McKinseywascommissionedinQ1 2003to providededicatedeffortinconductingin depthmarketsurveyandcollectdetailedinformationfrom4citieswithin2provincestoidentifythekeygrowthdriversinChina sbroadmarket 4productcategorieswereincluded G I Motilium OBGY Gyno NailInfection Sporanox providebusinessmodel proposalfortocapturethebroadmarket 1 McKinseyBroadMarketStudyProcess Projectdesign Q1 2003 ProjectreviewwithlocalandregionalJ Cteam Apr 03 Surveymarketselection Apr 03 Fieldworkin2citiesinShandong May03 1stinterimreport mid June03 Fieldworkin2citiesinSichuan mid June mid July03 2ndinterimreportandKillerIdeaworkshop endJuly03 Finalreport Aug 03 Presentationtocorporatemanagement Sept 03 2 BROADMARKETCANBEDEFINEDASCLASS2HOSPITALSANDBELOWATREGIONALCITYLEVELANDALLHEALTHCAREINSITITUTIONSATCOUNTYLEVELANDBELOW Regionalcity County Town Village Class3hospital Class2 belowhospital Pharmacy Clinic Broadmarket Source McKinseyanalysis 3 BROADMARKETDRUGSINCLUDEOTCAND OUTPATIENT RxDRUGS Source McKinseyanalysis Targetingeasilydiagnosed non lifethreateningdiseases Easytouse Relativelycheap Relativelysafewithfewsideeffect Examples OTC Mature New Motilium Gyno Daktarin Rx Outpatient In hospital Sporanox Sibelium Cipramil Broadmarketdrugs 4 McKinseyKeyFindingsOverallMarketSituation 5 BROADMARKETREPRESENTS94 OFOVERALLDEMANDFORBROADMARKETDRUGS Class3hospital BroadmarketdrugsalesbreakdownbygeographyPercent Foronly2accordingcities DataforonlySichuanprovinceSource Interviewwithdistributors hospitals pharmaciesMcKinseyanalysis All4cities Broadmarketrepresents94 ofdemand 100 3 6 2 3 1 3 BnRMB Shandong Sichuan City 100 21 6 2 MnRMB County Town Village Motilium Gyno Daktarin Sibelium Broadmarket SalesbreakdownofproductPercent Otherchannelatcitylevel GDPpercapita ofcounty 9 19932 11 30018 5 80114 Countyiscriticalforbroadmarket 6 DUETOLOWINSURANCECOVERAGEANDRECENTREIMBURSEMENTPOLICIYCHANGES MOSTPATIENTSPAYBROADMARKETDRUGSBYTHEMSELVES InsurancecoverageinYantai Jining Forthosewithinsurance theycanusetheirpersonalaccounts RMB100 300peryear tocovertheirbroadmarketdrugexpenseInlooselycontrolledregion likeYantai patientscantreatthepersonalaccountsassavingsaccountPatientspayontheirownaftertheaccountbalanceiszeroAmajorityofpopulationdoesnothaveinsuranceTheypaybroadmarketdrugsbythemselves Insured Self pay Total City County Town Village 3 5 95 97 20 30 70 80 10 15 85 90 1 99 0 100 Source Interview focusgroup McKinseyanalysis 7 PATIENTSGOTOPHARMACY CLINICSFORMINORSYMPTOMS Source Interview McKinseyanalysis Drivers IncreasedpricesensitivityChangedmedicalinsurancepolicyImprovedhighwayinfrastructureRichinformationaccessTVNewspaperIncreasedlifepaceNotimetovisithospitalPharmaceuticalmarketderegulationpolicyMoreandmorepharmacies clinicsConvenientlylocated Severesymptoms Townhospital Minorsymptoms Largesthospitalsincityandcounty Middle smallhospitalsincityandcounty Pharmacy clinics Ruralpatients Citypatients 8 ALARGEPROPORTIONOFDRUGSALESCOMESFROMRETAILPHARMACIES PHARMACYCLERKSBECOMEINFLUENTIAL 40 ofthepatientschangedtheirmindinpharmacySource Interview Focusgroup McKinseyanalysis Whatmakesyouchangeyourperceiveddrugs PharmacypatientsurveyPercent Shandongcitylevel Perceiveddrugnotavailable persuadedbypharmacyclerk Perceiveddrugavailablebutpersuadedbypharmacyclerk Changedmindbymyself WhenIgotothepharmacywithoutadruginmind Ijustaskthepharmacyclerktorecommend ThenIwillcheckthedrug sintroductionsheet ifthisdrugcoversmydisease Iwillhaveatry Yibincitylevelfocusgroup TotaldrugsalesbreakdownPercent Pharmacy Hospital Clinics Overall Motilium GynoDaktarin Sibelium 9 CLINICSAREPLAYINGIMPORTANTROLEESPECIALLYATCOUNTYANDTOWNANDBELOW Source Interview McKinseyanalysis Clinics shareintotaldrugsalesPercent Overall County Town Village 36 26 34 100 Sichuan Shandong City 8 27 8 27 100 3 10 G I CategoryReview 11 Morethanhalfofpatientsgoingtolargehospitalswillpurchasedrugatretailpharmacies Brandedgenericdrugsreferringtogenericdrugsthatrunadvertising creatingbrandawarenessinconsumersSource Physicianandpharmacyinterviews McKinseyanalysis FORGIDISFUNCTIONDRUGSASAWHOLETHEREISSIGNIFICANTLATENTDEMAND PEOPLEGENERALLYSEEKTREATMENTINCLINICSANDPHARMACIES Latentmarketdemand60 oftotalpatientsdonotseekanytreatmentAsmarketleader increasingawarenessforMotiliumtofurtherboosttreatmentrateisoneofthekeydemandleversSmallclinicsandpharmaciesareimportantchannels75 ofpatientsseekingtreatmentgotoclinicsandpharmacies Totalincidence Donotseektreatment Gotolargehospital Gotosmallclinic Selfmedicateatpharmacy Seektreatment Notaware Percent Motilium smarketshare Motiliumhasavastroomforgrowbecauseofsignificantleakagealongthepatientflow60 ofGIpatientsthatdoseektreatmentCurrentmarketshareof4 whichcouldbegrownfurtherAmongthe40 peoplewhoseekGItreatment about30 wouldbuybandedgenericdrugs whiletherestwouldbuynon brandgenericdrugs 1 6 12 FORGIDRUGS POLARIZATIONISBECOMINGMOREOBVIOUS Anecdotes Quantitativeexamples Sub TAsalesbychannelPercent Source Hospitalpharmacyinterviews retailpharmacyinterviews McKinseyanalysis 1997 1999 2