12 Challenges Big Pharma Faces in China

What challenges must pharma companies overcome in order to successfully leverage the opportunity China offers?

For this month’s article, I asked my team of emerging market experts to share their thoughts.  Read on to see if you agree.

1. Its vast size and heterogeneity.

In 2004, Austin Lally, General Manager of Procter & Gamble’s beauty care business in China, famously declared there to be “no such thing as China – there are 1,000 Chinas, where consumers have differing aspirations and spending power. Marketers must grasp that complexity or fail”.  Despite ongoing economic development across China, this holds as true today as it did back in 2004.  It is also just as applicable to healthcare industry as it is in the consumer world. The opportunity for pharma in a level 3a hospital* in a coastal tier 1 city is unrecognizable from that in a rural polyclinic in a remote province in Western China. While the tier 1 cities of Beijing, Shanghai and Guangzhou have much in common with developed economies, ‘emerging’ tier 2 and 3 cities represent the country’s key growth drivers – they are, therefore, increasingly relevant for pharma to understand. 

2. Public sector complexity.

The Chinese government funds, organizes and distributes the majority of the country’s healthcare. The national healthcare insurance scheme, a key outcome of previous healthcare reforms, now covers more than 90% of the population. However, this increased breadth of coverage has pushed the system to breaking point, exacerbating the shortage of supply and triggering calls for more and better services to be provided. While reforms have been drafted in an attempt to tackle the healthcare system’s inefficiencies and improve depth of coverage, the sheer number of stakeholders involved in public healthcare provision (Ministry of Health regulates the physicians, Ministry of Finance pays their salaries, Ministry of Human Resources and Social Security (MOHRSS) is in charge of the reimbursement, the National Development and Reform Commission (NDRC) is in charge of the drug pricing, and so on…) means that considerable time and effort is required to implement any changes; there are no ‘quick fixes’. 

3. Poor patient-physician relationships.

One of the greatest inefficiencies in China’s healthcare system is the absence of gatekeepers to control public sector referrals. Patients are free to present to any physician they choose – resulting in the absurd situation whereby a patient can present to a senior specialist in a prestigious level 3 hospital for a fever, for example, when such a condition could be easily resolved within a level 1 community hospital. This system results in long waiting times for short appointments, high dissatisfaction on the part of patients, deterioration in doctor-patient relationships and sub-optimal patient outcomes.  An article published in the Lancet in 2013 suggested that medical practice has become a “high risk job” in China, with physicians increasingly on the receiving end of violence from frustrated patients. While Primary Care Physicians are being trained and community hospitals are being built in an attempt to address this, establishing a functioning formal referral network will take time.  In the meantime, pharma has to manage the fact that physicians and patients are often not having open discussions about treatment options. This is a particular issue when high cost drugs are concerned, as the physician rarely has time to explain their choice, or to educate the patient on the importance of complying with the treatment. Patients may doubt a physician’s prescription but feel uncomfortable to challenge their authority during the short consultation. They may then decide to consult with friends and relatives, and subsequently elect not to take the drug. This is especially common for young patients, and people with chronic conditions.

4. Limited access to time-poor physicians.

Given physicians in the public sector are so overburdened with high patient workload, time for them to engage with medical reps or educate themselves on new treatments is extremely limited – meaning pharma companies increasingly have to seek innovative ways to engage with their target customers.  Holding CME events on weekends, rather than within the working week, is one way in which pharma companies have attempted to reach physicians at a time when they are more receptive. While the challenge of time-poor physicians is by no means specific to China, it is especially relevant to the Chinese market given the importance of sales culture and building relationship networks, known as ‘guanxi’.

5. Rationing of high cost drugs and patient self pay.

Increasing breadth of healthcare coverage without the necessary funding to improve depth of coverage has tasked China’s public hospitals with the unenviable task of treating more patients with less budget. In many cases this has resulted in increased rationing of high cost pharmaceuticals purchased by hospital pharmacies. An example of this is the mandate that 30% of scripts in level 3 hospitals must come from the National Essential Drug List, explained further in point #10. Patients often bear the brunt of much of the cost of treatment themselves. This makes them a ‘silent stakeholder’ in their own treatment; as mentioned above, while they have minimal input into which treatment they receive, they do have the power to decide whether to take the treatment, and for how long.  Patients may even put off seeking treatment from a healthcare professional until their condition is very severe in order to avoid the long queues for consultations and the associated high cost. These factors mean the market for pharmaceutical products is suppressed considerably, with many patients likely not receiving, or complying to, the appropriate treatment. 

6. Undeveloped private sector.

A stark difference between China and many other emerging markets is that the bulk of China’s healthcare provision falls on the state. Wealthy Chinese citizens do not, as a rule, opt out of public healthcare to obtain higher cost, higher quality care in the private sector. While the reasons for this are multi-faceted, a key factor is that negative attitudes towards private healthcare are deeply entrenched within the Chinese population. This sets up a vicious cycle which is hard to break, as it makes it very difficult for the private sector to attract good doctors, who feel the public hospitals offer them better career progression opportunities. Patients typically want to follow the best doctors, and therefore continue to flock to level 3 public hospitals. While the private sector has started to grow, and is being increasingly promoted by the government as an alternative option to alleviate the burden on the public sector, a number of barriers to its more widespread growth, including an unfavourable regulatory environment, have hindered growth to date.  Relaxing the restriction on physicians practicing in more than one location, which is currently being trialled on a small scale, may yet help to break the cycle and stimulate private sector growth.

7. Slow drug approvals.

The Chinese regulator, CFDA, has come under fire for dragging its feet in the approval of new drugs.  By the end of 2014, over 18,000 drug applications had yet to be reviewed.  The build-up of such a backlog was partly the result of a reaction to the execution of the former head of CFDA in 2007, who took bribes to allow expedited and unqualified approvals. It is unlikely to be alleviated in the short term, as there are only around 70 people with responsibility for drug approval, due to pressure from the state council to slash the central government’s HR budget. Compounding pharma companies’ challenge, the CFDA has a requirement for Phase III trials to be conducted in China regardless of where the product has previously been launched. The result of both the slow approvals and the clinical trial requirement is that it takes a long time for pharma companies to bring their products to market in China – often much later than in other markets.  The registration period is slightly expedited for orphan drugs, although these are not provided free of charge once available

8. Medical tourism and gray market imports.

While we have seen that affluent Chinese citizens don’t tend to opt out of the public system in the form of turning to the private sector, they are increasingly seeking treatment overseas.  Earlier this year, pharmaceutical products were found to be the most purchased items by Chinese holidaymakers to Japan.  As a result, Japanese companies have made plans to capitalise on the trend, by explicitly targeting Chinese consumers. Many drugs which are either very expensive in mainland China, or not yet available (due to the aforementioned slow approval process), can be obtained much more cheaply from Hong Kong. This has resulted in the development of a gray market, with hordes of mainland Chinese consumers crossing the border to purchase drugs from small Hong Kong pharmacies without a prescription.  Vaccines, such as HPV, are also obtained in this way. Pharma therefore needs to recognise that the value of the Chinese market extends beyond its own borders, and be aware of the broader impact of its strategy in neighbouring markets.

9. Scrutiny on international companies.

Recent industry bribery scandals have heightened the Chinese government’s scrutiny of foreign players. China’s anti-corruption initiatives have rained down on a number of multinationals, with the result of making pharmaceutical companies very tentative when operating in China. Compliance with China specific regulations – including anti-commercial bribing and anti-unfair competition law, is critical.

10. Preferential conditions for domestic players.

China’s domestic pharmaceutical companies are not only less subject to the restrictive compliance regulations that have been imposed on their multinational competitors, they are also given preferential access to drug lists – such as the National Essential Drug List (NEDL). Hospitals are obligated to fill a quota of their prescriptions from products included on the NEDL (70% in level 1 hospitals, 50% in level 2 hospitals, 30% in level 3 hospitals). These quotas force the prescribing of domestic products, where available.  Stringent price conditions applied to hospital tenders can also force foreign players to drop out of the tendering process – they simply cannot compete on cost. The result is a considerable competitive advantage for domestic manufacturers. However the flip-side of this is that physicians and patients typically prefer to prescribe / purchase products manufactured by multinational companies, which have a higher reputation in terms of quality.

11. Competition from Traditional Chinese Medicine (TCM).

TCM is viewed as a valid alternative to pharmacological treatment for many chronic conditions, such as diabetes and chronic hepatitis B. 203 of the 520 compounds on the 2012 edition of the NEDL are TCMs. Pharma therefore needs to factor in the impact of TCM on the patient journey and buying process, as it is often a relevant competitor that needs to be considered within the competitive set.

12. Economic slowdown.

Several of the above challenges, particularly the rationing of high cost pharmaceuticals within hospitals with ever tighter budgets, and limited patient willingness / ability to pay, have been exacerbated by China’s economic slowdown. In the first quarter of 2015, pharma grew 15.1% - this collapsed to just 4.6% by Q2. RMB devaluation is shrinking pharma’s earnings within China and may make overseas medical tourism less appealing for all but the super-rich. The public system is facing ever more pressure, and there are no easy answers. The longer-term impact of the changing economic climate on foreign investment in the private sector remains to be seen – while it is now a cheaper market for foreign players to invest in due to the RMB devaluation, the economic slowdown (coupled with an unfavourable regulatory environment) may make it a less attractive one.

Clearly, it is by no means straightforward for pharma companies to succeed in China.  But with high risk comes the potential for high reward.  Now more than ever, up to date information and understanding is required to effectively navigate the Chinese market and healthcare system.  Learn more about this by signing up for our upcoming webinar, ‘Understanding the Patient Journey in China’.

*Hospitals in China are classified according to a 3-tier system based on their ability to provide medical care, medical education, and conduct medical research. Level 3a hospitals are the highest tier – large hospitals providing specialist services that act as medical hubs.

Marc Yates is Director of Emerging Markets at Research Partnership and has 30 years’ experience of market research, specializing in healthcare research since 1996. He spent 15 years in Asia, originally based in Shanghai, then Hong Kong before moving to Singapore. In 2011 he relocated to London to take on a broader Emerging Markets role. Marc is a regular speaker at industry events and has presented papers on Emerging Markets at EphMRA and PBIRG conferences. Contact Marc at marcy@researchpartnership.com

Research Partnership is one of the largest independent healthcare market research and consulting agencies in the world. Trusted partner to the global pharmaceutical industry, we use our expertise and experience to deliver intelligent, tailor-made solutions. We provide strategic recommendations that go beyond research, helping our clients to answer their fundamental business challenges. Find out more at www.researchpartnership.com

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