之四某咨询拜耳医药中国东部渠道战略规划

ChinaDistributionStrategy

EasternChina:Shanghai,Nanjing,Changzhou

InterimReview:Shanghai27July1999Introduction/ProjectBackgroundEasternChinaFindingsCriticalIssuesNextStepsChinaDistributionStrategyAgenda:27July19992July27EastChinaChinaDistributionStrategyCriticalIssuesDevelopanentrystrategyforBayer’sOTCbusinessinChinaMarketDistributionHospitals/DoctorsRetailersMarketsizebychannelbyproductsLeadingmanufacturerperformanceincludingcasestudiesAssessmentofBayerperformancewhatworks/whatdoesnotworkFutureforecastscityprioritizationCharacteristicsfordifferentproductcategorieswesternvs.TCMpharmaceuticalvs.OTCproductsStructurepricingandmarginKeydistributorprofilesandevaluationTier1vs.Tier2/3citytrendsruralvs.urbanRegulatorySizeandsegmentationbyhospitalsizePurchasecriteria/behaviorpaymenttermslogisticsrequirementsproductusagedecisionmakingprocessKeyretailerprofilesSizeandsegmentationbyretailertypeStructurepricingandmarginslogisticrequirementsdecisionmakingprocessRegulatorytrendsinsurancereimbursementOthercountrymarketevolutionEurope(Germany?)andUS?3July27EastChinaPreviousattemptstoenterChinaOTCmarketnotfruitfulIntroducedthreeOTCproductsoverthepastyearwithinitialsuccessongovernmentdruglistinseveralmajorcoastalprovincesChangesinhealthcareandreimbursementsystemEmergenceofnewretailanddistributionchannelsUncertaintyinpredictingscaleofchangesandimpactBayerProjectInitialfocusonEasternChina:Shanghai,NanjingandChangzhouFocusonfourproductcategories:GI,pain,anti-fungalandmulti-vitaminConductprimaryresearchandintegratefindingsintofactbaseandstrategyDevelopre-entrystrategyforBayer’sOTCbusinessinChinaChinaDistributionStrategyProjectBackground4July27EastChina020406080Pre-planning100%Roll-outFieldResearchDataSynthesis/IntegrationStrategyIntegrationOptionDevelopmentPercentofTeamResourcesJune/JulySeptemberAugustShanghaiNanjingChangzhouChinaDistributionStrategyWorkplanPre-Planning5July27EastChinaChinaDistributionStrategyActivitiesToDate

(June18-July27)DistributorRetailerHospitalsOtherShanghai:Nanjing:Changzhou:Sevenfirsttierdistributors/branches,including:ShanghaiPharmaceuticalChinaPharmaceuticalFoursecondtierdistributorsShanghaiNo.1PharmaceuticalHuashiChainStorepurchasingmanageronebranchmanagerEightotherdrugstoresFourTier3FourTier2ThreeTier1Targetingpharmacymanagersandphysicians(internalmedicine,GI,dermatology,women’shealth)Bayermanagementinterviews:salesmarketinggovernmentaffairspharmaceuticalShanghaiMedicalUniversityEliLillyMarketingManagerFivefirsttierdistributors/branches,including:NanjingPharmaceuticalJiangsuPharmaceuticalBaiXinDrugStorechainXianShengDrugStorechainHuaDongDrugStorechainTwootherdrugstoresThreeTier3JiangsuPeople’sNanjingNo.1ThreeTier2OneTier1Bayermanagementinterview:hospitalsalesShanghaiSquibbSalesChangzhouPharmaceuticalNewDrugNo.1WholesaleSixdrugstores,includingfourbranchesunderChangzhouPharmaceuticalchainOneTier3ChangzhouNo.1ThreeTier2Bayermanagementinterviews:areasalesdrugstoresalespharmaceuticalsales6July27EastChinaLonghuaHospital(Tier3)HuadongHospital(Tier3)ZhongshanHospital(Tier3)No.1Women&ChildrenHealthHospital(Tier2)YangPuCentralDistrictHospital(Tier2)HuangPuCentralDistrictHospital(Tier2)ZhaBeiCentralDistrictHospital(Tier2)YichuanCommunityHospital(Tier2)LinfenCommunityHospital(Tier1)HainingCommunityHospital(Tier1)DirectorofpharmacyDirectorofGIdepartmentChiefPhysicianofInternalMedicine(MemberofRDLcommittee)DirectorofpharmacyDirectorofInternalMedicineDirectorofpharmacyDirectorofpharmacyDirectorofGIdepartmentDirectorofWomen’sHealthDirectorofpharmacyDirectorofpharmacyDoctorofInternalMedicineDirectorofpharmacyDirectorofpharmacyChiefPhysicianofInternalMedicineMr.LiuYuehuaDr.WangGenshengDr.HeLijianMr.GuoMr.HuaErquanMr.LiuWeiguoMr.ZhangBinDr.CaoDr.WangLingDr.JiMr.YangDr.TaiMr.CaiYourongMr.HuXishanDr.SunMr.PeterZhangProf.ChenWenEliLillyShanghaiMedicalSchool,Dept.ofHealthScienceMarketingManagerProfessor/ResearcherOthers:OrganizationIntervieweeTitleHospitals(10hospitals,15interviews):ChinaDistributionStrategyShanghai:InterviewList(I)7July27EastChinaDistributors(11):DrugStores(12):OrganizationIntervieweeShanghaiPharmaceuticalCo.NewDrugbranchYandongbranchShijiaobranchHuxibranchShanghaiNo.1PharmaceuticalCo.ChinaPharmaceuticalGroup,ShanghaiBranchMedicinesbusinessbranchShanghaiJinganPharmaceuticalCo.ShanghaiChangningDistrictPharmaceuticalCo.ShanghaiLeiyunshangNorthernAreaMedicineGeneralShanghaiMinhangDistrictPharmaceuticalCo.ShanghaiZhabeiDistrictPharmaceuticalCo.Mr.OuHuashiChainStoreMr.GaoMr.WangN/APangN/AMr.ChanMr.KongMr.WuXiongweiMr.CaoXingzuMr.FangZhiweiShanghaiPharmaceuticalCo.Mr.TuQizhongMr.ChenZhenghuiMr.DuXiemingMr.LiuYaohuaMr.YaoJunChinaPharmaceuticalGroup,Mr.YangChengli/LinMs.ZhangLinMr.WangZiweiMs.ZhangYahuaMr.FanHuafangMr.XuJianguoShanghaiPharmaceuticalCo.ManagerManagerManagerManagerAssistantManagerChinaPharmaceuticalGroup,ManagerManagerAssistantManagerAssistantManagerManagerManagerShanghaiNo.1PharmaceuticalHuashiChainStoreheadquartersHuashiDrugStore(Yangpu)HuningDrugstoreKanghuaDrugstoreChangxinDrugstoreGuolianDrugstoreXinteDrugstoreWatson(HuaihaiRoadoutlet)FengyangDrugStore(affiliatedwithHuashi)JianshenDrugStore(chainstoreofZhabeiDistrict)AssistantManagerHuashiChainStoreManagerManagerManagerManagerManagerManagerManagerManagerManagerManagerTitleChinaDistributionStrategyShanghai:InterviewList(II)8July27EastChinaNote:RailwayMedicalCollegeSource:BainInterviewsOrganizationIntervieweeTitleChinaDistributionStrategyNanjing:InterviewList(I)Hospitals(7hospitals,16interviews):Ms.MengMs.ChenDirectorofInternalMedicineDirectorofWomanDepartmentNanjingNumberThreePeople'sHospital(Tier2)Mr.ChenMs.RenDirectorofGIDepartmentDirectorofWomanDepartmentNanjingRMC*AssociatedHospital(Tier3)Mr.ChenMs.QinMs.ChenSiRongChiefofthePharmacyChiefdoctorinWomanDepartmentChiefdoctorinInternalMedicineNanjingXiaGuanHospital(Tier2)Mr.YangMr.YuanChiefofthePharmacyDirectorofGIDepartmentXuanWuHospital(Tier2)Ms.ZhangMs.ZhangYuzhuoHospitalChief,DirectorofInternalMedicineChiefofthePharmacyXiangYangHealthHospital(Tier1)DirectorofGIDepartmentDeputyChiefofthePharmacyNanjingNo.1People’sHospital(Tier3)Mr.SunMr.XueMs.SunChunYuMs.WangShuYuMr.ChenTuxingChiefofthePharmacyDirectorofWomanDepartmentDirectorofGIDepartmentJiangsuPeople’sHospital(Tier3)9July27EastChinaSource:BainInterviewsDrugStore(7):CompanyNameIntervieweeTitleDistributor(5):ChinaDistributionStrategyNanjing:InterviewList(II)BaiXinChainStore-HeadquarterBaiXin-ChangJiangbranchXianShengChainStore-HeadquarterHuaDongChainStore-No.11branchNo.1PharmacyDaZhongDrugStoreJiangsuPharmaceuticalStoreMr.ZhanMs.ZhaoMr.ZhangMs.LiuMs.MengMr.MiaoMs.WangDeputygeneralmanagerBranchGeneralManagerPurchasingmanager,BranchGMGeneralManagerGeneralManagerManagerManagerJiangsuYiyaoShiyeCompanyNumber3branchMedicineBusinessbranchMr.SunMr.ZhaoManagerManagerHuaDongMedicineCompanyMr.WangMs.ZhaoGeneralManagerAssistantGeneralManagerJiangsuPharmaceuticalCompanyMr.XueMr.ChenDongNingManagerofthePharmaceuticalBranchBusinessmanagerNanjingPharmaceuticalCompanyMr.ShiManagerofthePharmaceuticalBranchJiangsuHouhuiCompanyMr.HuangManager10July27EastChinaSource:BainInterviewsHospitals(4):CompanyNameIntervieweeTitleDistributor(3):No.1People’’sHospital(Tier3A)No.3People’’sHospital(Tier2)No.2People’’sHospital(Tier2)RedCrossChildren’’sHospital(Tier2)ZhengQingKunDr.XueYuZhongYuanShenGuoZhongDr.WangQianDr.GuoRenXiangRongPharmacyPurchaseManager-WesternMedicineChiefPhysicianofGIDepartmentPharmacyManagerPharmacyPurchaseManagerPhysician-GIViceChiefPhysician-DermatologyPharmacyManagerNewDrug.Co.ChangzhouPharmaceuticalCo.No.1WholesaleCo.JiangYaoYaoYaBaiShenYaoXinDeputyGeneralManagerDeputyGeneralManagerGeneralManagerRetailers(6):DrugShoppingMallTongNingYuanDrugStoreJuRenTangandQinYeDrugStoresZhongHuaDrugStoreMs.YanMs.LiMs.ShiMs.ShaoChaoZhongXiaHanZhongManagerCounterChiefCounterChiefManagerManagerDeputyGeneralManagerBayer(3):Bayer-OTCBayer-OTCBayer-PharmaceuticalsZhouYiJunZhouQiangZhangQianAreaSalesManagerSalesRep-DrugStoresSeniorSalesRep-PharmaceuticalsChinaDistributionStrategyChangzhou:InterviewList11July27EastChinaIntroduction/ProjectBackgroundEasternChinaFindingsCriticalIssuesNextStepsChinaDistributionStrategyAgenda:27July199912July27EastChinaCityEnvironmentLocationUrbanpopulationGDP/capita(Chinaaverage:RMB6.0K)HospitalEnvironmentTotalno.hospitalsGeneralSpecializedClinicsHospitals/capitaChinaDistributionStrategyEasternChina:City/HospitalEnvironmentShanghaiNanjingChangzhouMaincoastalcityinEasternChina10.2MMRmb25.8K300kmnorthwestofShanghaiDistributionhubforsomeproducts(consumercare)2.8MMRmb15K180kmnorthwestofShanghai0.8MMRmb14.0K3403148associatedwithPLA20-3030033/million1701564associatedwithPLA14N/A61/million32311(Women’’sHealth)16healthclinics40/millionSource:ChinaStatisticsYearBook(1998);BainInterviewsThefirstphaseofthedistributionprojecthasfocusedonthreelarger-sizedEasternChinacities.13July27EastChinaShanghai:HospitalEnvironment

(GeneralHospital)ChinaDistributionStrategySource:BainInterviews9HospitalsassociatedwithGeneralMedicalColleges3HospitalsassociatedwithPLAMedicalCollege~20CentralDistrictHospital5HospitalsassociatedwithPLALargeAccounts(94)~8TCMHospital~44OtherHospitals~17HospitalsassociatedwithIndustrialSectors(steel,weaving)SmallAccounts(200)Shanghaihasover300hospitals.5Others(twoassociatedwithRailway)3HospitalsassociatedwithTCMMedicalCollegeKeyAccounts(20)200CommunityHospitalHealth/EnterpriseClinics(??)NumberofBedsAvg.DailyOutpatientAvg.AnnualDrugSales(RMBMM)~800~2,300~130~300~800~4030-80100-300~714July27EastChinaNanjing:HospitalEnvironment

(GeneralHospital)ChinaDistributionStrategyNanjinghasover150hospitalsinthreetiers.3hospitalsassociatedwithGeneralMedicalColleges1TCMhospitalKeyAccounts(8)20District/countyhospitals3hospitalsassociatedwithPLALargeAccounts(42)8hospitalsassociatedwithIndustrialSectors(steel,weaving)1hospitalassociatedwithcitygovernment106CommunityHospital/Health/EnterpriseHospitalsSmallAccounts(106)NumberofBedsAvg.DailyOutpatientAvg.AnnualDrugSales(RMBMM)~760~2,000~80~285~620~1150100~13TCMhospitals7otherhospitals3others1hospitalassociatedwithPLA15July27EastChinaChangzhou:HospitalEnvironmentChinaDistributionStrategyNote:*Excludes500clinics.Source:BainInterviewsNo.1People’’sHospitalNo.2People’’sHospitalKeyAccounts(2):TCMHospitalNo.3People’’sHospitalLargeAccounts(6):No.5People’’sHospitalNo.6People’’sHospitalNo.4People’’sHospitalRedCrossHospitalSmallAccounts:Clinics(500)HealthClinics(16)SmallHospitals(8)Ontheotherhand,Changzhoucityhasmanyfewerspecializedandgeneralhospitals.1000-1200640-800No.ofStaffNo.ofBeds300-500200-60030-200*10-200*16July27EastChinaSizeSalesByChannelTotalDrugSales*(RmbBnPTC)PercentofTotalDrugSales*(RmbBnPTC)ChinaDistributionStrategyEasternChina:SalesByChannel(1998)Thethreecitiesrepresentthreedifferenttiersofpharmaceuticalsales.Hospitalsstilldominatethesellingchannel.Note:IncludingsalestospecializedhospitalsSource:MinistryofHealth;StatisticalYearbook;URL,IMS,BainInterviews;BainAnalysisAsaPercentofShanghai:17%5%DrugStoreSalesAsaPercentofTotal*:9%14%16%17July27EastChinaPercentofTotalHospitalDrugSalesSource:MinistryofHealth;StatisticalYearbook;IMSHospitalPharmaceuticalAudit;BainInterviews;BainAnalysisShanghaiNanjingChangzhouPercentofTotalHospitalDrugSalesPercentofTotalHospitalDrugSales200942048%34%18%10642838%53%9%246214090220ChinaDistributionStrategyEasternChina:Accounts/ThroughputbyHospitalTypeOnly20-40%ofthehospitalsacrossthesethreecitiesaccountforover65%ofdrugthroughput.18July27EastChinaAverageDrugSales/Hospital(RmbBn)ShanghaiNanjingChangzhouChinaDistributionStrategyEasternChina:AverageThroughputbyHospitalTypeWhilethenumberofTier3,2,and1hospitalsdiffersgreatlyacrosscities,theaveragedrugthroughputisroughlythesame.20NumberofHospitals:942008NumberofHospitals:421062NumberofHospitals:624Source:MinistryofHealth;ShanghaiStatisticalYearbook;IMSHospitalPharmaceuticalAudit;BainInterviews;BainAnalysisAverageDrugSales/Hospital(RmbBn)AverageDrugSales/Hospital(RmbBn)19July27EastChinaPercentofTotalDrugSalesTier3ChinaDistributionStrategyEasternChina:TCMvs.Non-TCMDrugsShanghaiChangzhouNote:*LongHuaisaTCMHospital;RMCisRailwayMedicalCollege-affiliatedSource:BainInterviewsRoughly20-40%ofdrugsusedareTCM.Thereisnosignificantdifferenceacrosscitiesorhospitaltiers.NanjingTier2Tier1Tier3Tier2Tier120July27EastChinaOTCvs.PharmaceuticalDrugsPerceptionsGovernmentDefinition:GovernmentessentialdruglistandreimbursementlistincludebothOTCandpharmaceuticaldrugsnoseparationbycategoryNewregulationonOTCdrugswasjustpublishedmostimportantchange:prescriptionswillberequiredforpharmaceuticaldrugsatdrugstoresmostofthe188westerndrugsonpreliminaryOTClistrefertoactiveingredientsonlyHospitalDefinition:“IhavenoideawhatdrugsfallundertheOTCcategory.UntilthegovernmentpublishesanofficialOTClist,nooneknowsexactlywhatcriteriawillbeusedtodistinguishbetweenthetwocategories.”ChiefPhysicianofGIDepartment,ChangzhouNo.1HospitalDrugStoreDefinition:ChinaDistributionStrategyNon-TCMDrugs:Pharmaceuticalvs.OTCDrugsCurrently,itishardtoforphysiciansandpharmaciststodistinguishbetweenOTCdrugsandpharmaceuticaldrugs.ThereisnodefinitionorofseparationOTCvs.pharmaceuticaldrugsinhospitalsPrescriptionsarerequiredforalldrugspurchasedathospitalpharmacyCurrentlyalldrugscanbepurchasedthroughdrugstoresexceptforafewcategoriesincludinganesthesia,cancertreatment,sleepingpills,andthoserequiringtestingandmonitoring“Wecarryalldrugsthatareallowedbygovernment,includingthosenewandspecialimportsthatarenotcarriedbyhospitals.CurrentlythereisnoseparationofOTCandpharmaceuticaldrugsatthepharmacy.”Manager,ShanghaiNo.1PharmaceuticalStore“Thenewregulationwillactuallytightenthecontrolforpharmaceuticaldrugs……WejustfoundoutthatBayaspirinandTalcidareincludedontheOTClist;Canesten’sactiveingredientsqualifyitforOTCaswell.Butweareonlyininitialstages.””-BayerGovernmentAffairs21July27EastChinaSource:HospitalInterviews;BainEstimatePercentofTotalDrugSalesShanghaiNanjingChangzhouPercentofTotalDrugSalesPercentofTotalDrugSalesChinaDistributionStrategyEasternChina:HospitalSourcingHowever,inthecaseofJV/importeddrugsversuslocaldrugs,thereareconsiderabledifferencesacrosshospitaltiers.Tier3hospitalsusethehighestproportionofJV/importdrugs.22July27EastChinaSource:BainInterviewsHospitalDrugCommitteeDepartmentPhysiciansPharmacyHospitalManagementGroupofdirectorswhoapprovenewdrugadditionsDecisionMakingRole:EvaluatesefficacyofnewdrugsProposesadditionaldrugstohospitallistStronginfluenceonjuniorphysicianspostapprovalMonitoralldrugusage/purchasestracksdrugswithlowturnoverforde-listingSupports/vetoesdruglistadditionsStrongerinfluenceinnon-specialized/genericdrugsMaybeultimatedecisionmakersdegreeofimportancevariesbyhospitalHasownknowledge/experience/relationshipswithmanufacturersKeyCriteria:QualifiesforreimbursementReasonableprices(vs.availableproducts)Differentiationfromcurrentdrugscarriedefficacy/qualityRegardlessofhospitaltierorgeographiclocation,therearetypicallythreepartiesresponsibleforhospitaldrugpurchasing.ChinaDistributionStrategyHospitalDecisionMakers23July27EastChinaNote:*RailwayMedicalCollegeSource:BainInterviewsNumberofDrugs70-80additionsannuallyTalcidonbothlistsCanestenonShanghailistTier3Tier2Tier1Gov’tListOverlap:NewAdditionsYearly:Tier3andTier2hospitalscarryahighernumberofdrugs,especiallyimportedproducts.Theyalsoaddagreaternumberofnewdrugsannually.95-100%30-40NumberofDrugsN/A60N/A100N/AN/A80-90%30-35N/A60N/A40100%20-30N/A20100%40-50100%N/A100%5-6N/A2ChinaDistributionStrategyEasternChina:DrugListingbyHospitalSegmentJVLocalImportTotalN/AN/A24July27EastChinaSource:BainInterviewsChinaDistributionStrategyEasternChina:ReimbursementPotentialbyHospitalTypeShanghaiNanjingPercentofTotalPatientsPercentofTotalPatientsTier3hospitalshaveahigherpercentageofnon-reimbursablepatients,mainlybecauseofspecializedtreatment.25July27EastChinaSource:MinistryofHealth,MinistryofLabor,HospitalInterviewsReimbursementamountsaredecidedprimarilybyinsurancetype,althoughTier1hospitalshavemuchlowerlimits.ReimbursementLimitperPrescriptionTier2Tier3HospitalTier1ChinaDistributionStrategyReimbursementLimitationsEvolutionofInsuranceShanghaiReimbursementState-fundedreimbursement:covers:governmentagencies,partyagencies,institutionsadministeredbyworkunitEnterprisemedicalcare(oldsystem):covers:state-ownedenterprises,collective-ownedenterprisesadministeredbyworkunitEmployeemedicalinsurance(undertestingforroll-outsince1994):covers:state-ownedenterprises,collective-ownedenterprisesadministeredbySocialWelfareCenter(SeriousDiseaseFundunderexperimentationaswell)Commercialinsurance,etc.FutureModelforEveryoneCovers40MMworkersCovers100MMCovers20MMworkerscurrentlyCovers27MM26July27EastChinaEasternChina:DrugRetailEnvironmentChinaDistributionStrategyNote:*Including~500supermarketsanddepartmentstoreswithsmalldrugsalesSource:BainInterviewsThenumberofdrugstoresandtotalsalesdiffersdramaticallydependingontheevolutionofthecity.DrugStoreSalesTotalDrugSalesRmbBn(PTC)AsaPercentofShanghaiSales:12%6%NumberofOutletsNumberofOutletsAverageThroughput:0.8MM0.7MMRmb1.3MM27July27EastChinaSource:BainInterviewsChinaDistributionStrategyDrugStoreDescriptionWhiletheremaybesomevariationsacrosscities,thereareonlyseveralmodelsfortheseretailoutlets.“Chain””StoresAffiliatedStoresJVwithHospitalsIndependentStoresWhollyownedbyoneownerUsuallyunderonebrandnameLocatedwithindistrictorcitywidePartnershipbetweenhospitalandchainretailer/distributorLocatednexttoTier3orTier2hospitalIndependentfromchainsandhospitalsMostassociatedwithgovernmentorpartyorganizationSomeownedbyindividualsIndependentstoresassociatedwithchainstoresusuallyseparatelymanagedOwnership:Value-added:FuturePotential:CentrallymanagedwithcentralpurchasingEachoutlettailorsitspurchasesbutmayberequiredtosource80-90%fromparentAffiliationwithhospitalConvenientlylocatedacrosscity,notjustinurbanareasMaysourceaportionfromcentralchain,butmaintainssomeautonomyContinuedconsolidationwithincitiesLinkbetweenchainstoresanddistributorsGoodhedgebyhospitalsincaseofhealthcarereformchangesWin-winforchainstoresHardtosustainbusinessgivenstrengthofchainstoresandhospitalJVdrugstoresWillbecomeintegratedmorecloselywithchainstores28July27EastChinaPercentofTotalDrugStores/SalesSource:URSDatabase;BainInterviews;BainEstimateandAnalysisShanghaiNanjingChangzhou50050030033%60%7%1209030%70%40252051PercentofTotalDrugStores/SalesPercentofTotalDrugStores/SalesChinaDistributionStrategyEasternChina:Accounts/ThroughputbyDrugStoreTypeKeyoutletsaccountforatleast50%oftotalcitydrugthroughput.29July27EastChinaAverageAnnualDrugSales/Outlet(RMBMM)ShanghaiNanjingChangzhouAverageAnnualHospitalThroughput(PTC,RmbMM):130ChinaDistributionStrategyEasternChina:AverageThroughputbyDrugStoreTypeTheaveragesalesofdrugstoresacrossthesethreecitiesrangesfromRmb0.2-5.5MM,lowerthanTier1hospitals’’.40780111151561Source:BainInterviews;BainEstimateandAnalysisAverageAnnualDrugSales/Outlet(RMBMM)AverageAnnualDrugSales/Outlet(RMBMM)30July27EastChinaChinaDistributionStrategySource:BainInterviewShanghai:DrugStoreKeyPlayer(HuaShi)HuaShiiscurrentlythelargestchainstorewithastrongparentandgrowthcapability.ShanghaiPharmaceuticalCo.HuaShiDrugStoreLtd.HudongDistributionBranch60chainstoresestablishedwithRMB~50MMinvestmentbranded““HuaShi””AnnualstorerevenueofRMB3-5MMCentrallymanagedSourcesfromparentandmanufacturersdirectlyCurrentlyhas100generalpharmacistsand30-40pharmacistsbeingcertifiedEstablishedinApril1998LargestdistributiongroupinShanghaiwith~50%marketshareChainStores~20outletsmostlyJVswithTier3andTier2hospitalsAlsobrandedunder““HuaShiDrugStore””CurrentlymanagedunderHudongbutsourcingthroughHuaShiPlansforHuaShitoacquirechaininfutureMinorityinvestmentin~500storesIncluding430outletsinShanghaiAutonomousmanagementincludingsourcingdecisions10-20%ofdrugssourcedfromHuaShiChainStoresAffiliateStoresOneofsixwholesalebranches31July27EastChinaNanjing:DrugStoreKeyPlayersSource:Interviews,BainAnalysisChinaDistributionStrategyBaiXinHuaDongEstablishedinSeptember1998bysubsidiariesofNanjingPharmaceuticalGroup:NanjingPharmaceuticalCompanyNanjingYaoyeCompanyOwnedbyHuaDongPharmaceuticalCompany(associatedwithNanjingAirForce)OrganizationalStructure:60outlets55outletsaretheoldstoresownedbyNanjingPharmaceuticalCompanyandNanjingYaoyeCompany5outletsarenewlyopenedinSuguoChainsupermarketstoresTotalof13outletsNumberofOutlets:LargestchainstorewithstrongownershipStrongcoveragewithgoodlocationsinNanjingGoodreputationamongconsumersGoodservicesuchas24hoursserviceandfreedeliveryforconsumersHighquality(education,relevantexperience)salespeopleandpharmacistsStrength:MostlycentralizedmanagementtoensureproductandservicequalityDistributioncenterwithcentralizedsourcingfromNanjingPharmaceuticalCo.EachbranchhassomeflexibilityindetermininghowmanyandwhatbrandstocarrySourcingisfromdistributioncenter,whichpurchasefromHauDongandNanjingPharmaceuticalCo.Management/Sourcing:Rmb80MMRmb14MMAnnualThroughput:32July27EastChinaChinaDistributionStrategySource:BainInterviewChangzhou:ChangzhouPharmaceuticalChangzhouPharmaceuticalCo.Ltd.Wholly-OwnedDrugStoresNewDrugCo~25storeswith6moreapprovedforopeningRununderGroup’slogoHave7-8certifiedpharmacistsin-houseAllstoreshaveatleastonepharmaceutical-trainedpersonheadingoperationsFairlyautonomousmanagementintermsofproductportfolio80-90%ofproductsmustbesourcedfromoneof7distributorsundertheGroupLargestdistributiongroupinChangzhouwith>60%marketshareNo.1WholesaleCo.No.2WholesaleCo.SalesofRmb170MMCarriesmainlynewandspecialdrugsImport:JV:Localmix-40:24:36Direct:Sub-wholesalers-75:25Coverage:hospitals,drugstoresandsub-wholesalersinChangzhouurbanareaSalesofRmb200MMTier1distributorforShanghaiSquibbanddesignateddistributorforallanesthesiaproductsgrewSquibbfromRmb5MM-12MMin4yearsImport/JV:Localmix-50:50Direct:Sub-wholesalers-65:35Coverage:hospitals,clinicsanddrugstoresinbothurbanandsuburbareasalsoserves500clinicsineastChangzhouSalesofRmb50MMTier1distributorforSmithKlineBeechamCoverage:mainlyhospitalsanddrugstoresinsuburbsandfactoryclinicsofwestChangzhouChangzhouPharmaceuticalisthedominantplayerinthemarket,controllingover60%shareofdrugmarketinChangzhou.33July27EastChinaChangzhou:ChangzhouPharmaceuticalRetailOperationsChinaDistributionStrategySource:BainInterviewsChangzhouPharmaceuticalCo.Ltd.RetailOperationsDrugShoppingMallKeyOutletsMediumOutletsSmallOutletsAutonomousmanagementgivenitssizedoesnothavethe80-90%sourcingrequirementfromparentcompanyAlsoactsasTier1distributorfor40-50localbrandsRevenuein1998~20MM25%non-drugs2-3MMinwholesalerevenues3:NanShan,TongFengYueandTongNingYuanRequiredtosource80-90%oftheirproductsfromaffiliateddistributors~Rmb4MMeachinsales~15%fromnon-drugsales~5%fromsalestofactory/corporateclinics,thoughthepercentisdecliningovertime~15intotalTightlymanagedbycorporatestrictadherencetosourcingrequirementsFewerselectionofproductsUsuallylocatedclosetohospitalsAveragerevenueofRmb1.5-2.0MM~5RevenueusuallybelowRmb1MM,closerinsizetootherindependentoperatorsinChangzhouWithitsclosetiestothegovernment,ChangzhouPharmaceuticalobtainedbetterlocationsinthecitytobuildastrong““chain”anderodetheindependentoperatorscompetitiveness.34July27EastChinaChinaDistributionStrategyEasternChina:DistributionStructureSourcingSupplyPercentofTotalDrugSalesPercentofTotalDrugSalesNote:ExcludingoutsidecitysalesbyShanghaiPharmaceuticalCompany’s38distributionbranchesacrossChina,whichsellmainlydrugsmanufacturedbyShanghaiPharmaceuticalGroupanditsassociatedcompaniesSource:BainInterviews;BainEstimateandAnalysisDespitethedifferentsizeofpharmaceuticalsalesineachcity,distributorssourceprimarilyfrommanufacturersandsupplyonlytheirowncities.35July27EastChinaNote:*ExcludingoutsidecitysalesbyShanghaiPharmaceuticalCompany’s38distributionbranchesacrossChina,whichsellmainlydrugsmanufacturedbyShanghaiPharmaceuticalGroupanditsassociatedcompanies**NotincludingdistributorsspecializedincertainbrandsSource:BainInterviewsPharmaceuticalManufacturer/ImporterFirst-tierDistributors*Second-tierDistributors88%(oftotalsales)20%60%10%(oftotalsales)8%30%DrugStores16%8%54%Number4**~20-3036%8%18%88%30%Tier3HospitalTier2/Tier1Hospital24%4%2%(oftotalsales)2%10%88%ofpharmaceuticalsaresoldthroughfirst-tierdistributors,andthemajorityoftheirsalesaresolddirectlytohospitalsanddrugstores.ChinaDistributionStrategyShanghai:PharmaceuticalDistributionStructure(Non-TCMPharmaceuticals)36July27EastChinaNanjing:PharmaceuticalDistributionStructure(Non-TCMPharmaceuticals)ChinaDistributionStrategyNote:MostdistributorsinNanjingsourcemorethan50%ofitssalesfrommanufacturersdirectlySource:BainInterviewsPharmaceuticalManufacturers/ImportersInCityDistributors*(mostlyFirst-tier)ChainStoreIndependentStoreTier3HospitalTier2HospitalTier1Hospital~1578%2%48%34%8%Majorit