In Part 1 of our analysis of McKinsey’s new report on China’s healthcare reforms and what they mean to your business, we spent a good bit of time discussing the policy framework evolving in the country to expand coverage of new drugs while changing the role prescription drugs played in a hospital’s revenue stream. These are certainly important issues, but in their presentation of the strategic challenges pharma faces, it can be easy to overlook the tactical issues present for companies who want to successfully navigate the changing landscape of China’s pharma space.
As a follow up to the last post covering McKinsey’s analysis, I wanted to focus more on the tactical issues pharma faces in dealing with the highly fragmented market in China. One of the most critical tactical factors the pharma industry faces in China is how to structure, manage and incentivize its sales force. The McKinsey report notes that, “The ten leading multinational pharmacos have added more than 19,000 reps in China over the last five years, some adding as many as 1,000 in one year.” Earlier this year, thePharmaLetter noted, “In the 12 months ending March 2012, sales force levels in China were up over 17% to 80,000 full time rep equivalents. Over the same period, sales force numbers dropped in the USA – down 8% on the previous year to 72,000.” Yes, you read that correctly: the pharmaceutical sales force in China is now larger than that deployed in the United States.
In an effort to think through the challenges MNC pharma faces as they expand their China sales force, Franck Le Deu and Bing Chen of McKinsey’s Greater China Healthcare practice were kind enough to spend time speaking with me to discuss their research findings. Obviously, the rapid increase in hires points to both the growth potential of the Chinese market, but also its highly fragmented nature. Bing observed that the low hanging fruit in China has been picked, “ten years ago, just being in the top 10 cities [in China] could make you successful, but right now, the MNCs have reached a tipping point where their sales force has covered a lot of urban China – the top 100 cities have been covered, and the question is what to do next.” The implication here is not only that growth is going to get harder to identify, but also that managing your “soft” costs will become a more important issue. Bing added, “Now that your sales force is in most places you can allocate it to, you have to balance focus on your bottom line and top line.” In the report, McKinsey identifies what they call an overall decline in productivity of pharma sales’ force in China. They write, “Some companies managed to expand head-count and still increase productivity, but for others the returns on their efforts to expand coverage have been disappointing, and have had the effect of diluting overall performance by stretching resources to significantly less productive areas.”
Our conversation turned back to the Anhui Model, but this time as a reflection on what it suggests about how pharma will need to approach thinking about market access on a very local basis. Franck commented, “the Anhui Model is an example of how complex and unpredictable local market access issues can become … companies need to organize to have local insights in a very timely way so they can adapt their strategies at a local level.” The McKinsey report notes that decisions in China can happen in an extremely unpredictable and very local level – hospital by hospital even. While this may seem obvious to western eyes, given the country’s supposedly consolidated policy regime, needing to rethink the tactics of how to navigate at such a local level is a surprise, and changes the costs for your sales force.
A highly localized sales force navigating an extremely fragmented market presents a series of managerial and compliance challenges. Referencing the compliance risk specifically, Franck shared “the compliance risk is linked to the pace of growth of the organization – the IT infrastructure supporting the headcount increase – which means companies are only recently investing in adequate SFE (sales force effectiveness) software to get sufficient data that tracks the time in the field for the reps, which hospitals they visit, not to mention getting transparency on inventory flows, where the products flow into the channels.” The McKinsey report notes that high turnover remains a problem for pharma companies in China. They write, “Turnover exceeds 20 percent in most companies, and can spike to a much higher rate in the event of a change of leadership.”
Towards the end of the report, McKinsey writes about the need to invest in better sales force effectiveness tools, “Those who have not yet invested need to get started now. The effort will require multinationals to get to the root causes of strong and weak performance. Few multinationals have the data to reveal which accounts and which reps perform well and why. A company cannot improve what it does not measure, so it is critical to review key account and brand performance with more rigor.” In the midst of major structural reforms to how China buys drugs, the role of the hospital in prescribing, and the need to lobby local institutions more effectively, it can be easy to overlook the daily challenge of improving efficiency for your deployed sales force. Yet, if McKinsey’s analysis is correct, one of the clearest indicators of which pharmaceutical companies will ultimately be successful is going to be those who best monitor and manage their sales force. It is a simple yet essential factor to success in China’s changing pharma landscape.
About the Author
