BioCentury BayHelix China healthcare Summit 2016 - McKinsey report _building bridges to innovation

Shanghai, October 18-19 2016

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Building Bridges to Innovation

2McKinsey & Company

Over the last 2 years, we have helped to frame and understand this

fundamental transition period for the industry

2015 BioCentury BayHelix Summit

1. 2015 in the

mirror

2. Decoding the

big slowdown

3. Assessing

progress on

innovation

2014 BioCentury BayHelix Summit

1. Framing the

possibilities –

Bridges to

innovation

2. Managing today –

driving growth of

mature brands

3. Bridging to

tomorrow’s

innovation

Reports are available for download at:

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3McKinsey & Company

2016 in the mirror – 9 significant themes shaping the market evolution

Economic reform –productivity and innovation imperatives

CFDA reform - full speed aheadAccelerating pricing and access reform

Private healthcare taking off

Tsunami of Healthcare outbound deals on the way

Emergence of more creative business models

Forceful push for localizationAmbitious restructuring of Gxindustry

Shift towards tiered diagnostic and treatment

1 2 3

4 5 6

7 98

4McKinsey & Company

Economic restructuring – Productivity imperative for China to

realize its potential

SOURCE: McKinsey Global Institute

Text

1

5McKinsey & CompanySOURCE: IDC, CPAT, annual reports, WIS, Global Insights, iSuppli

1 This is the ratio of a country's share in the global revenue pool by industry over a country's share of global GDP

2

345

CUSTOMER-

FOCUSED

SCIENCE-

BASED

1

Commercial aviation

Medical devices

Oil and gas engineering and equipment manufacturing

Application and system software

Automotives (OEM and parts)

Communication equipment

Wind turbines

Railroad equipment

Steel

Textiles Construction materials

Construction machinery

Electrical equipment

Commodity chemicals

Oil and gas upstream and downstream

Industrial machinery

Semiconductor foundry

And back-end engineering

Paper and forestry

Generic pharmaceutical

Solar panels

Consumer packaged goods

Home entertainment software

Consumer electronics

Smartphones

Internet retailing

Internet software and services

Household appliances

Biotechnology

Semiconductor design

Specialty chemicals

Branded pharmaceutical

ENGINEERING-

BASED

EFFICIENCY-

DRIVEN

0 of 4

above GDP

share

3 of 7 above

GDP share

3 of 8 above

GDP share

9 of 12

above GDP

share

Economic reform – glaring gap in science-based R&D1

Revenue fair share of Chinese companies, 2013

Fair share = 1

6McKinsey & Company

Profound restructuring of Gx industry kicking in high gear

Latest statusWhat it is

Gx registration

▪ Clinical data self-inspection: CFDA request

pharmacos to conduct self-inspection on data

integrity

▪ Accelerated approval for queuing

applications: CFDA No. 230 Announcement

set new rules to accelerate Gx application, BE

test changed from application to notification

▪ CFDA reform, including clear goals to

accelerate registration timeline

▪ As of Jan, 2016 when the self-inspection

window closed, 1,150 out of a total of 1,622

applications retracted (70% retraction rate).

Another 34 rejected by CFDA

▪ On Feb 26, 2016, CFDA No.19 document

added priority approval for the following

situations: new application of Gx that has been

previously self-retracted but is now with QCE

against off-patent originator

4

Quality

consideration

in tendering

▪ 15 provinces explicitly put Gx which passed

quality consistency evaluation and off-patent

originators in the same tendering group

▪ Encourage favorable consideration in

provincial tendering for those who passed

QCE

▪ Government launched a set of initiatives to

further screen out low-quality pharmacos. E.g.,

unannounced inspections, CFDA inspection

capacity expansion, and preparation to join

PIC/S

▪ By end of 2015, 25% of pharmacos’ licenses

revoked due to new GMP implementationGMP

implement-

ation/

inspection

Quality

consistency

evaluation

(QCE)

▪ In Mar, 2016, announcement of State Council

No. 8 document marked the official start of

implementation of QCE

▪ NIFDC released a set of technical guidelines (or

drafts) for QCE, including choice of reference

listed drug for oral solids and waiver policy of

bioequivalence studies for immediate release

oral solids dosage form

▪ 2015 CFDA No. 231 document, requesting

all Gx approved without quality

consistency evaluation vs. off-patent

originators to conduct QCE

▪ Evaluation for oral solids in 2012 EDL to be

completed by end of 2018

▪ Registration to be revoked if pharmaco fails to

complete QCE before the next registration

renewal

4

3

2

1

7McKinsey & Company

Gx restructuring: “self-inspection” has filtered out ~65%

applications with low quality registration data

4

NOT EXHAUSTIVE

Source: CDFA, GBI, DXY, lit research, team analysis

1 Including 1,960 applications required for self-inspection by CFDA's 2015-117 Notification (1,622), 2016-81 Notification (256) and 2016-142 Notification (82); all information on this page is as

of October 17, 2016; 2 In total 1,231 applications are withdrawn as of Oct 2016; 3 Include 839 withdrawn applications with disclosed information and 34 rejected applications; 4 Including

chem – 1.1, 1.2, 1.3 category and bio – 1 category; 5 Most are generics, others including chem-1.4 to 1.6, TCM; 6 Equal to # of applications withdrawn & rejected in each category divided

by total # of application required for self-inspection (1960)

1,960

839

392

CFDA rejected

Not withdrawn

(in review or

review finished)

Withdrawn with

information disclosure

Withdrawn

while no

information disclosed2

695

Total for

self-inspection

34

36

Others

(local)5

Innovative

(local)4

Imported

817

20

837 local

applications

withdrawn/

rejected belong to

446 local

sponsors, e.g.,:

Withdrawn &

rejection6# of applications

1%

42%

2%

Scope of self-inspection1 Breakdown of withdrawn & rejected applications3

8McKinsey & Company

Private healthcare taking off – multiple entry models for players7

Source: McKinsey analysis

▪ Integrator: Aim to establish a

payor-provider integrated

model in the longer term, with

pilots of “mini-system” at

hospital/city level

Healthcare insurance

1

Healthcare services

Primary care“Mainstream

hospital”Elderly care

▪ Gatekeeper

platform:

Create online

and/or offline

platform to

fundamentally

shape patient

flow of primary

care

2

▪ White space seeker: Target specific

opportunities to address unmet patient

needs (typically in specialty care and

high-end services) and provide

differentiated services

4

▪ “Resource acquirer”: Privatize

public hospitals and acquire

“mainstream” assets

3

▪ Greenfield builder: Build new

hospitals, sometimes in partnership

with public hospitals

5

▪ Adjacency

player: Enter

elderly care /

nursing home

first and

develop

capabilities and

experiences

that could be

relevant to

hosptials

6

9McKinsey & Company

Number of deals, $ bn

M&A activity in China is heating up – in particular, outbound

activity

SOURCE: Dealogic; McKinsey analysis

Number of deals

Inflow Outflow

1 Inflow: local target acquired by foreign companies; outflow: local companies acquiring targets abroad. Includes both cross-border M&A within Asia Pacific and cross-regional M&A

2 Announced deals (not withdrawn), includes deals of more than $25 mn only. Chinese targets

M&A activity in China

Value2, number of deals, $ Value2, $

M&A inflow1 (positive) and outflow1

(negative) in China

▪ Chinese M&A

volume increased

during 2015, and

reached its highest

level in the last 3

years; 2016

quarters witnessed

comparatively

lower activity, still

at high levels

historically

▪ Outbound M&A

continued to grow

even stronger in

2016 to almost

eight times of

inbound; major

deal being

ChemChina’s

acquisition of

Syngenta for

USD43 Bn

9

Q4

219

114

Q1

116

Q2 Q3

114

153

Q3Q1

100

Q2

98

86

Q2

169

65

Q1 Q4Q3

171

-23.2

Q3Q1

-45.5

Q3

-85.4

2.7

Q2Q4

-36.5

11.1

-41.2

5.27.8

-26.5

6.9

-14.8

6.4

Q1Q2

-13.7

Q1

3.9

-18.1

Q4

-16.8

6.2

Q2 Q3

-21.4

6.9

18.4

4.9

20162014 2015 20162014 2015

233 344 364 382 362 616 542 457 581 436 527

10McKinsey & Company

Healthcare not immune to the outbound M&A trend –

major deals announced to date in 2016

BioPharma

MedTech

Healthcare

Services

Target Deal Date

Deal Value

USD, Bn

SOURCE: Press Search; Team Analysis

Target

CountryBuyer

9

July 0.3

May 1.2

July 1.3

May 0.5

April 1.0

May 0.2

January 0.3

September 0.1

April n/a

July 1.3

April 0.7

September 0.2

September 1.5

Total deal

value of USD

8.5Bn year

to date


Building on this, today we will discuss 3 key topics

MedTech in China

– Coming of age

Innovation in China

– taking stock of

progress

Driving growth in a

BioPharma market

in transition


Innovation in China – taking stock of

progress

13McKinsey & CompanySOURCE: Press search; team analysis

Heavy-

weight

startups

fueled

with

funds

A Series $150Mn

C Series

$50MnB Series $28Mn

B Series $100Mn

B Series $25Mn

C Series

$55MnA Series

$27Mn

A2 Series $14Mn

IPO

The past 12 months continue to show accelerated momentum

behind China innovation (1/2)2015

Oct OctDec Feb Apr Jun AugNov2016

Jan Mar May Jul Sep

MAH

pilots

A Series $155Mn

NOT-EXHAUSTIVE

Progress

of China

assets

Successful Ph-II

of HMS5552, a

first-in-class for

Diabetes

Positive Ph-II of

Danoprevir/

Ravidasvir for

HCV

Successful Ph-I

of BGB-283, for

BRAF and KRAS

-mutated tumors

Present Ph-I

Clinical Data for

BTK Inhibitor

BGB-3111

Wrapped up Ph-I

Trial of HMPL-523,

inhibitor of spleen

tyrosine kinase

14McKinsey & CompanySOURCE: Press search; team analysis

The past 12 months continue to show accelerated momentum

behind China innovation (2/2)

China

going

global

In-

coming

innova-

tive

assets

Collabo-

rate in IO

therapies

Zai Lab license-

in Hanmi’s lung

cancer drug

HM61713 for

China

Strategic

alliance

on LM

and SM

develop-

ment

Co-develop

innovative

mAb

therapies

Hisun

purchased

Celsion’s

IL-2 IO

drug

Luoxin

in-

licensed

Korea

Yuhan’s

YH2544

8 for

NSCLC

Hisun

licensed-

in

Nascent’s

Pritumu-

mab for

skin

cancer

JV to

develop

CAR-T

formed

JV to

develop

cell

thera-

pies in

China

Co-develop

dyslipidemia

drug

Zai Lab

licensed in

Tesaro’s

Niraparib

US IND for

goserelin in

sustained-release

microspheres

US IND

approval for

BGB-A317, a

PD-1 mAb by

BeiGene

Generon’s

1st-in-

class

biologics

for

Alcoholic

Hepatitis

entered

PIIa study

in US

CTTQ licens-ed ex-China rights of a HBV drug to Janssen

Co-

develop

3 PD-1

mAbs

Fudan out-licensed IPR of an IO drug to Huya for $65M Luye

acquired

Acino’s TDS

Business

Wuxi AppTecopens MfgCenter for cell and gene therapies in Philadelphia

Human

well

opened

US

R&D

center

2015

Oct OctDec Feb Apr Jun AugNov2016

Jan Mar May Jul Sep

NOT-EXHAUSTIVE

Zai Lab

acquires

global

rights to 2

GSK

assets

Chidamide is in multiple global trials for

treatment of PTCL1, NSCLC2, breast cancer

1 Peripheral T-cell lymphoma; 2 Non-Small Cell Lung Cancer


Behind the “noise of the news flow” three questions to address

How real is

the CFDA reform?

Path forward –

where and how should

China innovate?

What is the broader momentum of

China BioPharmainnovation?

2

1

3


Initiated in August 2015, the CFDA reform is now in full swing

SOURCE: CFDA; team analysis

Aug OctDec Feb Apr Jun AugNov 2016 Jan Mar May Jul SepSep Oct

State Council No. 44

announced, initiating the

CFDA reform

2015 Jul

CFDA finalized new

chemical drug

classification

CFDA published

draft Regulation of

Drug Registration

General Office of

State Council No.

8 published

opinions on QCE

CFDA published

policy for priority

review

CFDA draft

guidelines on

conducting QCE1

CFDA draft policies

on MAH and new

chemical drug

classification

CFDA published

finalized work

procedure for QCE

CFDA issued

clinical trial

data audit work

plan

CFDA issued

Administrative Measures

for Communication on

Drug R&D and Technical

Review

State

Council’s MAH

pilot work plan

CFDA started

clinical trial data self-

inspection

1 Quality Consistency Evaluation

1. HOW REAL IS THE CFDA REFORM?

Key policies and initiatives

NOT-EXHAUSTIVE


The reform has set high aspirations

Enhance drug

quality

▪ Limited and small scale trial quality check with no enforcement mechanism

▪ Attempted to improve generics quality without long-lasting enforcement

▪ Conduct clinical data self-inspection, with penalty for companies with data quality issues

▪ Implement Quality Consistency Evaluation (QCE) of generic drugs to improve quality

▪ ~20,000 applications backlog ▪ Long queue time for review and

approval (e.g. ~30 months for chemical drug IDL-CTA)

▪ Lack of systematic fast-track review mechanism

▪ Achieve minimal queue time after clearance of backlog and shorten overall timeline

▪ Take more systematic fast-track reviewapproach for selective drug categories (e.g. innovative, unmet medical needs)

Achieve faster

review

From … To …Aspiration

SOURCE: CFDA; press search; team analysis


1 Issued Administrative Measures for the Communication on Drug R&D and Technical Review (Interim)

▪ Institutionalize and encourage communication between applicants and CDE1

▪ Establish advisory committee similar to FDA’s approach to provide scientific inputs on related topics

▪ Limited consultation dialoguesbetween regulatory authorities and pharmacos

▪ Complicated and suboptimal review process

Provide

transparent

and scientific

review

▪ “China new” definition▪ No contract manufacturing▪ MRCT data restricted for NDA in

China

▪ Introduce “International new” definition▪ Pilot market authorization holder (MAH)▪ Encourage local clinical trial centers to

participate in MRCT and allow eligible trial data to be used in NDA

Encourage

innovation


CFDA has since made substantial efforts to drive the reform at

unprecedented pace and scale


+90%

4,944

20152014

9,601

CDE has significantly accelerated review

and approval process

CFDA and CDE have issued many policies regarding

drug registration reform

12,000

2015, Aug.

21,000

2016, Sep.

36

81

# of application backlogs at CFDA

# of new policies/regulations/notifications in # of processed applications

“Transforming China pharma industry from ‘large’ to

‘strong’ is our bounden duty. To support it, we must

improve the effectiveness of CFDA policy and create a

better environment.”

– Bi Jingquan at CFDA annual meeting

Fast-track

review related

policies/

notifications

7%

15%

Self-audit

related

notifications New policies

/regulations

27%

Draft

policies

28%

22%

New technical

guidelines

2014Aug

-15Aug

2015Aug

-16Aug


“Backlog removal achieved through

▪ Centralized review

▪ Expanding CDE capacity

▪ Leveraging 3rd party service


CFDA has issued guidelines for priority review and approval…

2015.07 CFDA

published

“Drug

registration

acceleration”

(draft )

2015.11 CFDA

published

“Opinions on

product

registration”

(Order 230)

2016.02 CFDA

published the

“Priority

approval” policy

(Order 19)

Priority approval criteria

Demon-

strating

clear

clinical

value

In

priority

TAs

Now

Other


▪ New-to-world innovative drug

▪ Localized manufacturing of new-to-world innovation drug

▪ Advanced formulation technology, innovative treatment approach, with clear

clinical value

▪ Gx application close to patent expiry (CTA application: 3 year prior to patent

expiry; NDA application: 1 year prior to patent expiry

▪ Synchronized new drug CTA application in EU/US and approved in EU/US

▪ Synchronized NDA application between China and US/EU, using China local

manufacturing facility that passed cGMP

▪ TCM with therapeutic advantage in critical disease

▪ Innovative drug (National award winners)

▪ AIDS

▪ Tuberculosis

▪ Hepatitis

▪ Rare disease

▪ Tumor

▪ Pediatric disease

▪ Geriatric disease

▪ Gx applications that withdraw the current applications and apply under the new

regulations

▪ IND/NDA for drugs urgently needed or severely short in supply in the market

▪ Supplementary applications for changed manufacturing process or technology in generics quality consistency evaluation

SOURCE: CFDA; CDE; press search; team analysis

Criteria with prioritized drug

lists published already


1

3

2

4

5

6

7

2016.01.29

2016.03.05

2016.04.18

2016.04.24

2016.04.28

2016.06.12

2016.07.21

2016.09.14

8

1

27

By application

type

IND

97

69

Supple-

mentary

NDA

No. of applications with

prioritization status No. of molecules

By

category

25

73

15

Others1 33

In priority TAs

Demonstrating

clear clinical

value

Selected examples

HIV

Innovative drugs with

better clinical value

HCV

Pediatric

1 Including IND/NDA for drugs urgently needed or severely short in supply in the market, and supplementary applications for Gx quality consistency evaluation

SOURCE: CFDA; GBI; press search; team analysis

9

10

… and announced several batches of applications under priority review for

both local companies and MNCs



Drug review and approval timeline already showing

signs of acceleration; albeit still unsatisfactory

15

17

15

10

12 12

111111

142011 1512

-12%

13 2016H1

China US

39

4445

37

29

36

99101110

n/a

14

-11%

2016H11513122011

Month Month

SOURCE: GBI; DXY; CDER New Drug Review: 2015 Report; team analysis


Approval time for NDAApproval time for IND


Long awaited MAH pilots create more flexible options for drug innovators

in China


MAH scheme allows separation of license

holder and manufacturer

Sichuan

HebeiShandong

Fujian

Guangdong

Shanghai

Jiangsu

Zhejiang

Tianjin

Beijing

Pilot provinces


▪ Marketing Authorization Holder (MAH)

scheme allows R&D institutions and research

personnel to apply for drug approvals in their

own names with manufacturing outsourced

▪ MAH is piloted in 10 provinces/municipalities

for three years (Dec 2015 – Dec 2018)

MAH scheme will encourage local

innovation and localization of MNCs

▪ MAH scheme provides a flexible option

(i.e., CMO) for MNC localization

Recent cases (selected)

MAH CMO Time

Feb. 2016

Mar. 2016

Apr. 2016

Aug. 2016

▪ MAH scheme incentivize local biotech

companies and research institutes to

conduct drug development without

manufacturing capacity or capability


The reform still faces significant challenges that need to be addressed

proactively to ensure continued momentum

SOURCE: CFDA; expert interviews; team analysis

518+60%800-850

Current Projected

demand3

1 Drug Registration Regulation 2 Drug Administration Law

3 Conservative scenario by 2018: assume that the annual growth of clinical trials remains the same, with additional 300 BE studies each year; clinical trials re-conducted by companies who

withdrew their clinical trials in 2015 are not included

4 According to CFDA recruitment plan

450151106

152014 2016E4


▪ Top-level architecture to be strengthened, to ensure coherent and

lasting impact of CFDA reform

▪ Insufficient cross-ministry coordination and alignment under the same

legislative framework

▪ DRR1 has not been updated since 2007

▪ Key changes in regulations and policies need to be rooted back to DAL2

and DRR to ensure enforcement

▪ Capacity constraints due to

increased number of trials driven by

backlog clearance and generics QCE

requirement

▪ Lack of high-quality trial sites,

especially in crowded TAs (e.g., Onco)

Clinical trial center capacity gap

# of trial sites

▪ Lack of systematic capability

building programs to rapidly

build/strengthen technical and non-

technical capabilities and ensure

review quality and consistency

CDE capacity

# of reviewers

Trial site

capacity and

quality

Inconsistency of

laws and

regulations

Capability

building for CDE

reviewers

Overarching

design & cross-

ministry

coordination


We have updated China Drug Innovation Index (CDII) with broader inputs

Assess 5 key dimensions of China

innovation ecosystem

▪ Policy, Funding, Capability, Local

innovation output, Level of integration

into global

Calibrated against current U.S. levels

(US = 8 out of 10 points)

Approach

Sources of insights

Survey of ~65 industry experts, of

which 41 are

members1

10 set of quantitative metrics

comparing U.S. and China on reported

innovation indicators

Holistic updated

view of China

innovation

ecosystem relative

to that of the U.S.,

and comparison of

2016 vs. 2015

results

Output

1 We also appreciate support from several industry groups including PhIRDA and DIA advisory board etc.

2. WHAT IS THE BROADER MOMENTUM OF CHINA BIOPHARMA INNOVATION?

SOURCE: 2016 CDII Survey; team analysis


Key insights

Where does China drug innovation stand

today comparing to 2015?

SOURCE: 2015 and 2016 CDII Survey; team analysis

2. WHAT IS THE BROADER MOMENTUM OF CHINA INNOVATION?

▪ Average CDII score increased

from 4.3 in 2015 to 4.6 in

2016, indicating positive

progress of the ecosystem

▪ Largest improvements seen

in 3 areas – policy, capability

and integration with global

– Clear consensus on

improvement in regulatory

environment as result of

CFDA reform

– Market access shows signs

of optimism, although now

lags behind regulatory

– China has become more

closely integrated to global

innovation

▪ Local innovation score

dropped from 4.3 in 2015 to

4.1 in 2016, potentially due to

setbacks on clinical trials as

result of CFDA data inspection

Policy

environ-

ment

0 2 4 6 8 10

Local

innovation D

A

CDII scores

Capabilities C

Integration

with globalE

Market

Access

Review

and

approval

FundingB

3.1

3.1 3.5

5.4

4.8 5.1

4.34.1

3.6 4.6

4.0

China 2015 avg. = 4.3

China 2016 avg. = 4.6

Assumed US avg. = 8.0

Min Max

0 10survey

score

China 2015

China 2016

Assumed US


Drug review and approval process showing

signs of acceleration

2. MOMENTUM - POLICY

A

SOURCE: 2015, 2016 CDII Survey; GBI; DXY; team analysis

45 602930

24

5

72

12

2016H115

4011

355

69

22

2012

17

1413

Chemical drugsTherapeutic Biologics

249 14613814914021

282626

2012 14

175 293

15 2016H1

16744166

13

166

52 56313534

44

2016H1

1

14

0

60

32

15

34 39

13

6

2012

58

3232

2

5

0

2

2012

2

11

14

3 3

0

2016H115

1

13

Local

innovative

drugs2

Imported

drugs

1 CDII overall average score across all metrics; 2 Chem-1.1 and therapeutic biologics-1

Effectiveness of

drug review/

approval process

CTA approved NDA approved

CTA approved NDA approved

0 2 4 6 8 10

3.1 4.0

2015=4.31 2016=4.61


Industry experts largely recognize the positive direction of the

CFDA reform

0

25

21

19

Which of the following statements best describes your

view the on ongoing CFDA reform?

How would you rate progress

of selected reform initiatives?

Percentage

# of

respondents

38

29

0

32



A

Not

satisfied

MAH pilot

Backlog

clearance

New

classify-

cations of

chemical

drugs

Highly

satisfied

1 2 54

3.7

3.5

3.5

3Very high aspiration,

well designed and

implemented

High aspiration, well

designed but

implementation

remains uncertain

Moderate aspiration,

mixed view on design

and implementation

Skeptical about

commitment, design

and implementation


How do you view the future momentum of CFDA reform in the next 3-5 years?

Majority of industry experts remain optimistic about outlook of

the CFDA reform

0

24

The reform will not be fully carried

out and there will be limited changes

CFDA will continue deepening the

reform, and quickly build a more

friendly policy environment for

innovation

41

The reform will progress with

promising changes in some areas,

but the overall

implementation pace will be slow

63

37

0

Respondents


Percentage

Highly

optimistic

Cautiously

optimistic

Pessimistic


A


Pricing and reimbursement policies remain

a major barrier in rewarding innovation

China new

drug launch

reimbur-

sement status

(2003-16)

SOURCE: 2015, 2016 CDII Survey; GBI; team analysis

NRDL update

Examples

not in NRDL

Not on NRDL

263

187

On NRDL 76

135

76

Launched 2009-20162

398

1872016 NRDL may

consider patented drugs

after price negotiation


A

▪ NRDL has not been updated since 2009, though expected to be updated by end-2016

▪ Going forward, pharmacos need to consider pricing/coverage tradeoffs, as government will not

cover everything at any price

Pricing and

reimbursement policies

2009 20162004

0 2 4 6 8 10

3.1 3.5

2015=4.31 2016=4.61

1 CDII overall average score across all metrics; 2 The molecule launch date is defined as the first month of sales for the respective molecule, as observed in IMS MIDAS database; molecules

with zero revenue in 2013 are excluded. Traditional Chinese Medicines/OTC/composed formulation/ATC T/K /J7/V5/V6 /A10E are not included; drug launches in 2013-2016 are based on

GBI database, and only NCEs registered by RDPAC member companies and local companies are included


Despite recent progress, timely and transparent price negotiation and

reimbursement mechanism still largely missing

SOURCE: Team analysis


A

▪ Sustainable source of funding and

patient adoption remain to be seen

▪ Profitable business model not yet

defined – limited by data availability

and scale to have meaningful

influence over providers

▪ Disconnect between pricing decision

and reimbursement commitment

▪ Lacking implementation mechanism

at provincial level

Remaining challenges

▪ Innovative financing model

for select oncology drugs

(e.g. Cardinal Health for AZ’s

Iressa)

▪ New entrants into private

health insurance

▪ National level pricing

negotiation piloted for 3

drugs

Recent progress

▪ NRDL update in progress

with growing focus on clinical

benefits

▪ Lack of transparency and evidence-

based approach to assess clinical

value


Improved funding environment for start-ups,

especially from government and VC funds

Start-up’s access to funding

VC

Government funds

Debt financing

1 CDII overall average score across all metrics; 2 Established company with commercial presence; 3 PharmaCo's strategic investment was not tested in 2015 CDII

▪ Start-ups seem to have better access to government funding, indicating government’s commitment to encourage innovation

▪ Some established Chinese pharmacos has set up venture fund to invest in innovation (e.g., Fosun Pharma)

PE

PharmaCo’sstrategic investment3

SOURCE: 2015, 2016 CDII Survey; team analysis

2. MOMENTUM - FUNDING

B

Mature-co’s2 access to funding

0 2 4 6 8 10 0 2 4 6 8 10

5.9 6.3

2.9

5.4

4.9

4.9

China 2015 avg. = 4.6

China 2016 avg. = 4.9


6.2

6.76.6

5.6 5.8

5.5

5.7

China 2015 avg. = 6.1

China 2016 avg. = 6.0


5.1

5.1

6.1

6.1

2015=4.31 2016=4.61


Private capital into healthcare sector is surging…

SOURCE: ChinaBio 2016 Report; team analysis


B

Healthcare VC/PE funds raised nearly tripled in 2015,

and are still growing rapidly in 2016

12 13

+183%

2016Q1

3.9

1.2

15

0.6

7.2

10.9

14

1.0

2011

19 48

#. of funds

2964 86 21

Bn USD

VC investment into healthcare accelerating

1.7

0.6

14

1.0 1.0

13122011

1.8

2016H1

2.7

15

33 64

#. deals

4229 62 127

$233Mn

MedTech$273Mn

Services

Drug

$886Mn

$414Mn

Diagnostics

11Drug

Diagnostics

11

22

MedTech

Service

18

#. deals

Value

2015 VCs invested the most amount in

services, but made more deals for drugs

Bn USD


…with innovative pharmacos attracting investment and generics

companies building up innovative capability

IPO by innovation focused pharmacosVC investment in pharmacos

Jan. 2016 $100M

Jan. 2016 $28M

Aug. 2016 $25M

Aug. 2016 $27M

Jul. 2016 $150M

SOURCE: ChinaBio 2016 Report; press search; company annual report; team analysis

Apr. 2016 $50MHua

Medicine

1 VC investment in healthcare sector, including pharma, medical device; diagnostics and healthcare services; 2 As of Oct 12th, 2016

Gx pharmacos investment in drug R&D

R&D spend among selected leading pharmacos

Mn, USD


B

IPO date

Stock

Fund raised

Market.

Cap2

Feb.2016

Nasdaq

$158 Mn

$1.06 Bn

Mar. 2016

Nasdaq

$101 Mn

$1.37 Bn

Est.2016

Shenzhen

Aim $130 Mn

10% 7%7%10% 6%5%

596586100

138137

% R&D

in revenue

Hengrui Hisun Fosun Kelun LivzonHuman

-well

Aug. 2015 $16M

May 2015 $45M

Sep. 2016 $100M


Innovative models in investment and start-up incubation are emerging

SOURCE: BioClub; Biobay; team analysis

O2O start-up service platform in

healthcare offering range of services:

Start-up incubator

Venture capital opportunities

Start-up courses/salon

Start-up forum

BioClub

VC partnersAcademia

partners

Healthcare

start-ups

Physicians/KOL

BioClub (贝壳社): an O2O start-up

service platform

Established

Companies

Entrepreneur

mentors

BioBay: Building a comprehensive ecosystem

for healthcare start-ups

Investment Services70

50Nanotech

91

Medical Device

Drug Discovery88

36

CRO

38Biotech

Incentives

▪ Start-up funding & facility subsidies

▪ Application facilitation to research funds

▪ Application facilitation to talent subsidy

▪ Patent and trademark filing subsidies

Partnering

and

networking

Tenant

services

▪ Business Incorporation service

▪ Fire protection declaration and lab fitment

▪ Information & Communication Technology

Service

▪ Entrepreneur club and Industry alliance

▪ Investment and partnering bridging

▪ Symposium and Workshop

▪ Marketing Channel Development Support

HR

services

▪ Postdoctoral mobile research station

▪ Internship for universities and institutions

▪ Profession/Technical Training

▪ Human Resources Outsourcing Services

# of start-ups

by sector at

BioBay


B

Bio4P ForumStart-up Salon


Capabilities and infrastructure show gradual improvement,

while clinical development is facing a setback

1 CDII overall average score across all metrics; 2 Academic Research was not tested in 2015 CDII survey

▪ Clinical development experienced setback – largely as result of poor clinical data quality uncovered from CFDA’s data self-inspection effort

▪ Gradual improvement in Discovery and CMC


C

0 2 4 6 8 10 0 2 4 6 8 10

5.5

4.9

4.6

5.0 5.4

China 2015 avg. = 4.8

China 2016 avg. = 5.1


5.2

4.9

4.6

China 2015 avg. = 4.8

China 2016 avg. = 5.1


Quality of R&D talentOverall infrastructure for drug

innovation

Clinical

development

Academic

Research2

Drug

discovery

CMC

5.2

4.4

5.1

5.0 5.5

2015=4.31 2016=4.61

2. MOMENTUM - CAPABILITIES


1622

74%

Not withdrawn

Withdrawn

26%

Clinical trial quality: in 2015 self-inspection1,

~74% applications were withdrawn

China has a lower percentage of early phase trials

… and less investigator initiated trials (IIT)

67% 69% 76% 78% 80% 82%

33% 31% 24% 22% 20% 18%

1674927 15761986 200410969

% of applications withdrawnNo. of clinical trials and Phase I

trial percentage, 2013-2015

# of IIT3

390322320287207

1,4121,4021,4471,3521,210

14132011 12 2015

China U.S.

1 As of Mar. 2016; 2 Summarized from CFDI 2016 Drug Clinical Trial Data Inspection and Verification Report; 3 Sponsored by universities, research institutes or hospitals

SOURCE: CFDA; CFDI; GBI; ClinicalTrials.gov; expert interviews; team analysis

Key challenges of clinical development are manifested in clinical site

capacity, varying trial quality, and low volume of early phase trials


C

Clinical research capability still at nascent stage

Clinical data quality under serious concerns,

especially among locals

Range of issues2 uncovered during data self-

inspection include:

Data fabrication

Unreliable data sources

Selective use of data

Inconsistent data among files

Failure in reporting SAE

Use of drugs forbidden during the trials

Not following trial protocol

Phase I Others


Both Clinical research and cutting-edge basic research in China remain

underdeveloped, although basic research showing stronger momentum

Basic

research –

publications

in Nature,

Cell and

Science

Clinical

research –

publications

in NEJM and

Lancet

▪ Quantity of China’s basic research is rapidly growing, albeti off a small base

▪ # of high-quality clinical research publications has largely remained flat in the past

5 years


C

China US

725667

4636

20152011 12 13 14

+19% p.a. 1,1401,1451,1371,1681,088

20152011 12 13 14

+1% p.a.

7814

65

20152011 12 13 14

257247251312272

20152011 12 13 14

SOURCE: Web of Science


China R&D talents need to strengthen beyond technical

capabilities to become globally competitive

SOURCE: McKinsey analysis

C


Non-technical capability

Technical capability

China R&D

Learning agilityTake current knowledge

and adapt it for future use,

both within and outside

core R&D capability

Scientific and technological

thought leadershipThink across therapeutic areas,

assess clinical value, analyze risk

versus benefit, and exploit

technological advances

Deep

Understanding of quality Equipped with strong quality-

oriented mindset, and adhere

to highest quality standards

Strategic thinkingPartner with commercial and

medical affairs colleagues in

lifecycle planning; understand the

changing customer landscape

Business acumenBe conversant with full

commercialization process and

interpret R&D activities for

commercial and medical affairs

colleagues

Emotional intelligence

& communicationUnderstand and engage

customers and colleagues


Novelty and quality of innovation still lagging,

with quality of PIs facing biggest gap

D

Quality of R&D

Novelty

of innovative

pipeline


The key issue with physicians and clinical institutes is the lack of incentives. PIs are not well rewarded neither

financially nor academically for conducting high-quality trials. Meanwhile, given the short history of innovative

drug development, PIs in China usually do not have rich experience in trial design especially in early

development. Going forward, capability of PIs will continue to be a challenge as more first-in-class drugs enter

clinical phases

– China Head of R&D of a leading MNC pharmaco

2. MOMENTUM - LOCAL INNOVATION

PI

CRO

Sponsor

Discovery

research

0 2 4 6 8 10

3.7 3.8

4.1 4.3

3.9

5.2

4.4

China 2015 avg. = 4.3

China 2016 avg. = 4.1


“

2015=4.31 2016=4.61

1 CDII overall average score across all metrics


China 2015 score2= 3.6

Cross-border collaboration shows accelerated momentum,

especially in licensing from global partners

# of global trials3 (#)

Cross-border deals on

drug R&D (#)

China contribution by the numbers

6866766340

15

+18% p.a.

14 16H11312

Contribution

to global

innovation

China out-license to

global partner

China in-license from

global partner

SOURCE: 2015, 2016 CDII Survey; ChinaBio 2016 Report; Clinicaltrial.gov; team analysis

1 CDII overall average score across all metrics; 2 2015 Survey didn‘t break “contribution to global innovation” into “out-license” and “in-license“; and China’s ability in attracting/retaining global

talent was not tested in 2015 CDII Survey; 3 Data from public Clinicaltrial.gov source; number of global clinical trials started in the year including China clinical sites, sponsored by RDPAC

members and GSK. Global trials defined as trials including both China and US/EU; regional trials defined as trials including both China and other countries but not including US/EU

37345455

n/a

2016132012 14 15

Set-back

due to “3

submission

and 3

approval” for

MRCT

2. MOMENTUM - INTEGRATION WITH GLOBAL

E

0 2 4 6 8 10

3.5

5

China 2016 avg. = 4.6


2015=4.31 2016=4.61

China’s ability in attracting/retaining

global talent25.3


Cross-border collaborations heating up both in investment and

asset development

2. MOMENTUM - INTEGRATION WITH GLOBAL

E

China

company

going global

Global

biotech

entering

China

Investment and JV Asset

PD-1 mAb PD-1 mAb

HBV drug IDO mAb

Leading innovative Chinese pharmaCos also

start to develop drugs in global markets

SOURCE: Press Search; Clinicaltrial.gov; Pharmaprojects; team analysis

EGFR lung cancer drug

PritumumabYH25448 for NSCLC

IL-2 IO drug

Formed JV to develop

CAR-T therapies

Formed JV to develop cell

therapies in China

Collaborating on IO therapies

Co-developing innovative

mAb therapies Niraparib

Humanwell acquired US Epic

Pharma in March and opened US

R&D center in Aug. 2016

Luye acquired Swiss Acino

Pharma’s TDS business for $27Mn

Wuxi AppTec opened

biomanufacture center for cell and

gene therapies in PhiladelphiaLeading innovative Chinese pharmacos also

start to develop drugs for global markets

NON-EXHAUSTIVE


What could be the path forward for China BioPharma innovation? 3


1 Emerging innovative therapies using new technology, such as cell therapy and gene therapy

New horizon1Small molecule Biologics

First-in-

Class

Me-too/

Me-better

Generics/

Biosimilar

Which types of innovation

should China focus on in the

next 5-10 years?

In which area(s) could China

capitalize on its advantages

to lead the world?

2 1 3

A

3. PATH FORWARD FOR CHINA BIOPHARMA INNOVATION?

B


Strong CMC legacy

however lacking

novel targets

Opportunity to build

manufacturing

advantages

Potential to lead in

selected areas

Small or large molecules? – no clear winner today

New horizon1Small molecule Biologics

Advantages

Challenges/

gaps

3A

1 Emerging innovative therapies using new technology, such as cell therapy and gene therapy

▪ Strong legacy of CMC

competency

▪ Lower manufacturing

cost

▪ Access to growing

scale of manufacturing

capacity as result of

MAH pilot

▪ Strong government

support (e.g., 1st

CRISPR clinical trial)

▪ Growing talent pool

(e.g., Thousand talent

program)

▪ Capability gaps in

basic research and

early-stage clinical

development

▪ Lack of infrastructure

(e.g. compound

library) to develop

first-in-class assets

▪ Lack of target novelty

▪ Lack of competency in

core technologies

(e.g., cell lines, CMC)

and know-how

▪ Capacity still

constrained today with

few credible options

▪ Capability gaps of

regulatory agencies

to conduct scientific

and evidence-based

review for new

categories of

therapies

▪ Regulatory policy

uncertainty (e.g.,

regulation of cell

therapy)




First-in-

Class

Me-too/ Me-

better

Generics/

Biosimilar

China should aspire to gradually transition from fast-follower to a “well-

rounded” global leader that can also spawn breakthrough innovation

3 levels of innovation

Breakthrough

innovation1

High-quality

generics

1

Incremental

innovation

2

3

U.S.

2011-15

43%2

Japan

2011-15

37%2

China

2007-15

5%2

China’s potential

goal in 2030

20-30%

57%3 63%3 95%3 70-80%

SOURCE: Citeline; FDA; PMDA; expert interviews; team analysis

1 First-In-Class; 2 Percentage of launched NMEs with new MOA/target in the country in given years; 3 Percentage of launched NMEs with known MOA/Target in the country in given years

China should aspire to establish

presence across all three levels of

innovation – breakthrough

innovation, incremental innovation

and high-quality generics


3B

45McKinsey & CompanySOURCE: Expert interviews; team analysis

China should aspire to innovate faster, more efficiently, and in radically

different ways

3

How might China innovate?

Faster▪ Accelerate R&D process and reduce overall timeline

– Tap into the large treatment-naive patient pool

to achieve faster patient recruitment

– Leverage innovative clinical trial design in the era

of precision medicine (e.g., adaptive trials)

Different▪ Unlock potential of big-data and advanced analytics –

e.g., tapping into genetics data and real-world evidence to

better stratify patients and increase success rate of clinical

trials

▪ Create new lateral collaboration platforms to break the

sector silos, especially in pre-competitive areas (e.g.,

shared biobank)

▪ Virtual pharmaceutical company models (IP+VC+CRO)

More efficiently

▪ Explore cost-effective ways to conduct R&D without

compromising quality, e.g., open-source R&D and

manufacturing approaches (e.g., model animal

platform, monoclonal anti-body technology platform)

Examples



What could be the outlook of China drug innovation in next 5-10 years?

SOURCE: McKinsey analysis

3

Optimistic

Pessimistic

2025

2020

▪ Achieve breakthrough

success in selected TAs /

technology areas

▪ Booming – become top 3 global

innovation contributor, with

several first-in-class drugs

launched globally each year

▪ Build solid innovation

capabilities across value

chain, with sizable pipeline

assets of promising clinical

value

▪ Growing – become solid 2nd tier

innovation contributor, launching

several me-too/me-better drugs

annually to address unmet

medical needs in China

▪ Struggle to overcome key

challenges (e.g., policy to

reward innovation, capability,

quality etc.) within innovation

ecosystem

▪ Plateaued – missed the

opportunity window and limit

focus in incremental innovation

Cautiously

optimistic



Driving growth in a BioPharma market in

transition

48McKinsey & CompanySOURCE: Industry association; Evaluate; McKinsey analysis

China’s contribution to pharma MNCs has risen to new historical highs

China Rx sales in global Rx sales

Percentage

2.6

3.3

3.7

3.8

4.2

5.4

6.4

9.8

10.9

13.4

MNC 5

MNC 4

MNC 1

MNC 3

MNC 2

MNC 8

MNC 6

MNC 7

MNC 9

MNC 10

2015

Top 10 average：6.3%

Change since 2013

2.1

3.4

1.2

1.5

1.6

0.4

1.4

1.9

0.8

-0.3

CONTEXT

1.4


20,000

0

80,000

60,000

120,000

40,000

140,000

100,000

2016E151412 131104 0602 100703 0805 092001

Top 15 MNC companies sales

In a slowing market, absolute growth remains strong

SOURCE: Industry association; Team analysis

RMB millions

“Rebalancing era”“Hyper-growth era”“Relevance era”

Incremental

growth

RMB bn

CONTEXT

11.19.02.2 6.8 13.4

+16% p.a.

+28% p.a.

+11% p.a.

+9% p.a.

Economic turbulences

Patient flow slow-down

Closer look at productivity

Rebalancing of investments

Push for innovation

China’s economic boom

Healthcare reform

Large and rapid field

force expansion

Access initiatives

China pops up on the

map

Some invest ahead of

the curve


In fact, 2016 is turning into an OK year so far for most MNCs, in particular

relative to a difficult 2015

SOURCE: Company financial reports; Investor calls; literature search

2015 H1 vs. 2014 H1Percent

Example pharma players Quotes from Q2 releases

2016 H1 vs. 2015 H1Percent

-5+5

+1+9

We saw surprisingly strong performance in China in 2016 1H, which is largely driven by the volume growth

Our business in China returned to good growth. China remains a significant growth market for us going forward

CONTEXT

+19+11We saw strong and sustainable growth momentum in our respiratory and heart attack recovery while Iressa suffers from competition.

+7+11We are pleasantly surprised at a return to double-digit growth in China. We have not yet experienced the previously anticipated significant price impact

“

+9China business enjoyed strong volume growth during the quarter and continues to perform well, even in the face of some anticipated cost pressures

+11 “

+10+11China market growth stood at double-digit YOY if adjusting for foreign exchange rates. China remains a significant growth market for us

“

“

“

“


Mature portfolio still account for vast majority of pharmaco sales and growth

SOURCE: Industry association; McKinsey analysis

1 By year of registration

2015 sales by brands launch year1

Percentage

2014-15 growth by brands launch year1

Percentage

81%

68%

101%

62%

24%

89%

68%

99%

94%

32%

13%

55%

21%

9%

5%

21%

26%

Avg.=76%

-4%

10%

6%

0%1%

-1%

8%

0%

11%87%

90%

99%

98%

71%

89%

90%

100%

13%86%

9%

11%

21%

1%

1%

0%

8%

MNC 9

1%

2%

8%

MNC 3

0%MNC 8

Avg.=90%

MNC 7

MNC 62%

MNC 5

MNC 4 1%

0%

MNC 2 10%

MNC 12%

>10 years 5-10 years < 5 years

CONTEXT

+21%

-22%

+64%

+2%

-17%

+12%

N/A

-1%

+22%

>10 years brands

growth contribution

change vs. 2012-13


Given this context, key questions we wish to address today

12

3

Has the market truly recovered?

How can companies improve

chances of launch success for

innovative products?

How can companies continue to drive

volume growth efficiently for mature

portfolio?



12

3How can companies improve





portfolio?



How we went about developing our perspectives

Sources of insights

NHFPC statistics on

patient flow across

hospital segments -up to

July 2016

Hospital level prescriptions

data for ~700 hospitals

from China

Pharmaceutical

Association (CPA) - up to

June 2016

Multiple discussions

with senior executives

in the pharma industry

Results from a

survey of ~50

hospital directors

across city tiers,

conducted in

August 2016

McKinsey market

perspectives, informed by our

support to leading industry

players and associations

1. HAS THE MARKET TRULY RECOVERED?


YoY sales growth of CPA sampled Class III/II hospitals1, 2012-16 Q2

Percent

SOURCE: China Pharmaceutical Association (CPA); NHFPC

9.8%

Outpatient2

YOY

growth

Percent

8.2% 5.6% 6.6% 8.2% 4.3%4.5% 4.3% -8.8%

1 688 sampled hospitals, including 468 Class III hospitals, 211 Class II hospitals

2 Only include hospitals

12.4%12.0%

16.4%

2015 Average: 7.1%

10.0%

6.7%

2012 13 2015

Q1

14 2016

Q1

2016

Q2

After a slow year in 2015, there are some signs of market recovery

2015

Q2

2015

Q3

2015

Q4

9.7%

6.9% 6.2%5.7%

2015 outpatient growth = 1.2%



Patient flow1-YOY growth

Percent

8

10

7

12

67

17

7

15

24

0

15%

5%

10%

20%

25%

2

2016

Jan-July

3

1

14

6

11

6

10

12 13 15

17

4

2006 1009

8

08

6

07

9

10

Volume: Patient flow growth stabilizing, but far from historical levels

SOURCE: NHFPC

InpatientOutpatient

1 Include hospitals and grassroots facilities


However patient flow

slowed in July 2016

▪ Outpatient -1.2% YOY

▪ Inpatient +2.2% YOY

57McKinsey & CompanySOURCE: NHFPC

Price: Postponed provincial tenders likely to delay pricing impact to 20171. HAS THE MARKET TRULY RECOVERED?

Provincial tendering delayed for ~40% provinces

Price cuts significant in provinces

where tendering is completed

Provincial tendering status

N = 31

Document

released

26%

61%

Completed

Not yet started

13%

▪ Bidding drug prices (竞价品种)

dropped 18% on average

▪ Negotiated drug prices (议价品种) dropped 8% on average

▪ Divided all products into 4

quality groups

▪ Average price cut for tendered

products ~18%

▪ Set 2 quality groups-

unfavorable to MNCs

▪ Average price cut 14%

▪ Monthly tendering

▪ Set 2 quality groups and

benchmarked tendering prices

from other provinces

▪ Average price cut 5-10%

Fujian

Guangxi

Tianjin

Guang-

dong

Several large

including Anhui

or Zhejiang,

have not

finished the

tendering yet

<Document No.70> required all provinces to complete

tendering by the end of Nov. 2015. However, 12 provinces

have missed the deadline, by almost a year already


Price: New policies and pilots could further intensify pricing pressure

SOURCE: CFDA, press search, team analysis

New pilots further intensify pricing

pressure

▪ On May 2016, the NHFPC

announced 3 drugs (Viread,

Iressa, Conmana) were

selected post national price

negotiation, with price cut of

over 50%

▪ Priority likely given to these

drugs in NRDL listing update

▪ Shanghai and Shenzhen

exploring GPO models as

pilots for further price

negotiation, with first batch of

drugs announced in 2016

National

price

negotiation

GPO

In light of continuing price pressure, some

pharmacos have since voluntarily lowered

price (e.g. ~30% for Tarceva by Roche,

~26% for Lucentis by Novartis)

CFDA price commitment policy remains

uncertain

▪ State council issued opinion on price

commitment policy on August 2015

▪ Requires companies applying for new drug

registration to make price commitment

before issuing approval

▪ Product prices in China no higher than that

in the originating country or the

following select neighboring markets

▪ Uncertainties remain on appropriate basis

of price comparison, timing of

implementation, broader cross ministerial

implications on overall pricing and access

framework

Japan India South Korea Hong Kong Macau Taiwan



Access: Access environment will continue to improve, although step

change still needed

Source: NHFPC Yearbook, team analysis

China healthcare spend by funding source

$ Bn, percentage

35 39

25

31

4030

~1,000

Social

Patient

Out-of-

pocket

2020

Govern-

ment

2015

?

624

2008

209

?

?

Recent access trends

▪ Self-pay market expected to grow with

increasing disposable income and

willingness to pay

▪ CDI supplementing BMI but insufficient to

provide access to innovative medicines

▪ PHI expected to grow rapidly with

increased government support

▪ PAPs need to evolve to meet growing

patient needs and compliance

expectations

Step change in pricing and

reimbursement policy framework still

needed to achieve government priority

of improving patient access and driving

innovation



Access: Long delayed NRDL update process finally started

What we know

▪ Future NRDL update

frequency and mechanism

still unclear

▪ Annual NRDL update

through negotiation

mechanism is a possibility

▪ NRDL drug assessment

approach and criteria still

being shaped, in which

HTA likely would be a

critical component

What is uncertain

Criteria for

inclusion

▪ Strong intention from gov’t to include

innovative drugs with clear clinical values

in NRDL, especially those with local IP

High

priced

therapy

▪ Possible for high-priced therapies to be

included in NRDL through negotiation

mechanism, likely in the form of C list

▪ The process will start in 2017, after

announcement of A/B list

Governing

body

▪ MOHRSS will take the lead in price

negotiation for NRDL purpose. Number of

drugs going through national negotiation

mechanism likely will be limited

▪ For vast majority of the high-priced

therapies, reimbursement decision will be

left to provincial/city BOHRSS

▪ MOHRSS will issue guidelines for local

negotiations, while actual negotiations and

decisions happen at provincial/city levels



Our perspective on the market outlook

▪ We are cautiously optimistic about overall market outlook

▪ Signs of recovery from patient flow in first half of 2016, but volatility still

exists

▪ Future pricing pressure likely to intensify as tenders delayed in 2016 take

effect in 2017 and new pricing policies emerge

▪ Step change in Access expected in 2017 with NRDL/PRDL update, more

support for innovation

▪ Fundamental questions remain for pharmacos: how to capture continued

growth for mature portfolio and how to prepare for rise of innovation?




12






portfolio?



Key considerations in determining strategy to drive volume growth for

mature products

Set appropriate aspiration and

boundary conditions (e.g., revenue

growth target, margin improvement

requirement, productivity level)

Define granular market

segmentation (city tier, channel,

hospital class, etc…) and

determine forward looking

market potential

Conduct robust portfolio

prioritization to guide commercial

model design and resources

allocation, including portfolio

divestiture

Optimize sales force size, structure

and management model (e.g.

portfolio sell, segment specific

teams, alternative incentives)

Find the right recipe for multi-

channel to enhance value

proposition and enable efficient

coverage (e.g., access uncovered

territories, enable interactions)

Explore broad partnerships with

ecosystem stakeholders (distributor,

device, CSO, pharmacos, etc…) for

win-win collaborations

Business aspirations

Market segmentation and potential

Portfolio prioritization

Sales force model

Role of multi-channel

Partnership

Opportunity assessment Commercial model design

2. DRIVE VOLUME GROWTH EFFICIENTLY FOR MATURE PORTFOLIO

64McKinsey & CompanySOURCE: 2015 and 2016 McKinsey Hospital CEO Survey (n=48)

Hospital directors appear more confident of patient growth compared

with last year

Q: How would you predict patient flow growth evolution?

4%

46%

67%Slower33%

Same

Faster

2017H1 YoY

21%

2016H1 YoY

29%29%

50%

33%

17%

2016H1 YoY 2017H1 YoY

29%

42%

Tier 1/2 citiesPercentage

Tier 3/4 citiesPercentage



MNCs see markedly higher growth in lower tier cities, while difference

between hospital classes is small

SOURCE: China Pharmaceutical Association (CPA)

Rx sales growth1 (Hospital class view)

2016 1H YoY

1 in CPA 679 sampled hospitals, including 468 Class III hospitals, 211 Class II hospitals

Rx sales growth1 (City tier view)

2016 1H YoY


10

5

11

6

MNC Local

Class III hospitals

Class II hospitals

4

0

10

89

11

MNC Local

Tier 3 cities

Tier 1 cities

Tier 2 cities


Primary care molecules see consistent high growth in broader

markets

SOURCE: China Pharmaceutical Association (CPA)

Acarbose (OAD) growth by segment Atorvastatin (CV) growth by segment

Pemetrexed (Oncology) growth by segment

Class III

Class II

Tier 1

7% 18% 18% 15%

9% 20% 18% 28%

Tier 2 Tier 3 Tier 4

Class III

Class II

Tier 1

14% 25% 24% 22%

21% 58% 36% 52%


Class III

Tier 1

17% 47% 22% 25%

14% 40% 10% 109%


0-15% 15-30% >30%

12-15 CAGR for volume growthxx%

<0%


Gefitinib (Oncology) growth by segment

Class III

Class II

Tier 1

11% 12% 16% 9%

10% 10% 20% 0%


Class II

Note: based on data from 679 sampled hospitals, including 468 Class III hospitals, 211 Class II hospitals

67McKinsey & CompanySOURCE: NHFPC statistic yearbook

# of hospital bedsMn, percent

81%

25%

19%

2.4

5.3

2005 Government

announced

plan by 2020

75%

15

8.3

94%

6%

Public

PrivateGovernment plans for private hospitals to become an increasingly

important part of the health system

2.7

10%

90%

10%

2.5

5%

11%

95%

1.4

90% 89% 88%

12%3.0

+6%

+9%3.1

2005

51

96%

127

87%

13

88%

140

14

15%12%

2012

13%

154

89%

11%

4%

+7%

+13%

15

161

85%

Outpatient visitsBn visits, percent

Inpatient visitsMn visits, percent



-10%

20%

-40%1507030 1209040 60 80 1101000 50 190170160

40%

140%

130%

30%

10%

0%

-20%

230180 450280

1H 2016 VS 1H 2015Growth rate %

1H 2016 sales Mn USD

Performance variances among mature products indicate differences in

articulation of brand strategy and in quality of execution

SOURCE: Industry Association; Team Analysis

1 Analysis for off patent products with 20161H sales >25mn USD

Challenging Established

High valueRising



Pharmacos have adopted different commercial models for mature portfolio

Doubling down resourcesDriving effective sales model Divesting assets

Building dedicated team to

expand to lower tier

market

▪ E.g..., Sanofi build

dedicated county hospital

BU covered over 1,250

counties and organized

more than 8,000

education programs

Emergence of new partnership

within the HC ecosystem to drive

broader access with a

comprehensive solution

▪ E.g. Pfizer and Yuyue set up

partnership in chronic disease

management and cross selling

opportunities

Successful examples emerge as MNC engage locals

to promote tail products

▪ E.g. AZ out-licensed tail CV products to Sinopharm

and CMS and diabetes products to 3SBio

Reorient business focus on

key TAs

▪ E.g. BMS focusing on

innovation portfolio, UCB

divesting CV, GSK divesting

AI




12






portfolio?



Therapeutic areas

Tsunami of new product launches expected in next few years

SOURCE: DXY Insight; GBI Source

3. SECURING LAUNCH SUCCESS FOR INNOVATIVE PIPELINE

NOT EXHAUSTIVE

OUTSIDE-IN PERSPECTIVE

31 12

Torezolid

8

Vericiguat

Anacetrapib

3

Refametinib

# of molecules expected to launch in 2016-19 Logos: Example products

3

Edivoxetine

3 2

Atrasentan

2

Fasiglifam

Ertugliflozin

Ipragliflozin

11

Central nervous

Oncology BloodAnti-

infectiveAlimentary

Cardio-vascular

Mulsculo-skeletal

Respi-ratory

Hormones


Local pharmacos are also rapidly filling their innovation pipelines3. SECURING LAUNCH SUCCESS FOR INNOVATIVE PIPELINE

Molecular source analysis of Chinese new drugs 2015

Class 1.1 new chemical drugs-new molecular

entities (NMEs)

N = 64

Developed by MNC in China

Sources of

molecular

entities

13

Chinese companies

purchased from overseas

(incl. co-development)

2

49

64

Developed by

Chinese companies

Class 1 therapeutic biological products

N = 15

1 There are 10 Class 1.1 new chemical drug clinical applications and 4 therapeutic biological products in 2015 without revealing their sources of molecular entities

1

14

Sources of

molecular

entities

Developed by

Chinese companies

Chinese companies

purchased from overseas

15

SOURCE: GBI Source; Literature research

Examples:

Furaprevir

(Taigen),

BGB-3111

(BeiGene)

Examples:

PD-1 mAb

(Junshi),

SHR-1210

(Hengrui)


However, new launches in China still face slow ramp up3. SECURING LAUNCH SUCCESS FOR INNOVATIVE PIPELINE

1 USD/RMB=6.5; USD/JPY=102

SOURCE: Company reports; Prospectus; Testa Marketing; Fuji Keizai; Industry association

Mn USD1

Selected products 5- year sales performance after launch

Average Y5 sales of selected new products in Japan are 6X that of China

700

500

800

600

400

300

100

0

200

Enbrel

Lucentis

Avastin

Xarelto

Januvia

Tarceva

Y5Y4Y3Y2Y1

800

600

400

300

200

100

0

500

700

Tarceva

Y4Y1 Y3

Enbrel

Januvia

Lucentis

Avastin

Xarelto

Y5Y2

~360 6x

~60

74McKinsey & CompanySOURCE: Team analysis

Holistic approach is required to drive successful new product uptake in China

Six key success factors to drive rapid uptake of new launches in China

Drive accelerated ramp-up through

systematic key stakeholders

engagement to shape diagnosis and

treatment paradigms

Shape affordability,

rethink pricing strategy

and tap into multiple

funding sources for

innovative medicines

Drive accelerated listing

in core hospitals; ensure

relentless focus on

penetration of key hospitals

Develop and execute a

robust medical strategy,

including MSL readiness to

engage national and

regional KOLs; proactively

shape treatment guidelines,

etc...

Put in place a robust

channel management

strategy, including both

traditional distribution and

digital channels

Strengthen organization

readiness, enhance cross

functional collaboration and

build distinctive capabilities

for launch

New

product

Launch

excellence

applied to

China

Mobilize

Medical

Affairs

Shape

affordability

Accelerate

listing

Leverage

multi-

channel

Enhance

organization

launch

readiness

Engage

stake-

holders



Pharmacos need to manage an increasing number of stakeholders with

rapidly evolving needs

SOURCE: Expert interviews; literature research; team analysis

Hospitals

Patient

KOLs

Physicians

Pharmacies

Distributor

New

Product

Launch

Move from building scale

to improving quality

(e.g., treatment outcome

and patient satisfaction)

Expand influence

globally through peer-

to-peer discussion and

international clinical

collaboration

Build capabilities to

address increasing

needs in precision

medicine

Extend service offering to more

value-added activities (e.g., product

in-license, pharmacy management)

Secure timely and

higher quality

physician

interactions and

disease education

Increase

emphasis on

clinical value

and innovation


Build actuary

capabilities and

develop new

offerings

Build scale, upgrade

infrastructure and

capabilities to play an

increasing role in drug

dispensing

Build professional status,

patient followership, and

improve working

environment and reward


Comprehensive engagement approaches to manage broad range of

stakeholders

Type of partners

Association

Hospital/HC Provider

Payor

HC

eco-system player

Regulator

Digital

Distributor/ Pharmacy

Partnership archetypes

PharmaCo lead Co-create/ collaboration Out-source

Patient management app

Industry associations

National distributors

PHI

NHFPC

IVD companyDevice Co

International hospitals

Leading Chinese hospitals

Patient groups

Pharmacy chain

Physician education app

Local gov’t

NGO

CRO

BMI offices


Pharmacos have opportunity to develop broad partnership within healthcare ecosystems


More innovative approaches to engage stakeholders and improve access to

innovative medicine emerging

Case example: Novartis

Built COEs to improve physician

capability in intravitreal

injections

Service offered by Novartis

Elevated capabilities

through physician

training

▪ ~1,000

physicians

trained

across 200

hospitals

within 2

years

Elevated standards

of diagnosis and

treatment

Knowledge-

Provide update

medical

expertise/

experience

Standard-

Establish SOP to

elevate operation

excellence

Training- Offer

trainings to HCPs

Provided fast-track entry for

innovative therapy through pilot

program in Boao Lecheng

international medical tourism pilot

zone

Case example: Hainan medical tourism zone

SOURCE: Literature research; team analysis

Introduction of new entry model

Background

Boao, first medical-tourism Center in China

allows 100% foreign ownership hospitals and

fast-track for new drugs and medical devices

Hainan Cancer hospital gained approval from

CFDA to import Keytruda in March 2016 with

limited to specific use and small volume

Approval

The hospital announced import of 24 units

from its distributors in Sep. 2016

Import



Rethink pricing strategy for innovative medicines3. SECURING LAUNCH SUCCESS FOR INNOVATIVE PIPELINE

Pricing for reimbursement Pricing without reimbursement

Target broad coverage

- lower price in

exchange for better

access

Target self-pay

markets and PHI

covered population

▪ Leverage new NRDL update,

national price negotiation

scheme for better access

▪ Consider potential impact on

overall pricing strategy (e.g.

neighboring countries, portfolio

pricing)

▪ Adopt dynamic pricing strategy

with triggers

▪ Leverage provincial access

programs and CDI to improve

local access

▪ Collaborate with PHI to

improve patient affordability

▪ Evolve PAP programs to meet

patient needs

▪ Shape self-pay market


Strengthen organization readiness and capabilities for launch3. SECURING LAUNCH SUCCESS FOR INNOVATIVE PIPELINE

▪ Put in place knowledge

management mechanism

to capture deeper

customer insights, and

translate them into

business solutions

▪ Establish new engagement

models emphasizing,

solution-oriented mindset,

and creativity to address

evolving stakeholder needs

▪ Instill agility in the organization to

enhance internal collaboration

▪ Broaden partnership in the eco-

system and leverage alliances to

achieve win-win solutions

▪ Upgrade talent profile,

tap into unconventional

talent source and invest in

capability building

▪ Acquire new capabilities

and tools that enable new

engagement models (e.g.

big data analytics, digital

tools)

80McKinsey & CompanySOURCE: LinkDoc

Adopt innovative solutions to build differentiated advantages at launch –

Big data analytics example

LinkDoc has emerged as the leading healthcare big data analytics player and bring multiple solutions

to support PharmaCo’s new product launch

Monitor patient

uptake

More efficient

evidence

generation for

HCP SOV1

Track brand

performance

Identify granular

patient / physician

pool for growth

3. Securing launch success for innovative pipeline

Provinces

EXAMPLE

380K

>250

30

Patients

covered

Oncology

hospitals

Follow-upData

Drug therapy

Basic Information

Medical History

Surgeryreport

Imageexamination

report

Other examination

report

Pathology Report

Adverse event report

Hospita-lization

summary

Othertreatments

Full cohort clinical data

captured: 900+ data points

per patient

Potential support on

new product launch

… …1 Share of voice

LinkDoc’s cutting edge 3rd generation RWE data

structuration technique: (1) high efficiency enabled by

machine learning (2) high quality control


Implications for pharmacos

Transition business from relying on mature portfolio for

growth to achieving balanced growth across both

innovative and mature portfolio

Signs of recovery from patient flow in first half of 2016, but

volatility still exists and should continue to be expected

Run on both

legs

Expect

volatility

Foster a launch mindset and enhance organization’s

launch capabilities in disease education, differentiated

stakeholder engagement, and access innovation

Strengthen

new muscles

Build new competitive advantage by leveraging unique

sources of insights (e.g., big data RWE) to improve

understanding of patient needs, physician behaviors, reality of

disease management, competitive dynamics

Find your

next edge

Identify mutually beneficial partnership opportunities across

the industry value chain, leverage partnerships to

strengthen local presence and build internal capabilities

Develop strong

partnerships


MedTech in China – Coming of age

83McKinsey & CompanySOURCE: GlobalData Medical eTrack as of Oct. 2015, Health Research International 2015; Business Monitor International; McKinsey report “MedTech in Asia”

Global MedTech revenue

USD billion

CAGR,

2015-20Region

11%

5%

5%

2%

7%Other global

regions

10%Other APAC

countries

In an ever increasingly important Region for global MedTech, China shines

as a key engine of growth

37

2824

36

100

173

45

51

27

61

128

536

225

2015

398

2020E

China MedTech market growth expected

to continue on robust trajectory

USD billion

86

73

61

50

40

2218 20242016 20

+11% p.a.

+9% p.a.

5%

84McKinsey & CompanySOURCE: McKinsey Medical Device China CEO Survey 2016

5 trends that shape China’s MedTech market

3

2

4

1

5

Patient flow starting to shift to lower-tier care settings and into the

private sector forcing companies to rethink coverage and GTM model

Signs of government intervention targeting the traditional

healthcare distribution models – leading to a search for

alternative channel models

Pricing pressure is here to stay – enforced through more

sophisticated tenders, empowered by data transparency, and

ever increasingly complex to manage

Experimentation with innovative business models and partnerships

– searching for sustainable models for the future Chinese MedTech

market

Government’s push for a localized, high-quality and

compliant MedTech industry is impacting local / MNC

dynamics

85McKinsey & CompanySOURCE: McKinsey MedTech China CEO Survey 2014 (n=16) and 2016 (n=21); 2016 McKinsey Hospital CEO Survey (n=48)

High expectations on growth in Class II hospitals …

… but relatively flat momentum from the

perspective of Class II hospital CEOs

Much hope is resting on growth in class II / county hospitals – however,

there are mixed signals regarding actual demand growth

“From what hospital segment

will growth come from in the

near- and mid-term?”

67%

2016

63%

2014

52%

38%

Class II

and below

Class III

Class III

Class II

and

below

“How has your total medical device

expenditure changed

in 2016 1H vs. 2015 1H?”

22 22

56

FlatDecline

27

70

Grow

3

?

1

86McKinsey & CompanySOURCE: Transmedia; team analysis

Procedural volume distribution of joint replacement by hospital potential, 2015

Smaller hospitals tend to be more cost conscious: example of MNC / local

product penetration by segments for joint replacements JOINT REPLACEMENT

EXAMPLE

1 There are ~2,100 hospitals in China preform joint replacement procedures (joint and knee)

1,000 procedures (hip and knee)

40%

1,001-2,1001

21%

60%

22%22%

Top 1-200

18%

35%

Local

46%

501-1000

MNC

54%

201-500

39%

61%

82%

Average volume per

hospital

Hospital ranking by

procedural volume

86198334810

Total

share

Average

price

K RMB

62%

38%

40-50

20-30

1

87McKinsey & CompanySOURCE: NHFPC – latest available data, status April 2016

Patient flow1 – YOY growth

Private hospitals leading in patient flow growth

141316

20

2424

-1-1

55

1010

2

25

5

20

15

10

0

-5

16

Public hospital GrassrootsPrivate hospital

19192226

35

2421

2267

14

52

20

30

10

-10

40

0

Jun JulMayMar Apr2015 2016

Feb

Outpatient

Percent

Inpatient

Percent

Patient flow

growth

consistently

strong in

private

hospitals –

both for

inpatients

and

outpatients

1

88McKinsey & CompanySOURCE: Press search

Sichuan

Heilongjiang

Jilin

Liaoning

Hebei

Shan-dong

Fujian

Jiangxi

AnhuiHubei

Hunan

GuangdongGuangxi

Shanghai

Henan

Shanxi

Hainan

Inner Mongolia

Shaanxi

Ningxia

Gansu

Qinghai

Guizhou

Yunnan

Jiangsu

Zhejiang

Tianjin

Taiwan

Beijing

Hong Kong

Macau

Chongqing

HIGH-VALUE CONSUMABLES EXAMPLE

Ningbo (Zhejiang) 2014

5 rounds of tenders with

15-45% price cut

Liaoning 2015

~15% average price

cut for two categories

Anhui 2015

~20% average price

cut for ten categories

Shandong 2015

~15% average price cut

for the first batch of

tendering

Centralized provincial tenders increasing price pressure on MedTech

industry, with substantial cuts observed across China

Henan 2015

~30% price reduction

for orthopedic

consumables

Sichuan 2015

~10% cut based on

nationwide lowest price

reported

Jiangsu 2015

~15% price cut for the first

batch of tendering; ~25%

price cut for the second

batch of tendering

Shanxi 2016

~20% average price cut for

five categories,

max cut at ~30%

Xinjiang

Tibet

2


Product R&DRegulatory

ApprovalManufacturing

Distribution & Post-

market Surveillance

▪ New device GSP1

tightening control

over device

distribution

▪ Increasing post-

approval

enforcement

activities

▪ Replacing QMS1

with the new device

GMP1, with new

annexes for IVDs,

implantable and

sterile devices

▪ Published a draft

guidance on QMS

inspections during

product approval

processes

▪ Fast track

approvals available

for innovative

devices

▪ Updating the device

naming and

classification rules

▪ Seeking comments

on registration

units and split

applications

▪ Clinical trial

waivers available

(unclear conditions)

▪ CTAs for Class III

devices with higher

risk profiles

▪ Revising device

GCP1 with higher

standards

▪ Rules for study site

certification

SOURCE: Government announcement; press search; white paper “Coping with Evolving Regulatory Challenges” by Ropes & Gray and McKinsey

CFDA’s “Order 650” will lead to broad reaching overhaul of China’s

medical device regulation

1 GCP: Good Clinical Practice; GMP: Good Manufacturer Practice; GSP: Good Supply Practice; QMS: Quality Management System

▪ Foster and reward local innovation

▪ Improve industry conduct / compliance

▪ Secure quality and patient safety

Overall, policies designed to

3

90McKinsey & CompanySOURCE: Government announcement

Government has made a clear commitment to building a strong local

MedTech industry

Key initiatives as stated in 13th FYP

▪ Improve industry structure, coordinate resources between

developed and developing regions

▪ Strengthen financial support for MedTech companies

▪ Enhance government procurement system

▪ NHFPC and China Association of Medical

Equipment publish a list of recommended

local medical devices for public hospital

procurement

▪ “Local favoritism” observed in regional

execution, e.g.:

– “Encouraging local products” is

specified in tender documents (e.g.,

Hunan, Jinan, Beijing)

– Purchase of imported medical

equipment requiring special approval

process (e.g., Shenzhen, Xuzhou)

– Favorable tendering conditions:

▫ Higher score to manufacturers having

local factory in China

▫ Local products exporting to certain

countries are categorized in the same

quality group as imported ones

State Council's agenda…

…interpreted and put in action by central

and local governments

Develop local MedTech industry in key sectors:

Implants: biodegradable stents, heart valve,

pacemaker, joint and spine, cochlear, 3D technology

IVD: NGS, POCT, automated analyzer

Capital equipment: PET, MRI, CT, color ultrasound,

proton therapy, surgical navigation system

Digital health: health monitoring and management

products, telemedicine, big data

3

91McKinsey & CompanySOURCE: Bloomberg; Literature research

▪ Founded in 1991 in Shenzhen

▪ 10,000 employees globally

▪ 2 manufacturing centers and 11 R&D centers globally

+15%p.a.

+19%p.a.

IVD

Patient

monitor

2014

+61%p.a.

Others

Imaging

10%

26%

28%

37%881

6%

520

11

27%

2005

26%125

26%

26% 47%

48%

25%

25%

44%

08

1,323

Revenue and growth

USD mn

▪ Founded in 1988 in Shandong

▪ FTE: 9,900 employees globally

▪ 9 manufacturing subsidiaries, R&D centers and JVs

Blood

purification

+41%p.a.

275

+29%p.a.

2015

11%

7%Medical

consumables

6%

12

942

585

09

+17%p.a.

Ortho

2006

7%

99

Revenue and growth

USD mn

Listed in

NYSE

Acquire

controlling

stake in

Shanghai

Long

Island

Biotech

Complete

full

acquisition

of Wuhan

Dragonbio

2006 2014 2015 2016

De-listing

completed1

Partner with

United

Imaging

Acquire

Beijing

Precil,

Zonare

Medcial,

and Ulco

2013

Acquired

Suzhou

Hyssen

and

Changsha

Tiandiren

2011

Listed in

HKSE

Set up

ortho JV

with

Medtronic

(disconti-

nued in

2012)

Dialysis

center

granted

with

national

funding

2004 2008 2015 2016

Spin off

orthopedic

subsidiary

to IPO

Acquired

Yahua

(joint)

and

Bangde

(trauma)

2007

Leading local MedTech companies have achieved scale and growth3


“In the past 2 years, has there been

any specific requirement on local or

imported products in your hospital

tenders?”

Only a subgroup of public hospitals

use “local preferred” purchasing

criteria …

The real impact of “local preferred” policies may still be relatively limited

SOURCE: 2016 McKinsey Hospital CEO survey (n=38)

53%

38

11%

21%

16%

“Encouraging local products, but does not

specify a brand.”

– Class I hospital in Chongqing

“Requiring local DES only. Not tender granted

to imported.”

– Class II county hospital in Henan

“Procuring local products whenever possible.”

– Class II hospital in Jinan, Shandong

“Requiring tier 1 brands for capital equipment

like GE, Philips, and Siemens.”

– Class II hospital in Taiyuan, Shanxi

“Requiring imported products for DES, CT, etc.”

– Class III hospital in Suzhou, Jiangsu

… and this behavior is mostly found in

smaller hospitals (class II and below)

“

“

“

“

“

Local or imported preferred

depending on category

No specific requirements

for local or imported products

Yes, requiring imported

products

Yes, requiring local

products

3


MNCs have continued to invest in localization despite regulatory

uncertainties, and plan to continue doing so

Company Recent announcement

0%

81%90%

2016

10%

May re-assess and

potentially decrease

our footprint in China

No significant

change expected

2014

0%

19%

Will significantly

increase localization

and China footprint

NOT EXHAUSTIVE

SOURCE: McKinsey MedTech China CEO survey 2014 (n=16) and 2016 (n=21)

R&D

Manu-

factur-

ing

▪ 2016, the first experimental R&D

facility opened for operation in Suzhou

▪ 2015, the 1st APAC R&D center opened

in Shanghai, with $1mn in 2016 for R&D

on products tailored for China

▪ 2014, opened $56 mn R&D center in

Suzhou for developing global network

and bettering serving Chinese patients

▪ 2014, >$15 mn to establish new

innovation center in Shenyang for medical

imaging

▪ 2016, upgraded Shanghai site and built

1st APAC manufacture plant for IVD

▪ 2016, insulin pump plant built in

Chengdu

▪ 2016, joint pacemaker manufacturer with

Lifetech in Shenzhen

▪ 2016, announced plant building plan in

Wenzhou for proton therapy machine

LIGHT, with $140 mn investment

▪ Established 3 manufacturing sites

organically since 2008

“What do you think about

localization trend of the value chain

in China (e.g. R&D, manufacturing)

by 2020?”

3

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Platform distributors emerging, from

existing tier 1 distributors and large state

owned players

SOURCE: Medical Device Greenbook; Administration for Industry & Commerce (AIC); lit search

189 186165

-1%3% p.a.

China’s classic distributor-driven model is fundamentally broken

# of distributors (in 1,000)

MedTech

2010

13.0 13.5

3% p.a.

14

14.9

-9%

2015

Bio

Pharma

MedTech distribution is extremely fragmented –

with early signs of consolidation

Government taking more decisive

action to crack down on corruption in

the healthcare value chain

Multiple emerging trends will lead to

acceleration of distributor consolidation

Two-invoice policies piloted in selected

regions, aiming to delayer the channel

Squeeze of channel margin due to

increasing price pressure from tender /

listing and competition

“Promote provincial-level “two-invoice” policy in

pilot provinces and encourage public hospital reform

cities (200 cities in China)…to reduce layers of

distributors, for both drugs and devices”

– Jul 2016, NHFPC

“

▪ China MedTech market size is ~1/3 of BioPharma, but the # of distributors is x14 of Pharma

▪ Distributor consolidation will accelerate, following the footsteps of BioPharma

4


“How do you see the commercial model evolving(2020 horizon)?”

Trend toward more sophisticated commercial models:

from fast expansion to specialization

SOURCE: McKinsey MedTech China CEO survey 2016

33% 24%

43% 43%Rise of HTA as a key factor

for commercial success14%

Shift in distributor model

(consolidation, less tiers)48%

10%

Diversified sales force – e.g.,

KAM, value vs. premium71%

19%

57%

10%

33%

48% 5%

More science evidence

based approaches

Digital/multi-channel

marketing and sales43%

Expansion of sales force 19% 14%67%

Some movement

Minor/not relevant

Key trend

1 Health Technology Assessment, i.e. a more holistic and evidence based assessment of health technology considering medical, social, ethical and economic implications

Trend vs. 2014

▪ Increasing focus on more sophisticated sales coverage model vs. scale

– More targeted via customer segmentation

– More evidence based selling vs. account relationship

– More efficiency enabled by analytics and digital tools

▪ Many MedTech have already started channel reform, e.g., delayering channels by using platform or logistic providers

5


Business model innovation needed to build competitive advantage and

support economically sustainable models

SOURCE: Literature search

▪ Partnering typically with healthcare providers

to consolidate long term key account

relationships

▪ Moving into healthcare provision, maximizing

use of own device portfolio and capturing

additional revenue streams from HC services

▪ Providing capital equipment up-front "for free",

and generating revenues on an ongoing

bases through (captive) consumables or per-

use fees

▪ Developing integrated product + services,

software solutions (e.g., long-term equipment

maintenance & management services, work

place/ work flow redesign services, software)

Partner-ships & collabo-ration

Vertical integration

Pay-per-treatment /

revenue sharing

Integrated solutions

1

2

3

4

5


▪ July 2015, Pfizer and Yuwell set

up a partnership for chronic

disease management and

cross selling opportunities in

multiple channels

▪ Each party shares

complementary channel

strengths

– Pfizer: Large hospitals and

KOL resources

– Yuwell: Primary care

institutions, online platform

and retail

▪ Sep 2015, Guangzhou Pharma

and Siemens established a JV

(51/49% shareholding) in

Guangzhou

– Providing diagnostic

services including imaging

diagnosis, physical check-

ups, and IVD services

– Co-funded and established

independent clinical labs

by leveraging Guangzhou

Pharma’s hospital network

and Siemens’ expertise in

the field

– Also aims to develop remote

diagnosis in the long run

Multi-channel sellingPatient services

SOURCE: Lit research; McKinsey analysis

▪ In 2014, AZ collaborated with

Omron on nebulization

program to

– Advocate NHFPC on

necessity of establishing

nebulization room in

hospitals

– Improve patient awareness

to nebulized treatment

– Launch home nebulization

program and set up

respiratory counters in

pharmacies

▪ From the partnership:

– Nebulization center

increased from 300 to 2,000

via co-funding

– Donated over 8,000

nebulizers to patients

Diagnostic services

Partnership landscape is also evolving with increasing range of

collaboration models

5

http://www.gzmpc.com/

http://www.gzmpc.com/


Despite real headwinds, industry leaders are still mostly optimistic about

the outlook of MedTech in China

SOURCE: McKinsey Medical Device China CEO Survey 2016

6%

24%

A clear slowdown, e.g.

growth converging

with today’s GDP growth

A return to robust double-digit

growth numbers (15+%)

A moderate but robust growth

scenario - e.g. 10-15%

0%

A hard landing with growth

below today’s GDP growth

71%

“What kind of a future are you preparing for

overall (2020 horizon)?”

5

“This (China) is one of the few countries in the world

where the local market potential itself and the volume

it can generate will justify itself”

– Omar Ishrak, CEO of Medtronic

“

“This investment (in the new diagnostics

manufacturing facility in Sep 2016) demonstrates the

company’s continued commitment to address the

evolving needs in the Chinese market and in

healthcare markets across the globe”

– Franz Walt, President,

Laboratory Diagnostics, Siemens Healthineers

“This new Center (R&D center opened in Shanghai in

2015) is an important step to strengthen our presence

in the high-growth dialysis markets of the emerging

market nations and, thus, our position as the global

leader in dialysis products and services,”

– Dr. Olaf Schermeier,

Fresenius Medical Care’s CEO for Global R&D

“

“


Implications for MedTech


China MedTech industry is on the cusp of a significant

transformation, driven by regulatory changes and evolution of

industry structure

China as 2nd largest, fast-growing MedTech market will continue to

be a must win market for any manufacturer with global ambitions

Winners must accomplish the following:

▪ Capture new sources of growth, reinventing the GTM model and

distribution model

▪ Develop the next wave of strategic capabilities beyond commercial

functions (e.g., market access, government affairs, medical)

▪ Explore sustainable business models and partnership for the future

Chinese MedTech market


Our China healthcare leadership team (Partners and Associate Partners)

For more on China healthcare … www.mckinseychina.com

2014

2013

2012

2015

2016

1 How sick is China's

pharmaceutical market?

2 Will market forces revolutionize

Chinese healthcare?

3 What HC system can China

afford?

4 Will the next medical equipment

champion come from China?

5 Obesity – How big will

China get?

6 How patient do Chinese

patients need to be?

Industry insights Collaboration with CPA

Collaboration with CEIBS &

Korn Ferry on Healthcare

CEO Salons

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