Hide Notes 

Slide 1: 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 China’s broad market; • 4 product categories were included: G.I. (Motilium), OBGY (Gyno.), Nail Infection (Sporanox) & Vertigo (Sibelium) • provide objective assessment about the broad market opportunity (not including any urban centres); • provide business model / proposal for XJP to capture the broad market
Slide 2: 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)
Slide 3: 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 Broad market Class 2 & below hospital Class 3 hospital Regional city Pharmacy Clinic County Town Village Source: McKinsey analysis
Slide 4: BROAD MARKET DRUGS INCLUDE OTC AND “OUT PATIENT” Rx DRUGS Broad market drugs OTC Mature Targeting easily diagnosed, nonlife threatening diseases Rx New Outpatient In-hospital Easy to use Relatively cheap Relatively safe with few side effect Examples Motilium Gyno-Daktarin Sporanox / Sibelium Cipramil Source: McKinsey analysis
Slide 5: McKinsey Key Findings Overall Market Situation
Slide 6: BROAD MARKET REPRESENTS 94% OF OVERALL DEMAND FOR Broad market BROAD MARKET DRUGS Broad market drug sales breakdown by geography Percent 100%= 3.6 6% 20 Sales breakdown of XJP product Percent 100%= City County 21 1% 15 2.3 6 20 1.3 6 21 Bn RMB Other channel at city level 6 7 2 12 15 Mn RMB 28 24 Broad market represents 94% of demand 36 39 31 38 Town 19 16 24 26 47 24 19 19 18 Village Class 3 hospital 33 15 2 12 All 4 cities Shandong* GDP per capita: # of county 9,199 32 11,300 18 Sichuan* 5,801 14 Motilium GynoDaktarin Sibelium** County is critical for broad market * For only 2 according cities ** Data for only Sichuan province Source: Interview with distributors, hospitals, pharmacies & clinics; McKinsey analysis
Slide 7: DUE TO LOW INSURANCE COVERAGE AND RECENT REIMBURSEMENT POLICIY CHANGES, MOST PATIENTS PAY BROAD MARKET DRUGS BY THEMSELVES Insurance coverage in Yantai & Jining Insured 3-5 20-30 10-15 1 0 95-97 Self-pay 70-80 85-90 99 100 For those with insurance, they can use their personal accounts (~RMB 100~300 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 Total City County Town Village Source: Interview; focus group; McKinsey analysis
Slide 8: PATIENTS GO TO PHARMACY/CLINICS FOR MINOR SYMPTOMS Drivers Largest hospitals in city and county Middle-small hospitals in city and county Town hospital Pharmacy/clinics Increased price sensitivity Changed medical insurance policy Improved highway infrastructure Rich information access TV Newspaper Severe symptoms Minor symptoms Increased life pace No time to visit hospital City patients Rural patients Pharmaceutical market deregulation policy More and more pharmacies & clinics Conveniently located Middle-small hospitals find it hard to survive due to lack of patients Source: Interview; McKinsey analysis
Slide 9: A LARGE PROPORTION OF DRUG SALES COMES FROM RETAIL PHARMACIES; PHARMACY CLERKS BECOME INFLUENTIAL Total drug sales breakdown Percent Pharmacy 37% 42 33 52 Hospital 30 13 35 32 “When I go to the pharmacy without a drug in mind, I just ask the pharmacy clerk to recommend. Then I will check the drug’s introduction sheet, if this drug covers my disease, I will have a try” – Yibin city level focus group 45 Clinics 31 16 Overall Motilium Gyno Daktarin 32 “What makes you change your perceived drugs?”* – Pharmacy patient survey Percent, Shandong city level Sibelium Perceived drug not available; persuaded by pharmacy clerk Changed mind by myself XJP should design special initiatives to target pharmacy channels * 40% of the patients changed their mind in pharmacy Source: Interview; Focus group; McKinsey analysis 16 47 37 Perceived drug available but persuaded by pharmacy clerk
Slide 10: CLINICS ARE PLAYING IMPORTANT ROLE ESPECIALLY AT COUNTY AND TOWN AND BELOW Clinics’ share in total drug sales Percent Sichuan Overall 36% Shandong 27% City 8 3 XJP should think about cost-effective way to lock in individual clinic/barefoot doctors County 26 8 Town 34 27 Village 100 100 Source: Interview; McKinsey analysis
Slide 11: G.I. Category Review
Slide 12: Percent FOR GI DISFUNCTION DRUGS AS A WHOLE THERE IS SIGNIFICANT LATENT DEMAND; PEOPLE GENERALLY SEEK TREATMENT IN CLINICS AND PHARMACIES Motilium’s market share 100 Motilium has a vast room for grow because of significant leakage along the patient flow 60% of GI patients that do seek treatment Current market share of 4% which could be grown further Among the 40% people who seek GI treatment, about 30% would buy banded generic drugs**, while the rest would buy non-brand generic drugs ~30 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 ~30 ~40 1.6% ~5 ~20 ~20 Small clinics and pharmacies are important channels 75% of patients seeking treatment go to clinics and pharmacies Total incidence Not aware Do not seek treatment Seek treatment Go to large hospital* Go to small clinic Self medicate at pharmacy * 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
Slide 13: FOR GI DRUGS, POLARIZATION IS BECOMING MORE OBVIOUS ROUGH ESTIMATION Anecdotes Quantitative examples Sub-TA sales by channel Percent Yantai “Unlike things in the past, patients nowadays generally try to avoid coming to hospitals because of hospitals’ expensive charges. For GI disease, most people can judge by themselves. So they usually prefer to go to pharmacies or clinics to buy drugs.” —— Qixia GI physician interview Hospital ~50 ~40 ~20 ~40 Retail Pharmacy Clinic ~30 ~20 1997 30 30 1999 ~40 2002 Importance of GI drug sales in hospital is diminishing Retail pharmacy would be the major battle field for GI drugs Jining “Most GI patients are repeating patients. They know which drugs to buy, and where the drugs are cheap. So usually they will choose pharmacies & clinics.” —— Jining retail pharmacist interview Hospital ~30 ~50 ~20 ~10 ~40 1997 ~10 ~30 Retail Pharmacy Clinic ~50 ~60 1999 2002 Source: Hospital pharmacy interviews; retail pharmacy interviews; McKinsey analysis
Slide 14: SALES OF GI DRUGS ARE MORE CONCENTRATED TOWARDS VILLAGE AND COUNTY, WHILE THE MARKET IS FRAGMENTED WITH MANY DIFFERENT DRUGS Percent Total = RMB 243.05 million City Village 15 41 26 County Sidashu ( 斯达 Mosapride 舒) Wei’ershu ( 莫沙比利 ) ( 谓尔舒 ) Motilium 33 43 Tidines** ( 替丁类药 ) 18 69 Others* 19 Town * Others including more than 200 different GI drugs such as Kuiweipian( 快胃片 ) 、 Weifuan(w 胃复安 ) 、 Jinweixiaoshipian ( 健胃消食片 ) 、 999( 三九胃泰 ) 、丹桂香、胃舒平、健胃酵母片、果胶铋、邦消安、调胃片、胃气痛片、湿 胃舒、养胃舒 , and many other cheap non-branded generic drugs ** Including Cimetadine, Ramitidine & Famotidine Source: Distributor interviews; physician interviews; patient interviews; McKinsey analysis
Slide 15: IN BROAD MARKET, MOTILIUM IS LOSING OUT BIG TIME IN RETAIL YANTAI & JINING PHARMACY CHANNEL … Sales by channel Mn RMB, % GI drugs Motilium Sidashu ( 斯达舒 ) Wei’ershu ( 谓尔舒 ) Mosapride ( 莫沙比利 ) Tidines ( 替丁类药 ) 12 35 53 243.05 14 34 52 9.83 6 66 29 6.62 5 76 20 7.30 40 38 21 7.93 4 22 73 44.64 Hospital Retail pharmacy Clinic Source: Distributor interviews; hospital pharmacy interviews; retail pharmacy interviews; McKinsey analysis
Slide 16: … AND IN COUNTY GEOGRAPHY YANTAI & JINING Sales by strata Mn RMB, % GI drugs Motilium Sidashu( 斯达舒 ) Wei’ershu( 谓尔舒 ) Mosapride( 莫沙比利 ) Tidines( 替丁类药 ) 1 15 15 26 19 41 243.05 22 20 43 9.83 22 37 26 15 6.62 26 44 21 9 7.30 18 50 23 10 7.93 17 17 66 44.64 City County Town Village Source: Distributor interviews; hospital pharmacy interviews; retail pharmacy interviews; McKinsey analysis
Slide 17: Vaginal Infection Category Review
Slide 18: FOR VAGINAL INFECTIONS, PATIENTS ARE MORE AWARE OF THE DISEASE AND GO TO HOSPITAL FOR TREATMENT Percent 100 30% would use branded drugs, while 70% would use nonbranded drugs Less latent demand Hospital is still number 1 channel to push Gyno Daktarin sales Pharmacy is becoming increasingly important Almost all patients aware of the disease due to obvious symptoms and regular check up 80% of patients seek treatment ~1 ~20 ~80 Large hospital is important influencing channel ~55 ~0 ~25 Most patients seeking treatment will go to large hospitals Though half or more will purchase prescribed drugs in pharmacies Market player should focus on share gain Total incidence Not aware Do not seek treatment Seek treatment Go to large hospital Go to small clinic Self medicate at pharmacy Source: Physician, pharmacy and clinic interviews
Slide 19: FOR GYNO DAKTARIN, HOSPITAL IS CRITICAL FOR PRESCRIPTION BUT PURCHASING HAS BEEN GRADUALLY SHIFTING TO RETAIL PHARMACY ESTIMATE Anecdotes Quantitative examples Sub-TA sales by channel Percent “Gyno patients will usually come to hospital for body check and go to pharmacies to refill drugs. For such kind of disease, people still trust large hospitals. However, more and more people purchase drugs in pharmacies” —— Liangshan No.2 hospital, Gyno physician interview Yantai ~45 Hospital ~80 ~65 Retail Pharmacy Clinic ~45 ~20 ~0 1997 ~30 ~5 1999 ~10 2002 Jining “I don’t have many gyno patients. This is because of 3 reasons. First, I am a man; second, I don’t have facilities to check the body in the clinic; third, patients are usually familiar with me and they will feel awkword.” —— Zhangyongxin town level clinic interview ~30 ~55 Hospital ~80 ~60 Retail Pharmacy Clinic ~40 ~20 ~0 1997 ~5 1999 ~10 2002 Source: Hospital interviews; Retail pharmacy interviews; McKinsey analysis
Slide 20: IN ADDITION, GYNO DAKTARIN NEEDS TO GROW THE MARKET SHARE ESPECIALLY THOSE OF COUNTY AND TOWN YANTAI & JINING Sales by strata Mn RMB, % Vaginal infection drugs Gyno Daktarin 42 26 50 20 4 71.38 47 12 0 2.47 Xiaomishuan( 消糜栓 ) 24 43 32 0 4.54 Mycostatin( 制霉菌素 ) Shuangzuotaishuan( 双唑泰栓 ) Jie’eryin( 洁尔阴 ) 3 41 46 13 0 4.46 59 38 0 5.46 9 43 27 22 5.83 City County Town Village Source: Distributor interviews; hospital pharmacy interviews; retail pharmacy interviews; McKinsey analysis
Slide 21: Nail Fungal Infection Category Review
Slide 22: Percent FOR TINEA UNQUIUM DRUGS, DEMAND LATENCY IS EVEN HIGHER 100 ~20 Low treatment rate is mainly due to affordability issue of the patients Sporanox’s potential market as a Tinea Unquium drug is small, and is unlikely to be a broadmarket hit Extremely latent demand with increasing awareness 90% of patients do not seek treatment Awareness and treatment rate is increasing slightly due to competitor's heavy advertising ~70 Only 1% actually buy drugs ~10 ~5 Total incidence* Not aware Do not seek treatment Seek treatment Go to large hospital ~0 Go to clinic ~5 Go to pharmacy directly Only around 10 % of those seeking treatment purchase drugs Only 1% would follow prescription * The incidence rate is around 5% in Shandong Source: Physician and pharmacy interviews; McKinsey analysis
Slide 23: HOSPITAL CHANNEL IS STILL DOMINATING TINEA UNQUIUM DRUG MARKET WHILE PHARMACY CHANNEL IS PICKING UP Anecdotes Quantitative examples Sub-TA sales by channel Percent Yantai “We gradually carry some Tinea Unquium drugs in these years. Because more and more patients, although still quite small in amount, come here to ask for Liangjia after seeing its advertisement. I think most patients still go to hospital for treatment.” —— Jining Kangfu pharmacy ~50 ~70 Hospital Retail Pharmacy Clinic Jining ~90 ~50 ~10 ~0 1997 30 ~0 1999 ~1 2002 “I seldom see Tinea Unquium patients. And also, because the drugs are very expensive, I didn’t carry them. If there is really someone come to my clinic, I will suggest them to pharmacy.” —— Yantai clinic interview Hospital ~90 ~80 ~75 Retail Pharmacy Clinic ~10 ~0 1997 ~15 ~5 1999 ~20 ~5 2002 Source: Hospital pharmacy interviews; Retail pharmacy interviews; McKinsey analysis
Slide 24: THERE ARE ONLY A FEW COMPETITORS AT CITY AND COUNTY LEVEL FOR SPORANOX; LIANGJIA IS DOING BETTER THAN SPORANOX AT RETAIL PHARMACIES DUE TO HEAVY ADVERTISING Percent Total = RMB 9.22 million Village 0 Town Liangjia ( 亮甲 ) 2 14 44 Lanmeishu ( 兰美抒 ) City Others* 16 County 54 46 24 Sporanox Source: * Others including around five drugs, such as Huihuangmeisu （灰黄霉素） , Lisulao （里素劳） ,Lianghuija （亮灰甲） etc. Distributor interviews; physician interviews; patient interviews; McKinsey analysis
Slide 25: THERE ARE ONLY A FEW COMPETITORS AT CITY AND COUNTY LEVEL FOR SPORANOX; LIANGJIA IS DOING BETTER THAN SPORANOX AT RETAIL PHARMACIES DUE TO HEAVY ADVERTISING Share of leading drugs within Tinea Unquium – Yantai & Jining Mn RMB, % City 100%= 4.0 1.8 2.2 0.1 County 5.0 4.1 0.8 0.2 14% Sporanox 26% 29% 25% 5 8 22% 25% 12% 0 27 5% 0 10 Liangjia has relatively high market share in retail pharmacies At city level, Lanmeishu has 31% of hospital channel, better than Sporanox Hospital at county level and above should be the main focus 11 Lanmeishu* ( 兰美抒 ) Liangjia ( 亮甲 ) 14 7 20 31 21 0 39 73 17 4 85 57 Others 54 61 33 40 25 Total Hospital Retail Clinic pharmacy Total Hospital Retail pharmacy Clinic Source: Distributor interviews; physician interviews; patient interviews; McKinsey analysis
Slide 26: RMB PRICE IS A HUGE ISSUE FOR SPORANOX ~500 ~420 ~200 ~80 15 County level price threashold Sporanox is too expensive for most farmers whose annual income is only around RMB 2,000 Even at county level, cost of using sporanox for effective treatment is higher than total drug expense per year for an average person 20 City level County level Average price annual drug insurance threashold expense per allowance person per year Cost of sporanox as a derma drug Cost of sporanox as a STD drug Source: Interviews; McKinsey analysis
Slide 27: FOR SPORANOX, XJP SHOULD CONTINUE TO FOCUS ON HOSPITALS … Sales by channel Mn RMB, % Tinea Unquium 65 33 2 9.22 YANTAI & JINING Sporanox 69 30 1 2.21 Lanmeishu* ( 兰美抒 ) 84 15 0 1.50 Liangjia ( 亮甲 ) 12 87 2 1.26 Hospital Retail Clinic pharmacy Source: Distributor interviews; hospital pharmacy interviews; retail pharmacy interviews; McKinsey analysis
Slide 28: … AND AT CITY AND RICH COUNTIES Sales by strata Mn RMB, % Tinea Unquium drugs 44 54 2 0 YANTAI & JINING 9.22 Sporanox 48 50 2 1 2.21 Lanmeishu*( 兰美抒 ) 53 47 11 1.50 Liangjia( 亮甲 ) 67 29 4 0 1.26 City County Town Village Source: Distributor interviews; hospital pharmacy interviews; retail pharmacy interviews; McKinsey analysis
Slide 29: Vertigo Drug Category Review
Slide 30: THERE IS UNTAPPED DEMAND IN TWO OF THE THREE PRODUCTRELATED TAs GI disfunction patient flow in broad market percent VI patient flow in broad market percent Vertigo patient flow in broad market Percent • Vertigo incidence rate is only 1%-3% • Sibelium can target more indications with much larger patient population 100 ~30 ~1 20~ 40 30~ 40 20~ 40 Total Not incidence aware Do not Seek seek treatment treatment Total Not incidence aware Do not Seek seek treatment treatment Total Not incidence aware Do not Seek seek treatment treatment 99 60~ 80 100 0 1 • Huge latent demand • Awareness can be increased by patient education • Affordability can be improve due to economic development 100 Source: Hospital & pharmacy interview; McKinsey analysis
Slide 31: BY GEOGRAPHY, COUNTY LEVEL AND ABOVE CONSUME A DOMINANT SHARE OF SIBELIUM Percent Total = RMB 2.0 million for sales of Sibelium in Deyang and Yibin Sibelium’s market share in dizziness drug sales in Deyang and Yibin 2.64 1.88 1.79 1.65 100%= (Rmb Mm) City County 13% Sibelium 27 38 32% 28% 25% Sales of Sibelium is more dominant in city and county level Market share of Sibelium in total drugs for dizziness is also higher in county level and above Others 87% 72% 75% Village 12 24 Town 68% City County Town Village Source: Interviews; McKinsey analysis
Slide 32: McKinsey Broad Market Proposal
Slide 33: WE NEED TO SOLVE THREE CRITICAL ISSUES TO ACHIEVE OUR ASPIRATION FOR BROAD MARKET Build a solid platform Prioritize market opportunities Financial and org. implication “Capturing broad market” “Hospital Seeding” for large county hospitals “Pharmacy Plus” for large pharmacy chains “Distribu tor network to county level” “Turbo CME” for clinic/ barefoot doctors and township pharmacies 332 regional cities (whole China) Around 80 regional cities Sub-market within a region Investment Returns People development Organization XJP broad market team
Slide 34: XJP NEEDS TO INVEST TO CAPTURE THE GREAT POTENTIAL IN BROAD MARKET High potential broad market Opportunity vs. XJP coverage gap New initiatives Broad market drug sales breakdown by geography Percent, all 4 cities Insufficient coverage of county hospitals County hospitals represents 16% of demand Largest county hospitals can heavily influence consumption of Gyno Daktarin XJP only cover 23% of Tier II and 12% of Tier I hospitals Detail to county hospitals Class 3 hospitals Village 6 19 Other channels at city level Nearly no coverage of pharmacies Pharmacy represents 37% of demand Pharmacy in county and below represents 23% of demand In developed cities, pharmacy chains are playing dominant role XJP now only covers city level pharmacies in several large cities 20 Town 19 Control large pharmacy chains at county level 36 County Low utilization of distributors’ push Broad market: 94% of overall demand County and below: 74% of overall demand Distributors’ have influence on clinic and pharmacies XJP has not utilized distributors’ capability to push sales of XJP products Give distributors more incentive to push for XJP products Nearly no coverage of barefoot doctors Barefoot doctors represent 45% of GI drug sales and 33% of Vertigo drug sales XJP has almost no coverage on them Source: McKinsey analysis Adapt CME focus to barefoot doctors
Slide 35: DURING OUR KILLER IDEA WORKSHOP, WE DEVELOPED FOUR SETS OF HYPOTHESIS TO BE TESTED IN PILOT “Hospital seeding” • One sales rep per region • Sales reps are dedicated and with medical background • For the covered region, all county No. 1 and 2 large hospitals should be covered • Focus on Gyno-Daktarin but also detail Motilium, Sibelium, Daktarin, and other XJP drugs “Pharmacy plus” • Three sales reps per region, covering top three pharmacy chains • For the covered pharmacy chains, all county and some towns should be covered • Focus on Gyno-Daktarin and Motilium but also push other XJP drugs • “Sweeties” to pharmacy owners could include information system support, training, in store advertising, gifts in box, and pharmacy owner club • “Sweeties” to pharmacy clerks could include travel for star staff, training, and gifts in box “Distributor network to county level” • One rep per region, covering all county No. 1 distributors • Rewrite distributor contract • Leverage distributor network and push distributor staff to reach the villages/clinics • “Sweeties” to distributor could include information system support, training, and distributor club • “Sweeties” to distributor staff could include travel for star staff and training Broad market, especially county level “Turbo CME” * • Will be conducted by HQ OTC CME team. Local sales team will provide coordinating support • Workshop holds once a year in each county • Target audience is clinic/barefoot doctors • Focused drug include Motilium, Daktarin, Pevison, and Sibelium • Leverage local healthcare authority and associations to reach mass number of clinic/barefoot doctors * Summary based on Zhejiang field trip and internal interviews
Slide 36: Comments on the McKinsey Proposed Initiatives Hospital Seeding Besides testing the idea to conduct professional detailing to the county hospitals, we also want to provide coverage among the smaller hospitals (Tier I & II ) in the urban cities to compare the R.O.I.s Pharmacy Plus We have seen competitors (like SiDaShu) sales growth via aggressive coverage and promotion among the drugstores in the richer countis. So, this is definitely worth testing.
Slide 37: Comments on the McKinsey Proposed Initiatives Distributor Drive We have expanded our distribution network to include almost 1,000 sub-distributors in the last 3 years. We will try to test the sales impact if we invest more program and resources among them. Turbo CME We have started CME program among county hospital doctors. It would be interested to find out the sales contribution if we conduct the program among the barefoot doctors.
Slide 38: XJP COULD ADOPT A THREE-PHASED ACTION PLAN TO ESTABLISH ROUGH ESTIMATE AND MAINTAIN DOMINANT POSITION IN BROAD MARKET Phase III: Strengthening and maintaining the dominant position Phase II: Dominating the broad market Phase I: Capturing the broad market Time frame Coverage 2005~2007 2008~2010 2011 and beyond Nearly all regions (about 330 regions covering 2,050 counties) Cover at county and selected town level 1/4 of all regions (about 80 1/2 of all regions (about 170 regions with 500 counties) regions covering 1,100 Cover county level (leveraging counties) CME to reach town and Cover county and selected below) town level Source: McKinsey analysis
Slide 39: McKinsey Estimate Assuming Roll-Out in 2004 REVENUE FORECAST OF NATIONAL ROLL-OUT 14,751 RMB millions, at NTS price 11,501 9,896 8,626 7,425 6,231 13,171 Total sales 16,522 at NTS price Additional sales from broad market initiatives at NTS price 6,859 6,124 5,468 4,623 3,755 5,340 1,631 4,440 9,663 1,206 8,628 3,492 790 7,703 6,877 2,560 2,852 312 6,141 5,057 5,483 4,134 4,600 2,902 3,192 3,650 2,560 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2,368 3,143 XJP BP sales at NTS price
Slide 40: Eye Opening Key Learnings • Development of G.P. clinics • Lack of sensitivity of reimbursement in the broad market due to new M.I. System • Speed of retail drugstore development and influence in patient product choice • Prescription spill over to the retail outlets
Slide 41: Our Conclusions • The potential of the broad market is once again confirmed by the McKinsey study • The fast development of drugstores and the polarization of hospitals sales are aligned with our understanding • Agree with McKinsey’s finding regarding our share loss in the broad market (especially among county level drugstores) to local competitors and generic products • Testing the different proposal initiatives with dedicated resources and monitoring effort will enable us to focus on the key business drivers for future broad market expansion
Slide 42: Our Proposed Action Steps • Seek management approval for the broad market pilot test in 2004 • Assume approval is obtained before Nov. 1, – Select internal candidate to be project leader – Form the project task force with marketing, sales and market research members – Recruit and train the broad market team – Kick off the plan by Feb. 1 after CNY
Slide 43: Our Proposed Pilot Test Shandong City 1 City 2 City 3 City 4 City 5 City 6 City 1 City 2 City 3 City 4 City 5 City 6 Distributor Push X X X X Turbo CME X X Hospital Seeding City County City X X X X X X X X X X X X X X X X X Pharmacy Plus X Sichuan
Slide 44: Our Proposed Pilot Test Schedule Management Approval Recruitment Training Pre-test survey Pilot Test begins 1st Assessment (with 3 months data) 2nd Assessment (with 6 months data) National Roll-out Proposal Management Approval Nov. 1, 03 Nov. – Dec., 03 Jan., 04 Jan., 04 Feb., 04 June, 04 Sept., 04 Mid-Sept., 04 Nov. 1, 04
Slide 45: Required FTEs Distributor Push No. of Customers/City 10 - 12 Shandong City 1 1 City 2 1 City 3 1 City 4 1 City 5 City 6 Sichuan City 1 1 City 2 1 City 3 1 City 4 1 City 5 City 6 Total Field FTEs 8 HQ Support Team Leader: Project Assistant: Turbo CME 1500 -1800 Hospital Seeding Pharmacy City County City Plus 8 - 10 12 - 16 1 1 2 1 1 2-4 chains + 80-100 stores Test Mkt. Total Supervisor FTEs 0.5 0.5 0.5 0.5 1 1 2 1 1 1 1 2 2 1 1 4 0.5 0.5 0.5 0.5 4 4 8 4 5.5 2.5 2.5 3.5 1 1 5.5 2.5 2.5 3.5 1 1 32 1 1 34
Slide 46: Required Funding
Slide 47: Products to be supported by the Broad Market Test Initiatives Main Focus (in order of priority) • Motilium • Gyno-Daktarin • Sibelium Tag-Ons • Pevisone • Daktarin
Slide 48: Potential Pilot Test Sales & Opex Impact Distribution Hospital Seeding Pharmacy Turbo (RMB million) Push City County City Plus CME XJP # of pilot cities 8 4 4 4 4 NTS / city (Mck. Est) 0.4 0.7 0.4 0.9 0.5 Risk Adjustment 70% 70% 70% 70% 50% Adjusted NTS / City 0.49 0.28 0.28 0.63 0.25 Total NTS Contri. 3.9 1.1 1.1 2.5 1.0 Cost / City * 0.70 0.80 0.80 0.75 0.75 Total Opex 5.60 3.20 3.20 3.00 3.00 Total 2.9 1.93 9.68 3.80 18.00
Slide 49: How to measure? • Pre and Post survey to measure the change • Monthly survey to monitor the change in customers attitude and sales off take • Monthly report from sales reps. / supervisors / project leader for qualitative feedback • Senior consumer research manager will be responsible for the tracking study