McKinseywascommissionedinQ1,2003to:providededicatedeffortinconductingin-depthmarketsurveyandcollectdetailedinformationfrom4citieswithin2provincestoidentifythekeygrowthdriversinChina’sbroadmarket;4productcategorieswereincluded:G.I.(Motilium),OBGY(Gyno.),NailInfection(Sporanox)&Vertigo(Sibelium)provideobjectiveassessmentaboutthebroadmarketopportunity(notincludinganyurbancentres);providebusinessmodel/proposalforXJPtocapturethebroadmarketMcKinseyBroadMarketStudyProcessProjectdesign(Q1,2003)ProjectreviewwithlocalandregionalJ-Cteam(Apr.03)Surveymarketselection(Apr.03)Fieldworkin2citiesinShandong(May03)1stinterimreport(mid-June03)Fieldworkin2citiesinSichuan(mid-June–mid-July03)2ndinterimreportandKillerIdeaworkshop(endJuly03)Finalreport(Aug.03)Presentationtocorporatemanagement(Sept.03)BROADMARKETCANBEDEFINEDASCLASS2HOSPITALSANDBELOWATREGIONALCITYLEVELANDALLHEALTHCAREINSITITUTIONSATCOUNTYLEVELANDBELOWRegionalcityCountyTownVillageClass3hospitalClass2&belowhospitalPharmacyClinicBroadmarket

Source:McKinseyanalysisBROADMARKETDRUGSINCLUDEOTCAND“OUTPATIENT”RxDRUGS

Source:McKinseyanalysisTargetingeasilydiagnosed,non-lifethreateningdiseasesEasytouseRelativelycheapRelativelysafewithfewsideeffectExamplesOTCMatureNewMotiliumGyno-DaktarinRxOutpatientIn-hospitalSporanox/SibeliumCipramilBroadmarketdrugsMcKinseyKeyFindings

OverallMarketSituationBROADMARKETREPRESENTS94%OFOVERALLDEMANDFORBROADMARKETDRUGSClass3hospitalBroadmarketdrugsalesbreakdownbygeographyPercent * Foronly2accordingcities ** DataforonlySichuanprovince Source: Interviewwithdistributors,hospitals,pharmacies&clinics;McKinseyanalysisAll4citiesBroadmarketrepresents94%ofdemand100%=BnRMBShandong*Sichuan*City100%=2162MnRMBCountyTownVillageMotiliumGyno-DaktarinSibelium**BroadmarketSalesbreakdownofXJPproductPercentOtherchannelatcitylevelGDPpercapita:#ofcounty9,1993211,300185,80114CountyiscriticalforbroadmarketDUETOLOWINSURANCECOVERAGEANDRECENTREIMBURSEMENTPOLICIYCHANGES,MOSTPATIENTSPAYBROADMARKETDRUGSBYTHEMSELVESInsurancecoverageinYantai&JiningForthosewithinsurance,theycanusetheirpersonalaccounts(~RMB100~300peryear)tocovertheirbroadmarketdrugexpenseInlooselycontrolledregion(likeYantai),patientscantreatthepersonalaccountsassavingsaccountPatientspayontheirownaftertheaccountbalanceiszeroAmajorityofpopulationdoesnothaveinsuranceTheypaybroadmarketdrugsbythemselvesInsuredSelf-payTotalCityCountyTownVillage3-595-9720-3070-8010-1585-901990100Source: Interview;focusgroup;McKinseyanalysisPATIENTSGOTOPHARMACY/CLINICSFORMINORSYMPTOMSSource: Interview;McKinseyanalysisDriversIncreasedpricesensitivityChangedmedicalinsurancepolicyImprovedhighwayinfrastructureRichinformationaccessTVNewspaperIncreasedlifepaceNotimetovisithospitalPharmaceuticalmarketderegulationpolicyMoreandmorepharmacies&clinicsConvenientlylocatedMiddle-smallhospitalsfindithardtosurviveduetolackofpatientsSeveresymptomsTownhospitalMinorsymptomsLargesthospitalsincityandcountyMiddle-smallhospitalsincityandcountyPharmacy/clinicsRuralpatientsCitypatientsALARGEPROPORTIONOFDRUGSALESCOMESFROMRETAILPHARMACIES;PHARMACYCLERKSBECOMEINFLUENTIAL*40%ofthepatientschangedtheirmindinpharmacySource:Interview;Focusgroup;McKinseyanalysis“Whatmakesyouchangeyourperceiveddrugs?”*–PharmacypatientsurveyPercent,ShandongcitylevelPerceiveddrugnotavailable;persuadedbypharmacyclerkPerceiveddrugavailablebutpersuadedbypharmacyclerkChangedmindbymyself“WhenIgotothepharmacywithoutadruginmind,Ijustaskthepharmacyclerktorecommend.ThenIwillcheckthedrug’sintroductionsheet,ifthisdrugcoversmydisease,Iwillhaveatry”–YibincitylevelfocusgroupTotaldrugsalesbreakdownPercentPharmacyHospitalClinicsOverallMotiliumGynoDaktarinSibeliumXJPshoulddesignspecialinitiativestotargetpharmacychannelsCLINICSAREPLAYINGIMPORTANTROLEESPECIALLYATCOUNTYANDTOWNANDBELOW

Source: Interview;McKinseyanalysis Clinics’shareintotaldrugsalesPercentOverallCountyTownVillage36%2634100SichuanShandongCity827%8271003XJPshouldthinkaboutcost-effectivewaytolockinindividualclinic/barefootdoctorsG.I.CategoryReview*Morethanhalfofpatientsgoingtolargehospitalswillpurchasedrugatretailpharmacies**Brandedgenericdrugsreferringtogenericdrugsthatrunadvertising,creatingbrandawarenessinconsumersSource:Physicianandpharmacyinterviews;McKinseyanalysisFORGIDISFUNCTIONDRUGSASAWHOLETHEREISSIGNIFICANTLATENTDEMAND;PEOPLEGENERALLYSEEKTREATMENTINCLINICSANDPHARMACIESLatentmarketdemand60%oftotalpatientsdonotseekanytreatmentAsmarketleader,increasingawarenessforMotiliumtofurtherboosttreatmentrateisoneofthekeydemandleversSmallclinicsandpharmaciesareimportantchannels75%ofpatientsseekingtreatmentgotoclinicsandpharmaciesTotalincidenceDonotseektreatmentGotolargehospital*GotosmallclinicSelfmedicateatpharmacySeektreatmentNotawarePercentMotilium’’smarketshareMotiliumhasavastroomforgrowbecauseofsignificantleakagealongthepatientflow60%ofGIpatientsthatdoseektreatmentCurrentmarketshareof4%whichcouldbegrownfurtherAmongthe40%peoplewhoseekGItreatment,about30%wouldbuybandedgenericdrugs**,whiletherestwouldbuynon-brandgenericdrugs1.6%FORGIDRUGS,POLARIZATIONISBECOMINGMOREOBVIOUSAnecdotesQuantitativeexamplesSub-TAsalesbychannelPercentSource:Hospitalpharmacyinterviews;retailpharmacyinterviews;McKinseyanalysis199719992002RetailPharmacyHospitalClinic“Unlikethingsinthepast,patientsnowadaysgenerallytrytoavoidcomingtohospitalsbecauseofhospitals’’expensivecharges.ForGIdisease,mostpeoplecanjudgebythemselves.Sotheyusuallyprefertogotopharmaciesorclinicstobuydrugs.”——QixiaGIphysicianinterview“MostGIpatientsarerepeatingpatients.Theyknowwhichdrugstobuy,andwherethedrugsarecheap.Sousuallytheywillchoosepharmacies&clinics.”——JiningretailpharmacistinterviewYantai199719992002RetailPharmacyHospitalClinicJiningImportanceofGIdrugsalesinhospitalisdiminishingRetailpharmacywouldbethemajorbattlefieldforGIdrugsROUGHESTIMATIONSALESOFGIDRUGSAREMORECONCENTRATEDTOWARDSVILLAGEANDCOUNTY,WHILETHEMARKETISFRAGMENTEDWITHMANYDIFFERENTDRUGSPercentMotiliumWei’ershu(謂爾舒)Mosapride(莫沙比利)Tidines**(替丁類藥)Others*Sidashu(斯達舒)*Othersincludingmorethan200differentGIdrugssuchasKuiweipian(快胃片)、、Weifuan(w胃復安)、、Jinweixiaoshipian(健胃消食片片)、999(三九九胃泰)、、丹桂香、、胃舒平、、健胃酵母母片、果膠膠鉍、邦消消安、調胃胃片、胃氣氣痛片、濕濕胃舒、養(yǎng)養(yǎng)胃舒,andmanyothercheapnon-brandedgenericdrugs** IncludingCimetadine,Ramitidine&FamotidineSource:Distributorinterviews;physicianinterviews;patientinterviews;McKinseyanalysisTotal=RMB243.05millionVillageCountyTownCityINBROADMARKET,MOTILIUMISLOSINGOUTBIGTIMEINRETAILPHARMACYCHANNEL……RetailpharmacyHospitalClinicSource:Distributorinterviews;hospitalpharmacyinterviews;retailpharmacyinterviews;McKinseyanalysisSalesbychannelMnRMB,%MotiliumSidashu(斯達舒)Wei’ershu(謂爾舒)Mosapride(莫沙比利)Tidines(替丁類類藥)GIdrugs123553243.051434529.83666296.62576207.304038217.934227344.64YANTAI&JINING…ANDINCOUNTYGEOGRAPHYCityCountyTownVillageSource:Distributorinterviews;hospitalpharmacyinterviews;retailpharmacyinterviews;McKinseyanalysisSalesbystrataMnRMB,%MotiliumSidashu(斯達舒舒)Wei’ershu(謂爾舒舒)Mosapride(莫沙比比利)Tidines(替丁類類藥)GIdrugs152619243.05411522209.83432237266.62152644217.3091850237.93101171744.6466YANTAI&JININGVaginalInfectionCategoryReviewFORVAGINALINFECTIONS,PATIENTSAREMOREAWAREOFTHEDISEASEANDGOTOHOSPITALFORTREATMENTPercentLesslatentdemandAlmostallpatientsawareofthediseaseduetoobvioussymptomsandregularcheckup80%ofpatientsseektreatmentLargehospitalisimportantinfluencingchannelMostpatientsseekingtreatmentwillgotolargehospitalsThoughhalformorewillpurchaseprescribeddrugsinpharmaciesMarketplayershouldfocusonsharegainTotalincidenceDonotseektreatmentGotolargehospitalGotosmallclinicSelfmedicateatpharmacySeektreatmentNotawareSource:Physician,pharmacyandclinicinterviewsHospitalisstillnumber1channeltopushGynoDaktarinsalesPharmacyisbecomingincreasinglyimportant30%wouldusebrandeddrugs,while70%wouldusenon-brandeddrugsFORGYNODAKTARIN,HOSPITALISCRITICALFORPRESCRIPTIONBUTPURCHASINGHASBEENGRADUALLYSHIFTINGTORETAILPHARMACYAnecdotesQuantitativeexamplesSub-TAsalesbychannelPercentSource:Hospitalinterviews;Retailpharmacyinterviews;McKinseyanalysis199719992002RetailPharmacyHospitalClinic“Gynopatientswillusuallycometohospitalforbodycheckandgotopharmaciestorefilldrugs.Forsuchkindofdisease,peoplestilltrustlargehospitals.However,moreandmorepeoplepurchasedrugsinpharmacies”——LiangshanNo.2hospital,Gynophysicianinterview“Idon’thavemanygynopatients.Thisisbecauseof3reasons.First,Iamaman;second,Idon’thavefacilitiestocheckthebodyintheclinic;third,patientsareusuallyfamiliarwithmeandtheywillfeelawkword.”——ZhangyongxintownlevelclinicinterviewYantai199719992002Retail

PharmacyHospitalClinicJiningESTIMATEINADDITION,GYNODAKTARINNEEDSTOGROWTHEMARKETSHAREESPECIALLYTHOSEOFCOUNTYANDTOWNSource: Distributorinterviews;hospitalpharmacyinterviews;retailpharmacyinterviews;McKinseyanalysisSalesbystrataMnRMB,%GynoDaktarinXiaomishuan(消糜栓)Mycostatin(制霉菌素)Shuangzuotaishuan(雙唑泰栓)Jie’eryin(潔爾陰)VaginalinfectiondrugsYANTAI&JININGCityCountyTownVillage26502071.384247122.472443324.544146134.46359385.46943275.834000022NailFungalInfectionCategoryReviewFORTINEAUNQUIUMDRUGS,DEMANDLATENCYISEVENHIGHERPercentExtremelylatentdemandwithincreasingawareness90%ofpatientsdonotseektreatmentAwarenessandtreatmentrateisincreasingslightlyduetocompetitor'sheavyadvertisingOnlyaround10%ofthoseseekingtreatmentpurchasedrugsOnly1%wouldfollowprescriptionTotalincidence*DonotseektreatmentSeektreatmentNotaware*Theincidencerateisaround5%inShandongSource:Physicianandpharmacyinterviews;McKinseyanalysisOnly1%actuallybuydrugsLowtreatmentrateismainlyduetoaffordabilityissueofthepatientsSporanox’spotentialmarketasaTineaUnquiumdrugissmall,andisunlikelytobeabroadmarkethitGotolargehospitalGotoclinicGotopharmacydirectlyHOSPITALCHANNELISSTILLDOMINATINGTINEAUNQUIUMDRUGMARKETWHILEPHARMACYCHANNELISPICKINGUPAnecdotesQuantitativeexamplesSub-TAsalesbychannelPercentSource: Hospitalpharmacyinterviews;Retailpharmacyinterviews;McKinseyanalysis199719992002Retail

PharmacyHospitalClinic“WegraduallycarrysomeTineaUnquiumdrugsintheseyears.Becausemoreandmorepatients,althoughstillquitesmallinamount,comeheretoaskforLiangjiaafterseeingitsadvertisement.Ithinkmostpatientsstillgotohospitalfortreatment.”——JiningKangfupharmacy“IseldomseeTineaUnquiumpatients.Andalso,becausethedrugsareveryexpensive,Ididn’tcarrythem.Ifthereisreallysomeonecometomyclinic,Iwillsuggestthemtopharmacy.”——YantaiclinicinterviewYantai199719992002Retail

PharmacyHospitalClinicJining*Othersincludingaroundfivedrugs,suchasHuihuangmeisu（灰黃霉素）,Lisulao（里素勞）,Lianghuija（（亮灰甲）etc.Source: Distributorinterviews;physicianinterviews;patientinterviews;McKinseyanalysisTHEREAREONLYAFEWCOMPETITORSATCITYANDCOUNTYLEVELFORSPORANOX;LIANGJIAISDOINGBETTERTHANSPORANOXATRETAILPHARMACIESDUETOHEAVYADVERTISINGPercentOthers*Total=RMB9.22millionCountyTownCitySporanoxLanmeishu(蘭美抒)Liangjia(亮甲)Village0Source: Distributorinterviews;physicianinterviews;patientinterviews;McKinseyanalysisTHEREAREONLYAFEWCOMPETITORSATCITYANDCOUNTYLEVELFORSPORANOX;LIANGJIAISDOINGBETTERTHANSPORANOXATRETAILPHARMACIESDUETOHEAVYADVERTISINGCityTotalRetailpharmacyHospitalClinicCountyShareofleadingdrugswithinTineaUnquium–Yantai&JiningMnRMB,%TotalRetailpharmacyHospitalClinic4.05.0100%=SporanoxLanmeishu*(蘭美抒)Liangjia(亮甲)OthersLiangjiahasrelativelyhighmarketshareinretailpharmaciesAtcitylevel,Lanmeishuhas31%ofhospitalchannel,betterthanSporanoxHospitalatcountylevelandaboveshouldbethemainfocusPRICEISAHUGEISSUEFORSPORANOXSporanoxistooexpensiveformostfarmerswhoseannualincomeisonlyaroundRMB2,000Evenatcountylevel,costofusingsporanoxforeffectivetreatmentishigherthantotaldrugexpenseperyearforanaveragepersonCountylevelpricethreasholdCitylevelpricethreasholdCountylevelannualdrugexpenseperpersonAverageinsuranceallowanceperyearCostofsporanoxasadermadrugSource:Interviews;McKinseyanalysisCostofsporanoxasaSTDdrugRMBFORSPORANOX,XJPSHOULDCONTINUETOFOCUSONHOSPITALS……RetailpharmacyHospitalClinicSource:Distributorinterviews;hospitalpharmacyinterviews;retailpharmacyinterviews;McKinseyanalysisSalesbychannelMnRMB,%SporanoxLanmeishu*(蘭美抒)Liangjia(亮甲)TineaUnquium65339.22693012.21841501.5012871.2622YANTAI&JINING…ANDATCITYANDRICHCOUNTIESCountyTownVillageSource:Distributorinterviews;hospitalpharmacyinterviews;retailpharmacyinterviews;McKinseyanalysisSalesbystrataMnRMB,%SporanoxLanmeishu*(蘭美抒)Liangjia(亮甲)CityTineaUnquiumdrugs44549.22485022.21534711.5067291.26240110YANTAI&JININGVertigoDrugCategoryReviewTHEREISUNTAPPEDDEMANDINTWOOFTHETHREEPRODUCT-RELATEDTAsGIdisfunctionpatientflowinbroadmarketpercentSource:Hospital&pharmacyinterview;McKinseyanalysisVIpatientflowinbroadmarketpercentVertigopatientflowinbroadmarketPercentTotalincidence100~3030~4020~40NotawareDonotseektreatmentSeektreatmentTotalincidence100~120~4060~80NotawareDonotseektreatmentSeektreatmentTotalincidenceNotawareDonotseektreatmentSeektreatment1001990Vertigoincidencerateisonly1%-3%SibeliumcantargetmoreindicationswithmuchlargerpatientpopulationHugelatentdemandAwarenesscanbeincreasedbypatienteducationAffordabilitycanbeimproveduetoeconomicdevelopmentBYGEOGRAPHY,COUNTYLEVELANDABOVECONSUMEADOMINANTSHAREOFSIBELIUMCityCountyTownVillageSource:Interviews;McKinseyanalysisPercentTotal=RMB2.0millionforsalesofSibeliuminDeyangandYibinSalesofSibeliumismoredominantincityandcountylevelMarketshareofSibeliumintotaldrugsfordizzinessisalsohigherincountylevelandaboveSibelium’’smarketshareindizzinessdrugsalesinDeyangandYibinCityCountyTownVillage100%=(RmbMm)1.652.641.881.79SibeliumOthersMcKinseyBroadMarketProposalWENEEDTOSOLVETHREECRITICALISSUESTOACHIEVEOURASPIRATIONFORBROADMARKETInvestmentReturnsPeopledevelopmentOrganizationFinancialandorg.implicationPrioritizemarketopportunitiesSub-marketwithinaregionAround80regionalcities332regionalcities(wholeChina)BuildasolidplatformXJPbroadmarketteam“Capturingbroadmarket”“TurboCME”forclinic/barefootdoctorsandtownshippharmacies“PharmacyPlus”forlargepharmacychains“HospitalSeeding”forlargecountyhospitals“Distributornetworktocountylevel”XJPNEEDSTOINVESTTOCAPTURETHEGREATPOTENTIALINBROADMARKETBroadmarket:94%ofoveralldemandCountyandbelow:74%ofoveralldemandBroadmarketdrugsalesbreakdownbygeographyPercent,all4citiesVillageCountyOtherchannelsatcitylevelTownClass3hospitalsHighpotentialbroadmarketOpportunityvs.XJPcoveragegapNewinitiativesNearlynocoverageofbarefootdoctorsBarefootdoctorsrepresent45%ofGIdrugsalesand33%ofVertigodrugsalesXJPhasalmostnocoverageonthemAdaptCMEfocustobarefootdoctorsNearlynocoverageofpharmaciesPharmacyrepresents37%ofdemandPharmacyincountyandbelowrepresents23%ofdemandIndevelopedcities,pharmacychainsareplayingdominantroleXJPnowonlycoverscitylevelpharmaciesinseverallargecitiesControllargepharmacychainsatcountylevelInsufficientcoverageofcountyhospitalsCountyhospitalsrepresents16%ofdemandLargestcountyhospitalscanheavilyinfluenceconsumptionofGynoDaktarinXJPonlycover23%ofTierIIand12%ofTierIhospitalsDetailtocountyhospitalsLowutilizationofdistributors’pushDistributors’haveinfluenceonclinicandpharmaciesXJPhasnotutilizeddistributors’capabilitytopushsalesofXJPproductsGivedistributorsmoreincentivetopushforXJPproductsSource:McKinseyanalysisDURINGOURKILLERIDEAWORKSHOP,WEDEVELOPEDFOURSETSOFHYPOTHESISTOBETESTEDINPILOT*SummarybasedonZhejiangfieldtripandinternalinterviews“Hospitalseeding””“Pharmacyplus”O(jiān)nesalesrepperregionSalesrepsarededicatedandwithmedicalbackgroundForthecoveredregion,allcountyNo.1and2largehospitalsshouldbecoveredFocusonGyno-DaktarinbutalsodetailMotilium,Sibelium,Daktarin,andotherXJPdrugsThreesalesrepsperregion,coveringtopthreepharmacychainsForthecoveredpharmacychains,allcountyandsometownsshouldbecoveredFocusonGyno-DaktarinandMotiliumbutalsopushotherXJPdrugs“Sweeties”topharmacyownerscouldincludeinformationsystemsupport,training,instoreadvertising,giftsinbox,andpharmacyownerclub“Sweeties”topharmacyclerkscouldincludetravelforstarstaff,training,andgiftsinboxBroadmarket,especiallycountylevel“TurboCME”*WillbeconductedbyHQOTCCMEteam.LocalsalesteamwillprovidecoordinatingsupportWorkshopholdsonceayearineachcountyTargetaudienceisclinic/barefootdoctorsFocuseddrugincludeMotilium,Daktarin,Pevison,andSibeliumLeveragelocalhealthcareauthorityandassociationstoreachmassnumberofclinic/barefootdoctors“Distributornetworktocountylevel”O(jiān)nerepperregion,coveringallcountyNo.1distributorsRewritedistributorcontractLeveragedistributornetworkandpushdistributorstafftoreachthevillages/clinics“Sweeties”todistributorcouldincludeinformationsystemsupport,training,anddistributorclub“Sweeties”todistributorstaffcouldincludetravelforstarstaffandtrainingCommentsontheMcKinseyProposedInitiativesHospitalSeedingBesidestestingtheideatoconductprofessionaldetailingtothecountyhospitals,wealsowanttoprovidecoverageamongthesmallerhospitals(TierI&II)intheurbancitiestocomparetheR.O.I.sPharmacyPlusWehaveseencompetitors(likeSiDaShu)salesgrowthviaaggressivecoverageandpromotionamongthedrugstoresintherichercountis.So,thisisdefinitelyworthtesting.CommentsontheMcKinseyProposedInitiativesDistributorDriveWehaveexpandedourdistributionnetworktoincludealmost1,000sub-distributorsinthelast3years.Wewilltrytotestthesalesimpactifweinvestmoreprogramandresourcesamongthem.TurboCMEWehavestartedCMEprogramamongcountyhospitaldoctors.Itwouldbeinterestedtofindoutthesalescontributionifweconducttheprogramamongthebarefootdoctors.XJPCOULDADOPTATHREE-PHASEDACTIONPLANTOESTABLISHANDMAINTAINDOMINANTPOSITIONINBROADMARKETSource:McKinseyanalysisROUGHESTIMATEPhaseI:CapturingthebroadmarketPhaseII:DominatingthebroadmarketPhaseIII:StrengtheningandmaintainingthedominantpositionTimeframeCoverage2005~20072008~20102011andbeyond1/4ofallregions(about80regionswith500counties)Covercountylevel(leveragingCMEtoreachtownandbelow)1/2ofallregions(about170regionscovering1,100counties)CovercountyandselectedtownlevelNearlyallregions(about330regionscovering2,050counties)CoveratcountyandselectedtownlevelREVENUEFORECASTOFNATIONALROLL-OUTRMBmil