Pharma faces China healthcare
challenge By Benjamin A Shobert
SAN FRANCISCO - Milling around the hotel
lobby at the Sir Francis Drake hotel in downtown
San Francisco are an eclectic group of investors,
entrepreneurs and executives from established
healthcare companies.
They have all come
to learn more about China's healthcare market; how
better to invest in, raise capital from, and sell
into the country's exploding biotech,
life-sciences, pharma and medical device sectors.
Hosted by OneMedPlace, a New York-based research
organization, Monday's China Forum shed new light
on the rapidly changing healthcare landscape in
China.
As Chinese society has advanced
over the past two decades, some of the most
compelling business opportunities have been those
that address the most overwhelming needs of the country's
people. No opportunity
reflects this better than healthcare. Equally, no
market space may better capture the unique
challenges to successfully operating in China
given the role of the Chinese government as the
funder, organizer and distributor of healthcare
services and its nascent efforts to build a higher
quality healthcare system for its people.
Western companies are eager to tap into
the growing Chinese healthcare market; yet, the
challenges many of them face are more complex than
has been appreciated until recently. The
challenges range from the traditional (regulatory,
protection of intellectual property) to the
unusual (prompting Chinese to save less because
they are confident in public healthcare).
In the late 1980s and early 1990s, China
was a poor country in need of jobs. While job
creation still remains a top priority for Beijing,
now the central government faces a twin challenge:
making sure job creation continues and that social
services are expanded.
Not only must China
expand social services, it must ensure that
distribution of, and access to these services is
perceived as fair and equitable across its
provinces. Already, signs are growing that rural
Chinese are growing increasingly frustrated over
the lack of services they have access to in
relation to their urban counterparts.
Jonathan Woetzel, director of McKinsey's
Greater China Office, has written "The dismantling
of state-owned enterprises and rural collectives
has left hundreds of millions of people in China's
impoverished countryside to fend for themselves
when it comes to health care, old-age pensions,
and education."
Woetzel notes,
"Recognizing that such inequalities heighten the
potential for social unrest, the government
recently stepped up its efforts to address the
needs of the rural poor."
China has made
significant progress in extending healthcare
services to all Chinese, James Huang, managing
director for Kleiner Perkins Caufield & Byers
noted at the forum. According to Huang, since 2009
"basic healthcare insurance now covers 1.295
billion people; and, this was all done in three
years".
The quality of this insurance and
the healthcare it provides remain areas for marked
improvement, but as Huang put this step in the
right direction - "It was all done in three years.
Can you imagine something like that being done in
the United States in a similar time frame?"
This amazing progress has been made
possible because of three factors: first, the
Chinese government's pursuit of improved
healthcare as part of its Five-Year Economic Plan;
second, the government's increased willingness to
allow privatization of certain healthcare
services; and third, aggressive price controls put
in place for government owned and operated
hospitals, focused on the cost of
government-covered pharmaceuticals in particular.
China's 12th Five-Year Plan expands on
what the government hopes to accomplish in these
areas. Typically seen through the prism of China's
economic development strategy and the strategic
emerging industries the country announces it will
be pursuing, the most recent plan also shows
Beijing's awareness that it must expand the social
safety net in order to get Chinese to stop saving
and start spending - a critical transition if the
Chinese middle class is to continue expanding.
Three economists, Marcos Chamon from the
International Monetary Fund, Kai Lui from John
Hopkins and Eswar Prasad at the Brookings
Institution found that, thus far at least, the
Chinese government is not having much success on
this front. In fact, as they write, "Chinese
households save a large share of their disposable
incomes and their average saving rate has
increased over the last decade and a half."
What may surprise some is their finding
that "This pattern is particularly pronounced for
urban households." Young Chinese, in what they
call an act of "self-insurance", continue to build
their savings for two things: unforeseen medical
expenses and the high cost of housing.
In
order for the Chinese government to convince both
its young urban and aging rural populations that
they can save less, it must ensure that higher
quality and more efficient healthcare is
available. With this in mind, the government has
put into place increasingly aggressive cost
savings' plans to try and control expenses. First
among these endeavors has been the National
Development Reform Commission's (NDRC) two rounds
of mandatory price decreases on key drugs -
primarily antibiotics and cardiovascular - over
the past year.
For pharmaceutical
multinationals that are deriving more and more of
their top-line revenue and bottom-line profits
from the China market, the NDRC's moves are
troubling. According to Huang, from the point of
view of the Chinese government, these are
necessary steps to take but they are putting
pressure on companies eager to sell into the
Chinese healthcare market.
Huang said that
while "the Chinese government announced it would
be putting US$125 billion into healthcare in 2012,
that means the budget is only going up 1%, while
consumption is going up over 15%."
Enabling this process of expanding
coverage by compressing prices has been the
success of what analysts call the "Anhui Model".
Originally designed for eastern Anhui province in
2010, the centralized tender process had been
expanded by December 2011 to 16 provinces across
China.
The trade pharmaceutical and
medical supply companies are asked to produce in
volume for significantly decreased price, the only
exchange the central government can really offer
given its need to expand services and keep costs
under strict controls. What concerns industry
analysts like Huang is that this model is proving
to be successful for the provincial governments,
which means it could be deployed more broadly in
the Chinese healthcare market to cover diagnostics
and medical devices as well.
In a market
where some estimates of out-of-pocket expenditures
on basic healthcare services exceed 50% for the
average person in China, newer medical procedures
for common health problems like cancer, diabetes
and cardiovascular issues, are out of reach.
As was noted in Monday's OneMedPlace China
Forum, the Chinese are aware that heart stents are
priced to the consumer at eight to 10 times
ex-factory pricing, which begs the question for
both Beijing's central government and the typical
Chinese healthcare consumer of how much they are
willing to pay for such a procedure.
In
the West, this is largely a moot question given
public and private insurance provides largely
satisfactory coverage; however, in China the cost
may mean certain life-saving practices taken for
granted as rudimentary in the West are avoided in
China. One analyst noted on Monday that diagnosis
and mortality rates for cancer are very tightly
linked in China. Essentially, when a Chinese
person is diagnosed with cancer, they soon will
die from it. Why? Diagnostics, while new in China,
are reasonably cost effective while the subsequent
medical procedures are out of reach due to cost.
Beijing's efforts in the healthcare market
have certainly not all been bad for Western
multinationals. Huang noted on Monday that some
"60% of China's healthcare stimulus money ended up
going to non-Chinese multinationals". While the
headwinds of expanding government-sponsored
coverage for basic medical services and drugs
remain a challenge, a recent JPMorgan report noted
that AstraZeneca, Sanofi, Roche, GlaxoSmithKline,
Novo Nordisk, Johnson & Johnson and Pfizer all
realized over 30% growth from their China
operations in the early part of 2011.
Beijing deserves credit not only for
recognizing the pressing need to expand basic
healthcare services across both its rural and
urban populations, but also for its attempt to
walk the fine line between more centrally driven
Anhui-style reforms and tentative efforts towards
hospital privatization, allowing the country's
best doctors to work one day a week at a private
hospital, and the expansion of private insurance.
China's ability to deliver expanded
healthcare coverage may rank second only to the
country's ability to deliver economic growth in
terms of keeping the country stable and unified.
For Beijing, its policies in this area must be
more nuanced and sophisticated than perhaps any
other industrial or political issue.
It
must aggressively push for cost reductions given
its limited wealth and seemingly unlimited number
of healthcare needs. It must also develop domestic
capabilities to research new, and produce existing
drugs and devices for the healthcare needs of its
people, two steps that will require Western
technology. And, it must do all of this while
reforming its insurance in such a way as to
continue promoting consumption from a reluctant
Chinese populace.
These overwhelming needs
and the compelling opportunities they suggest may
be the most interesting and compelling since the
country's last round of major economic reforms in
the late 1980s.
Benjamin A
Shobert is the Managing Director of Rubicon
Strategy Group, a consulting firm specialized in
strategy analysis for companies looking to enter
emerging economies. He is the author of the
upcoming book Blame China and can be
followed atwww.CrossTheRubiconBlog.com.
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