Post on 15-Feb-2017
transcript
Shanghai, October 18-19 2016
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company
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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:
http://www.biocentury.com/elearning/Whitepapers/formChinaMcKinseyReport2015/download
s?file=McKinseyBioCenturyHealthcareSummit2015.pdf&message=1#.V7Ztsfl97JJ
http://www.biocentury.com/elearning/Whitepapers/formChinaMcKinseyReport/downloads?fil
e=BuildingBridgestoInnovation_McKinseyPresentation_11_18_14.pdf&message=1#.VPtlwuG
ErwA
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
11McKinsey & Company
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
12McKinsey & Company
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
15McKinsey & Company
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
16McKinsey & Company
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
17McKinsey & Company
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. HOW REAL IS THE CFDA REFORM?
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
18McKinsey & Company
CFDA has since made substantial efforts to drive the reform at
unprecedented pace and scale
SOURCE: CFDA; press search; team analysis
+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
1. HOW REAL IS THE CFDA REFORM?
“Backlog removal achieved through
▪ Centralized review
▪ Expanding CDE capacity
▪ Leveraging 3rd party service
19McKinsey & Company
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
1. HOW REAL IS THE CFDA REFORM?
▪ 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
20McKinsey & Company
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
1. HOW REAL IS THE CFDA REFORM?
21McKinsey & Company
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
1. HOW REAL IS THE CFDA REFORM?
Approval time for NDAApproval time for IND
22McKinsey & Company
Long awaited MAH pilots create more flexible options for drug innovators
in China
SOURCE: CFDA; press search; team analysis
MAH scheme allows separation of license
holder and manufacturer
Sichuan
HebeiShandong
Fujian
Guangdong
Shanghai
Jiangsu
Zhejiang
Tianjin
Beijing
Pilot provinces
1. HOW REAL IS THE CFDA REFORM?
▪ 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
23McKinsey & Company
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
1. HOW REAL IS THE CFDA REFORM?
▪ 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
24McKinsey & Company
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
25McKinsey & Company
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
26McKinsey & Company
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
27McKinsey & Company
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
SOURCE: 2016 CDII Survey; team analysis
2. MOMENTUM - POLICY
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
28McKinsey & Company
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
SOURCE: 2016 CDII Survey; team analysis
Percentage
Highly
optimistic
Cautiously
optimistic
Pessimistic
2. MOMENTUM - POLICY
A
29McKinsey & Company
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
2. MOMENTUM - POLICY
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
30McKinsey & Company
Despite recent progress, timely and transparent price negotiation and
reimbursement mechanism still largely missing
SOURCE: Team analysis
2. MOMENTUM - POLICY
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
31McKinsey & Company
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
Assumed US avg. = 8.0
6.2
6.76.6
5.6 5.8
5.5
5.7
China 2015 avg. = 6.1
China 2016 avg. = 6.0
Assumed US avg. = 8.0
5.1
5.1
6.1
6.1
2015=4.31 2016=4.61
32McKinsey & Company
Private capital into healthcare sector is surging…
SOURCE: ChinaBio 2016 Report; team analysis
2. MOMENTUM - FUNDING
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
33McKinsey & Company
…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
2. MOMENTUM - FUNDING
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
34McKinsey & Company
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
2. MOMENTUM - FUNDING
B
Bio4P ForumStart-up Salon
35McKinsey & Company
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
SOURCE: 2015, 2016 CDII Survey; team analysis
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
Assumed US avg. = 8.0
5.2
4.9
4.6
China 2015 avg. = 4.8
China 2016 avg. = 5.1
Assumed US avg. = 8.0
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
36McKinsey & Company
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
2. MOMENTUM - CAPABILITIES
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
37McKinsey & Company
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
2. MOMENTUM - CAPABILITIES
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
38McKinsey & Company
China R&D talents need to strengthen beyond technical
capabilities to become globally competitive
SOURCE: McKinsey analysis
C
2. MOMENTUM - CAPABILITIES
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
39McKinsey & Company
Novelty and quality of innovation still lagging,
with quality of PIs facing biggest gap
D
Quality of R&D
Novelty
of innovative
pipeline
SOURCE: 2015, 2016 CDII Survey; team analysis
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
Assumed US avg. = 8.0
“
2015=4.31 2016=4.61
1 CDII overall average score across all metrics
40McKinsey & Company
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
Assumed US avg. = 8.0
2015=4.31 2016=4.61
China’s ability in attracting/retaining
global talent25.3
41McKinsey & Company
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
42McKinsey & Company
What could be the path forward for China BioPharma innovation? 3
SOURCE: Team analysis
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
43McKinsey & Company
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)
SOURCE: Team analysis
3. PATH FORWARD FOR CHINA BIOPHARMA INNOVATION?
44McKinsey & Company
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
3. PATH FORWARD FOR CHINA BIOPHARMA INNOVATION?
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
3. PATH FORWARD FOR CHINA BIOPHARMA INNOVATION?
46McKinsey & Company
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
3. PATH FORWARD FOR CHINA BIOPHARMA INNOVATION?
47McKinsey & Company
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
49McKinsey & Company
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
50McKinsey & Company
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
“
“
“
“
51McKinsey & Company
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
52McKinsey & Company
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?
53McKinsey & Company
Given this context, key questions we wish to address today
12
3How can companies improve
chances of launch success for
innovative products?
How can companies continue to drive
volume growth efficiently for mature
portfolio?
Has the market truly recovered?
54McKinsey & Company
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?
55McKinsey & Company
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%
1. HAS THE MARKET TRULY RECOVERED?
56McKinsey & Company
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
1. HAS THE MARKET TRULY RECOVERED?
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
58McKinsey & Company
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
1. HAS THE MARKET TRULY RECOVERED?
59McKinsey & Company
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-
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
1. HAS THE MARKET TRULY RECOVERED?
60McKinsey & Company
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
1. HAS THE MARKET TRULY RECOVERED?
61McKinsey & Company
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?
1. HAS THE MARKET TRULY RECOVERED?
62McKinsey & Company
Given this context, key questions we wish to address today
12
3How can companies improve
chances of launch success for
innovative products?
How can companies continue to drive
volume growth efficiently for mature
portfolio?
Has the market truly recovered?
63McKinsey & Company
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
2. DRIVE VOLUME GROWTH EFFICIENTLY FOR MATURE PORTFOLIO
65McKinsey & Company
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
2. DRIVE VOLUME GROWTH EFFICIENTLY FOR MATURE PORTFOLIO
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
66McKinsey & Company
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%
Tier 2 Tier 3 Tier 4
Class III
Tier 1
17% 47% 22% 25%
14% 40% 10% 109%
Tier 2 Tier 3 Tier 4
0-15% 15-30% >30%
12-15 CAGR for volume growthxx%
<0%
2. DRIVE VOLUME GROWTH EFFICIENTLY FOR MATURE PORTFOLIO
Gefitinib (Oncology) growth by segment
Class III
Class II
Tier 1
11% 12% 16% 9%
10% 10% 20% 0%
Tier 2 Tier 3 Tier 4
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
2. DRIVE VOLUME GROWTH EFFICIENTLY FOR MATURE PORTFOLIO
68McKinsey & Company
-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
2. DRIVE VOLUME GROWTH EFFICIENTLY FOR MATURE PORTFOLIO
69McKinsey & Company
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
2. DRIVE VOLUME GROWTH EFFICIENTLY FOR MATURE PORTFOLIO
70McKinsey & Company
Given this context, key questions we wish to address today
12
3How can companies improve
chances of launch success for
innovative products?
How can companies continue to drive
volume growth efficiently for mature
portfolio?
Has the market truly recovered?
71McKinsey & Company
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
72McKinsey & Company
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)
73McKinsey & Company
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
3. SECURING LAUNCH SUCCESS FOR INNOVATIVE PIPELINE
75McKinsey & Company
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
3. SECURING LAUNCH SUCCESS FOR INNOVATIVE PIPELINE
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
76McKinsey & Company
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
3. SECURING LAUNCH SUCCESS FOR INNOVATIVE PIPELINE
Pharmacos have opportunity to develop broad partnership within healthcare ecosystems
77McKinsey & Company
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
3. SECURING LAUNCH SUCCESS FOR INNOVATIVE PIPELINE
78McKinsey & Company
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
79McKinsey & Company
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
81McKinsey & Company
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
82McKinsey & Company
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
89McKinsey & Company
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
92McKinsey & Company
“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
93McKinsey & Company
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
94McKinsey & Company
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
95McKinsey & Company
“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
96McKinsey & Company
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
97McKinsey & Company
▪ 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
98McKinsey & Company
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
“
“
99McKinsey & Company
Implications for MedTech
99McKinsey & Company
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
100McKinsey & Company
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