Mr. Shobert kicked off the event by talking about China’s priorities in the early 1980’s, which then only consisted of massive economic development plans. Shobert discussed how China, like America during the industrial revolution, compromised their personal health for economic wealth. He then spoke about China’s foreign direct investment life cycle. He explained that foreign companies in China are welcomed when needed, but are eventually shown the door when domestic counterparts are able to replace them. According to Shobert, this phenomenon has been happening since the medieval days of Chinese emperors and dynasties. Mr. Shobert extensively talked about the promise of China’s healthcare economy. He talked about the billions of dollars spent by the Chinese on healthcare every year, and he showed a survey that explained how the Chinese value healthcare spending above anything else. He discussed the geographic differences of China, which is one of the biggest countries in the world and the home to 1.3 billion people. He then highlighted how motivated the government is in seeking the best healthcare for all their people. Shobert also talked about the perils and the challenges of China’s healthcare economy. Initially, he gave generalized comments regarding business laws not being implemented and applied to local companies. He highlighted how global pharmaceutical companies are coping with this disadvantage, and he also touched based on the challenges of building a medical staff/team in China. Towards the end his speech, Mr. Shobert emphasized the expectations of the Chinese economy. He said he believed that the glory days in the 1990’s and early 2000’s of double digit growth every year have passed, and we could expect China to grow “only” at around 7.5% of its GDP per year. Nevertheless, he reminded everybody that China is still a land of massive growth, and that big opportunities remain for companies seeking to do business there.

1. THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
Friday, February 21, 2013
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2. CONTEXT
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3. China-Specific Healthcare Context
•
•
•
•
•
•
Rapidly maturing pharma pipeline
w/ key drivers of revenue and
profit coming off patent.
Commercial impact of key new
research, such as the human
genome getting “cracked,” has
thus-far been illusive.
Conquering communicable disease
has extended life times, but
increased overall cost as more
chronic diseases become longterm, treatable conditions.
Role of government in healthcare
unclear (Regulator only? Payer?
Provider? Both?)
Globally emerging middle class.
•
•
•
•
Access and affordability continue
to be problems.
Healthcare, environment and
corruption vie for the top three
concerns of Chinese people and
their government.
Healthcare in any society is a
political good, but problems in
China’s healthcare economy
embody many of the frustrations
Chinese have about what they
have given up in exchange for
economic growth.
Many of the inputs to a healthcare
system are targets of China’s 12th
Five Year Plan.
Foreign companies need to
understand, and
incorporate, these realities.
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
Global Healthcare Context

4. Accessing Healthcare in China
•
•
•
While today China’s government can accurately state that >95% of the country’s
rural dwellers have government provided healthcare insurance, in 1999 only 7%
did.
Divides between rich/poor/middle class and urban/rural persist.
Inadequate clinical capabilities in rural areas forces people to China’s larger
cities, creating greater burden on an already strained public hospital system.
Affording Healthcare in China
•
•
•
•
•
•
In 2000, the WHO ranked China 188 of 191 countries globally regarding “fairness
of healthcare finance.”
56% of rural Chinese do not bother to follow up on doctor recommendations
because of expense.
WHO estimates that 50% of China’s rural poor find themselves in “entrenched
poverty” due to healthcare costs.
Ubiquitous “red envelope” practices reflect a broken funding mechanism that
places enormous financial strain on families.
This same broken funding mechanism has led to hospital administrators and
doctors prescribing un-necessary medicine, diagnostic procedures and medical
interventions.
2012 Pew Global Attitudes Project found that between 2008 and 2012 anxieties
over China’s healthcare system had more than doubled.
But, why?
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
Organizing China’s Healthcare Context

5. •
•
•
Christina Ho, Fellow and Project
Director of the China Health Law
Initiative at Georgetown and
Yanzhong Huang of the Council on
Foreign Relations have written on
how China’s modernization did not
result in the same sort of
improvements in healthcare
outcomes as other emerging
economies w/ lower rates of GDP
growth experienced.
When China’s “Barefoot Doctor
Brigades” were disbanded, China’s
only functioning primary care
system was eviscerated.
The Barefoot Doctors were not
sophisticated, but they created
better outcomes for the average
Chinese than what they have
today.
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
Why Healthcare in China Deteriorated Over the Last 30 Years

6. •
•
•
•
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China’s economic reforms resulted
in the dismantling of large parts of
the state’s involvement in the
economy.
State Owned Enterprises (SOEs)
were shut down, privatized, or
modernized.
Many of the healthcare benefits
and pensions the average Chinese
once received from the
government were severed.
These good and necessary steps
had a bad and unintentional
effect: the “broken rice bowl” was
not replaced by similar
investments from the private
sector.
China’s central government was so
focused on modernization and its
many down-stream implications
that it overlooked healthcare.
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
Breaking the “Iron Rice Bowl”

7. Water Pollution
70% of China’s rivers are too
polluted to provide safe
drinking water.
Air Quality
PM2.5 poses immediate
cardiovascular and long-term
cancer problems.
Smoking
Between 300-350m smokers.
Western Diets
Hypertension, cerebrovascula
r disease rates, diabetes, etc.
are all on the rise.
Demographics
No country will get as old or
as rich as fast as China will.
By 2050, 1/3 of China’s
population will be 60+.
Ratio of elderly in need of
support today is 16:100, by
2050 that will be 64:100.
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Trade China’s People Have Made

8. China’s Priorities - 2014
1.
1.
2.
3.
4.
Economic development.
Economic development.
Economic development.
Economic development.
2.
3.
4.
Transition from infrastructure
and export-led economic
growth,
• Towards domestic
consumption and,
• Capturing higher valueadded, technology-rich
industries.
Healthcare access &
affordability.
Environment.
Corruption.
What happens to an industry within China during this sort of re-prioritization?
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
China’s Priorities - 1980

9. WFOEs ReCalibrate
Expectations, Or, In
Special Cases, Exit
China
Life
Sciences, Today
China Recognizes It
Needs Foreign
Investment &
Expertise
WFOEs Complain
of Rules in China
Being Designed to
Favor Domestic
Firms
China Tentatively
Opens – FDI
Catalog Is Revised
JVs
Dissolve, Domestic
and Foreign
Former Partners
Now Compete
Foreign
Participation
Limited, Largely Via
Hong Kong &
Macao Entities
JVs Practically
Necessary, Even
Though FDI Catalog
Says WFOEs
Permissible
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Hospitals, 2012
Revision
THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Lifecycle of Foreign Direct Investment (FDI) In China

10. WFOEs Re-Calibrate
Expectations, Or, In
Special Cases, Exit China
China’s Domestic
Technology
Development Goals
Begin to Fundamentally
Change the Landscape in
China
China Recognizes It
Needs Foreign
Investment & Expertise
What do the life sciences mean to
China today?
MNC Pharma Gets
Protected Status to
Engage China (early 90s)
1. Control: Captive Domestic
Manufacturing
2. Cost: Price Controls
3. National Economic
Development: Moving Up the
Global Value Chain
Product Offerings of
MNCs Get Market
Acceptance, Utilization
Goes Up, Price Pressures
Intensify
Life Science Companies
Agree to More Actively
Participate in China, But
w/ Older Technologies
China Begins to Move
into API, Generics, Lower
Technology Niches in the
Global Supply Chain
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
Applying This Life Cycle to Bio-Tech

11. •
•
Access and Affordability will drive China’s policies.
Healthcare in China will remain an extremely political issue.
•
•
•
•
•
Because the reimbursement scheme in China remains broken, economic
rent will continue to be extracted in unconventional ways.
•
•
In America, our conflict is over the role of government in healthcare.
Few in China question the government’s responsibility for healthcare.
In China, their conflict is about whether modernity was worth the price
average families are having to pay, the much greater costs they will have to
face tomorrow, and why the government has been so ineffective addressing
these concerns.
Foreign companies that fail to recognize the role of domestic political forces
in how China’s government responds to business are in for some nasty
surprises.
Foreign companies need to understand that compliance issues are not going
away. The market’s current structure has too many incentives built into it
that foster corruption. Uneven application of compliance standards will
result in a “tax” on foreign businesses.
China plays a unique role in life science MNCs revenue and profitability.
•
And China wants its own domestic champions in these same sectors.
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
Context Take-Aways

12. THE PROMISE
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13. 1.
2.
3.
4.
The Scale & Scope of the Need
Massive Government-Led Infrastructure Spending
A Growing Middle Class
China’s Government Is A Motivated Partner
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Promise Within China’s Healthcare Economy

14. •
•
•
2009 investment by China’s
central government of RMB 1.13
trillion into healthcare.
12th 5 Year Plan (5YP) has RMB 4.4
trillion specifically planned for
healthcare.
Government plans to add:
•
•
•
•
•
•
150,000 primary care physicians
in next 5 years.
2,000 new county hospitals.
29,000 new township hospitals.
5,000 existing hospitals
upgraded.
95% of all Chinese covered by
expanded national insurance.
Expanded national drug
formulary (EDL), access to new
diagnostics and medical devices
for treatment of chronic diseases.
www.HealthIntelAsia.com
THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Promise – Massive Government Led Infrastructure Investment

15. China Government Healthcare Spending – Actual Spending
Growth & Year-Over-Year Percentage (%) Increase
2,500.00
40
35
2,000.00
30
25
1,500.00
20
1,000.00
15
10
500.00
5
0.00
0
2003
2004
2005
2006
2007
Billion RMB
2008
YOY Growth (%)
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2009
2010
2011
THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Promise – Massive Government Led Infrastructure Investment

16. Where China's 2009 Healthcare Reform Went
New Rural Co-Op and Urban Residents
Insurance
12%
7%
45%
Insurance Subsidies for Enterprises in
Difficulty
Indigent Patients Medical Aid
24%
Public Health Awareness Investment
9%
Primary Care & Public Hospitals Upgrade &
Construction
2%
Drug Subsidies
Other
1%
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Promise – Massive Government Led Infrastructure Investment

17. • Middle class, as defined by
between $10-60,000 USD
per year income.
• Roughly 300 million person
market today.
• The most bullish projections
suggest that between 700800 million people in China
could ultimately work their
way into this group.
• Strong preference for
spending on healthcare and
education.
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Promise – A Growing Middle Class

18. •
•
•
Enormous pilot activity within
China’s healthcare delivery sector.
• Community Healthcare
• Home Healthcare
• Long Term Care Insurance
• Public/Private Hospital
Partnerships
Offering incentives to privatize
public hospitals (“20% by 2020”).
• Around 4,000 company
owned & run hospitals to
be privatized this decade.
• Wants to sell off VIP wards
at public hospitals.
Overall FDI friendly environment –
particularly for healthcare service
providers and life science
companies.
• Changes to FDI catalog.
• Relaxing WFOE in
healthcare delivery.
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Promise – China’s Government Is A Motivated Partner

19. THE PERIL
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20. 1.
2.
3.
4.
5.
6.
Misplaced Economic Enthusiasm
Misunderstanding Where Profit Resides
Excessive Fixed Asset Investment
Market Acceptance of Private Healthcare
Rising Technology Transfer Expectations
Uneven Application of Rules & Regulations
www.HealthIntelAsia.com
THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Perils Within China’s Healthcare Economy

21. •
•
•
•
•
•
•
“Trees do not grow to the sky.”
China has successfully defended itself
against the 1997 Asian and 2008
US/EU financial crises; but,
The country has yet to face a
structural financial crisis of its own
making.
Lots and lots and lots of bad debt
floating around the country –
everywhere (businesses, central
government, municipalities).
China is in the midst of a very awkward
economic transition.
There are very real dangers about
getting caught up in the “Middle
Income Trap.”
These possibilities would alter many of
the economic projections specific to
China’s middle class, and the
government’s ability to continue
expanding healthcare reimbursement.
www.HealthIntelAsia.com
THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Peril – Misplaced Economic Enthusiasm

22. •
•
•
•
•
•
Roughly $1.7 billion invested
capital into China’s domestic
hospital sector last year.
Why?
CN Healthcare’s research found
that almost all of the profit that
China’s privately-owned hospitals
generate – regardless of the
market segment they serve – is
made in the sale of
pharmaceuticals and devices.
Today, even in the high-end
private VIP niche, profit does not
reside in the delivery of healthcare
services.
Paying for services – even
healthcare – remains a challenge
in China.
What do your organization’s
clinical pathways, pharmaeconometrics look like if the only
variable is input cost of the
consumables?
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Peril – Where Profit Resides

23. • There is a lot of fixed asset
spending taking place across
China.
• New hospitals are directly tied to
political advancement within
local government.
• Already reports of massive
under-utilized capacity;
• Not because the demand is not
there, but because the hospitals
do not have staff; and,
• Because healthcare continues to
be a consciously rationalized
expenditure by Chinese
consumers.
www.HealthIntelAsia.com
THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Peril – Excessive Infrastructure Spending

24. McKinsey: What Drives Affluent Chinese into Private Healthcare
25%
20%
Private ≠ Better
Higher Acuity = Public Hospital
15%
10%
5%
0%
General Medicine
(Check-Up)
Cosmetic Surgery
(Eyelid Surgery)
OB/GYN
Pediatrics
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Oncology
Cardiology
THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Peril – Market Acceptance

25. •
•
•
Could China achieve in the life
sciences what it did in clean-tech?
• Create the most amenable
location in the world for
innovation to be trialed.
• Foster
public/private, academic/i
ndustry partnerships to
accelerate key
technologies.
• Fill the western financial
capital gap between
government, VCs, and
industry.
What will China’s technology
transfer expectations be for
market access?
Are today’s WTO protocols
adequate to address both the
needs of China and its trading
partners in the life science sector?
www.HealthIntelAsia.com
THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Peril – Technology Transfer

26. •
•
•
This past summer’s GSK scandal:
• GSK is alleged to have
routed $489 million to
bribe hospital officials and
doctors.
• Use of 700 travel agencies
to wash the money.
• Peter Humphrey and his
wife arrested on charges of
violating China’s data
privacy act.
Sinopharm, the largest
pharmaceutical distributor in
China, just charged w/ same thing
GSK was this summer.
But what are these companies
really guilty of?
www.HealthIntelAsia.com
THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Peril – Uneven Application of Rules & Regulations

27. • How should industry interpret
this past summer’s GSK scandal?
•
Reforming the Healthcare
Economy
•
•
•
Xi Jinping’s Anti-Corruption
Drive
•
•
When is the broken
reimbursement system going
to get fixed?
When are doctors going to
be paid more?
Why disproportionately crack
down on foreign vs. domestic
players?
China Is Becoming a Less
Hospitable Place for MNCs to
do Business
•
Certainly fits w/ critiques of
China by other business
groups.
• What really are your options?
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
The Peril – Uneven Application of Rules & Regulations

28. WHAT SHOULD BUSINESSES & INVESTORS DO?
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29. •
•
•
•
•
•
Reframe your expectations about growth in China.
Be clear-eyed about the political risks you will face.
Recognize the un-even application of standards will continue.
• Compliance, compliance, compliance.
• That means for you and your distribution channel.
Distinguish between what you can do yourself, and what you need
government partners to accomplish.
• Businesses can address issues like the Anhui Pricing Model.
• Businesses are less powerful to address changes such as:
• revisions to China’s IP laws specific to life sciences,
• compulsory licensing,
• compliance standards being un-evenly applied to foreign versus
domestic firms,
• technology transfer for market access expectations, and
• what it takes to actually get a therapy on the EDL.
• These issues are all on the radar screen in Washington DC.
Meet China as it is, not how you want it – or perhaps even need it – to be.
Get back to the basics: new ways of talking to your market, new
products, new models, new disruptive innovations.
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THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY
What Should Businesses & Investors Do?

30. For more information:
Rubicon Strategy Group, LLC
Two Union Square
601 Union Street, Suite 601
Seattle, WA 98101
www.RubiconStrategyGroup.com
www.HealthIntelAsia.com
Phone: 206-652-3572
QUESTIONS?
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