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Building Bridges toInnovationDecoding the Big Slowdown;

Assessing Progress on Innovation

Shanghai, October 20-21 2015

CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited



McKinsey & Company 2|

Decoding the big

slowdown

Contents

2015 in the mirrorAssessing progress

on innovation




2015 in the mirror


http://slidepdf.com/reader/full/1-the-risk-revolution 4/77McKinsey & Company 4|

Last year we introduced the concept of China’s

potential “Bridges to Innovation”

Broken bridgeNarrow bridgeBroad bridge1 2 3

▪ Mature drugs have lastingstaying power and continue togrow beyond 2020

▪ China delivers meaningful andbroad step-up to reward of

innovation

▪ Mature drugs have stayingpower, but come understronger pressure and plateaubeyond 2020

▪ China delivers meaningful but

narrow reward for innovation,closely aligned with diseasepriorities

▪ Window for mature drugsstarts closing rapidly by 2020,earlier for some drugcategories

▪ Innovation remains heavily

constrained

▪ Self-pay market becomesmain viable segment

e-Health

▪ Each potential scenario has profound implications on market outlook andattractiveness for participants

▪ It will take some time before we know for sure which bridge we are walking on



As of today, we would argue that we are on a Narrow bridge scenario

Narrow bridgeBroad bridge Broken bridge

Slowdown in Rx market(still growing though)

CFDA reform

13th Five Year Plan

CDI expansion

Delay in NRDL update

Pricing reform



2015 in the mirror – 8 key trends worth understanding

Deals

7

Anti-corruption drive

2

Economic slow-down

1

China manufacturing2025

CFDA reform

5

Cost containment

6

e-Health

8

China innovation

43



Slowdown of the economy is impacting many sectors, somemore dramatically than others

Construction Automobile Retail

Electricity consumption Luxury goods

1

SOURCE: McKinsey




Large, low-cost, lower-skilled laborsupply $300

150m

Monthlysalary

Migrantworkers

Old

Lower-value,low-productivity export business model

with FDI

20% Annual export growth

Old

Cost-consciouswith lowersophistication(supply-drivenofferings)

50% Householdsaving rate

Old

4x Debt in2014 vs.2007

Debt-financedproperty andinfrastructure

investment

Old

50% Urbanpopulation(1978:18%)

Inflow into citieswith pollution,

real estateinflation, etc.

Old

China’s new normal – China is transitioning to a new growthmodel with less rapid but higher quality growth (1/2)

SOURCE: McKinsey

Previousgrowth

engine

1

Labor

5

Investment/debt

4

Urbani-zation

2

Consum-ption

3 Businessmodel

Model not sustainable

1




More emphasis on soft thanhard infrastructureand deleveraging

More experienced, higher-wage work force, and moreentrepreneurship and jobcreation

Sustainable and equitablegrowth in smarter cities

Consumption-driven growthwith digitally informed anddemanding customers

Higher-value adding

activities (service and manufacturing)and mass innovation

China’s new normal – China is transitioning to a new growthmodel with less rapid but higher quality growth (2/2)

SOURCE: McKinsey

Previousgrowth

engine

1

Labor

5

Investment/debt

4

Urbani-zation

2

Consum-ption

3 Businessmodel

The success of companies in China will depend on how quickly they adapt tothe new normal

1






Deals – Another year of heavy activity

+++

7




“Internet+” aims to further fuel economic growth by

integrating Internet with traditional industries

Policy description Implication to healthcare stakeholders

▪ Encourage online healthcare service – Develop internet based healthcare services

and information exchange centers acrosshospitals (e.g., EMR and imaging records)

– Promote online registration, result checking,drug distribution and BMI payment

– Improve treatment outcome by adoptingprecision treatment and disease prevention

▪ Promote digital elderly care

– Set up digital community centers andenhance chronic disease management

– Adopt innovative products such as wearable

devices and remote monitoring devices tomonitor and track physical conditions

▪ Enhance e-commerce in healthcare

– Improve operational efficiency andprocurement process via e-commerceplatform

▪ Released in July 2015

▪ Mapped out development targets in 11 keysectors incl. healthcare, manufacturing,agriculture, energy, finance, logistics etc. byintegrating mobile Internet, cloudcomputing, and big data technologies

▪ Aims to build a new economic model and animportant driving force for social innovationby 2025

SOURCE: Lit-search; Government website; McKinsey analysis

8




Many players – both small and large – are actively riddingthe e-Health wave

Example of players Digital giants Healthcare ITEntrepreneurs

Delivery

Personalcare

Accessibility

Distribution

Community

8




In this complex context, we aimed to tackle two key themes

▪ Survey of 50hospital directors

▪ CPA market data upto July 2015

▪ China DrugInnovation Index –

survey ofinnovation leaders

(BayHelix)

▪ Interviews withindustry leaders

“Decoding the bigslowdown”

▪ What is really happening?

▪ What should we expect next?

▪ What are the implications?

“Assessing

progress on China

innovation”▪ Are measures for real?

▪ Who will pay for innovation?

▪ What are the implications?

1

2




Decoding the big slowdown




Decoding the big slowdown – How we went about it

Sources of insights

Latest NHFPCstatistics on

patient flowacross hospitalsegments

Hospital levelprescriptionsdata from ChinaPharmaceuticalAssociation

(CPA) up toJune 2015

Multiple

discussions withseniorexecutives in thepharma industry

Results from asurvey of 50hospitaldirectors acrosscity tiers

McKinsey marketperspectives




China pharma market has experienced a marked slowdown in 2015

YoY sales growth of CPA sampled Class III/ II hospitals1, 2012-15 Q2Percent

SOURCE: China Pharmaceutical Association (CPA); NHFPC

1 679 sampled hospitals, including 468 Class III hospitals, 211 Class II hospitals2 2015 April and May data

6.3%

2015Q114 2015Q213

9.6%

12.4%

16.4%

2012

12.0%

9.8%Outpatient YOY growthPercent

8.2% 5.6% 3.9% 1.8%2




Majority of TAs and top MNC brands are affected bythe slowdown

Growth comparison by TA (ranked by 2014 TA size)CPA sampled hospitals1

Growth comparison by Top MNC Brands (ranked by2014 sales)RDPAC reported sales

CV

CNS

Blood

Alimentary Tract and Metabolism

AI

Antineoplastic andImmunomodulating

12%

7%

8%

7%

9%

6%

9%

Sensory Organs

3%

Genito-Urinary System AndSex Hormones

Dermatologicals

19%

2%

Systemic Hormones 4%

Musculo-Skeletal 8%

Respiratory

8%

LIPITOR

GLUCOBAY

14%

18%

PLAVIX

8%

BETALOC

27%

7%

12%

22%

15%

24%

DIOVAN

NEXIUM

HERCEPTIN

LANTUS

CRESTOR

SULPERAZON

NORVASC

ADALAT

BARACLUDE

-7%

3%

PULMICORT

16%

BAYASPIRIN 8%

43%

16%

5%

15%

15%

18%

19%

15%

13%

14%

19%

12%

15%

39%

18%

14%

23%

19%

36%35%

22%

15%

28%

12%

13%

32%

27%

78%

2011-14 CAGR

2014H1-15H1 growth

1 679 sampled hospitals, including 468 Class III hospitals, 213 Class II hospitals

SOURCE: China Pharmaceutical Association (CPA); RDPAC

% f %




Mature brands drive 78% of growth compared with 71% last year,suggesting an aging portfolio

SOURCE: Industry association; McKinsey analysis

1 By year of registration

2013-14 growth breakdown by brands launch year 1

RMB billions, %2015H1 sales contribution of top 3 brands%

75%

96%

85%

60%

53%

78%

100%

19%

14%

19%

50%

11%

20%

1%

11%

MNC 4

MNC 7 0%

MNC 6

0%

MNC 5 -3%

MNC 3

0%

MNC 1

3%MNC 2

6%

78%

< 5 years>10 years 5-10 years

63

42

57

42

50

62

44

51%2012-13 growth contribution from brands>10 years was 71%, suggesting an agingportfolio

N t j t i ff t th t f ti t fl h d li d t it




4

8

10

7

12

4

6

34

17

8

7

15

24

10%

25%

20%

15%

5%

0

6

6

1310 1411

17

6

1208 09

10

2006

10

9

07 2015 Apr-May

2

2015Q1

Not just a price effect – growth rate of patient flow has declined to itslowest point in 10 years

SOURCE: NHFPC

1 Include hospitals and grassroots facilities

Patient flow1-YOY growthPercent

InpatientOutpatient

M MNC d l l f l th i l d ti t t




Many MNCs and locals feel the pain; some leaders continue to grow atdouble digits

SOURCE: China Pharmaceutical Association (CPA); company financial reports; investor calls; literature search

2015 H1perfor-mance vs.2014 H1, %

2015 H1perfor-mance vs.2014 H1, %

Pharmaplayers

PharmaplayersQuotes from Q2 releases

+1MNCpharmaco2

Sales of mature productswere impacted bycompetition

+3MNCpharmaco3

A combination ofgovernment cost control onreimbursement, strict anti-graft campaigns, the rise oflocal player with cheaper products and the slowdownin distribution resulted in ourslowdown

+6Localpharmaco1

Industry continues toslow … lowest in 10 years

-5Localpharmaco2

Due to price control,increased production cost,and tender policy the wholeindustry is facing severechallenges

Quotes from Q2 releases

-5.4MNCpharmaco1

Chinese government is putting a lot of pressure onoff-patent originators. Thiswill be a big challenge for usin the short term

+25Localpharmaco3

Despite the negativeimpact from the government,we have achieved rapidgrowth by adapting thestrategy of innovation andinternationalization

+19MNCpharmaco

4

Pricing pressure will betight in China and we are

trying to achieve significantvolume reflex as a remedyfor the price drop

+16Localpharmaco4

Despite the slowdownof the overall pharmaceutical industry inChina, the strategy of leanmanufacturing and internet

marketing has lead tosuccess in 2015 1H

+11Localpharmaco5

Facing a challengingenvironment, we havemaintained moderately rapidgrowth through innovativemarketing method, industrialresource consolidation, etc.

Decoding the slowdown: Five key questions




Decoding the slowdown: Five key questions

Where have patients gone?

How low couldprices go?¥

What does this

all mean forpharmacos?

What are thebright spots?

Who’s capturingthe volume?

Growth of public hospital patient flow has experienced markedWHERE HAVE THE PATIENTS GONE?




Growth of public hospital patient flow has experienced markedslowdown this year

Public hospital patient flow (January to Mayof each year)YoY growth, %

SOURCE: NHFPC; interviews

4.7%

9.5%8.5%

12.0%

4.9%

8.5%

2012-2013

2013-2014

2014-2015

2012-2013

2013-2014

2014-2015

Outpatient Inpatient

Budget control policies limiting

hospital ability to

treat patients Anti-graft

campaign reducing

unnecessary visitsMore patients

going to retail

pharmacy for self-medication

Reduced

income for

healthcare due to

stock market crash

Hospitals

reaching saturation

Migrant workers

returning to rural areas

due to economicslowdown

Pharma executives hypothesesPublic hospital patient flow growthsignificantly slower than previous years

Patients

getting medical

advice through

mobile apps

Fewer patients

due to a warm

winter

Effects of hospital related policies and constraints are seen asWHERE HAVE THE PATIENTS GONE?




Effects of hospital related policies and constraints are seen asthe primary driver to patient flow slowdown

How does YoY growth in outpatient flow

compare between 2015 H1 and 2014 H1?100% = 48 respondents

22%

Patients are less inclined to go to hospitalsdue to reduced disposable income

44%

Reduction of unnecessary return visitsof patients

33%

Fewer people getting sick

Patients choose to self-medicate moreby going to retail

Hospital capacity reaches saturationand has limited room to accommodatepatient growth

Hospitals less focused on increasing scale andpatient volume due to public hospital reform

61%

89%

44%

What is driving reduced patient flow growth?

% of top 3 drivers among respondents seeing slower growth

SOURCE: 2015 McKinsey hospital director survey; McKinsey analysis

Hospital related drivers most impactful to patientflow slowdown, suggesting no fundamental shift inunderlying demand

50%

25%

21%

29%

46%

29%

Slower

Faster

Same

100%

Tier 3 andbelow/ county(N=24)

Tier 1/2 city(N=24)

100%

Shift in hospital focus driven by BMI budget control and greaterWHERE HAVE THE PATIENTS GONE?




Shift in hospital focus driven by BMI budget control and greateremphasis on service quality

Due to the BMI budget control policies, we are

simply not able to treat mor e patients

– Deputy hospital director, Class III hospital in

Kunming

▪ BMI budget control measures continue toexpand both in breadth and depth

– Most provinces have set targets for BMIcontrol since 2012 – Jiangsu plans to implement BMI budget

control to all cities/counties – Coverage of budget control in Shanxi

exceeds 80% among all Class II and IIIhospitals

▪ Hospital management focus switchesfrom capacity expansion to serviceimprovement – Multiple government announcements to

prevent “unnecessary” capacity

expansion

– Hospitals make service qualityimprovement a top priority

[2014] Document No.32 by NHFPC

[2015] Document No.45 by State Council

Hospital expansion was very common in the past

while recently central government no longer

encourage large hosp i tals to continu e to expand

– Government official in healthcare reform

We have no plans to add mo re beds in the next

few years . Top priority is to enhance quality and

service of selected departments and make them

national leaders

– Director of BMI affairs, Class III hospital in Shanghai

[2015] Document No.38 by State Council

SOURCE: Government website; expert Interview; McKinsey Analysis

Respondents from lower tier cities are more optimistic on futureWHERE HAVE THE PATIENTS GONE?




Respondents from lower tier cities are more optimistic on futureoutlook for patient flow growth

How would you predict patient flow growth in 2016 H1 vs 2015 H1?100% = 48 respondents


67%

29%

29%

42%

29%Same

Slower

Faster

Tier 3 andbelow/ county(N=24)

4%100% 100%

Tier 1/2 city(N=24)

Future increase in ho spi tal level patient

f low will be driven by capaci ty expansion .

When you look at the big picture, we expect a

relat ively stable grow th

– Deputy hospital director, Class III, Weifang

Growth of patient flow will cont inue to

s low down in 2016. Class III hospitals today

focus more on improving serv ice quali ty ,rather than just attracting more patients

– Head of Reimbursement. Class III, Shanghai

2015 has been a busy year on the pricing frontHOW LOW COULD PRICES GO?




2015 has been a busy year on the pricing front

Nationalpricing

Reimburse-ment

Provincialtendering

Secondary pricenegotiation

I n c r e a s i n g l e v e l

o f f r a g m e n t a t i o n

2015 highlights

▪ National retail price cap removed for most drugs

▪ NDRC retains price monitoring and investigation authority

▪ Price for patented drugs to be set through “multi-party negotiation

mechanism”▪ Reimbursement based pricing piloted

▪ Price point collection initiated for international price referencing

▪ Highly transparent price reference across the country

▪ Provinces demanding aggressive tender price cuts

▪ Independent price category for off-patent originators at risk

▪ Hospital/group level price negotiation pilots ongoing

▪ Expanding scale of pilots in 100+ cities

▪ Lack of volume guarantee

¥

Most provinces expected to initiate tender the near term, many earlyHOW LOW COULD PRICES GO?




Most provinces expected to initiate tender the near term, many earlymovers demanding aggressive price cuts

SOURCE: Literature research; GBI; McKinsey analysis

Tender in progress1Tender hasn’t started Finished 2015 tender 2

Anhui

▪“Double envelope” process

▪ City level “price-volume”

negotiation after provincialtendering

▪ Severe price cut across cities,e.g. average 17% price cut inBengbu

Hunan

▪ Two rounds of negotiation beforeanother two rounds of bidding

▪ Less than 50% of drugsaccepted negotiation

▪ Average price cut 10%-20%1 Includes provinces that have published tendering policies2 Guangdong has finished 2015 tender for reimbursed drugs, while tendering for non-reimbursed drugs is in progress3 No.7 document refers to <Guiding Opinion for Public Hospital Centralized Drug Procurement> issued by State council in Feb. 2015; No. 70 refers to

<Opinion of Public Hospital Centralized Drug Procurement> issued by NHFPC in June 2015

▪ Request 10-20% price cut aspre-requisite for participation

▪ Reference national lowest price▪ Separate groups for off-patent

originators and Gx

Zhejiang

Guangdong

▪ Third party online platform

▪ Monthly tendering▪ 2 quality layers and set the 5

lowest average price as the cap▪ Average price cut 5-10%

▪ First province to tender after

Document No.7 and No.703 werepublished

▪ Introduced transparent purchasing(price negotiation)

▪ Reference national lowest price

Beijing

Jiangsu

▪ Draft version for tenderingpublished in Sep. 2015

▪ Off-patent originators maypotentially be in same categorywith first-to-market Gx

¥

Downward tender price pressure likely to continueHOW LOW COULD PRICES GO?




Downward tender price pressure likely to continue

SOURCE: GBI

2012-15 Indexed average provincial tendering price

2012 price = 100

80

85

90

95

100

105

110

142012 13 2015

2015 averageprice

2012 price = 100

2015 lowestprice

2012 price = 1009999

9696

9297

8892

8795

9090

8790

8383

EXAMPLES

¥

▪ Price trends vary across brands – selected brands chose to drop out of tender requesting fierceprice drop, in the process sacrificing some volume

▪ Greater downward price pressure expected in 2016 due to – Increasing transparency in tender price reference system – More provinces expected to initiate tender

Secondary price negotiation continue to expand, adding further priceHOW LOW COULD PRICES GO?




y p g p , g ppressure on manufacturers

100

Hospitalpurchaseprice

85-95

Secondarypricenegotia-tion

0-15

Retailprice

Provincialtenderprice

5-15

Hospitalmarkup

100-115

Zero-markup hospitals nolonger enjoy15% marginon drug sales

Secondary pricenegotiation providessome margin relief

SOURCE: NHFPC; literature search; McKinsey analysis

Latest development

▪ 3 archetypes of secondary price negotiationsemerging

– City level volume based price negotiation forall public hospitals, e.g. Anhui, Liaoning, 21cities in Sichuan

– Hospital group purchasing organization,e.g., Ningbo, Shaoxing

– Individual hospital negotiations, e.g.,Tianjin, Shanxi, Hubei

▪ Zhejiang province took the lead to pilot profitattribution scheme, savings from pricenegotiation collected by local Bureau of Finance(BoF), and allocated to local hospitals

Indexed price waterfall (tender price = 100)

Context

¥

Several reimbursement pricing models being pilotedHOW LOW COULD PRICES GO?




p g g p

SOURCE: Literature search; McKinsey analysis

Policy Overview Latest development in 2015

▪ Sanming Model

– Set the lowest Gx price as price forreimbursement (piloted for select drugs)

– The rest is out-of-pocket expense forpatients

▪ Chongqing Model

– Use average tendering price to set

reimbursement price – Select top 300 drugs (based on 2014

trading volume) in the pilot

▪ Shaoxing Model

– Use tendering price for each brand toset reimbursement price

– Anhui and Zhejiang provinces adoptsimilar model in 2015

▪ Pricing Bureau Chief conference on

October 27, 2014 suggestedreimbursement-based pricing beimplemented in 2015

▪ No official national guideline publishedto date

▪ Pilots start to emerge in differentprovinces with different

¥

Reimbursement pricing expected to promote usage of Gx given greater discrepancy inout-of-pocket expense for patients using originators vs Gx

Volume growth has not been holding up for many top moleculesWHO IS CAPTURING THE VOLUME?




g g p y p

-5

0

5

10

15

20

Q215Q1

Q4Q3Q2Q413Q1

Q22012Q1

Q3 Q4 Q3Q2 14Q1

-5

0

5

10

15

2025

30

35

40

45

50

15Q1

Q4Q3Q214Q1

Q22012Q1

Q3Q2Q3Q2 13Q1

Q4 Q4

Price

Volume

YoY growth by quarter of volume and price forAcarbose, 2012 Q1-2015 Q2Growth rate by quarter, %

YoY growth by quarter of volume and price forAtorvastatin, 2012 Q1-2015 Q2Growth rate by quarter, %

CPA sampled Class III/Class II hospitals1

SOURCE: China Pharmaceutical Association (CPA); McKinsey analysis

Drop in volume rather than price is partly caused by pharmacos’ decision to “walk away” from

provinces with too aggressive pricing conditions


In the battle for share, both MNCs and locals are able to winWHO IS CAPTURING THE VOLUME?




9%

Local

14

10%

90%

12%

91%

2015

1H

8%

100

MNC

92%

100 100

1312

100

88%

2011

15%

85%

100100

59%

41%

48%

52% 47%

100

2011 12 13

100

53%

39%

MNC

Local

61%

2015

1H

14

100

39%

61%

100

Locals gaining volume share

# of Gx

Top 3 GxCompanies

15

▪ Shandong Qilu▪ Jiangsu Haosoh▪ Shanghai Chemo Wanbang

41%

14%

CAGR

2011-14%

MNC gaining volume share

77

▪ CR Saike▪ Yangtze River ▪ Dawnrays Pharma

5%

25%

CAGR

2011-14%

# of Gx

Top 3 GxCompanies

Amlodipine volume%

Pemetrexed volume%

SOURCE: China Pharmaceutical Association (CPA); McKinsey analysis

CPA sampled Class III/Class II hospitals1


WHO IS CAPTURING THE VOLUME?Product attributes and organizational capabilities are key to capturing




17%

81%

81%

31%

6%

69%

15%

Importance for preferred prescription% of hospital directors list as top 3 reasons, N = 48

volume

Good quality

Convincing clinical data

Low price/good reimbursment

coverage policiesOriginal drug with goodbrand image

Strong support on drug/TAinformation

Innovative communication

New drug with patent


Product related attributes

Deep understanding of prescribermindset and emotions

Unique channel access, e.g., retail,digital

Extensive external collaborations,

e.g., distributor, government,ecosystem partners

Effective coverage and competitiveshare of voice

Market shaping capability

Organizational capabilities

Holistic offering keyto volume capture

Despite slowing growth, there are still bright spots in marketWHAT ARE THE BRIGHT SPOTS?




E-health initiatives▪ Strong government

endorsement on e-health

e.g., Internet+ plan▪ Digital provide new

models to broadenaccessibility, improvehealthcare deliveryquality, and strengthenphysician and patientconnections

High potential onlinechannel▪ Online OTC sales only

USD 60 million in 2014but regulation on onlineRx sales would unlocksignificant upside

▪ County hospital, fastestgrowing segment in hospitalsector, achieved 28% CAGR2011-2013

▪ CHC market achieved 30%CAGR 2011-2013

▪ Brick-and-mortarretail channelkept ~9% growth

in H1 2015,on par with H1 2014

▪ Retail pharmacies becoming an increasingly importantchannel given access hurdles to hospitals

S

Growth potentialbeyond large

hospitals

Rising importanceof retail channel

New productlaunches

Digital-healthfrenzy, beginning of

a new S-curve

S

▪ 20+ innovative drugs launched since2013. Many with potential to changetreatment paradigm and become futuredrivers of the market

▪ CFDA reform underway – “tsunami oflaunches” coming

County hospital market experiencing strong growth momentumWHAT ARE THE BRIGHT SPOTS?




7%

66%

Urban

393

County

144

27%25%

5.5%

70%

County

89

Urban

271

County

52

Urban

171

CHC

Hospital

4.5%

23%72%

2008 2011 2013

17%

22%

Hospital western medicine expense, 2008-2013 (latest available data)Billion RMB

SOURCE: MOH database; NHPFC yearbook

16%

19%

28%

CAGR CAGR

19%

28%

32%

Urban

hospital

Countyhospital

CHC

Accelerated growth incounty hospitals

further driven bygovernment financialand policy support (e.g.,MoF allocated $900+Mto support countyhospital reforms)

CHCs fast growth froma small base, importantto target cities withconcentrated marketpotential

Retail pharmacies becoming an increasingly important channel givenh ll

WHAT ARE THE BRIGHT SPOTS?




access challenges

SOURCE: MOHRSS; MOC; expert interviews

Initialprescri-ption inhospitals

Twoprescri-ption

fulfillmentchannels

Patient self-pick up frompharmacies

Cold-chaindelivery to home/hospital

Case example: Victoza effectively leveragespharmacy channel to drive growth

Retail channel has been growing significantlyin the past few years

39322521

+11% p.a.

20112009 20132007

Revenue (at retail price) of retail pharmacies

in ChinaBillion USD

Pharmacy reimbursement coverage‘000s of pharmacies

284 288 272 265

168152136115

424 424

12112010

399+3% p.a.

433

2013

# of pharmaciesw/o reimbursement

# of pharmaciesw/ reimbursement

10%

CAGR,2010-13

-2%

Another breakthrough year for E-health in 2015WHAT ARE THE BRIGHT SPOTS?

NOT EXHAUSTIVE

H lth i f ti i id th i ti d t i i l t



McKinsey & Company 38|SOURCE: Lit research; McKinsey analysis

▪ Healthcare information service provider authorization moved to provincial gvt▪ State council issued Internet Plus plan in July 2015▪ Moving one step further in lifting the ban on online sale of Rx drugs▪ Linking remote healthcare to tiered treatment

▪ Fosun Pharma cooperates with Guahao.com on O2O strategy

▪ Pfizer teams up with Yuwell Medical on chronic diseasemanagement through online platform

▪ Shanghai Pharma partners with Wonders and JD.com for pharmae-commerce

▪ Sanofi cooperates with Google life science to treat diabetics

▪ PingAn insurance enters into E-health with PingAn Good Doctor

▪ Guahao.com USD 394mn in series D financing

▪ 111.com RMB 450mn in series C financing

▪ Haodf.com RMB 370mn in series C financing

▪ Huakang RMB 200mn in series B financing

▪ Baidu leverages big data capability, introduces robot assistant “Duer ”, “Baidu Brain”

▪ Ali Cloud Hospital went online; cooperates with Carestream on setting up onlineimaging platform; partners with CPIC for online health insurance service

▪ Tencent releases intelligent blood glucose meter ; publishes smart pharmacy plan tobuild one-stop online healthcare service platform through WeChat

E-health

Policy andRegulation

BusinessModel

Investment

BAT on themove

Recently launched products and new launches should bean engine of gro th

WHAT ARE THE BRIGHT SPOTS?




an engine of growth

SOURCE: RDPAC; CFDA

Examples of recentlyapproved drugs

2011-2015 new launch products by RDPAC companiesMn RMB

NOT EXCLUSIVE

Examples

2,425

1,360

7251405

122011 13 2015E14

All productslaunched since2011 expected toaccount for only~2% of MNC Rxsales in 2015

# of newlaunches

3 4 19 1

▪ New approvals postMRCT rulesinterpretation

▪ Does not includeseveral indicationexpansions, e.g.Xarelto (SPAF),

Avastin (lung cancer)

Our perspectives on the big slowdownWHAT DOES THIS ALL MEAN FOR PHARMACOS?




While price pressure and slowing volume growth both contribute to recent market slowdown, the latter seems to have played a bigger role in 2015

Slowing patient flow growth is not a result of changing underlying demand, but more likelyreflects shifting policies/ incentives and constraints at hospital level

Slowdown will likely continue in the near term as more provincial tenders are

announced and volume growth will take time to recover

Attractive areas still exist (e.g., lower tier markets, retail channel, digital health,regulatory); those able to capture new opportunities will have a clear competitiveadvantage

Changing market context has become a catalyst for organizational changes, e.g.,dynamics between local and HQ, greater emphasis on resource efficiency and productivity

Future winners will be those who can evolve their capabilities and strengths to fit the newmarket norm

Eight commercial imperatives for pharmacosWHAT DOES THIS ALL MEAN FOR PHARMACOS?




Through cycle mentalitywith “topline corridor”

Resourceflexibility in faceof uncertainties

Dynamic pricingmodel to copewith pricingpressure

E-healthinitiatives todrive growth fromnew channels

1

2

5

36

7

8

Rigorous SFEfundamentals todrive productivitygain

Externalcollaboration toshape regulatoryframework

Granular miningof data for better

insights and decisions

4

Innovations toshape treatmentparadigm and themarket




Assessing progress on innovation

China Drug Innovation Index (CDII) is the first holistic assessmentof China’s innovation ecosystem to be tracked annually




of China s innovation ecosystem, to be tracked annually

Assess 5 key dimensions of China

innovation ecosystem▪ Policy, Funding, Capability, Local

innovation output, Level of integrationinto global

Calibrated against current U.S. levels(2014 US = 8 out of 10 points)

Aim to update annually to track progress

Approach

Sources of insightsSurvey of ~70members

10 quantitative metrics comparingU.S. and China on reported innovationindicators

Holistic view ofChina innovationecosystem relativeto that of the U.S.

Output

Where does China stand on drug innovation?



McKinsey & Company 44|SOURCE: Source

Text

Where does China stand on drug innovation?

Momentum of China innovation accelerating over the last 12 months




Jan 2015 March 2015 March 2015 June 2015

Epidaza, a global firstselective HDACinhibitor, launched inChina by Chipscreen

AZ and Wuxi AppTecJV filed clinical trialsapplication for MEDI-5117

Innovent and Lillyentered into a 10-year,~$450M collaborationon biologics

J&J Innovation andWuXi AppTec formedpartnership to fund/incubate high qualitystart-ups

July 2015

Beigene compoundBGB-283 received

CFDA IND approval,and CTA approval

Mar-Aug 2015

Zai Lab secured 4assets from deals with

3 MNCs – BMS, Sanofi,UCB

Sept 2015

Hengrui out-licensedex-China rights of

SHR-1210 to Incyte forup to ~$800M

Oct 2015

Innovent and Lillydeepened relationship

with up to $1bn deal todevelop 3 preclinicalanti-PD-1-basedantibodies

SOURCE: Press search



So where does China stand today across5 key dimensions of innovation ecosystem?

Min Max

0 10Surveyscore




y y

SOURCE: 2015 CDII Survey

score

Ave. ChinaScore = 4.2

Key insightsCDII scores

Access to funding less of an issue

Novelty of innovation is lacking.On the bright side, # of Class 1.1drug applications has increased at

CAGR 18% since 2010

Localinnovation

4Min

0 4.7

Max

10

Integration with global seen as aweak link in China’s innovation

ecosystem

Integrationwith global

5Min

0 3.6

Max

10

Regulatory environment faceschallenges but CFDA is planning

unprecedented reformsLack of reimbursementcontinues to be a key challenge

Min

0 3.1

Max

108.0

Overall infrastructure perceivedto be weaker than talentCapabilities3

Min

0 5.4

Max

108.0

8.0

8.0

Min

0

Max

108.04.0

Funding2

Policy1

Drug review and approval process very lengthy and seen as aweak link for China

POLICY

1




Approval time for IND Approval time for NDA

14.6

11.69.6

11.6

1.01.01.01.0

>10X

201413122011

USChina

22.021.019.018.0

6.5

11.010.09.6

>3X

201413122011

USChinaMonths Months

Min Max

0 103.1 8Ave. China Score = 4.2

Effectiveness ofdrug review/

approval process

SOURCE: 2015 CDII Survey; DXY Insight 2014; CDER 2014 update

R&D leaders view regulatory process as a major barrier in current innovation ecosystem

Recently announced CFDA reform could potentially accelerateapproval timeline and boost innovation

POLICY

1




pp

SOURCE: State Council; CFDA; Industry expert interviews; McKinsey analysis

Industry experts expect significant progress to be made in the next 2-3 years

Applicationtimeline

▪ Dedicated innovativedrugs review channel

▪ MRCT data will beaccepted to supportfiling

▪ Pilot MAH scheme

▪ Bio-equivalent testingchanged fromapplication tonotification

▪ Potentially unifiedapplication process

▪ Enforce originator asreference

Eliminatereviewbacklog

Improvequality ofgenerics

Encourageinnovation

Improvequality ofreview andapprovalprocess

Increasetransparencyof review andapprovalprocess

Reduce non-qualifiedapplications

▪ Self-audit byapplicants

▪ CROsinspection

5 pillars of Reform Review and Approval

System for Drugs and Medical Devices

国务院关于改革药品医疗器械

审评审批制度的意见

国发

2015

44号

Targetedresults

Generics applicationInnovative drugapplication process/requirement

▪ Eliminate allbacklog by2016

▪ Achievereview timetarget set outin regulationby 2018

2 3 41 5

Pricing and reimbursement policy remains a major barrierin the China innovation ecosystem

POLICY

1




Examples of MNC andlocal drugs not on NRDL

Non-NRDL

500

50

NRDL

It is very challenging for

pharmacos to recoup R&D

investment if innovative drugs

cannot be listed on RDL. Oneof our cancer drugs is still not

listed on NRDL 8 years after

launch

– SVP of a leading

local pharmaco

Min Max

0 103.1 8

Ave. China Score = 4.2

Pricingand

reimbursement

Chinanew drug

launchreimbur-sementstatus(2011-2014)

SOURCE: 2015 CDII Survey; GBI; expert interview

▪ NRDL has not been updated since 2009, and no drug launched since is covered yet

▪ Going forward, pharmacos need to consider pricing/coverage tradeoffs, asgovernment will not cover everything at any price

Access to funding not perceived as a major hurdlefor pharmacos

FUNDING

2




Start-up’s access to funding

Min Max

0 1085.9

Min Max

0 1086.6

Mature-co’s1 access to funding

Privatecapital

Min Max

0 1085.1

Min Max

0 1086.1

Govern-mentfunds

Debtfinancing

Min Max

0 1082.9

Min Max

0 1085.6

Ave. China Score = 4.2 Ave. China Score = 4.2

SOURCE: 2015 CDII Survey

1 Established company with commercial presence

Types of funding options for Chinese companies are limited, whereas in U.S. companieshave access to broad ecosystem of angel investors, VCs etc., … with creative funding

options

Total R&D funding has been rapidly growing, although stillat 1/8th of US investment level

% of US level

FUNDING

2




+27% p.a.

2014

8.9

13

6.5 7.5

2010 11 12

4.83.4

2014

68

13

+1% p.a.

65

12

63

11

62

2010

66

NSF Pharma R&DVC

Funding for R&D

$Bn

Funding for R&D

$Bn VCNIH Pharma R&D

5% 8% 10% 12% 13%

% of US level

1 McKinsey Global Institute projection

SOURCE: 2015 CDII Survey; McKinsey Global Institute; China Investment 2015 – ChinaBio, STS.org; NSF annual report;NIH report; PWC Moneytree life science report; 2015 PhRMA industry profile

China R&D funding has grown at 27% CAGR in the past five years,and is expected to reach ~$25-30 Bn by 20251

Funding raised by Chinese innovation companies has been growing inpast 12 months; first wave of IPOs also coming up

FUNDING

2



McKinsey & Company 53|SOURCE: Press search

Jan, 2015

Dec, 2014

Dec, 2014

Dec, 2014

Jan, 2015

May, 2015

Oct, 2015

Sep, 2015

Aug, 2015

May, 2015

$100M

$75M

$8M

$10M

$25M

$97M

$100M

$35M

$16M

$45M

Growing fund raising in innovation Recent IPOs from China Pharmacos

Oct, 2015

Jun, 2015

Oct, 2015

Capabilities and infrastructure still lagging US benchmarks,but with some promising potential

CAPABILITIES

3



McKinsey & Company 54|SOURCE: 2015 CDII Survey

Discovery

Clinicaldevelop-ment

How wouldyou rate China’s overall

infrastructure for druginnovation today

Chemistry,Manu-facturing,Controls

How would you ratethe quality of R&Dtalent available inChina today?

Min Max

0 1084.9

Min Max

0 1084.6

Min Max

0 1085.0

Min Max

0 108


4.6

Capabilities in basic research has gap to U.S.,particularly in quality

CAPABILITIES

3




Publicationsin inter-national

journals

(‘000s)

+20% p.a.

2014

73

13

66

12

52

11

42

2010

35

269

+3% p.a.

201413

275

12

268

11

250

2010

242

Average

citations (#)

SOURCE: Thomson Reuters; InCite; Using Essential science indicators category (Immunology, Microbiology, Neuroscience& Behavior, Clinical medicine, molecular biology & genetics, Biology & biochemistry, Pharmacology & toxicology)

0.8 1.4

▪ China’s quantity of research is rapidly gaining momentum

▪ However, to improve quality, the academic community needs to clean uppractices of mediocre/me-too publications and enhance data integrity

China US

Chinese firms are building technology platforms to enableinnovation – BGI and genomics / DNA sequencing example

CAPABILITIES

Unique scale in genomics

3



McKinsey & Company 56|SOURCE: Company website; annual report; news release; expert interviews

Unique scale in genomics

#1 in NGS field in China

16 Years in business

15 state of the art genetic

sequencing machines

Large database specific forChinese patients

#1

16

150

Ranked by Nature in 2014 as:

5th

of Top institutions inNature and Science

15th of Top institutions

5th

15th

Sequencing Platform

Mass Spectrometry platform

Computing platform

3

9 O r g a n i z a t i o n s

P l a t f o r m s

Managing director Wang Jun recentlyfounded a startup ShenZhen TanyuanTechnology Ltd. focusing on healthcarebig data

Chinese firms also actively contributing to improving globaldrug innovation model – Wuxi AppTec example

CAPABILITIES

3



McKinsey & Company 57|SOURCE: Expert interview; company website

Large scale enabling 2,000collaborators globally

Start-upcompanies with

great ideas

Equipment

Key analytical

equipment of over50 percent

measured by 24x7utilization

Innovativecompanies withcapacityconstraints

Capabilityaugmentation

Facility

5 millions sq ft of

R&D andmanufacturing

Space 21 sites

Traditional Gxcompanies trying

to innovate

Virtual labInnovative engine

Man power

10,000 employees

globally4,000 synthetic,medicinal andprocess chemists

#1 CRO in Asia

CMC platform inspected byFDA

1st

cGMP biologics manufacturingfacility compliant with US, EUand Chinese regulatorystandards

1st

GLP preclinical laboratorydouble certified with an OECDcountry and CFDA

1st

GLP/GCP bio-analytical labthat passed FDA, OECD, andCFDA inspections

1st

CLIA-certified clinicalgenomics lab

1st

#1

1st in China:

4 Novelty and quality of innovation still laggingLOCAL INNOVATION



McKinsey & Company 58|SOURCE: 2015 CDII Survey; expert interview

Min Max

0 1083.8

Min Max

0 108

Min Max

0 1084.2


4.3Quality of R&D

Noveltyof innovativepipeline

Discoveryresearch

Clinicaldevelop-ment

Today majority of Chinese companies are focusing on “me-too” and “me-better”targets in drug R&D with few exceptions, such phenomenon is probably driven by

the fact that pharmacos need to establish credibility and demonstrate progress on

innovation. Going forward I hope these companies will also invest in new MOAs and

first-in-class as they build up R&D scale and capabilities

– China-based investor

Local PCT and IND applications are rapidly growing

LOCAL INNOVATION

4




PCTpatentsfiled1

(#)

1 PCT: Patent Cooperation Treaty2 Class 1 applications in China; Commercial IND applications in the US

SOURCE: 2015 CDII Survey; PatentScope; GBI; FDA

INDapplica-tions2

(#)

China’s levels of PCT patent and IND applications still a fraction of that of U.S. (17% and 22%in 2014, respectively), however growth trajectory of both metrics has been strong

974

504

+18% p.a.

17356

+33% p.a.

20142010

5,8215,272

+3% p.a.

782601

+7% p.a.

2010 2014

While cross-border collaboration is increasing, participation inglobal trials has been limited due to recent regulatory hurdles

INTEGRATION WITH GLOBAL

5



McKinsey & Company 60|SOURCE: 2015 CDII Survey; China Investment 2015 – ChinaBio; Thomson Reuters

# of global trials (#)

Cross-border dealson drug R&D (#)

Min Max

0 103.6 8


Contributionto globalinnovation

Co-authorship withoverseas

researchers (‘000s)

China contribution by the numbers

4771

2014

-10% p.a.

2010

2613

+19% p.a.

76

27

+30% p.a.

Overall, survey participants believe that the outlook forChina innovation is promising

Wh l ill Chi l i l b l

Wh Chi ’ bi d i




What role will China play in globaldrug innovation by 2025?

% of surveyed, N = 69

Majority of R&D leaders believe China could become a top-3 contributoror a solid 2nd tier player in global drug innovation by 2025

9%62%29%

Top 3 globalcontributor

Solid 2ndtier player

Struggling,focused onincrementalinnovation

What are China’s biggest advantages indrug innovation?

Strong government support, evidenced byrecently announced changes to acceleratedrug registration and approval

Sizable Chinese market attracts R&D

investments from both MNCs and locals

Proximity to leading drug R&D serviceproviders in China including CROs, CMOsetc.

Highly motivated Chinese companieseager to learn and play in global marketReference countries

Making the leap – what it could take

Pharma-coGov PE/VC￥




￥

Opportunities for key ecosystem participantsKey hurdles / challenges

▪ Challenging regulatory

environment▪ Lack of mechanisms to

reward innovationConsider trade-off between pricing and reimbursement

Incorporate value evidence in clinical development plans

▪ Limited types of fundingoptions for start-ups

Allocate a proportion of government pension fund orsovereign wealth fund to VCs focusing on life science

Partner with promising startups in early stages

▪ Large talent pool withmixed level of capabilities

Encourage academic-private collaboration; urgeacademic to train “industry-ready” graduates

Attract and develop high-quality R&D talent

▪ Pipeline novelty andquality of R&D can be

enhanced Invest in innovative solutions that address China-prevalent disease areas (e.g., Lung cancer, liver cancer)

▪ Inclusion in global trialshas declined

Leverage new CFDA reforms to integrate China early oninto global development planning

Incentivize high-quality basic research (especially inBiology) to build cutting-edge expertise in select areas




Finding the funds for innovation

“Finding the funds for innovation” becoming increasingly relevant




“Who will pay for innovation” becomes an increasingly relevant question for pharma

industry, payors, policy makers and ultimately patients

Research & development RegistrationMarket access &commercialization

▪ Growth of mature drugs slowing down furtherexacerbates importance of innovative drugs

▪ Wave of new drugs expected to reach China

– MNCs launching waves of new drugs with highexpectations on uptake

– China innovation ecosystem has been improving,leading locals begun to develop and launch newdrugs

– CFDA reform expected to accelerate review andapproval of new drugs in coming years

▪ Patients increasingly demand access to new

drugs as affordability and awareness of optionsimprove

▪ Market rewards for innovativedrugs remain limited

– Fragmented and inefficientlisting & tendering processes

– Infrequent RDL/PRDLupdates with narrow

coverage

▪ Government spending onhealthcare remainsconstrained and focuses onproviding basic coverage

▪ Private health insurance still atnascent stage

Large number of innovative drugs expected to hit the market incoming years

Strong innovative pipeline with multiple planned new launches (examples)



McKinsey & Company 65|SOURCE: GBI; lit search

Strong innovative pipeline …

129

284

70

83

34

IND1

367

NDA2

104

131

Pre-clinical1

2

1 Class 1.1 Chemical drugs and Class 1 biologics in CFDA2 Drugs in NDA review and drugs approved for NDA but not marketed (Jan 1 st, 2011-Oct 13th, 2015), including drugs in category chem-1.1, chem-3.1,

and innovative biologics

… with multiple planned new launches (examples)

Cadrofloxacin

Hemporfin

Nolatrexed

LocalMNC

Brand / product Company

NDA approved In NDA review

China faces clear constraints when considering rewards for innovation

Per capita healthexpenditure Total health expenditure

Healthcareexpenditure



McKinsey & Company 66|SOURCE: WHO; World Bank

expenditureUSD

US

Japan

UK

China

3,965

9,150

3,600

370

Total health expenditureBn,USD

230

2,870

510

505

▪ Despite strong growth in past decade, China per capita healthcare spend stillsignificantly lagging behind developed countries

▪ Reward for innovation will be selective – government unlikely to support all innovativetreatments equally

17.1%

10.3%

9.1%

5.6%

expenditureas % of GDP

A set of levers could be considered to bridge the funding gap andreward innovation



McKinsey & Company 67|SOURCE: NHFPC Yearbook; McKinsey Analysis

China healthcare spend byfunding source

$ Bn, percentage

40 34

35

36

2530

515209

2008

Social

PatientOut-of-pocket

Govern-ment

2013 2020

?

~1,000

?

?

On-going levers

Future possibilities?

Direct increased publicspend on innovation

5

Redeployment of savingsfrom price cuts of mature

drugs

6

Governmentreimbursement NRDL and CDI1

Selected localreimbursement

4 Self-pay market

3Patient AssistancePrograms (PAPs)

Outcome/value-basednegotiation

7Development of privatehealth insurance (PHI)

2

1 NRDL: national reimbursement drug list; CDI: critical disease insurance

1

Local governments have provided reimbursement schemeto a subset of innovative drugs – select examples

1

# of provincesDi

Locally negotiated



McKinsey & Company 68|SOURCE: GBI; literature research; McKinsey analysis

1 Chronic myelogenous leukemia 2 Gastrointestinal Stromal Tumor

with PRDLDisease area reimbursement scheme

2Non-small celllung cancer

Qingdao

4Non-small celllung cancer

Zhejiang 3 cities (Qingdao, Zhuhai and Shenzhen

2Breast cancer 3 provinces (Zhejiang, Inner Mongolia,and Jiangxi)

8 cities

11Rheumatoidarthritis

Zhejiang Qingdao

12Non-small cell

lung cancer

2 provinces (Jiangxi and Zhejiang) Zhuhai

While more cities and provinces are starting to cover innovative drugs through PRDLor local negotiations, overall scale and scope of coverage remain limited

Acceleration of roll-out of Critical Disease Insurance program

Policy evolution Impact to date

1



McKinsey & Company 69|SOURCE: Government official website; lit research; McKinsey analysis

y p

2007

2012

2014

▪ Piloted in all 31 provinces,covering ~700 million

population as of April.2015

▪ Actual reimbursement rate noless than 50% for OOP, andincreases with OOP expense

▪ ESRD example: NRCMS coverthe first 70% of expenses, thenCDI covers 50% of remainingexpenses

▪ CDI is now operated by privateinsurers in most regions

▪ “Guidance and

Definition ofCritical DiseaseInsurance” issuedby CIRC1 to setup a model policyof critical diseaseinsurance

“Opinions on ImplementingCritical Disease Insurancefor Urban and RuralResidents” jointly issued byMOH, MoLSS2, CIRC, etc. to

encourage cooperationbetween government andPHIs

▪ “Accelerate Developmentof CDI for Urban & RuralResident” issued by the

State Council, whichencourage PHI to provideCDI services and establishevaluation and supervisionsystem for expanding PHIcoverage

▪ “Guideline on Full Implementation ofCDI for Urban and Rural Residents”

released by the State Council in Aug. – CDI should benefit all urban and rural

residents covered in the nation's basic

health insurance by the end of 2015 – A relatively sound system for CDI will

be established by 2017

▪ CDI expected to befully roll-out soon andmay cover UEBMIparticipants as well(Pilots in some regionsalready)

▪ The reimbursementrate will increasegradually in future

Future outlook

2015

1 China Insurance Regulatory Commission2 Ministry of Labor and Social Security

CDI programs should expand

to the whole country by the end of

2015 to help financially challengedresidents

– Premier Li, Keqiang

Growth of China PHI marketUSD b

Private health insurance (PHI) is rapidly growing, providingsupplementary funding source

P i t ti l di

2




USD, bn

SOURCE: CIRC; State Council; literature research; McKinsey analysis

13

18.213.7

2012

20.1

2015 H114

25.8+37%

Private payors actively expanding presence

Private payors are exploring new ways to

enhance access to data and improve riskassessment▪ Collaborate with providers

▪Invest in mHealth

▪ Invest in hospitals to become integratedmanaged care systems

▪ Manage BMI for local government

▪ Growth driven by favorable policies, e.g.,

– Increasing social capital

– Tax benefits

▪ PHI uptake still limited by

– Access to patient data

– Demand generation of target population

– Lack of bargaining power over providers

– Capability and talent

+

++

+

2% 2% 5% 7%

xx% PHI as % of total HC spend

Nanjing Gulou hospital

Patient Assistance Programs (PAPs) could help expand accessiblepatient pool

Nexavar Gleevec Iressa

3% of relevant patient pool coveredxx



McKinsey & Company 71|SOURCE: China Charity Federation; literature search; McKinsey analysis

▪ Donation to poorestRCC and HCC

patients

▪ Donation to poorest 10%of CML & GIST patients

▪ Setup medical centers &disease consultinghotline

▪ Provide medicalassessment to patients

▪ Iressa Pan AsianStudy (IPASS)

clinical trials in 11cities in China

Charitydonation andclinical trials

▪ 3-month cap, after

which drugs are freefor life with provenefficacy

▪ Free for patients with

basic living allowences▪ 3/6-month cap, after

which free for rest ofyear

▪ 5-month cap for

NSCLC patients,after which drugs arefree for life

Program

▪ 20K patients▪ 25K patients

Impact

(by 2014)

▪ 39K patients

~10% <5% <10%

While beneficial to patients enrolled, PAPs only cover a subset of diseases andfraction of patients in need of innovative therapies; scaling up poses challenges

Self-pay segment could be further activated, leveraginglearnings from other markets

Increasing patient affordability & willingness to payInnovative ways to activateself-pay segment

4




Increasingwillingnessto pay

SOURCE: National Bureau of Statistics; MGI; McKinsey analysis

1 Affluent (>36K USD annual household income), Mainstream (17-36K USD annual household income), Mass (10-17K USD annual household income),Poor (<10K USD annual household income)

2 Including all healthcare related spending across prevention, diagnosis, treatment and nutrition

Example

Learnings from other markets

▪ Partner with private banks and

consumer financingcompanies to provide loans topatients

▪ Short-term installments to helppatients manage cash flows

▪ Risk-sharing mechanisms to

mitigate patients’ perceivedrisk (e.g. on product efficacy)

24%

7%

26%

16%26% Healthcare2

Transportation andcommunication

Recreation, education

and culture

Others

Personal product

Consumption of New Mainstream by category, 2015

42.9

45.660.7

62.4

14.0 21.4

14.923.7

9.3

Poor

Affluent

NewMainstream

Mass

2025E

6.2

1.3

2020E

4.2

1.7

2015

2.7

2.3

Increasingaffordiblity

Consumption of urban households – By annual income1

Percentage, 100% = trillion USD

In India, Enbrel can be paidthrough installments of <$200to minimize cash flow disruption

for RA patients

Going forward, additional set of levers can also be explored

RationalePotentialimpact



McKinsey & Company 73|SOURCE: McKinsey analysis

Rationaleimpact

▪Current healthcare spending accounts for 5.6%of GDP, lower than many developed market

▪ Increasing healthcare spend on innovativedrugs by 0.5% of GDP in 2025 couldtranslate into ~$20 Bn opportunity forpharma industry

Increase publicdirectspending oninnovative drugs

5 High

▪ Cost saving from reducing price of maturedrugs likely to be limited – estimated at $0.6-1.5 Bn per year

Redeploy savings ofprice cuts onmature drugs

6 Low

▪ Adopt Health Technology Assessmenttools/framework, where drugs with compellingclinical benefits could gain more commercialupside

Value-basednegotiation betweenpayors andpharmacos

7 Medium

In summary, narrowing the “paying for innovation” gap requires a

multi-pronged effort

T i t lti l f di




A multi-prongedapproach

Better articulate the total economic and socialimpact of rewarding innovation, includingaddressing critical medical needs, creating a healthier

society and cultivate an innovative and strong industry

Tap into multiple funding sources, e.g.,▪ Increase government HC spend on innovative drugs

▪ Unleash Private Health Insurance market▪ Further activate self-pay segment

Not all innovation will be rewarded –

demonstrating the value of innovative drugswill be critical

Creative cross-sector partnershipsshould be explored (e.g., betweenprivate payors and pharmacos)



Closing thoughts




We are on a narrow bridge to innovation, with stilla high degree of uncertainty on outlook1

2 The going gets tougher; however there arestill tremendous opportunities to capture

3 The time to drive real change in business andoperating models is now

For more on China healthcare …

Our China healthcare leadership team (Partners and Associate Partners)




Industry insights Collaboration with CPA

▪ Data driven periodic reports▪ TA specific deep-dive

(e.g., oncology, immunology)

iTunes Store –

“McKinsey on

China”

▪ How sick is China'spharmaceutical market?

▪ Will market forces revolutionizeChinese healthcare?

▪ What healthcare system can

China afford?▪ Will the next medical equipment

champion come from China?

▪ Obesity – How big willChina get?

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