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BcChina Distribution StrategyEastern China:Shanghai,Nanjing,ChangzhouInterim Review:Shanghai27 July 1999bcHKG Introduction/Project BackgroundEastern China FindingsCritical IssuesNext StepsChina Distribution StrategyAgenda:27 July 19992bcHKG China Distribution StrategyCritical IssuesDevelop an entry strategy for Bayers OTC business in ChinaMarketDistributionHospitals/DoctorsRetailersMarket size-by channel-by productsLeading manufacturer performance-including case studiesAssessment of Bayer performance-what works/what does not workFuture forecasts-city prioritizationCharacteristics for different product categories-western vs.TCM-pharmaceutical vs.OTC productsStructure-pricing and marginKey distributor profiles and evaluationTier 1 vs.Tier 2/3 city trends-rural vs.urban RegulatorySize and segmentation by hospital sizePurchase criteria/behavior-payment terms-logistics requirements-product usage-decision making processKey retailer profilesSize and segmentation by retailer typeStructure-pricing and margins-logistic requirements-decision making processRegulatory trends-insurance-reimbursementOther country market evolution-Europe(Germany?)and US?3bcHKG Previous attempts to enter China OTC market not fruitfulIntroduced three OTC products over the past year with initial success-on government drug list in several major coastal provinces Changes in healthcare and reimbursement system Emergence of new retail and distribution channelsUncertainty in predicting scale of changes and impactBayerProjectInitial focus on Eastern China:Shanghai,Nanjing and ChangzhouFocus on four product categories:GI,pain,anti-fungal and multi-vitaminConduct primary research and integrate findings into factbase and strategyDevelop re-entry strategy for Bayers OTC business in ChinaChina Distribution StrategyProject Background4bcHKG 020406080Pre-planning100%Roll-outField ResearchData Synthesis/IntegrationStrategy IntegrationOption DevelopmentPercent of Team ResourcesJune/JulySeptemberAugustShanghaiNanjingChangzhouChina Distribution StrategyWorkplanPre-Planning5bcHKG China Distribution StrategyActivities To Date(June 18-July 27)DistributorRetailerHospitalsOtherShanghai:Nanjing:Changzhou:Seven first tier distributors/branches,including:-Shanghai Pharmaceutical-China PharmaceuticalFour second tier distributorsShanghai No.1 PharmaceuticalHuashi Chain Store-purchasing manager-one branch managerEight other drug storesFour Tier 3Four Tier 2Three Tier 1Targeting pharmacy managers and physicians(internal medicine,GI,dermatology,womens health)Bayer management interviews:-sales-marketing-government affairs-pharmaceuticalShanghai Medical UniversityEli Lilly Marketing Manager Five first tier distributors/branches,including:-Nanjing Pharmaceutical-Jiangsu PharmaceuticalBai Xin Drug Store chainXian Sheng Drug Store chainHua Dong Drug Store chainTwo other drug storesThree Tier 3-Jiangsu Peoples-Nanjing No.1Three Tier 2One Tier 1Bayer management interview:-hospital salesShanghai Squibb SalesChangzhou Pharmaceutical-New Drug-No.1 WholesaleSix drug stores,including four branches under Changzhou Pharmaceutical chainOne Tier 3-Changzhou No.1Three Tier 2Bayer management interviews:-area sales-drug store sales-pharmaceutical sales6bcHKG Longhua Hospital(Tier 3)Huadong Hospital(Tier 3)Zhongshan Hospital(Tier 3)No.1 Women&Children Health Hospital(Tier 2)Yang Pu Central District Hospital(Tier 2)Huang Pu Central District Hospital(Tier 2)Zha Bei Central District Hospital(Tier 2)Yichuan Community Hospital(Tier 2)Linfen Community Hospital(Tier 1)Haining Community Hospital(Tier 1)Director of pharmacyDirector of GI departmentChief Physician of Internal Medicine(Member of RDL committee)Director of pharmacyDirector of Internal MedicineDirector of pharmacyDirector of pharmacyDirector of GI departmentDirector of Womens HealthDirector of pharmacyDirector of pharmacyDoctor of Internal MedicineDirector of pharmacyDirector of pharmacy Chief Physician of Internal MedicineMr.Liu YuehuaDr.Wang GenshengDr.He Lijian Mr.GuoMr.Hua ErquanMr.Liu WeiguoMr.Zhang BinDr.CaoDr.Wang LingDr.JiMr.YangDr.TaiMr.Cai YourongMr.Hu XishanDr.SunMr.Peter Zhang Prof.Chen Wen Eli LillyShanghai Medical School,Dept.of Health ScienceMarketing ManagerProfessor/ResearcherOthers:OrganizationIntervieweeTitleHospitals(10 hospitals,15 interviews):China Distribution StrategyShanghai:Interview List(I)7bcHKG Distributors(11):Drug Stores(12):OrganizationIntervieweeShanghai Pharmaceutical Co.-New Drug branch-Yandong branch-Shijiao branch-Huxi branchShanghai No.1 Pharmaceutical Co.China Pharmaceutical Group,Shanghai Branch-Medicines business branchShanghai Jingan Pharmaceutical Co.Shanghai Changning District Pharmaceutical Co.Shanghai Leiyunshang Northern Area Medicine GeneralShanghai Minhang District Pharmaceutical Co.Shanghai Zhabei District Pharmaceutical Co.Mr.OuHuashi Chain Store-Mr.Gao-Mr.WangN/APangN/AMr.ChanMr.KongMr.Wu XiongweiMr.Cao XingzuMr.Fang ZhiweiShanghai Pharmaceutical Co.-Mr.Tu Qizhong-Mr.Chen Zhenghui-Mr.Du Xieming-Mr.Liu YaohuaMr.Yao JunChina Pharmaceutical Group,-Mr.Yang Chengli/LinMs.Zhang Lin Mr.Wang ZiweiMs.Zhang YahuaMr.Fan HuafangMr.Xu JianguoShanghai Pharmaceutical Co.-Manager-Manager-Manager-ManagerAssistant Manager China Pharmaceutical Group,-ManagerManagerAssistant ManagerAssistant ManagerManagerManagerShanghai No.1 PharmaceuticalHuashi Chain Store-headquarters-Huashi Drug Store(Yangpu)Huning Drug storeKanghua Drug storeChangxin Drug storeGuolian Drug storeXinte Drug store Watson(Huaihai Road outlet)Fengyang Drug Store(affiliated with Huashi)Jianshen Drug Store(chain store of Zhabei District)Assistant ManagerHuashi Chain Store-Manager-ManagerManagerManagerManagerManagerManagerManagerManagerManagerTitleChina Distribution StrategyShanghai:Interview List(II)8bcHKG Note:Railway Medical CollegeSource:Bain InterviewsOrganizationIntervieweeTitleChina Distribution StrategyNanjing:Interview List(I)Hospitals(7 hospitals,16 interviews):Ms.MengMs.ChenDirector of Internal MedicineDirector of Woman DepartmentNanjing Number Three Peoples Hospital(Tier2)Mr.ChenMs.RenDirector of GI DepartmentDirector of Woman DepartmentNanjing RMC*Associated Hospital(Tier3)Mr.ChenMs.QinMs.Chen Si RongChief of the PharmacyChief doctor in Woman DepartmentChief doctor in Internal MedicineNanjing Xia Guan Hospital(Tier2)Mr.YangMr.YuanChief of the PharmacyDirector of GI DepartmentXuan Wu Hospital(Tier 2)Ms.ZhangMs.Zhang Yu zhuoHospital Chief,Director of Internal MedicineChief of the PharmacyXiang Yang Health Hospital(Tier 1)Director of GI DepartmentDeputy Chief of the PharmacyNanjing No.1 Peoples Hospital(Tier 3)Mr.SunMr.XueMs.Sun Chun YuMs.Wang Shu YuMr.Chen TuxingChief of the PharmacyDirector of Woman DepartmentDirector of GI DepartmentJiangsu Peoples Hospital(Tier 3)9bcHKG Source:Bain InterviewsDrug Store(7):Company NameIntervieweeTitleDistributor(5):China Distribution StrategyNanjing:Interview List(II)Bai Xin Chain Store-Headquarter Bai Xin-Chang Jiang branchXian Sheng Chain Store-HeadquarterHua Dong Chain Store-No.11 branchNo.1 PharmacyDa Zhong Drug StoreJiangsu Pharmaceutical StoreMr.ZhanMs.ZhaoMr.ZhangMs.LiuMs.MengMr.MiaoMs.WangDeputy general managerBranch General ManagerPurchasing manager,Branch GMGeneral ManagerGeneral ManagerManagerManagerJiangsu Yiyao Shiye Company-Number 3 branch-Medicine Business branchMr.SunMr.ZhaoManagerManagerHua Dong Medicine CompanyMr.WangMs.ZhaoGeneral ManagerAssistant General ManagerJiangsu Pharmaceutical CompanyMr.XueMr.Chen Dong NingManager of the Pharmaceutical BranchBusiness managerNanjing Pharmaceutical CompanyMr.ShiManager of the Pharmaceutical BranchJiangsu Houhui CompanyMr.HuangManager10bcHKG Source:Bain InterviewsHospitals(4):Company NameIntervieweeTitleDistributor(3):No.1 Peoples Hospital(Tier 3A)No.3 Peoples Hospital(Tier 2)No.2 Peoples Hospital(Tier 2)Red Cross Childrens Hospital(Tier 2)Zheng Qing KunDr.XueYu Zhong YuanShen Guo ZhongDr.Wang QianDr.GuoRen Xiang RongPharmacy Purchase Manager-Western MedicineChief Physician of GI DepartmentPharmacy ManagerPharmacy Purchase ManagerPhysician-GIVice Chief Physician-DermatologyPharmacy ManagerNew Drug.Co.Changzhou Pharmaceutical Co.No.1 Wholesale Co.Jiang YaoYao Ya BaiShen Yao XinDeputy General ManagerDeputy General ManagerGeneral ManagerRetailers(6):Drug Shopping MallTong Ning Yuan Drug StoreJu Ren Tang and Qin Ye Drug StoresZhong Hua Drug StoreMs.YanMs.LiMs.Shi Ms.Shao Chao ZhongXia Han ZhongManagerCounter ChiefCounter ChiefManagerManagerDeputy General ManagerBayer(3):Bayer-OTCBayer-OTCBayer-PharmaceuticalsZhou Yi JunZhou QiangZhang QianArea Sales ManagerSales Rep-Drug StoresSenior Sales Rep-PharmaceuticalsChina Distribution StrategyChangzhou:Interview List11bcHKG Introduction/Project BackgroundEastern China FindingsCritical IssuesNext StepsChina Distribution StrategyAgenda:27 July 199912bcHKG City EnvironmentLocationUrban populationGDP/capita(China average:RMB6.0K)Hospital EnvironmentTotal no.hospitals-General-Specialized-ClinicsHospitals/capitaChina Distribution StrategyEastern China:City/Hospital EnvironmentShanghaiNanjingChangzhou Main coastal city in Eastern China10.2MMRmb 25.8K 300 km northwest of ShanghaiDistribution hub for some products(consumer care)2.8 MMRmb 15K 180 km northwest of Shanghai0.8 MMRmb 14.0K 340314-8 associated with PLA20-3030033/million 170 156-4 associated with PLA14N/A61/million 32311(Womens Health)16 health clinics40/millionSource:China Statistics Year Book(1998);Bain InterviewsThe first phase of the distribution project has focused on three larger-sized Eastern China cities.13bcHKG Shanghai:Hospital Environment(General Hospital)China Distribution StrategySource:Bain Interviews9 Hospitals associated with General Medical Colleges3 Hospitals associated with PLA Medical College20 Central District Hospital5 Hospitals associated with PLALarge Accounts(94)8 TCM Hospital44 Other Hospitals17 Hospitals associated with Industrial Sectors(steel,weaving)Small Accounts(200)Shanghai has over 300 hospitals.5 Others(two associated with Railway)3 Hospitals associated with TCM Medical CollegeKey Accounts(20)200 Community HospitalHealth/Enterprise Clinics(?)Number of BedsAvg.Daily OutpatientAvg.Annual Drug Sales(RMB MM)8002,3001303008004030-80100-300714bcHKG Nanjing:Hospital Environment(General Hospital)China Distribution StrategyNanjing has over 150 hospitals in three tiers.3 hospitals associated with General Medical Colleges1 TCM hospitalKey Accounts(8)20 District/county hospitals3 hospitals associatedwith PLALarge Accounts(42)8 hospitals associated with Industrial Sectors(steel,weaving)1 hospital associated with city government106 Community Hospital/Health/Enterprise HospitalsSmall Accounts(106)Number of BedsAvg.Daily OutpatientAvg.Annual Drug Sales(RMB MM)7602,00080285620115010013 TCM hospitals7 other hospitals3 others1 hospital associated with PLA15bcHKG Changzhou:Hospital Environment China Distribution StrategyNote:*Excludes 500 clinics.Source:Bain InterviewsNo.1 Peoples HospitalNo.2 Peoples HospitalKey Accounts(2):TCM HospitalNo.3 Peoples Hospital Large Accounts(6):No.5 Peoples HospitalNo.6 Peoples HospitalNo.4 Peoples HospitalRed Cross HospitalSmall Accounts:Clinics(500)Health Clinics(16)Small Hospitals(8)On the other hand,Changzhou city has many fewer specialized and general hospitals.1000-1200640-800No.of StaffNo.of Beds300-500200-60030-200*10-200*16bcHKG SizeSales By ChannelTotal Drug Sales*(Rmb Bn PTC)Percent of Total Drug Sales*(Rmb Bn PTC)China Distribution StrategyEastern China:Sales By Channel(1998)The three cities represent three different tiers of pharmaceutical sales.Hospitals still dominate the selling channel.Note:Including sales to specialized hospitalsSource:Ministry of Health;Statistical Yearbook;URL,IMS,Bain Interviews;Bain AnalysisAs a Percent of Shanghai:17%5%Drug Store Sales As a Percent of Total*:9%14%16%17bcHKG Percent of Total Hospital Drug SalesSource:Ministry of Health;Statistical Yearbook;IMS Hospital Pharmaceutical Audit;Bain Interviews;Bain AnalysisShanghaiNanjingChangzhouPercent of Total Hospital Drug SalesPercent of Total Hospital Drug Sales200942048%34%18%10642838%53%9%246214090220China Distribution StrategyEastern China:Accounts/Throughput by Hospital TypeOnly 20-40%of the hospitals across these three cities account for over 65%of drug throughput.18bcHKG Average Drug Sales/Hospital(Rmb Bn)ShanghaiNanjingChangzhouChina Distribution StrategyEastern China:Average Throughput by Hospital Type While the number of Tier 3,2,and 1 hospitals differs greatly across cities,the average drug throughput is roughly the same.20Number of Hospitals:942008Number of Hospitals:421062Number of Hospitals:624Source:Ministry of Health;Shanghai Statistical Yearbook;IMS Hospital Pharmaceutical Audit;Bain Interviews;Bain AnalysisAverage Drug Sales/Hospital(Rmb Bn)Average Drug Sales/Hospital(Rmb Bn)19bcHKG Percent of TotalDrug SalesTier 3China Distribution StrategyEastern China:TCM vs.Non-TCM DrugsShanghaiChangzhouNote:*LongHua is a TCM Hospital;RMC is Railway Medical College-affiliated Source:Bain InterviewsRoughly 20-40%of drugs used are TCM.There is no significant difference across cities or hospital tiers.NanjingTier 2Tier 1Tier 3Tier 2Tier 120bcHKG OTC vs.Pharmaceutical DrugsPerceptionsGovernment Definition:Government essential drug list and reimbursement list include both OTC and pharmaceutical drugs-no separation by categoryNew regulation on OTC drugs was just published-most important change:prescriptions will be required for pharmaceutical drugs at drug stores-most of the 188 western drugs on preliminary OTC list refer to active ingredients onlyHospital Definition:“I have no idea what drugs fall under the OTC category.Until the government publishes an official OTC list,no one knows exactly what criteria will be used to distinguish between the two categories.Chief Physician of GI Department,Changzhou No.1 HospitalDrug Store Definition:China Distribution StrategyNon-TCM Drugs:Pharmaceutical vs.OTC DrugsCurrently,it is hard to for physicians and pharmacists to distinguish between OTC drugs and pharmaceutical drugs.There is no definition or of separation OTC vs.pharmaceutical drugs in hospitalsPrescriptions are required for all drugs purchased at hospital pharmacyCurrently all drugs can be purchased through drug stores except for a few categories including anesthesia,cancer treatment,sleeping pills,and those requiring testing and monitoring“We carry all drugs that are allowed by government,including those new and special imports that are not carried by hospitals.Currently there is no separation of OTC and pharmaceutical drugs at the pharmacy.Manager,Shanghai No.1 Pharmaceutical Store“The new regulation will actually tighten the control for pharmaceutical drugs We just found out that Bayaspirin and Talcid are included on the OTC list;Canestens active ingredients qualify it for OTC as well.But we are only in initial stages.-Bayer Government Affairs21bcHKG Source:Hospital Interviews;Bain EstimatePercent of Total Drug SalesShanghaiNanjingChangzhouPercent of Total Drug SalesPercent of Total Drug SalesChina Distribution StrategyEastern China:Hospital SourcingHowever,in the case of JV/imported drugs versus local drugs,there are considerable differences across hospital tiers.Tier 3 hospitals use the highest proportion of JV/import drugs.22bcHKG Source:Bain InterviewsHospital Drug CommitteeDepartment PhysiciansPharmacyHospital ManagementGroup of directors who approve new drug additionsDecision Making Role:Evaluates efficacy of new drugs Proposes additional drugs to hospital listStrong influence on junior physicians post approvalMonitor all drug usage/purchases-tracks drugs with low turnover for de-listingSupports/vetoes drug list additionsStronger influence in non-specialized/generic drugsMay be ultimate decision makers-degree of importance varies by hospitalHas own knowledge/experience/relationships with manufacturersKey Criteria:Qualifies for reimbursementReasonable prices(vs.available products)Differentiation from current drugs carried-efficacy/qualityRegardless of hospital tier or geographic location,there are typically three parties responsible for hospital drug purchasing.China Distribution StrategyHospital Decision Makers23bcHKG Note:*Railway Medical CollegeSource:Bain InterviewsNumber of Drugs70-80 additions annuallyTalcid on both listsCanesten on Shanghai listTier 3Tier 2Tier 1Govt List Overlap:New Additions Yearly:Tier 3 and Tier 2 hospitals carry a higher number of drugs,especially imported products.They also add a greater number of new drugs annually.95-100%30-40Number of DrugsN/A60N/A100N/AN/A80-90%30-35N/A60N/A40100%20-30N/A20100%40-50100%N/A100%5-6N/A2China Distribution StrategyEastern China:Drug Listing by Hospital SegmentJVLocalImportTotalN/AN/A24bcHKG Source:Bain InterviewsChina Distribution StrategyEastern China:Reimbursement Potential by Hospital Type ShanghaiNanjingPercent of Total PatientsPercent of Total PatientsTier 3 hospitals have a higher percentage of non-reimbursable patients,mainly because of specialized treatment.25bcHKG Source:Ministry of Health,Ministry of Labor,Hospital InterviewsReimbursement amounts are decided primarily by insurance type,although Tier 1 hospitals have much lower limits.Reimbursement Limit per PrescriptionTier 2Tier 3 HospitalTier 1China Distribution StrategyReimbursement LimitationsEvolution of InsuranceShanghai ReimbursementState-funded reimbursement:-covers:government agencies,party agencies,institutions-administered by work unitEnterprise medical care(old system):-covers:state-owned enterprises,collective-owned enterprises-administered by work unitEmployee medical insurance(under testing for roll-out since 1994):-covers:state-owned enterprises,collective-owned enterprises-administered by Social Welfare Center-(Serious Disease Fund under experimentation as well)Commercial insurance,etc.Future Model for EveryoneCovers 40MM workersCovers 100MMCovers 20MM workers currentlyCovers 27MM26bcHKG Eastern China:Drug Retail Environment China Distribution StrategyNote:*Including 500 supermarkets and department stores with small drug salesSource:Bain InterviewsThe number of drug stores and total sales differs dramatically depending on the evolution of the city.Drug Store SalesTotal Drug SalesRmb Bn(PTC)As a Percent of Shanghai Sales:12%6%Number of OutletsNumber of Outlets Average Throughput:0.8MM0.7MMRmb 1.3MM27bcHKG Source:Bain InterviewsChina Distribution StrategyDrug Store DescriptionWhile there may be some variations across cities,there are only several models for these retail outlets.“Chain Stores Affiliated Stores JV with HospitalsIndependent StoresWholly owned by one ownerUsually under one brand name Located within district or city widePartnership between hospital and chain retailer/distributorLocated next to Tier 3 or Tier 2 hospitalIndependent from chains and hospitalsMost associated with government or party organizationSome owned by individuals Independent stores associated with chain stores-usually separately managedOwnership:Value-added:Future Potential:Centrally managed with central purchasing-Each outlet tailors its purchases but may be required to source 80-90%from parentAffiliation with hospitalConveniently located across city,not just in urban areasMay source a portion from central chain,but maintains some autonomyContinued consolidation within citiesLink between chain stores and distributorsGood hedge by hospitals in case of healthcare reform changesWin-win for chain storesHard to sustain business given strength of chain stores and hospital JV drug storesWill become integrated more closely with chain stores28bcHKG Percent of Total Drug Stores/SalesSource:URS Database;Bain Interviews;Bain Estimate and AnalysisShanghaiNanjingChangzhou50050030033%60%7%1209030%70%40252051Percent of Total Drug Stores/SalesPercent of Total Drug Stores/SalesChina Distribution StrategyEastern China:Accounts/Throughput by Drug Store TypeKey outlets account for at least 50%of total city drug throughpu
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