With China on target to join the world\'s leading pharmaceutical markets in the near future, Ray Hill, global head of IMS Health Consulting, highlights the factors that challenge success in this market, and the opportunities for pharmaceutical companies that tailor their sales and marketing effectively.
The prospects for pharmaceutical multinationals in China are more promising now than they have ever been. The country has posted some of the most impressive pharmaceutical sales growth rates of any market in recent times - 18 per cent CAGR for the five-year period from 2000-05. China's pharmaceutical market (ethical and OTC) is currently worth in the region of $12bn, giving it by far the largest market share in terms of sales in Asia Pacific, and making it the ninth largest market in the world. Over the next five years it has the potential to grow at 15-18 per cent, doubling in size to become the seventh largest pharmaceutical market in 2010.
The main driver of China's recent performance is above-average economic growth, an increase in the average standard of living (average incomes have tripled since 1992), improved health awareness and the government's determination to provide quality and cost-effective healthcare across the entire population.
China's sustained high GDP growth is expected to increase by an average of 8 per cent over the next five years. If the country maintains the pace of development it has shown in the past 20 years, it is predicted to catch up with the USA in terms of total GDP within the next two decades, and become the largest economy in the world by 2050, fueling the ability of China's vast population to spend more on healthcare and drugs.
Asia-Pacific Pharmaceuticals Market
(Source: IMS Health MIDAS MAT Sep 05)
Some of the major pharmaceutical corporations are already making China a strategic market for the twenty-first century; Novartis has just announced plans for a major R&D centre in the country; AstraZeneca and sanofi aventis are investing significantly in representatives and infrastructure; Roche has located its fifth global R&D centre in Shanghai; and Pfizer is now including substantial R&D investments as part of its strategy in China.
However, committing to expansion in China requires the skilful handling of multiple issues, and success does not come easy. Apart from its sheer size (the city of Shanghai alone has a larger population than Australia), there are particular features that set China apart from most Western pharmaceutical markets. These include a far more dynamic and fast changing healthcare environment, extremely fragmented industry sectors (over 6000 manufacturers and more than 17,000 hospitals), the significant role of Chinese medicine in healthcare delivery and the large disparity between its 650 major cities in terms of development and behaviour patterns.
It is the wide differential between the various cities in China, each with its own unique characteristics, physician attitudes and drivers for prescribing, that underscores the need to build city and region-based strategies when expanding in this market. It is important to view the country as a collection of cities, broken down into three distinct tiers, rather an individual market. Historically, pharmaceutical companies have focused on the big tier 1 cities, such as Beijing, Shanghai and Guangzhou. However, one of the key strategic factors in the Chinese pharmaceutical market at this time is that the real future growth will occur in the tier 2 (mid-size) and tier 3 (small) cities rather than tier 1 cities. In fact, IMS is predicting that by 2008, 86 per cent of the Chinese hospital market will be outside the larger cities.
This shift in the source of growth in China has significant implications. As wealth expands beyond the largest urban areas into smaller cities there will be a significant upturn in pharmaceutical sales, providing companies can position themselves to overcome the logistical hurdles.
Another major strategic factor is the negative health effect of increasing affluence. Greater prosperity often leads to changes in lifestyle, for example, richer, less healthy diets, and a consequent increase in certain chronic diseases, such as diabetes. On the basis of IMS forecasts, China will have 38 million diabetic patients by 2025, almost double the projections for diabetes in the USA, and about 13 per cent of the global diabetic population. A rapidly aging population further fuels chronic disease. Currently increasing at around 0.6 per cent per year, China's 1.3 billion population is projected to grow by around 83 million to 1.39 billion individuals from 2005 to 2010. The over-65 age group is expanding most rapidly at 2-2.4 per cent per year and is estimated to reach 111 million by 2010.
Pharmaceutical manufacturers are testing several business models to drive growth in China over the next few years including government partnerships, significant investment in disease awareness, new channel targeting (such as retail pharmacies, private clinics, hypermarkets, national distributors and retail chains), peer-to-peer selling and aggressive expansion of their sales forces.
Sales penetration and productivity are particularly significant drivers of growth in the vast Chinese pharmaceutical market today. In line with their pursuit of more widespread penetration into the tier 2 and tier 3 cities, successful corporations are already investing heavily in their field forces, operating single line teams in tier 1 cities and also tier 2 where feasible, while continuing to use multiple line teams in tier 3 cities. However, there are still opportunities for improvement. In order to secure continued growth, companies must focus their efforts on transforming their approach to customer segmentation, determination of call rates, and development of their promotional messages. IMS sees four key steps for increasing sales-force productivity in China:
IMS research from 2003 indicates that 80 per cent of the hospital market in China today could be targeted by focusing on just 120 cities, perhaps not surprising given the historical concentration on large tier 1 cities. However, this dynamic is changing rapidly, making a better understanding of the shifts from tier 1 to tiers 2 and 3 a critical first step towards reaching China's future markets.
Correct segmentation is the next crucial area of focus. For example, in some typical cases, 75 per cent of target hospitals in China actually represent the bottom 40 per cent of the market for a potential therapy class, as well as the lowest 40 per cent of a company's sales of a particular product. In contrast, as few as 20 per cent of the hospitals make up 60 per cent of the market. Clearly, a pharmaceutical company can improve its sales force productivity by focusing its efforts on these hospitals. Knowing which hospitals and doctors to target can have a huge impact on ROI, especially since significant additional investment is still required to staff up the sales force.
Successful corporations have well-planned and well-executed message strategies based on accurate customer segmentation. These companies craft the most effective promotional messages and deliver them to the right doctors in the right format. For example, there would be no reason to emphasise cost with doctors if segmentation data show that they are clearly more responsive to arguments about efficacy or patient compliance.
The single biggest challenge in China is execution. Many companies are struggling with building a profitable and reputable industry in this complex market, primarily because they lack the wealth of experience they have accumulated in other large and more developed markets. A high turnover in the sales force and difficulty in attracting and retaining talent are two of the typical problems they face. Those companies with well thought-out human resources programmes that attract and retain top-shelf talent are in the best position to accelerate market penetration.
Given the 2004 performance of 28 per cent annual growth, and the forecasted growth of 15-18 per cent, China is clearly the future pharmaceutical market. There is no doubt that companies that are successful there will achieve higher growth rates than their counterparts operating in more mature markets around the world. Industry leaders are already investing significantly in China, and this is certainly the time to move swiftly to build competitive advantage. With sales penetration and productivity already proving to be key drivers of growth, planning for penetration beyond tier 1, proper hospital targeting coupled with effective messaging and a well-constructed HR plan built around people as the competitive differentiator, will be key to success.
