As part of the recently completed report on China’s healthcare system by McKinsey & Company, I had the pleasure of speaking with Franck Le Deu, the head of McKinsey’s Greater China Healthcare practice. At a little under 200 pages, the report is highly recommended for anyone who wants to understand how China’s healthcare reforms are going to dovetail with one another, and how they are going to impact particular sectors like pharma, devices, health insurance, and hospitals. Over the course of the next several weeks, I will be expanding from today’s column into a more thorough analysis of pharmaceuticals (with an eye towards how reforms in this space might shape similar efforts in devices and diagnostics), private for-profit hospitals, and China’s private insurance market, all based on the McKinsey report.
Let’s get the obvious out of the way: China’s spending on healthcare is going to explode over the next two decades, but this is going to occur within an environment where cost/benefit and volume/margin trade-offs will be more acute than perhaps in any other economy around the world. So yes, China is an exciting market to play in if you are a healthcare provider or life sciences company; but don’t make the mistake of thinking that all you need to do is build capacity to serve that amazing double-digit top line growth. Operating successfully in China’s healthcare market is going to take a very sophisticated and policy-savvy strategy.
With this in mind, I was curious to get Franck’s thoughts on what he sees across his practice as the most common problem healthcare companies attempting to craft and execute a strategy for China make: “Consistency of investment. You cannot make quick wins in China. You have to make sufficient investments for the long hall. In addition, many underestimate the complexity of market access at the provincial, city and hospital levels.” If this all sounds familiar to you, then it should! One of the common themes written about on the blog is the idea that what is promulgated in Beijing from the Central Government, and how that is understood and implemented by local officials is the magic, mystery and mayhem of China’s healthcare system. Referencing difficulties device and pharma companies have faced, the McKinsey report puts it this way: “… reimbursement for medical products varies by city, and the processes for obtaining reimbursement vary significantly at the local level. The decentralized reimbursement process can include even hospital-specific policies.” (emphasis mine, pg. 17) Until reforms make their way to policies, and policies become consistently practiced across the country’s healthcare institutions, the need to block and tackle at a regulatory and point of sale levels should not be under-stated.
Franck expanded on this point: “We see a changing mix of how companies are thinking about their resources. A few years ago it was all about adding sales reps, but now it is getting more complex. The good organizations are thinking about building more sophisticated local marketing capabilities, market access capabilities, hospital by hospital development plans. They need to understand the access hurdles at the hospital level, and these can change city-by-city, hospital-by-hospital. Those that can deal with these constraints have a tactical advantage. Those that don’t’ have the ability, or who can’t make the necessary investment in these capabilities have a problem.”
Operating in China obviously presents more than just the volume/ margin trade-off challenge. Some healthcare companies are concerned, especially in the pharmaceutical sector, of the need to structure joint ventures where technology transfer is required in order to access the domestic Chinese market. If we step outside the healthcare space, one of the common industrial and telecommunication strategies that had been used in the past by Western multinationals was to take older technology to China first. Currently, the aviation industry is under pressure to adjust this market-entry strategy. I was curious if Franck sees something similar as a possibility in China. His answer was a firm “no.”
He added, “Fifteen years ago, multinationals did not necessarily see China as an important market, so drugs were not developed with the Chinese in mind. Because of this, many innovative pharmaceutical products did not get to market in a timely manner. This is now changing and innovation is increasingly launched in sync with global timelines. If you try and bring old mature products to China today, it is likely you already have many generic competitive products on the market. It is very difficult to get your product listed, and it doesn’t make sense to do this unless you can differentiate on quality or delivery format.” As he sees it, healthcare companies in China will increasingly need to focus on innovation: “innovate globally, or innovate in China for the Chinese patient. We are seeing research done in China on diabetes and cancer specifically for the Chinese. Mature drugs still have potential and so do have differentiated branded generics – but pricing pressure will intensify and locals will get stronger”
The McKinsey report identifies “eight principles for successful growth.” They are as follows (quoted from page 23):
- Adopt a “second home market” mindset.
- Step up engagement with central and local governments to shape the environment.
- Tailor business models to better address diverse market needs.
- Drive operational improvements to sustain the economic model.
- Double down on the role of innovation.
- Seek out bigger, bolder partnerships.
- Invest in attracting and developing top talent, and build capabilities that are relevant to China.
- Have a “through cycle” mentality.
I noticed though the report the occasional reference to needing to think long-term, or to balance short and mid-term profitability objectives with longer-term strategy. My initial thought was that McKinsey might be trying to temper expectations given the ways in which public policy reforms could crimp top line growth opportunities. Franck acknowledged that some of the unknowns have implications on pace of development of the market, “who is going to be in charge of China, who is going to be the Minister of Health, what specific aspects of healthcare will be priorities for the new government; but, fundamentally we are cautiously optimistic. The demand is there and it will be for many, many years. The key question is really at what price healthcare will be delivered”
By: Benjamin Shobert,
About the Author
