China’s 2015 healthcare prescription – investment, infrastructure & innovation
Martyn Link
Strategic Market Analyst (Life Science &, Energy)
In March 2011, China’s National People Congress approved the 12th Five Year Plan (FYP) covering the years 2011 to 2015. This approval signalled the end of months of discussions between local and central government on what the key priorities should be for the world’s second largest economy over the next 5 years. Every 5 years the FYP sets the investment budget, financial incentives and industrial growth targets for the country to achieve. Each plan reflects the domestic political, social and economic climate of its day, as well as the international opportunities and challenges, and this plan is no different.
Inclusive growth
More than any other previous plan, this FYP seeks to deliver the economic Holy Grail – growth with a conscience. To focus not only on the quantity of industrial output but also the quality of life for its citizens and minimise the impact on its natural resources. Sustainability and equality are the key overall themes to this plan – the aim is to create an economic engine that is capable of driving long-term GDP growth while also reducing social inequalities and responsibly managing its environment.
The country seems to be finally realising the high costs that have been borne both by the environment and some of its less fortunate citizens, by its growth at all costs strategy. This change in mood is reflected in the outlook of its leaders. As Chinese Premier Wen Jiabao announced the details of the plan he commented:
“In some places, I have seen, urban construction is very fast, but as you walk along, you see shabby rural streets and housing, and some farmers are still hard pressed to pat the schools the 100-yuan heating fees for their kids. Therefore, I tell local officials, wouldn’t it be better if we construct fewer high buildings and spend the funds expanding the urban scale on raising living standards?”
"More than any other previous plan, this FYP seeks to deliver the economic Holy Grail – growth with a conscience."
China is now seeking to redress this imbalance through a strategy focussed on “inclusive growth”. The overall growth target has been lowered slightly – from 7.5% to 7% growth in annual GDP. It is hoped that this will allow some breathing space for local officials to focus on more sustainable means of growth. However, whether this slight reduction changes the mindset of growth-hungry regional authorities remains to be seen. Actual growth rates have repeatedly over-shot government targets, as demonstrated by the following figure:
Figure 1: China’s actual and forecast GDP vs. targets1
As a means of developing a sustainable competitive industrial sector, the 5 year plan focus is on key “Strategic Emerging Industries” (SEIs) that will benefit from preferential government support over the coming economic period. This plan focuses on seven SEIs – including hi-tech areas such as energy, ICT and biotechnology. For clarity it should be noted that this biotechnology theme includes both the supply (pharma &, biotech industry) and demand (patient healthcare system) aspects of the healthcare sector.
Healthcare market drivers
In terms of the healthcare sector, the plan included three key objectives that will shape how the sector develops over the coming years and importantly, what the opportunities are for foreign pharmaceutical and biotech companies looking to enter the Chinese market:
"While in the urban areas access to hospitals and quality of treatment has steadily improved, after years of neglect the country’s rural healthcare system collapsed in the 1980s."
1. Investment in healthcare delivery
The 12th 5-year plan underlines China’s earlier commitment to reforming its healthcare system. While in the urban areas access to hospitals and quality of treatment has steadily improved, after years of neglect the country’s rural healthcare system collapsed in the 1980s. Through a series of reform proposals, most notably a three year reform plan released in April 2009, China is seeking to reduce the huge inequalities between urban and rural patients.
Thousands of healthcare centres are currently being built and this plan provides for further investment to support this process. Until this infrastructure is in place, China’s vision of universal access to healthcare will remain just that. Alongside reforming the healthcare infrastructure, China is also seeking to realign its skewed hospital funding mechanism. Chinese hospitals receive very little central funding, and are forced to make profits from drug sales and medical treatment in order to cover costs. This leads to high-mark up rates, inappropriate use of expensive imaging machines and excessive prescribing patterns. One of the main weaknesses in the current system is a lack of control over drug pricing and an inefficient drug distribution system.
2. Drug distribution infrastructure
China has a highly fragmented drug distribution system, with thousands of small local distribution enterprises. The lack of scale of these companies can lead to high mark-up of therapeutics and allows for counterfeit drugs to enter the supply chain more easily. This latest plan seeks to stimulate consolidation in the industry through promoting the formation of larger companies with greater scale.
"China is seeking to reduce the huge inequalities between urban and rural patients."
The plan suggests the creation of one or two Tier one companies that will have national reach and generate revenues of RMB100bn ($15bn). The establishment of 20 Tier two regional companies with revenues of RMB10bn ($1.5bn) are also going to be encouraged. The government hopes that this will create larger distribution networks and thereby improve delivery times and reduce costs.
China is mid-way through implementing an Essential Drug List (EDL) aimed at standardising drug pricing and reimbursement. The first half of the list was published in August 2009 and included 307 drugs (205 Western and 102 Traditional Chinese Medicines). A number of the leading global pharma companies have managed to secure some of their key brands on the EDL, but this list now represents a barrier for new entrants. Moreover, plans are underway to centralise the procurement of drugs for government-run hospitals in order to drive down prices – again presenting a further challenge for new entrants without a direct Chinese presence or track record.
3. Pharmaceutical innovation
Since 2010, China has invested enormous amounts of capital into pharmaceutical research and development. The country is determined to become a centre for pharmaceutical R&,D and develop its own compounds that it believes it will confirm its status as a global centre for innovation. As yet China is still waiting for the new drugs to emerge from its national R&,D drug research programmes, such as the 5-year Mega New Drug Programme initiated in September 2009. Nevertheless, China has successfully attracted many of the top pharma and biotech companies to set up R&,D bases in the country, particularly in the science parks around Shanghai.
A large part of previous plans have been stimulus packages for new drug development and this plan is no different – RMB12bn to be invested between 2011 and 2015. The main recipients of this investment will surely be the national key laboratories and those Chinese pharmaceutical companies engaging in new drug R&,D. However, there is an opportunity for foreign firms and Universities with industry expertise or proprietary technology to partner with Chinese groups in order to access this attractive level of funding and subsequently the large domestic patient pool.
"China sees biotechnology as a means of moving up the value chain away from low-cost manufacturing."
Opportunities and challenges
China sees biotechnology as a means of moving up the value chain away from low-cost manufacturing. By developing a strong industrial base and encouraging pharmaceutical R&,D, it believes it can simultaneously develop an economic engine of the future, whilst improving the quality of life of its citizens. However, key to achieving this objective is firstly, the commercialisation of academic research into industrial innovation, and then the translation of industrial R&,D into improved patient wellbeing. China is heavily focussed on growing both its academic and industrial R&,D base, but it is slowly realising that the flow through benefits to the patient is, at best, slow and limited, and at worst non-existent.
So while it waits to reap the benefits of the huge investment into R&,D, the country is engaging in direct intervention in the national healthcare system in order to generate the patient benefit it is seeking. Eventually new Chinese-derived treatments and technology will reach patients, but unless heavily subsidised, these products will look a lot like the premium priced Western brands.
References:
About the author:
Martyn has provided commercial insight into the life science industry for nearly 10 years. Martyn started his career as a pharma biotech analyst for Wood Mackenzie, specialising in corporate analysis of big pharma companies, therapeutic analysis of cardiovascular &, metabolism diseases and thought pieces on major industry events. As a Principal Analyst Martyn had responsibility for project management across the entire suite of research products, including analyst mentoring, client training and product development. From Wood Mackenzie, Martyn joined ITI Life Sciences, a private innovation fund developing next-generation medical technology.
Following the consolidation of ITI into Scottish Enterprise Martyn undertook a strategic review of Scotland's life science industry working with CEOs, investors and senior government officials to produce a competitive landscape analysis of the life science industry in Scotland. During his time at SE Martyn created a 5-year strategy for Scottish Development International's activities in China. Through an in-depth market report (available here), and extensive tour of the country visiting Chinese universities, companies and science parks Martyn provided SDI with objectives, activities and opportunities to maximise their impact in this key region over the next 5 years. Martyn is continuing to provide insight on events in China through his blog, The Foresighter. In 2011 Martyn moved from economic development at SE to work within a newly created team at the leading energy player, Wood Group.
Linkedin profile:
What changes do you expect to see in healthcare in China by 2015?
