One of our hopes for this blog is that we can blend the strategic (China’s healthcare reforms) with the practical (how to adjust your pricing or distribution strategy as a pharma or device company). Emphasizing only the former runs the risk of constantly talking up the opportunity inherent with the massive influx of government-led investment into China’s healthcare system. Focusing purely on the latter carries with it the danger that your implementation tactics become disengaged from where the country’s over-arching reforms are taking it. A good example of this is the dynamic unfolding in pharma where national policies that seek to pursue more sophisticated total cost assessment methodologies are working at cross purposes with provincial level cost-control efforts. As a new sector opening up to greater foreign investment in China, balancing between the strategic and the tactical is particularly important for healthcare companies.
We have written extensively about China’s major healthcare reforms, but it bears repeating simply to get a sense of the enormous amount of capital and energy the country is directing into this space. First up was the 2009 investment by China’s central government of RMB 1.13 trillion. Next was the 12th 5 Year Plan (5YP) that set aside an extra RMB 4.4 trillion just for healthcare expenditures. As part of the 5YP, the government plans to add 150,000 primary care physicians, 2,000 new county level hospitals, 29,000 new township level hospitals, 5,000 existing hospitals will be upgraded, the existing insurance plans will continue to be expanded with access to new drugs as part of China’s national formulary, new diagnostics and treatments all coming as part of the expanded access. This is all breath taking and may well be a once in a generation opportunity for businesses and investors. Some have gone so far as to suggest that the amount China is investing into the country’s healthcare system is the most amount in the shortest period of time any country has ever spent on its healthcare system in such a short period.
Here is the rub: the sheer amount of money and the number of places where investments could be made, where products could be sold, where services could be offered are almost over-whelming. The key is to be able to step back and understand which parts of the country’s healthcare system are ready to accept foreign investment and expertise. Many of the sectors where the Chinese government would like to attract investment are simply not ready yet. In some the regulatory environment works at cross-purposes with what investors need to deploy capital. In others the government’s need to drive cost down is working at a higher velocity than industry’s ability to carve out new niches based on innovative services or product offerings. This all begs the obvious question: how do you, as a business or as an investor, figure out how and where to deploy limited capital?
Too many businesses jump to the conclusion that they “need to be in China.” China has become such a ubiquitous part of contemporary business dialogue that to not be in China is perceived as being somehow unsophisticated. But one of the first experiences I had with a business was where the owners were absolutely convinced they “had to do something” in China, rather than doing the right thing in China. Yes, healthcare is a fascinating opportunity with very unique timing in China. But simply throwing yourself in the middle of all that is going on is not a guarantee of success. More businesses that we see coming our way need to stop and double check that the specific market segment where they want to play is ready, and whether the capital they are going to have to allocate to their China strategy could be spent somewhere else domestically or globally to generate a better return. As someone who has worked extensively in China, this may see counter-intuitive; however, this is advice based on having seen too many companies throw good money after bad. Not going to China today doesn’t mean never going to China. In fact, a gut check that results in your company saying “we’re just not ready” can lead to a great conversation about where else you should look or what you need to pursue to get ready to go to China.
What does that gut check look like? A good gut check is holistic, taking into account your internal capabilities, financial resources, the operational bottlenecks that will need to be addressed for you to export your business model or products into an emerging economy, and the risk appetite of your ownership and management team relative to other domestic or foreign investment opportunities. The “go/no-go” process should allow key management team members and other stakeholders to ask questions, raise concerns, and feel their input has been sought out and incorporated into the final decision. If a decision to go forward in China is made, your management team should have several different market access strategies presented with a comprehensive analysis of each, along with an idea on the potential fatal flaws or key points that implementation hinges on. Market access issues where a market does not yet fully exist are, well, tricky. It’s good to know you have a couple of different options sketched out in case you run into a wall with what seems like the best approach today.
The idea of not beginning your analysis of China confident that your business should go is another way to say that the decision to go to China should be a strategic, not purely opportunistic one. A lot of great relationships start at trade shows and conventions. Small and medium-sized (SMEs) businesses are particularly eager to jump on the relationships that come from these interactions; in fact, many SMEs go to the trade shows largely for the networking effect. This is a great way to dip the toe into the water. And, in fairness, let’s assume you get some good nibbles. What are your criteria for picking the right partner in China? Going to the trade show in the first place was a good decision in that it reflected your sense that a lot of what happens in China happens because of informal relationships. But how do you discern between one potential partner versus another? What is it you need from your Chinese counterpart to successfully execute in the country? Do you need someone with access to referral networks? Do you need to place your products in the public hospital system in order to be successful? If so, what is the point of sale for the public hospital? Every potential distributor is going to tell you they have the right contact to do so, but how do you determine which one actually can deliver? I write this all to reinforce the idea about being strategic versus opportunistic. It may well be that someone you meet fortuitously turns out to be the right partner; but you will save yourself a lot of grief and bring much needed clarity to your decision if you have thought this through in advance of your prospecting efforts.
The process of getting to a yes/no answer and then driving an implementation strategy is what Rubicon is focused on providing. The methodology we use segments this process into four questions, each of which we are going to be writing on over the course of the next month. The first question is: “Do we, as a company (management team and ownership) have the bandwidth and cultural DNA to export our business model to China’s emerging healthcare economy?” Again, by design these questions do not assume you should be in China. In fact, they attempt to root out cultural, financial and operational reasons not to go to China … yet. If you are ready, the process moves towards questions that identify bottlenecks, intra-company resistance, regulatory concerns, and other execution level details that will constitute your market access plan. We will be writing on the first question in more detail in a forthcoming blog. The take away is not that you should not be considering China. It is an amazing opportunity and the benefits are certain to outweigh the risks; however, going into China the right way, with everyone’s expectations properly framed is key to getting an attractive return on investment.
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