.
• Seven non-government organizations provided
  input major differences in opinion and battle
  for control between MOH and MOLSS.

11
Key Regulatory Factors

• Reduction in tariffs on imported medicine
• After Chinas entry into the WTO, import tariffs
  were reduced from 20 in 2001 to 5-8 in 2007.
• After 2007 the tariff will be discontinued.

12
Discussion Topics

• Key economic and demographic factors
• Pricing and reimbursement
• Access to care and ability to pay for branded
  Western pharmaceuticals

13
Central Government Authorities in China
50

• The State Council is the highest executive level
  of government in the Peoples Republic of China.
• Among nearly 50 ministries and commissions
  reporting directly to the State Council, four
  authorities have direct influence on health care
  and pharmaceuticals in China.

14
Ministry of Health

• Highest level of health authority in China
• The State Councils mandates for the MOH are to
• Focus on rural areas
• Rely on prevention
• Emphasize both Western medicine and TCM
• Depend on science, technology and education
• Promote the participation of the entire society
• Improve health care
• Contribute to Chinas overall development.

15
Ministry of Health

• The MOH plays a key role in setting overall
  health policy, but
• Does not administer drug registration or drug
  pricing
• Administers only the New Rural Cooperative
  Medical Scheme (NRCMS). MOLSS is responsible for
  urban health insurance.
• Is responsible for establishing a nationwide
  community-level health care service.
• Multinational companies (MNCs) collaborate with
  the MOH
• Promoting treatment guidelines
• Launching education programs
• Undertaking public health initiatives
• Training health care personnel

16
Ministry of Health

• Responsibilities of the MOH include
• Health care laws, regulations, and policies
  health care guidelines and goals and technical
  and health care standards.
• Regional health care planning national health
  care resource allocation and community health
  care service.
• Rural health maternal and child health.
• Disease prevention nationwide health education
  major diseases control.
• Health care organization reform quality of
  health care personnel and service.
• Blood supply.
• Medical research and education.
• Infectious disease control quality of food and
  cosmetics.
• Medical personnel training.
• International collaboration internal
  collaboration.
• Promotion of TCM.
• Response to pandemic situations.

17
State Food and Drug Administration

• Responsible for drug registration of all medical
  products sold or manufactured in China
• New chemical entities
• TCMs
• Drugs already marketed outside of China
  (pharmaceutical imports)
• MNCs must apply directly to the SFDA to obtain
  approval for imports.
• Domestic Chinese companies submit drug
  applications to provincial-level SFDA
  departments.
• Administrative review for completeness, check and
  verify submitted materials, and arrange for
  testing of samples.

18
State Food and Drug Administration

• Stage 1 Technical evaluation and sample testing
  and standards
• Stage 2 The SFDA requires clinical data in
  Chinese patients for all new products, including
  imports.
• 100 pairs of subjects one indication
• 60 pairs if two or more indications
• Stage 3 - Registration

5-6 months
2-3 years
4-6 months
19
From Registration to Market

• Once registered, a drugs pricing status is
  determined, and the decision is made whether or
  not to reimburse it in various insurance
  programs.
• These decisions do not occur within a given
  timeframe, or always at the national level. Thus,
  it may be several years post-launch before a drug
  is fully integrated into the reimbursement
  schemes.

20
Insurance Coverage

• As of 2005, the government of China estimates
  that approximately 55 of urban inhabitants and
  30 of rural inhabitants have some form of health
  insurance
• Government funded (GIS, LIS, BMI, NRCMS) or
  commercial

21
Ministry of Labor and Social Security

• Established in March 1998 responsible for urban
  health insurance and occupational health.
• Basic Medical Insurance (BMI) is the most recent
  urban insurance scheme and will eventually
  replace
• Government Insurance Scheme (GIS) government
  employees
• Labor Insurance Scheme (LIS) state-owned
  enterprises
• Key difference between the BMI and earlier plans
  is the shared responsibility of cost between the
  state and the employee.
• Employee pays 2 of salary to a personal
  medical savings account (MSA)
• Employer pays 6 of salary 2-3 to the MSA ,
  remainder to a social risk pool fund (SRP) for
  the organization

22
Basic Medical Insurance

• Outpatient
• MSA used to cover all outpatient expenses
• After MSA is depleted, out-of-pocket (some cities
  will cover a percentage of costs)
• Inpatient
• SRP fund covers inpatient costs after a
  deductible coinsurance is typically required
• Maximum reimbursement per year is typically 4x
  the average salary of the city
• If the maximum reimbursement is reached,
  out-of-pocket, unless employer funds supplemental
  insurance or employee has private commercial
  insurance

23
Exceptions

• Some cities reimburse
• All chemotherapy and radiation treatments, but
  with an annual ceiling for total reimbursements
• Dialysis treatments
• Transplant rejection drugs

24
Urban BMI Reimbursement Drug Lists
25
National Reimbursement Drug List

• The Department of Health Insurance within the
  MOLSS designs the National Reimbursement Drug
  List (NRDL).
• Every drug on the list is available for
  reimbursement under one of the national insurance
  programs (typically, the BMI).
• A panel of experts reviews each drugs efficacy,
  safety, and overall clinical benefits when
  determining inclusion.
• Typically, a drug must be on the market at least
  one year before inclusion on the NRDL.
• Updates are supposed to occur every two years
  however, the current list was released in 2004
  and is expected to be updated in 2008.

26
National Reimbursement Drug List

• Each drug included in the NRDL is listed in one
  of two drug categories.
• Type A 100 of the cost is available for
  reimbursement
• Type B up to 90 of the cost is available for
  reimbursement (typically varies between 50-90,
  by province)
• Most drugs delivered on an inpatient basis are
  reimbursed
• Reimbursement of outpatient drugs varies by
  province and city

27
Urban BMI Reimbursement Drug Lists
Bureau of Labor and Social Security with Bureau
of Health, Bureau of Finance and Bureau of Civil
Affairs
Must include A drugs, 85 of B drugs. May
also add drugs.
In wealthiest cities, not as important
28
Centralized Drug Tender

• All public hospitals have to participate in a
  centralized drug purchasing process
• Resulting pricing from all tenders is used to set
  the price of a newly listed drug on the NRDL or
  to enact a price cut
• In most provinces, only drugs purchased through a
  centralized tender can be reimbursed
• Takes place at a provincial or prefecture level
• Typically occurs for one to several drug classes
  at a time

29
Centralized Drug Tender - Multisource

• Although the processes vary, the general steps
  are
• Agency sends out notice of contract, application
  form
• Bidders submit application form
• Agency examines bidders qualifications
• Tender receives samples and document tests on
  sample purity, bio-availability, stability etc
  are completed
• Agency opens the bids, expert evaluation (price,
  quality, etc.)
• Tender selects the drug
• Agency sends out notice
• Agency publicizes the results
• Tender and bidder sign the contract

30
Hospital Listing and Purchase New Drug

• If the drug is novel and not listed on the NRDL
• Doctors suggest the usage of a new drug
• Hospital pharmacists research the effectiveness
  of the drug, including literature review
• Gather experiences from other hospitals, opinions
  of experts, etc.
• Contact manufacturer for detailed information
• Reports submitted for committee discussion
• If all facets of drug are proven, enter into
  negotiation with the pharmaceutical company
• Contract signing
• Clinical feedback and evaluation

31
Community Drug Lists

• In the healthcare reform process, one major goal
  is to strengthen community healthcare delivery.
• One element that is being piloted is the
  development of a community drug list for those
  drugs that would be reimbursed in a community
  setting.

32
National Development and Reform Commission

• The Department of Pricing within the NDRC is
  responsible for pricing nearly all drugs marketed
  in China.
• Current rules for the pricing of drugs in China
  are found in
• Drug Administration Law of the Peoples Republic
  of China
• Regulations for the Implementation of the Drug
  Administration Law of the Peoples Republic of
  China.
• Article 48 of the implementation regulations
  states that drug prices are either
• Fixed by the government
• Guided by the government or
• Regulated by the market.

33
National Reimbursement Drug List

• The NDRC uses the national reimbursement drug
  list (NRDL), which is established by the MOLSS,
  when deciding for which drugs to set prices.
• Pricing and reimbursement for drugs listed on the
  NRDL depends on the category of the drug
• Type A
• Price fixed by the government
• 100 of the cost is available for reimbursement
• Type B
• Price guided by the government
• Up to 90 of the cost is available for
  reimbursement (typically varies between 50-90 by
  province

34
Type A Drugs Government Fixed Price

• Government price is the highest price a retailer
  may charge

Retail price Ex-man price x (1 x
distribution differential)
(or port price, inclusive of all taxes and
tariffs)

• The distribution price differential takes into
  account costs and profits of wholesalers and
  retailers
• Drugs with higher prices use lower differentials
• Drugs with lower prices use a higher rate

35
Type A Drugs Government Fixed Price

• Price Markup Schedule, Shanghai Government

36
Type B Drugs Government Guided Price

• The government suggests a price to be used by
  provincial governments in setting the retail
  price.
• Retail price may be adjusted upward or downwards
  by 5.
• Until recently, retailers (including hospitals)
  have been allowed to mark up the price of
  pharmaceuticals 15 from the wholesale price.
• The markup quite often exceeded this limit the
  prices of some drugs increased 60-80, and their
  mark-up over ex-man pricing was even more
  significant.
• As of June 2006, the government forbade public
  hospitals from selling pharmaceuticals at prices
  above 15 of the ex-manufacturer price.

37
Non-NRDL Drugs

• Regulated by the market
• Must comply with Article 56 of the Drug
  Administration Law
• Prices are to be set on the principles of
  fairness, rationality, good faith, and
  commensuration of price with quality, in order to
  provide the users with drugs of reasonable
  prices.
• The article also prohibits usurious profits and
  fraud in pricing in its guidance.

38
Implementation of Pricing Guidelines

• In spite of the strict pricing policy for listed
  drugs, the NDRC has significant flexibility in
  its pricing structure, particularly for branded
  products.
• If a manufacturer believes its drug is more
  efficacious, safer, or more cost-effective than
  other drugs in its class, it can negotiate
  premium pricing.
• Generic drugs are typically registered as
  ordinary, while branded products are registered
  as special new.
• To date, MNCs market the majority of drugs with
  premium pricing, but Chinese manufacturers also
  will register new branded versions of generic
  drugs to obtain premium pricing.

39
Pricing of Chinese Versus MNC Brands

• Selected examples of price premiums for MNC drugs
  over domestic versions range from 33 to over 8
  times the price.

40
Pricing of Chinese Versus MNC Brands

• In a majority of diseases, the difference in
  price between a MNC versus a domestic drug
  influences which version of the same drug a
  patient may receive.
• In some cases, particularly in oncology, the
  price differential may determine the actual
  components of treatment.

41
Pricing in China Versus ROW

• Typically, pricing for an MNC product in China is
  lower than that for the same drug in Europe or
  Japan. There are, however, exceptions.

42
NDRC Price Cuts

• Under pressure from other government
  organizations, the NDRC continues to address the
  overall cost of drugs and pricing inequities.
• Since 1998, the government has cut the retail
  prices of drugs 21 times. The most recent in
  January 2007
• Affected 354 drugs in ten classes the main
  targets were cardiovascular drugs.
• The average reduction in the retail prices of the
  affected pharmaceuticals was 20, while the
  highest reduction was 85.
• Price cuts in previous years affected anticancer
  and antiviral therapies.

43
Western Pharmaceutical Pricing Trends

• The net result has been a decline in the growth
  rate of Western pharmaceutical prices over the
  last ten years.

44
Discussion Topics

• Key economic and demographic factors
• Pricing and reimbursement
• Access to care and ability to pay for branded
  Western pharmaceuticals

45
Investment in Second-Tier Cities

• What is a second-tier city?
• No consensus definition exists among researchers.
• Cities with developed infrastructures.
• Growth at a pace that will allow them to
  economically match the first-tier cities of
  Shanghai, Beijing, Shenzhen, and Guangzhou.
• Multiple cities could be classified as
  second-tier, we selected Tianjin, Wuhan,
  Hangzhou, Jinan, and Nanjing based on
• Overall population
• Economic status
• Availability of healthcare infrastructure
  (hospitals, doctors, etc.)

46
Characteristics of Selected Major Cities

• First-tier cities Beijing, Shanghai, Guangzhou
• Second-tier cities Hangzhou, Nanjing, Tianjin,
  Jinan, Wuhan
• Total of 72 million residents
• 5.6 of Chinas population
• More pronounced aging pattern than the national
  average
• Slightly more females than national average
  (49-50 versus 48)

47
Selected Major Cities, Population, 2005
48
Selected Major Cities, Age Distribution

• Slightly more skewed toward the elderly than are
  other cities.

49
Selected Major Cities, Urbanization

• Second-tier cities are significantly more rural
  than their first-tier counterparts, with more
  than twice the rural percentage.

50
Selected Major Cities, GDP per Capita

• Overall economic status may or may not reflect
  access to Western medicines

51
Ability to Pay for Western Brands Varies

• Trends in patients who can afford branded Western
  medicine are similar by city, but more pronounced
  for diseases with expensive therapies.

52
Selected Major Cities, Disposable Income
53
Selected Major Cities, Healthcare Infrastructure
54
Tianjin A Leading Second-Tier City

• An example of a rising second-tier city, Tianjin
  is located on the northern coast in close
  proximity to Beijing.
• Population 9.39 millionGDP (2005) 44.14
  billion (366.4 billion RMB)TV households (2005)
  1,479,000
• The government is investing heavily to have
  Tianjin become the financial capital of northeast
  China, driven by the Binhai New Area zone.
• The Binhai New Area is a 90-mile stretch along
  the coast being developed into a manufacturing
  area. Its port capacity is expected to double by
  2010.
• Because of the lower prices in Tianjin,
  Beijingers regularly shop and eat out in Tianjin
  to save money, despite the drive.

55
Tianjin A Leading Second-Tier City

• Top 10 brands by ad spend on TV (2005)1. Oil of
  Olay (Procter Gamble)2. Colgate (Colgate
  Palmolive)3. Crest (Procter Gamble)4. Tianjin
  Huabei Hospital5. Tianjin Leyuan Hospital6.
  Rejoice (Procter Gamble)7. Tianjin Huaxia
  Hospital8. Lux (Unilever)9. Safeguard (Procter
  Gamble)10. Pond's (Unilever)(Local channels
  only, based on rate card.)
• Source AdAge China

56
Wuhan A Lagging Second-Tier City

• During the 20th century, Wuhan evolved into an
  industrial powerhouse for manufacturing, science
  and technology, as well as an important
  university town for technical and engineering
  fields.
• Population 7.86 millionGDP (2004) 23.57
  billion (195.6 billion RMB)TV households (2005
  est.) 1,231,000
• Began sliding in early 80s as foreign investment
  poured into other cities such as Chongqing,
  Nanjing and Shanghai
• Unemployment rate is higher than in other Chinese
  cities, more than 20, compared to less than 10
  in Shanghai.
• Consumers are less apt to buy foreign brands or
  support premium-priced goods.

57
Wuhan A Lagging Second-Tier City

• Top 10 advertising categories on TV (2005)1.
  Shampoo Conditioner2. Tonic Vitamin3. Oral
  Hygiene4. Professional Services5. Skin Care6.
  Cough Cold Preparation7. Chinese OTC
  pharmaceuticals8. Soap9. Communication
  Equipment Services10. Stomach Medicine(Local
  channels only, based on rate card.)
• Source AdAge China

58
Hangzhou Wealthy Ancient Capital

• From 1995 to 2002, the city's economy grew
  steadily at 12 annually.
• Top tourist destination and manufacturing center.
• Now one of China's largest and wealthiest cities,
  with a modern airport, above-average
  infrastructure and upscale shopping and real
  estate options, Hangzhou was ranked by Forbes as
  the No. 1 city in China for doing business in
  2004.
• Population 6.52 millionGDP (2004) 30.3
  billion TV households (2004 est.) 484,000

59
Hangzhou Wealthy Ancient Capital

• Top 10 advertising categories on TV (2005)1. Oil
  of Olay (Procter Gamble)2. Rejoice (Procter
  Gamble)3. Head Shoulders (Procter Gamble)4.
  Aoqili (Chinese toothpaste/oral hygiene)5. Crest
  (Procter Gamble)6. Conba Pharm (Chinese OTC/
  tonic/vitamin)7. Safeguard (Procter Gamble)8.
  Hangzhou Tongji Clinic (Chinese professional
  services)9. Gai Zhong Gai (Chinese
  tonic/vitamin)10. Chiatai Pharm (Chinese OTC/
  tonic/vitamin)(Local channels only, based on
  rate card.)
• Source AdAge China

60
Selected Regional Examples, TCM Use

• Use of TCM varies between cities within China and
  is dramatically different between diseases.

Hypertension
Hepatitis B
61
For Further Information
Alice von Loesecke, PhDTel 781-296-2535avonloe
secke_at_dresources.com Decision Resources, Inc.260
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