Understanding Chinas pharmaceutical market

To understand the pharmaceutical market in China, Robert Pollard, director of market research firm Synovate Healthcare in Beijing, says first it pays to understand the history of healthcare in this dynamic and maturing nation.



To understand the pharmaceutical market in China, Robert Pollard, director of market research firm Synovate Healthcare in Beijing, says first it pays to understand the history of healthcare in this dynamic and maturing nation.


Pollard says if you look back to the founding of the Peoples Republic in 1949, some of the demographic measures were alarming. Life expectancy was just over 40 and the Chinese population was plagued by infectious diseases transmitted by a large number of vectors.


Home hygiene was not at the greatest level probably comparable to Europe in the 19th century, says Pollard. The health outlook was not fantastic at this stage, but what the Chinese did have was a universal system whereby the government took pretty much complete control of everything. It was called the Iron Rice Bowl that meant that they looked after people from the day they were born until the day they died.


Sea change


From 1952 to 1982, however, he says, infant mortality fell from around 200 per 1,000 live births to about 32 per 1,000. The change came as there were massive improvements in infrastructure.


A lot of communes provided healthcare and village healthcare centers were staffed by practitioners with basic knowledge kind of barefoot doctors, Pollard says. There was a tremendous focus on disease prevention and treatment of infectious diseases, driven by public health investments, improved sanitation, and control of mosquitoes and snails.


Even by the 1950s and 60s, according to Pollard, a shift from infectious diseases to more chronic conditions associated with urbanization was beginning to take place as the lifestyle of many in China began changing.  Then, as Deng Xiao Peng became enamored with capitalism, central government funding for healthcare was gradually reduced from 32% in 1978 to around 15% by 1999. Pollard says this meant funding responsibility was shifted to local authorities who relied heavily on local taxation to improve their medical infrastructure.


As China opened up in the 1980s, we saw the establishment of special economic zones, mostly on the east coast, such as in Shenzhen, Dalian, Chengdu and in parts of Qingdao, Shanghai and Tianjin, and heavy foreign direct investment and infrastructure development in these areas, he explains. This provided local governments with considerable amounts of tax revenue, which they could reinvest into services, including healthcare. This resulted in a tremendous disparity between the wealthy coastal provinces and the less wealthy inner parts of China, with the exception of a few large inland cities such as Chengdu, Xian, Kunming and others.


Despite these changes, the central government retained control over price for such things as surgery, diagnostic tests and medication in an effort to protect the poorest Chinese citizens, particularly in urban centers, against not being able to get any medical care, Pollard says.  Ultimately, he says, the result was hospitals, especially on the east coast cities, with advanced and modern medical infrastructures that were growing and expanding, limited central government funding and unrealistically low prices for consultation and diagnosis.


This created an unusual situation where income was generated through drug sales and in many hospitals in the 1990s, up to 70% of their income was generated this way, and provided a majority of the hospitals profits, Pollard says. Doctors were actually incentivized by their hospital according to the amount of money they generated for their hospital. As has been well documented there was quite a lot of corruption within the system that went from top to bottom. In some cases, you had pharma companies who actually paid doctors to prescribe particular products and that went on throughout the 80s and 90s.


But he says, multinational companies belonging to the R & D Based Pharmaceutical Association Committee (RDPAC), the trade association of multi-national pharma companies operating in China, signed agreements outlawing the practice in 2000. In 2006, Pollard says, the communist party investigated almost 3,000 bribery cases involving nearly $30 million.


Basically, what we saw was that overall healthcare was improving, with advances in diagnosis, treatment, and access to information and hospitals, but there was tremendous disparity between the rich and poor and a major change in disease patterns as workers migrated from the countryside to urban centers with increasingly incidence of hyperlipidemia, hypertension, diabetes and gastric illness, he says


Still work to be done


Pollard says that even though the government does provide some health insurance and is driving hard to have universal coverage with the new health legislature plan in place, the majority of urban coverage for employees is provided by their employers who have seen their premiums rise steadily over the years.  However, many urban and rural Chinese are still without insurance coverage.


In Beijing, probably 70-80% of the population has some form of health insurance, he says. In Shanghai, it might be 90-95%, but in Guangzhou, it might be as low as 50-55%.


Because of this disparity, coupled with the high cost of healthcare and continued challenges with access to information, Pollard says a large number of patients fail to seek care until their conditions are well advanced. To combat this problem, the government is moving toward improved diagnosis and is investing $125 billion over the next three years to improve the healthcare infrastructure, particularly in rural areas.


Its a bit of a move back to a more socialist approach, with plans for a comprehensive rural medicine co-op insurance program with small co-pays aimed at ensuring that more than 800 million Chinese have some form of health insurance and a new basic insurance scheme for the urban unemployed (about 43 million nationwide) to be certain they dont fall through the gap, he says.




Pharmas future


But what does the new approach mean for Pharma?


Pollard says many of the issues pharmas face in China are similar to those they encounter elsewhere. Synovate Healthcare research among doctors in China indicates that they expect innovative and leading edge drugs from multinational companies and understand these may cost more than domestic products. In addition, they desire good educational support from pharma companies operating in China.


According to recent reports from McKinsey on healthcare spend by governments, European countries are spending about 9% of GDP and the US government spends about 18%, while the Chinese government spends about 5%. Pollard says that investment in healthcare by governments over the past 25-30 years consistently has been about 2% above GDP growth, indicating that the cost of healthcare is accelerating quicker than individual countrys economies.


In order to keep up with demand and rising costs, governments are trying to (1) improve the system, including measures such as putting better preventative medicine in place and moving slowly to a more efficient primary care model and away from the current hospital based model, (2) revamp the payment structure to put more responsibility on consumers to carry a greater share of the cost of care and through both driving OTC business and encouraging more private health insurance and (3) maintain the profits of pharmas and medical equipment and device makers at reasonable and fair levels, Pollard explains. So clearly, companies are going to have to continue to develop innovative drugs that offer significant advantages over generics available in the marketplace. Theyre also going to have to look closely at health economic data and work with governments to help them understand the long term cost benefits from having more proactive early intervention programs for high incidence, high cost diseases such as diabetes.


When a new drug is launched in China, he says, it generally cannot be considered for national health insurance reimbursement for a minimum of two years.


That obviously controls cost as most new drugs are normally more expensive than those already in market, Pollard points out. And hospitals can only have two drugs of any given molecule thats normally a branded version and the local generic. However, although theres a national reimbursable insurance drug list (NRDL) it has not been updated for several years and a new updated version is expected in November.  It should be noted that although there is an NRDL, that list can be altered at the provincial or municipal level by 10-15%, so some products may be covered by insurance locally but not nationally. So, in addition trying to build relationships with central government for greater understanding of their products for early registration and acceptance, pharma also needs to work at the provincial and municipal level to ensure that even if a drug doesnt make the national list, there is an opportunity to be considered at the more local levels.


And Pollard says pharmas will have to adapt to a changing hospital infrastructure system as part of the recent healthcare reform act.


The infrastructure in the government plan is to move toward a UK or US type model with primary care physicians functioning out of community healthcare centers and clinics, he says. The belief of most people is that most Level II and Level III hospitals will remain as secondary and tertiary specialist care facilities and that Level I hospitals and other facilities will be designated as community healthcare facilities, where there will be a lot of primary care physicians, filtering patients and referring on as necessary.


There are some barriers, Pollard says. Because general practitioner training courses have only been introduced recently in many medical universities, there may be some need for investment in infrastructure at local clinics and hospitals, including basic diagnostic equipment such as ultrasounds, X-ray equipment and cardiac monitors.


This offers a great opportunity for medical equipment manufacturers and pharma companies to aid in this transition, he says. Some, including Bayer Schering and Pfizer, seem to be a little ahead of the curve in getting into these hospitals, talking to the doctors and promoting their products. So thats an interesting dynamic.


But as Chinas approach to healthcare continues to change and mature, the role for pharma companies in that transition and the challenge of working in this dynamic marketplace will continue to evolve. The only certainty in China is that change will continue.


Robert Pollard is the Director of Synovate Healthcare China. Robert has worked in the healthcare industry for 30 years, initially for 17 years on the client side (Reckitt Beckinser, Sanofi Aventis, Quintiles and Astellas) across Europe and in New Zealand.  He held progressively senior roles in sales, marketing and sales management.  In 1995, he opened the first specialized customized healthcare market research company in China for Isis before moving on to become Managing Director of Ogilvy Healthcare China.  He returned to Isis in 2000 as regional head of Greater China and, following the acquisition of Isis by Synovate in 2003, he became the head of Synovate China Healthcare Operations. Robert is on the advisory board of Pharma China and an executive board member of the Sino EU Chemical Manufacturers Association.  He is a regular contributor in the international press and at conferences on matters related to healthcare in China.  He lives in Beijing and is married with two young children.