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CPA_McKinsey_China_Hospital_Pharmaceuticals_Report_June_2013

CP A-McKinsey China Hospital Pharmaceuticals Report:

An In-depth Perspective

June 2013 Report

CPA-McKinsey Report

CP A-McKinsey China Hospital Pharmaceuticals Report:

An In-depth Perspective

June, 2013

About this report

Context for this report

The CPA-McKinsey report is published by a joint research team established by the Science and

Technology Development Center of the Chinese Pharmaceutical Association (DCSTCPA) and

McKinsey & Company to generate insights on China’s hospital pharmaceutical market.

The joint effort between DCSTCPA and McKinsey builds on the unique and distinctive strengths of both organizations. DCSTCPA boasts the most thorough and high quality hospital pharmaceutical data available, while McKinsey combines proprietary data with a rigorous analytical approach. Through this collaboration, we aim to create high quality reports focusing on the dynamics of the hospital

pharmaceutical market in China.

We released the first report under this joint effort in November 2012. It contained analyses based on data from 2008 through the first half of 2012. This second report has been updated to reflect data for the latter half of 2012. It also includes a detailed section on the oncology market, which is the second largest therapeutic area in the hospital channel and includes many innovative products in the market.

Going forward, we will continue to update the data and analyses periodically. We welcome your

feedback and comments.

About the methodology

Our report focuses on the hospital pharmaceutical market, which we define according to statistics from the Ministry of Health. Therefore, it includes information on all general and specialized hospitals but does not discuss various health centers (such as community health centers and village/rural clinics).

We concentrated on hospitals because they account for the largest share of the overall pharmaceutical sales. Developing insight into this channel will thus be critical to capturing China, the third largest

pharmaceutical market worldwide. China’s pharmaceutical market also includes other important channels such as retail pharmacies, but they are not covered in this report.

Hospitals are categorized as Class I, II, or III according to government definitions, with Class III

representing the largest hospitals. Unclassified hospitals are categorized according to available

infrastructure information (e.g., bed numbers).

Greater China office McKinsey & Company 麦肯锡公司The market value in this report is calculated based on ex-trade price in hospitals.

“City tiers” in this report are defined according to the city-tier system developed by the McKinsey Global Institute. Based on GDP , population, and various other city characteristics, Chinese cities (including 650 official cities and 165 city-equivalent counties) are divided into four broad tiers. Beijing, Shanghai, Guangzhou, and Shenzhen are the four Tier 1 cities; Tier 2 has 46 cities (e.g.,Tianjin, Nanjing, Hangzhou, Wuxi, and Wenzhou); Tier 3 has 211 cities (e.g., Lanzhou, Guiyang, and Shantou); Tier 4 has 554 cities (e.g., Penglai, Yanji, and Longhai). The rest of China is classified as county/rural. (See Appendix 1)The therapeutic areas in this report are classified according to the World Health Organization (WHO) Anatomical Therapeutic Chemical (ATC) classification system.

The analyses in Section II are based on data from 650 sample hospitals in 28 selected provinces, while the analyses in Section III are based on 530 sample hospitals that purchase oncology products. The majority of the sample hospitals are Class III and Class II hospitals. (See Appendix 2)

DCSTCPA and McKinsey hold the proprietary rights to this report. Any use of this material without written permission from both parties is strictly prohibited.

Key messages

China’s hospital pharmaceutical market

China’s overall hospital pharmaceutical market reached

2012; the year-on-year growth rate slowed from

The Class III hospital segment is the largest one, representing

hospital pharmaceutical market, and the fastest-growing, with a CAGR of

from 2008 through 2012

Tier 2 and 3 cities represented 58% of the total market; the market in Tier 3 grew fastest, with a CAGR of 24%; although Tier 1 cities still had a CAGR of 17% from 2008 through 2012, their market share decreased by

period

In the sample hospitals, which are mainly Class III and Class II, the overall MNC share of market value has held steady at

Oncology market at a glance

The oncology drug market in the hospital channel has grown at a CAGR of since 2010 and reached RMB ~30 billion

The market is very concentrated, with

about 25% of oncology sales

In the sample hospitals, locals grew faster than MNCs and now hold a majority of the market value, with an approximately

Top 10 manufacturers account for over

are locals

Top 10 products represent over 30%

from local manufacturers

Table of content

Overview of China’s hospital pharmaceutical market 1 Analysis of market leaders and major therapeutic areas 6 Oncology market deep dive 13

Section I: China’s hospital pharmaceutical market

China’s overall hospital pharmaceutical market doubled in size from 2008 to 2012, but the growth rate slightly slowed over that period:

China’s overall hospital pharmaceutical market increased from RMB ~200 billion in 2008 to RMB ~440 billion in 2012. The growth value increased and reached a new record every year, during this period. The growth rate slowed slightly, however, going from 25% in 2009 to 19% in 2012 as the size of the value base increased

The pharmaceutical market has steadily increased in size every quarter since Q1 2011, with the

From a hospital-class viewpoint, Class III hospitals account for the largest share of the pharmaceutical market:

Class III hospitals represent 61% of the market, with RMB ~270 billion in 2012, and have been growing steadily at a CAGR of 25%

Class II hospitals represent 34% of the market, while Class I hospitals represent 5% of the market, with lower CAGRs of 17% and 22%, respectively

The higher growth rate for larger hospitals highlights the challenge for the government of driving more patients towards lower class hospitals.

From a city-tier viewpoint, Tier 2 and 3 cities represent the majority of China’s hospital pharmaceutical market and are growing rapidly:

In 2012, Tier 2 and 3 cities represented ~60% of China’s hospital pharmaceutical market (Tier 2 and

3 cities accounted for only 30% of the national population and 52% of GDP)

The pharmaceutical market in Tier 3 cities is growing much faster (at a CAGR of 24%) than that in Tier

1 cities (17%), followed by the Tier

2 cities and Counties (at a CAGR of 23%)

Tier 1 cities’ market share shrank by 3% between 2008 and 2012, highlighting the need for manufacturers to continue to expand their coverage beyond traditional sources of growth.

Additional observations

Section II: Analysis of market leaders and major therapeutic areas

While still growing rapidly in absolute terms, MNCs’ share of market value has held steady at around 44% since 2009:

The value share of MNCs, including their JV companies, was 45% in 2008; from 2009 through 2012, the value share split for MNCs versus locals was 44:56

MNCs have a lower value share in the overall market than in Class III and Class II sample hospitals; it is likely that they have lost more ground to locals in the overall market than in the top-tier hospitals.

MNCs have a greater representation than locals in the Top 10 manufactures in sample hospitals:

The market remains very fragmented; the overall market share of the Top 10 manufacturers has remained stable, at around 22% in 2011 and 2012 (Exhibit 2.2)

The Top 10 concentration in Class II hospitals (~19%) is lower than that in Class III hospitals (~22%) (Exhibit 2.3)

Seven of the Top 10 manufacturers are MNCs, the top 3 in 2012 were Pfizer (3.4%), AstraZeneca (2.7%), and Sanofi (2.7%) (Exhibit 2.2)

The locals represented among the Top 10 manufacturers differ in Class III hospitals and Class II hospitals. For instance, Shandong Qilu ranks sixth in Class III but is not among the Top Ten in Class II; similarly, Yangtze River ranks second in Class II but eighth in Class III.

(Exhibit 2.3)

MNCs lead the market in relatively more developed areas:

In Shanghai, Guangdong, and Zhejiang, 8 or more of the Top 10 are MNCs. Pfizer, AstraZeneca, and Sanofi have remained among the Top 5 in recent years.

At the same time, local pharmaceutical manufacturers often enjoy a strong presence in their home markets. Some leading locals even have top positions in several provinces:

Harbin Pharma and Medisan together have gained more than 5% of the value share in Heilongjiang, but they have less than 2% share in other provinces

Some leading local manufacturers have achieved the top position in several provinces besides their home markets, as illustrated by Qilu and Yangtze River

MNCs often have to face local leaders on their “home turf”. The impact of local competition is therefore more acute than what a national level picture would suggest.

For the major therapeutic areas (TA), value share and ranking generally remained stable from 2011 to 2012; the exception was the General Anti-infective category, which saw its value share decrease by 3% and had a 2% negative growth rate:

The General anti-infective area is still the largest TA, followed by the Antineoplastic and immunomodulating system area

The Central nervous system area and the Respiratory system area achieved the highest growth (28% and 27% respectively) among all the TAs

The 2% negative growth for the General anti-infective area reflects the impact of a series of antibiotic-management regulations, which place restrictions on molecule, amount, formulation, and prescription rights.

The value share and ranking of each therapeutic area differs slightly at Class III and Class II sample hospitals:

The General anti-infective area is the largest TA in both Class III and Class II hospitals, but its share at these facilities declined by 4% and 3%, respectively, from 2011 to 2012

Class III hospitals have more demand for the Antineoplastic and immunomodulating drugs than Class II hospitals.

The market share of the Top 10 manufacturers differs significantly among major therapeutic areas: In the Respiratory system area and the Systemic hormonal area, the Top 10 manufacturers have over a 60% share; in the largest TA, General anti-infective, the Top 10 have a 32% share In the Central nervous system area, MNCs only had a 6% market share, while locals had a 28% market share MNCs have a much greater share in the Top 10 in 3 TAs: the Alimentary tract and metabolism system area, the Respiratory system area, and the Systemic hormonal area.

The concentration of the Top 10 manufacturers in major therapeutic areas 1%, 2012

4115

4453

11601724

611722

1820

6524

2862Low

concentration

High

concentration

General anti-infective area

Central nervous system

Alimentary tract and metabolism system

Cardiovascular system

Antineoplastic and

immunomodulating system

Blood and blood-forming system

Musculo-skeletal system Respiratory system

Systemic hormonal area

Top 10share

Locals’ share in Top 10

MNCs’ share in Top 10

Rest of the market

Relative Size of TA

SOURCE: China Pharmaceutical Association; McKinsey analysis

1 650 sample hospitals in 28 provinces

Exhibit 2.7

China’s oncology sales through the hospital channel grew at a CAGR of 22% from 2010 through 2012 and now generate RMB ~30 billion annually:

Targeted therapy is growing faster than market average (at a CAGR of 27%); the number would be higher if sales had not shifted from the hospital channel to pharmacies, patient-assistance programs, and other sources Non-targeted therapy (including the chemotherapy and hormone therapy and excluding the immunotherapy and vaccine therapy) still accounts for the greatest market share (~86%).

Our Perspective

The numbers for the hospital channel likely do not reflect the full size of the targeted therapy (TT) market. A significant portion of TT drugs are sold out of the hospital channel, such as patient-assistance programs and pharmacies. If sales through these sources were taken into account, the whole TT drug market would have shown higher growth in recent years:

1) Sales shift to patient-assistance programs

Manufacturers of expensive TT drugs often run patient-assistance programs that provide free drugs to eligible patients

2) Sales shift to retail pharmacies mainly results from:

-Hospital-listing constraints

Many TT drugs are not yet listed at a meaningful number of major hospitals. Patients who need these drugs have to get a prescription and then purchase them though pharmacies -Hospital Budget-capping limitations

TT drugs get listed at hospitals, but regulations capping Basic Medical Insurance (BMI) budgets have limited the prescription of expensive drugs, including many used in targeted therapy.

Section III: Oncology market deep dive

Our Perspective

1) Sales shift to patient-assistance programs

Manufacturers of expensive TT drugs often run patient-assistance programs that provide free drugs to eligible patients.2) Sales shift to retail pharmacies mainly results from

Hospital-listing constraints: Many TT drugs are not yet listed at a meaningful number of major hospitals. Patients who need these drugs have to get a prescription and then purchase them though pharmacies Hospital Budget-capping limitations: TT drugs get listed at hospitals, but regulations capping

Basic Medical Insurance (BMI) budgets have limited the prescription of expensive drugs, including many used in targeted therapy.