The new crown epidemic is completely changing the market structure of China's health care. The epidemic has had a huge impact on the medical budget in the short term, while squeezing the medical resources of non-new coronary pneumonia patients and subverting market fundamentals. At the same time, the investment growth expectations triggered by the economic recovery and the subsequent supportive policies have enabled us to see some new areas of focus and opportunities. The current urgent task of pharmaceutical companies is to alleviate the short-term impact of the epidemic and prepare for market changes after normalization.

　　China is the world’s second largest pharmaceutical market and an important strategic market for most of the world’s top pharmaceutical companies. The complexity of the Chinese market will be further intensified under the influence of the epidemic; all walks of life have lowered their economic growth and medical expenditure expectations. During the epidemic, companies face major challenges in customer communication, and it is difficult to recover to the treatment and treatment required for medical staff and patients before the epidemic. The level of support and impact of drug information. The approval of new drugs is still going on, but the launch of new drugs is facing challenges, reflecting the shrinking of the number of consultations caused by the limited capacity of hospitals and the reduction in the number of patients. The diagnosis and treatment of chronic diseases will be less affected because patients can obtain prescriptions for longer periods of time and purchase medicines through retail pharmacies and online platforms.

　　We believe that when leading pharmaceutical companies think about these latest developments, pharmaceutical companies must now assess the impact of the epidemic and plan based on their own positioning, capabilities, and goals. The criterion for judging the success of a business strategy lies in its suitability for post-epidemic development plans, supporting future growth and ensuring flexibility and resilience in the coming years.

　　With the gradual alleviation of the new crown epidemic in China, pharmaceutical companies should focus on the important variables that affect the company's business, and consider the impact of changes that have occurred or may occur. With the changing market structure, the following areas are particularly worthy of attention by pharmaceutical companies:

　　The impact of the new crown epidemic on medical budgets

　　The market has reached a consensus on the negative impact of the new crown epidemic on the economy and medical expenditures. The McKinsey Global Institute estimated that before the outbreak of the new crown epidemic, China's medical expenditure as a percentage of GDP will increase to 6.6% in 2020, while the Chinese economy will grow by 5.9%. Based on this calculation, China's medical expenditure is estimated to be RMB 6.93 trillion. However, in the context of the impact of the new crown epidemic on the global economy, China's GDP growth this year may be between 1% and 2.3% (according to statistics released by the government, in the first quarter of 2020, China's GDP fell by 6.8% year-on-year). According to McKinsey's analysis, to maintain the absolute value of expected medical expenditures unchanged, the government needs to increase the proportion of medical expenditures in GDP to between 6.8% and 6.9%. On the contrary, if the GDP ratio of 6.5% in 2019 is maintained, medical expenditure this year will be reduced by RMB 340 billion to RMB 420 billion.

　　The Chinese government may continue to promote mass procurement in 2020, and will also introduce supporting policies to improve medical efficiency, such as the recently piloted Diagnosis Related Groups (DRG), and strengthening the review of drug prices in the national medical insurance drug catalog Wait.

　　From a more positive perspective, budgets in certain areas may increase. After SARS in 2003, the government announced that it would vigorously upgrade the infrastructure and information system of the CDC, requiring hospitals to invest 5% of their income. The new crown epidemic may also give birth to similar projects. The government may increase primary medical expenditures (Shanghai announced on March 26 that 182 new fever clinics will be built) and will invest heavily in building more advanced disease prevention capabilities. As digital solutions played an important role during the COVID-19 pandemic, 5G networks and artificial intelligence may receive more support. In fact, investment in science and technology after SARS has also increased.

　　According to previous anti-epidemic experience, the reduction of hospital patients will lead to a decline in the income of the medical industry in recent months. However, from the previous experience of the epidemic, the income of the medical industry will usher in a rapid recovery after falling. Statistics show that the number of outpatients and hospitalizations in Beijing increased by 22% and 28% respectively in the year following the SARS outbreak. Over the same period, medical expenditures also achieved growth, and continued to increase in subsequent years.

　　patient shunt

　　After the outbreak, the hospital invested a lot of resources and medical capabilities to treat patients with COVID-19. The latest data from the National Health and Construction Commission show that in February this year, the number of hospital visits across the country (except Hubei) decreased by about 40%. Tertiary hospitals suffered the most severe impact, with the number of doctors dropping by more than 50%. This trend is also in line with the results of our questionnaire survey of doctors: primary hospitals recover faster (Figure 1)1. More than 90% of doctors said that the number of outpatient cases has decreased during the COVID-19 pandemic. The impact on secondary and tertiary hospitals is particularly obvious. In February, the number of outpatients nationwide decreased by 60% year-on-year, and sales of prescription drugs fell by 27% year-on-year2. Both of these indicators have begun to pick up, but many hospitals have not yet returned to full capacity.

　　After the epidemic is over, medical needs will inevitably return to normal (according to the experience of SARS, it takes about two years), but patients may continue to be diverted to small and medium primary hospitals, online platforms (Internet hospitals and online pharmacies), and retail pharmacies.

　　Go-To-Market model

　　The epidemic has three major impacts: increased demand for digital solutions; increased importance of pharmacies; and changes in the communication methods and relationships between pharmaceutical companies and doctors. These trends have begun to have a profound impact on the direction of the industry, and they are unlikely to disappear as the epidemic subsides. Therefore, pharmaceutical companies urgently need reform and innovation to cope with changes in market entry modes.

　　1. Explore other ways besides public health insurance to cope with the challenge of declining medical budget

　　We expect that the decline in the medical budget will continue for one to two years. In order to cope with this situation, pharmaceutical companies can measure their impact on revenue models by modeling different scenarios. Corporate executives believe that volume purchases can relieve pressure on medical budgets to a certain extent, but their budget levels are still lower than expected. This budgetary pressure may accelerate the introduction of the disease diagnosis-related group (DRG).

　　As the ratio of self-finance and commercial medical insurance is expected to increase, pharmaceutical companies should look for other sources of funding outside the public budget. We expect that the proportion of commercial medical insurance in medical expenditure will increase from 7% in 2019 to 18% in 2025 (Figure 3). The projected growth reflects the government’s goal under a looser regulatory environment and tax incentives. This is a four-fold increase in the proportion of commercial medical insurance in medical expenditures in the next five years. In January this year, 13 departments including the China Banking and Insurance Regulatory Commission jointly issued the "Opinions on Promoting the Development of Commercial Insurance in the Field of Social Services" to encourage commercial insurance institutions to participate. Technological disruption has also become a favorable factor, which provides consumers with educational resources and more choices. About 70 insurance companies have included COVID-19 in their insurance coverage.

　　2. Actively respond to the trend of patient shunting

　　Pharmaceutical companies may need to adjust their operating models to cope with the trend of patient diversion and accelerated hierarchical diagnosis and treatment. As more and more patients go to primary-level hospitals for treatment, companies may also have to rethink how to participate in resource allocation and use new methods and technologies to interact with a wider range of primary-level doctors. The development of Internet hospitals requires pharmaceutical companies to formulate special strategies, build corresponding capabilities, and cultivate cooperative relationships for this purpose. Through these measures, pharmaceutical companies can strengthen the participation of relevant parties, increase the supply of medicines and improve the doctor-patient experience.

　　As the role of pharmacies becomes more and more prominent, pharmaceutical companies should strengthen the retail key customer management system, including customer management for distributors and pharmacists, and improve business operations capabilities. Due to the increase in prescriptions processed by pharmacies, pharmaceutical companies should increase disease education support for patients and ensure that drugs can be supplied on time and on demand (see below). As the market structure changes, pharmaceutical companies can provide more support to professional medical staff through on-site and digital channels.

　　3. Adjust the market entry mode (Go-To-Market)

　　In the face of fierce competition, the market entry mode will become the key for pharmaceutical companies to achieve differentiated competition. The key challenge is to find a way to integrate offline and online activities. Before the outbreak, most activities were conducted offline. Under the new normal, companies should adapt to the long-term trend of changes on the demand side to open up various service channels. From 2012 to 2016, the number of online consultations increased by 49%, and the growth may accelerate in the coming period. It is estimated that the annual number of online consultations (including free and paid) in 2025 may exceed 1.5 billion. After the epidemic, in the future, there may be more opportunities to solve the medical needs of patients online and strengthen services such as medical education and virtual assistance. In fact, in addition to the new crown pneumonia, local governments may hope that digital technology can play a greater role. Cities such as Shanghai and Wuhan have included online diagnosis and treatment of 10 chronic diseases into the coverage of public medical insurance.

　　When pharmaceutical companies create omni-channel customer solutions, they need to first evaluate a series of strategic factors, including digital budgets and the most efficient investment areas. They should also think about how to measure the influence of digital channels and cultivate related capabilities, such as big data and advanced analytics, both inside and outside the company. In addition to these measures, they should also integrate the factors required for change in the corporate culture and ensure that digital tools and processes are effectively compatible with existing systems.

　　Large pharmaceutical companies are currently more or less adopting digital initiatives. Due to the increase in the popularity of online activities during the epidemic, some companies have invested as much as half of their sales budgets in this area. The general manager of a company revealed that when the company transferred all sales representatives to the digital platform, it "spent two months for two years." The acceleration of the digital trend is also affecting the long-term planning of enterprises. After the outbreak, more than 70% of the interviewed companies are considering combining traditional sales models with digital solutions, indicating that while embracing digitalization, they believe that face-to-face communication will still play an important role after society returns to normal (Figure 4).

　　In view of this, companies should have a clear online interaction strategy and double their investment in technology. Digital "Share of Voice" (Share of Voice) will become an important source of differentiation. Companies will gradually increase their investment in omni-channel customer interaction and compete in content, responsiveness, channels, information delivery, fun and quality of advice. This is not only beneficial to customers, but also helps promote doctor-patient interaction.

　　Finally, although the launch of new drugs has slowed down significantly in the past few months, the momentum of innovation has not diminished. The State Food and Drug Administration has approved a large number of new drugs on the market, and is actively exploring the use of Real World Evidence (RWE) to support drug approval, demonstrating its support for innovation.

　　4. Responding to the risk of clinical trial interruption

　　With the relief of the epidemic, clinical trial activities are gradually recovering, and companies are beginning to refocus on risk aversion and management strategies. Technology will become a key tool to promote virtual clinical trials, digital monitoring and logistics. At the same time, pharmaceutical companies may re-select strategic locations for clinical trial centers and may plan to increase the number of clinical trial centers. Where self-management of drugs is allowed, consider hiring a certified cold chain logistics company to deliver drugs directly to patients’ homes.

　　Companies should take into consideration the "black swan" incidents such as the new crown epidemic when formulating future vision plans, and attach importance to emergency planning for small-probability incidents. Enterprises should formulate corresponding strategies according to various situations, and guide data management, evaluate test results, and mitigate possible negative effects through close cooperation with regulatory agencies.

　　5. Constructively participate in policy making

　　In order to build a stronger medical ecosystem, the government will continue to formulate and improve existing medical policies. Pharmaceutical companies can actively participate to deepen their understanding of relevant regulations on market access, innovation, insurance and technology. Possible future policies include the formulation of new retail distribution standards (especially for pharmacies) and the encouragement of online diagnosis and treatment legislation. The government may encourage the development of commercial medical insurance, promote the construction of clinical trial centers and cultivate data management capabilities. In order to support innovation, the State Food and Drug Administration may continue to explore new approval processes. Finally, the government may establish a strategic reserve of key medical supplies across the country, thereby boosting medical production activities in the short term.

　　With the advancement of these policies, established pharmaceutical companies may consider contacting the government and make corresponding adjustments to their strategies. So as to deeply understand and comply with the laws and regulations that will affect the business development in the next few years.

　　The "black swan" incident of the new crown epidemic has brought major short-term challenges to the Chinese pharmaceutical industry, and at the same time it may completely change the face of the medical industry. Fortunately, the market fundamentals are still strong. Under the combined influence of a series of recent events, China may increase its investment in the medical industry, which will also provide growth momentum for the future development of the pharmaceutical industry. As China takes the lead out of the epidemic crisis, while the rest of the world is still facing severe challenges, the Chinese market may become more attractive during this special period.

　　This is not the time to question investment strategy. Instead, pharmaceutical companies should use the experience of the new crown epidemic to accelerate investment in promising areas (such as digitalization and retail) and strengthen interaction with key decision makers. When economic growth and budgetary pressures gradually ease, pharmaceutical companies that have been deployed in advance can achieve rapid development. At the same time, companies must pay attention to risks that are difficult to avoid, and also consider the flexibility of market fundamentals. As the pressure of the epidemic gradually eases, it is also necessary to adjust the plan with the times and invest resources in key strategic areas to avoid missed opportunities. Companies that can successfully grasp changes in the situation and fully tap the potential of digitalization are most likely to flourish in the coming months and years.