McKinsey was commissioned in Q1, 2003 to: provide dedicated effort in conducting in-depth market survey and collect detailed information from 4 cities within 2 provinces to identify the key growth drivers in Chinas broad market; 4 product categories were included: G.I. (Motilium), OBGY (Gyno.), Nail Infection (Sporanox) provide business model / proposal for to capture the broad market,McKinsey Broad Market Study Process,Project design (Q1, 2003) Project review with local and regional J-C team (Apr. 03) Survey market selection (Apr. 03) Field work in 2 cities in Shandong (May 03) 1st interim report (mid-June 03) Field work in 2 cities in Sichuan (mid-June mid-July 03) 2nd interim report and Killer Idea workshop (end July 03) Final report (Aug. 03) Presentation to corporate management (Sept. 03),BROAD MARKET CAN BE DEFINED AS CLASS 2 HOSPITALS AND BELOW AT REGIONAL CITY LEVEL AND ALL HEALTH CARE INSITITUTIONS AT COUNTY LEVEL AND BELOW,Regional city,County,Town,Village,Class 3 hospital,Class 2 & below hospital,Pharmacy,Clinic,Broad market,Source: McKinsey analysis,BROAD MARKET DRUGS INCLUDE OTC AND “OUT PATIENT” Rx DRUGS,Source: McKinsey analysis,Targeting easily diagnosed, non-life threatening diseases,Easy to use,Relatively cheap,Relatively safe with few side effect,Examples,OTC,Mature,New,Motilium,Gyno-Daktarin,Rx,Outpatient,In-hospital,Sporanox / Sibelium,Cipramil,Broad market drugs,McKinsey Key Findings Overall Market Situation,BROAD MARKET REPRESENTS 94% OF OVERALL DEMAND FOR BROAD MARKET DRUGS,Class 3 hospital,Broad market drug sales breakdown by geography Percent,* For only 2 according cities * Data for only Sichuan province Source: Interview with distributors, hospitals, pharmacies McKinsey analysis,All 4 cities,Broad market represents 94% of demand,100%=,3.6,2.3,1.3,Bn RMB,Shandong*,Sichuan*,City,100%=,21,6,2,Mn RMB,County,Town,Village,Motilium,Gyno- Daktarin,Sibelium*,Broad market,Sales breakdown of product Percent,Other channel at city level,GDP per capita: # of county,9,199 32,11,300 18,5,801 14,County is critical for broad market,DUE TO LOW INSURANCE COVERAGE AND RECENT REIMBURSEMENT POLICIY CHANGES, MOST PATIENTS PAY BROAD MARKET DRUGS BY THEMSELVES,Insurance coverage in Yantai & Jining,For those with insurance, they can use their personal accounts (RMB 100300 per year) to cover their broad market drug expense In loosely controlled region (like Yantai), patients can treat the personal accounts as savings account Patients pay on their own after the account balance is zero A majority of population does not have insurance They pay broad market drugs by themselves,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; focus group; McKinsey analysis,PATIENTS GO TO PHARMACY/CLINICS FOR MINOR SYMPTOMS,Source: Interview; McKinsey analysis,Drivers,Increased price sensitivity Changed medical insurance policy Improved highway infrastructure Rich information access TV Newspaper Increased life pace No time to visit hospital Pharmaceutical market deregulation policy More and more pharmacies & clinics Conveniently located,Severe symptoms,Town hospital,Minor symptoms,Largest hospitals in city and county,Middle-small hospitals in city and county,Pharmacy/clinics,Rural patients,City patients,A LARGE PROPORTION OF DRUG SALES COMES FROM RETAIL PHARMACIES; PHARMACY CLERKS BECOME INFLUENTIAL,* 40% of the patients changed their mind in pharmacy Source: Interview; Focus group; McKinsey analysis,“What makes you change your perceived drugs?”* Pharmacy patient survey Percent, Shandong city level,Perceived drug not available; persuaded by pharmacy clerk,Perceived drug available but persuaded by pharmacy clerk,Changed mind by myself,“When I go to the pharmacy without a drug in mind, I just ask the pharmacy clerk to recommend. Then I will check the drugs introduction sheet, if this drug covers my disease, I will have a try” Yibin city level focus group,Total drug sales breakdown Percent,Pharmacy,Hospital,Clinics,Overall,Motilium,Gyno Daktarin,Sibelium,CLINICS ARE PLAYING IMPORTANT ROLE ESPECIALLY AT COUNTY AND TOWN AND BELOW,Source: Interview; McKinsey analysis,Clinics share in total drug sales Percent,Overall,County,Town,Village,36%,26,34,100,Sichuan,Shandong,City,8,27%,8,27,100,3,G.I. Category Review,* More than half of patients going to large hospitals will purchase drug at retail pharmacies * Branded generic drugs referring to generic drugs that run advertising, creating brand awareness in consumers Source: Physician and pharmacy interviews; McKinsey analysis,FOR GI DISFUNCTION DRUGS AS A WHOLE THERE IS SIGNIFICANT LATENT DEMAND; PEOPLE GENERALLY SEEK TREATMENT IN CLINICS AND PHARMACIES,Latent market demand 60% of total patients do not seek any treatment As market leader, increasing awareness for Motilium to further boost treatment rate is one of the key demand levers Small clinics and