Dr. Bates’ Talkback: How to grow sales and brands in China
Dr. Andree K. Bates outlines 10 barriers to growing pharma sales and brands in China and how to overcome them
IMS Health predicts China will be the world’s third largest drug market after the US and Japan very soon and the second largest by 2020. The economy is booming and expenditure on private healthcare is increasing approximately 11.6% a year, according to McKinsey. Because of this, China is now fully on most companies’ agendas as pharmaceutical growth continues to grow in the double digits.
There are numerous barriers to growing your brands in China, and not all are easy to overcome. Nonetheless, there is also vast opportunity and some very easy changes that can be made to dramatically increase the results of your sales and marketing efforts. Here are 10 barriers to growing your sales and your brand in China and how to overcome them:
1. Global business models
Often companies try to utilize their traditional global business model for China. They are stuck in a one-size-fits-all mode of thought. This doesn't work in China for several reasons, one of which is that this approach fails to capture lower demographic groups and market segment differences. These comprise significant proportions of the market. Market-specific business models need to be created wherein companies can both keep in touch and influence physicians and other target groups at a significantly lower cost.
You can’t speak about ‘the Chinese consumer’ any more than you can about the ‘European consumer’. China is almost like Europe in that every country in Europe has differences, and every cluster within China has vast differences, making them almost like separate countries. Examples are Guangzhou and Shenzhen, two cities that are geographically close but the differences between them could not be stronger. The majority of people in Guangzhou speak Cantonese, are from the area, and tend to spend their time at home. In Shenzhen, the majority of the population are from other parts of the country, speak mainly Mandarin, and spend most of their time away from home. Marketers can see that it would be highly likely that the drivers in these two areas are different.
It simply isn’t enough to have a country-level strategy in China because there is huge variation in needs in different areas, particularly as the population and income characteristics vary dramatically and continue to evolve. Companies need to examine their strategies not only on a country basis but also on a regional basis. By modifying the focus of marketing, firms can get impressive sales growth.
Working slightly different strategies within clusters means you can focus resources to build scale and network effects that stimulate even more growth in that specific cluster. By focusing on attaining a specific growth in a cluster, once you gain a level of about 15% growth, you find that you suddenly grow a lot faster without additional resource, as growth is heavily boosted by word of mouth and reputation. Interestingly we find that word of mouth is a strong driver in China, more than in other countries.
3. Lack of good segmentation
No one is saying this is easy, especially given the lack of traditional data upon which to do this. There are over 160 cities with a population greater than 1 million and several with a population greater than 10 million. The foreign pharmaceutical companies get the majority of their revenue from the top 30 cities (and several cover over 150 cities). But with the population still growing, the penetration in smaller cities and rural areas is not proving as effective.
Reps are not as productive with smaller accounts, there are higher price sensitivities, and the logistics are less than efficient. To ensure the largest segment of the market for each product, large pharmaceutical companies need to tailor their product marketing more effectively to meet the local needs as well as the country needs and to develop a more efficient distribution strategy.
According to McKinsey, Beijing, Shanghai and Guangzhou account for 21% of the existing pharma market and are home to many leading physicians. China is a very rep-sensitive market, and physicians are more correlated to prescribe a new drug if they receive two visits or more a month from a rep. Larger hospitals are targeted but, in fact, physicians in smaller hospitals see more patients per day. In the smaller hospitals, 71% of physicians see an average of 20 or more patients a day; in the larger ones, less than half see that many. This is especially important for primary care drugs, as studies in China have found that the more frequently physicians interact with patients the more prescriptions for primary care drugs they write. Health centers are also important in both top- and second-tier cities.
There are around 36 cities that represent roughly 37% of the market, according to McKinsey, and are just as important as the top tier. Pharma companies tend to target the larger hospitals but less so the mid-size and smaller ones. The same rep sensitivity applies to tier 2 hospitals.
McKinsey reports that there are 600+ third-tier cities. Many companies largely ignore these but represent a strong growth potential if companies target them correctly and efficiently. These are great opportunities for good OTC drugs and older prescription drugs. Firms often use partner companies in many of these regions, thereby cutting their costs but also preventing them from controlling their sales channels. In the smaller cities, the larger hospitals are the ones with the most drug sales. Companies could consider creating local sales teams to target some of these hospitals.
4. Cluster segmentation
In China, there are 22 distinct clusters of population that each have different drivers. Within a cluster they are homogenous enough to make sensible and profitable strategic marketing decisions. We often analyze the overall country data for general drivers, but then divide the data up into clusters so we can see the different drivers. By focusing this way, faster growth is achieved.
The drivers within a cluster are easily identifiable and managed. Also, the bureaucracy can be reduced if you focus on a cluster compared to nationally, as you have the same government authorities, regulations and policies. The large cities can be far apart so focusing on them can be inefficient. For example, cities in the top 10 can be over 1,000 km apart. This makes it difficult to keep a coherent strategy given the different drivers at work.
However, if you look at a province like Shandong, you see 21 cities that are in China’s top 150, which makes it a very attractive cluster to analyze. As always, flexibility is important. For example, distribution could go across several proximally located clusters for increased efficiency. Also, marketing channels in China are more suitable to cluster analysis. Although China has over 3,000 national TV networks, few of these are available everywhere. Other media are more local, so localization is key in Chinese regional markets.
5. Intellectual property protection
A decade ago, intellectual property and patent protection was a really BIG problem. Even as recently as 2006, Pfizer took some local manufacturers to court for producing and selling counterfeits of Viagra—and won. So, things are improving on this front. In 2006, over 1,200 drug and medical equipment makers were shut down for producing fake drugs and equipment, and the government is increasingly supporting patent protection.
Affordability of medicines and vaccines is a significant issue. But populations are large and continuing to grow dramatically. China is a partially reimbursed country, so part of the population is covered. This means that some people may have to pay for medicines themselves. The question then becomes one of volume versus pricing and how to get the balance right.
This is also part of the reason why the branded generics market is so strong in China. Branded generics are big business in China. An example is liver cancer, which is treated mainly by generics in China; 50% of all liver cancer is in China. (For more on branded generics, see Branded generics: The emerging market opportunity, Dr. Bates Talkback: How to mount an effective defense against generics and Pharma’s evolution: From blockbusters and biologics to branded generics, medical devices and functional foods.) Drugs need to be affordable for the general population. Companies have several options. GSK, for example, has adopted a flexible pricing approach to improve the affordability of their medicines and increase access for lower income patients while still remaining profitable.
7. Reimbursement and coverage
The current system is clearly insufficient but improving. Many local drugs are covered by the government’s Basic Medical Insurance (BMI), to which employers and workers contribute. There is a strong correlation in our analytics with BMI coverage and a physician’s willingness to prescribe innovative drugs. Government policies are still being changed so estimating the current percentage covered by this insurance is a challenge. However, there is data that can be used. The Ministry of Health annually updates its database of all hospitals in the country, which includes items such as hospital beds and consumption of Western drugs. Commercial health insurance companies do operate in China.
8. Local competition and relationships
Local players have built up relationships over decades, and relationships are critical in China. When I first worked with China in 1995, I was looking at pricing for a drug. I received a faxed answer that confused me, detailing the relationships of the CEO and his wife and the competitor company and explaining the pricing. That fax is so indicative of the importance of relationships to business in China. Specific elements of relationships are the strongest drivers for foreign pharmaceutical firms in China.
9. Lack of a strong brand
China is brand-focused. Having a strong, well-known brand is critical to success. The first thing to consider is approval, as Chinese regulators are not keen on brand names that imply a cure, efficacy, intended use or target audience. These things should be kept in mind when naming a pharmaceutical brand in this market. Strong brand awareness always correlates with increased prescribing and sales in China.
10. Lack of focus on a wider portfolio
There are several ways to plug the gaps in your portfolio, the obvious one being to acquire a local company, possibly one with niche OTC products, given that many Chinese self-medicate. Other options are to in-license products for China from local Chinese companies or perhaps foreign companies that have little or no presence in China. (For more on in-licensing, see New models for drug discovery and marketing and Will big pharma become a collection of marketing and distribution firms?)
There is not a simple one-size-fits-all approach to China. Traditional strategies do not account for the huge variability within the country, nor the rapid changes taking place. To have a stronger chance of winning, companies need to examine the barriers they face and then access strong analytics data to make better-informed decisions.
Dr. Andree K. Bates, a regular contributor to eyeforpharma, is CEO of Eularis, which applies analytics to determine the sales impact of marketing programs.
For more on China and other emerging markets, join the sector’s key players at Emerging Markets USA in June of 2012, check out Special report: Pharma's emerging markets, and download eyeforpharma's Pharma Emerging Markets Report 2011-12.
To read more on China, see Market access: China and international reference pricing, Cracking the Chinese pharma market, and Forecasting for emerging pharma markets.
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