CHINESE HEALTH BIZ VERSION 2.0

JAN RŮŽIČKA

BASIC INDICATORS OF THE CHINESE HEALTH CARE MARKET

BASIC INDICATORS OF THE CHINESE HEALTH CARE MARKET

China:� the largest manufacturing economy in the world� the largest exporter� second largest importer of goods in the world

� With a population of 1.3 billion, the Chinese workforce is made up of 800 million people,60% of which are employed in technologically intensive sectors, providing a virtuallyinexhaustible base of qualified workers

� This is closely connected to the growth in GDP, raising purchasing power of the populationand, generally, also the size and power of the market, which has made China one of thelargest pharmaceutical markets in the world

TEN LARGEST HEALTH CARE MARKETS IN THE WORLD

2001 2005 2009 2011 20141 USA 1 USA 1 USA 1 USA 1 USA2 Japan 2 Japan 2 Japan 2 Japan 2 China3 Germany 3 Germany 3 Germany 3 China4 France 4 France 4 France 4 Germany5 Italy 5 Italy 5 China 5 France6 UK 6 UK 6 Italy 6 Italy

7 Spain 7 Spain 7 Spain 7 Spain8 Canada 8 Canada 8 UK 8 Brazil9 Mexico 9 China 9 Canada 9 UK10 China 10 Mexico 10 Brazil 10 Canada

BIG CHINESE DATA

According to figures provided by Chinese institutions, the health caremarket in the PRC (including pharmaceuticals, APIs, diagnostics andmedical devices)

reached a volume of USD 253.5 billion (2013)

� USD 135 billion on the pharmaceuticals market� USD 63.7 billion on the APIs market� USD 54.8 billion on the diagnostics and medical devices market

At the same time, the whole market continues to grow at a rate of 15.5%p.a.

BIG CHINESE DATA� Total expenditure of the Chinese government on health amounted toRMB 739 billion (USD 116 billion) in 2011

� Private expenditure on health currently amounts to USD 90 p.a./p. p.

� In addition to that, private health expenditure grows steadily, currently amounting to RMB1490 billion (USD 238 billion)

In 2020, public expenditure on health care is to total USD 1 trillion

direct private expenditure on health goes down, due to the implementation of the healthinsurance systemIt peaked in 2001 when – according to WHO – private expenditure made up 60% (!) of Chinesehealth budget

BIG CHINESE DATAThe strong growth in the whole industry may also be accounted for by demographic andeconomic changes� China's population is aging rapidly (population growth of 0.66% per year versus population

aging of 3.26% per year) and moving from villages to cities and towns

� The population aging brought about the emergence of a new industry of health and socialcare and especially a significant growth of some types of diseases

� These include primarily oncological diseases, diabetes mellitus, diseases of the circulatorysystem and various types of neurological diseases with dementia and Parkinson's diseaseat the forefront

� On the one hand, the ongoing urbanization substantially increased the incidence ofinfectious diseases but, on the other hand, it also gave rise to a new and better system ofhealth care delivery

CHINESE DEMOGRAPHY

Population over 60

2006 2020 2030

153 million 240 million 340 million

Growth in health expenditure (aggr.)

Urban areas Rural areas

13.50% / year 11.80% /year

TEN LEADING CAUSES OF DEATH IN CHINA

Urban areas Rural areas

CauseMortality rate 1/100000

% CauseMortality rate 1/100000

%

1 Malignant neoplasms 164.51 26.81 Malignant

neoplasms 151.47 22.96

2 Cardiovascular diseases 131.64 21.45 Cerebrovascular

diseases 135.95 20.61

3 Cerebrovascular diseases 120.33 19.61 Cardiovascular

diseases 119.5 18.11

4 Respiratory diseases 75.59 12.32 Respiratory

diseases 103.9 15.75

5 Injuries & traumas 34.79 5.67 Injuries & traumas 58.86 8.92

6 Endocrine &metabolism 17.32 2.82 GIT 16.79 2.54

7 GIT 15.25 2.48 Endocrine &metabolism 10.66 1.62

8 Neurological diseases 6.86 1.12 Infectious diseases 7.77 1.18

9 Genitourinary diseases 6.3 1.03 Genitourinary

diseases 6.62 1

10 Infectious diseases 6.07 0.99 Neurological

diseases 6.26 0.95

Total 94.3 93.64

ECONOMICS OF THE CHINESE HEALTH SYSTEM

SIZE OF THE CHINESE MARKET (USD)2006 2011

Expenditures

Public expenditure 116 billion

Private expenditure per capita 94 billion 156 billion (2015p: 238)

Percentage of people with insurance 43%

95 % (99 % at present, but the amount of coverage differs considerably)

Pharmaceuticals

Market volume 27 billion 71 billionMarket size (worldwide) 9 3 (2014: 2)Profits of the ten largest MNCs in PRC (combined) 4 billion 10 billion

Number of pharmaceutical sales representatives of the ten largest MNCs in PRC (combined)

6 25

TCMMarket volume

6 billion 13 billionVaccines 1 billion 2 billion

Medical devices Market size (worldwide) 6 3

SIZE OF THE CHINESE MARKET (USD)

Sales structure – general retail pharmacies

Prescription drugs 38.5%

OTC 34.5%

TCM 11.5%

Dietary supplements 9.3%

Expenditure on drugs in China (bill. USD)2009 2010 2011

Total expenditure 119.32 133.96 151.48Expenditure in inpatient health care facilities 92.77 101.18 111.66

of which inpatient 48.76 523.2 56.1

of which outpatient 44.0 48.86 55.57

retail 26.55 32.78 39.83

Expenditure per capita (USD) 89.4 99.9 112.4Expenditure on pharmaceuticals in % of total medical expenditure 40.4% 40.3% 37.6%

HOSPITAL FUNDING

REGIONAL DISPARITIES

PURCHASING POWER OF CHINESE PATIENTSThe purchasing power of Chinese patients = key factor in deciding whether to enter theChinese market

� It is expected that the middle-income group in Chinese population (the biggest clientof the Chinese health services sector) will rise

from 29% in 2005 to 75% in 2020(a cohort with incomes between USD 9,596 and 15,997 p.a.)

If this prediction is valid, more than 50% of Chinese households will earn over USD 18,000in 2030 !!

� With their incomes increasing, Chinese patients should be expected to invest moreactively and intensively in their own health (correlation observable worldwide)

� This situation will open the door to more sophisticated methods of product offer andpossibilities of health care utilization. With respect to the Chinese population aging,there will be a growth in pharmaceuticals and health expenditure in China

PUBLIC HEALTHCARE FINANCIAL OVERVIEW� The development of the Chinese health system over the last decade has been characterized, in the first

place, by a substantial increase in financial resources from� Central government� Provincial government� Private sector (Employers, Private health insurance, Direct payments)

� The distribution of expenditures is concentrated primarily in the hospital segment

� The most alarming aspect of health care delivery are Chinese hospitals – Most of them are huge (2000+acute beds) =� In effectivities� Overflow in outpatient services

(due to the absence of efficient primary care and a network of general practitioners)� Problems with financial stability

(low health insurance coverage complicates the inpatient care reimbursements)

The hospitals used to “help themselves out” by artificially increasing their incomes from selling medications

The Chinese government has striven to change these things over the last three years, particularly byradically transforming the hospital system and the system of pharmaceuticals sales

POLICIES AND REFORMS OF THE CENTRAL GOVERNMENT

POLICIES AND REFORMS OF THE CENTRAL GOVERNMENT

In the last five years, Chinese politicians have striven to radically redefine the Chinesehealth and pharmaceutical systemFive priority areas for reform are:

� System of compulsory health insurance� Regulation system for medicinal products� Primary health care system� Equal access to health care� Hospital reform

The reforms were initiated already in 2009 and legislative changes are planned carefullyuntil 2020The number of insured people has been successfully increased to 95% (however annualvolume of coverage is capped)Above all, at least basic health care was ensured in rural China (western provinces)

2009 – 2013 HEALTH CARE REFORM IN PRC

Health care system Transformation of funding Transformation of institutionsOfficial backbone network of medical facilities

(district hospitals, polyclinics and health care centres)

Establishment of compulsory insurance system

(many regional versions)

Establishment of State FDA + drug policy reform

(national and regional level)

Two-tier system of reference prices

(district and university hospitals)

Drawing up the national essential drug list

Establishing a network of public health and sanitation institutions under the Ministry of Health in the PRC

(national and regional level)

Establishing a system of prevention and education of patients + screening programmes

(targeting pregnant women, the chronically ill and poor inland)

Establishing a system of public procurements for the supply of drugs and medical supplies

Reform of the legal basis of the existence of health facilities

(possibility to establish private profitable medical facilities including hospitals, possibility to privatize existing state facilities, possibility to establish joint ventures between state and private entities, possibility of ownership by foreign entities)

Out-of-pockets payments reform

(efforts to reduce direct payments from patients by 30% and replace them with insurance)

NEW REFORM APPROCH

� A positive drug list and lists of so-called „necessary medicines“ were drawn up� List of innovative medicines was reduced and public drugs and pharmaceuticals

procurements were organised on a mass scale� It is assumed that the permitted lists of prescription drugs will be divided into two groups

� innovative (premium) for large hospitals� generics for health centres and polyclinics

� The effort to reduce the costs of inpatient hospital care� To shift a proportion of patients to outpatient care (there still does not exist a sufficient

network of primary care nor outpatient facilities)� In the area of hospital care, the existing system of out-of-pockets payments and fee-for-

service is unsustainable and leads only to an increase in health care expenditure(overtreatment of patients, additive care costs). China is therefore considering theintroduction of the DRG system

� Primary care system� Adequate financial compensation to GPs

DRUG POLICY REFORM

"The Five-Year Plan for Health Sector Development (2011)“ by MIIT

� Particular attention to the departure from the drug production of traditional Chinesemedicines (TCM) and the transition to a standard regulated pharmaceutical industry of theWestern type

(According to the MIIT, this is the only way to ensure a sustainable economic developmentof Chinese pharmaceutics)

� The key areas further include: technological innovations, drug quality and security reform

� In this respect, the US and Australian FDAs are the main partners and models, the norms andstandards of which China is trying to replicate

REGISTRATION OF DRUGS IN THE PRC� Imported drugs: registration takes 2 to 3 years� Drugs made in China: about 1 year

� Registrations are issued by the central SFDA in Beijing

� Entry point + evaluation of documents are possible at any (33) branch office of theFDA

� Registration costs: approx. 200 to 300 thousand E� Registration is valid for 5 years

� Registration is valid for the whole of the PRC

The areas of APIs and pharmacy fall within the competence of regional or municipalSFDAsRegional SFDAs also authorize the establishment of new pharmacies on the basis ofcompliance with the minimum distance between two pharmacies

CHINESE HEALTH BIZ VERSION 1.0

CHINESE EXPORTERS

� Chinese health market is the largest market in the world with 40,000 companies

� A vast majority of these companies, however, produce chemicals and "raw materials

� According to the statistics of the Chinese Ministry of Commerce, there are1,200 APIs manufacturers and 3,500 manufacturers of finished drugs

� Chinese government has called on its producers (2011+) to assume an active role whentrying to meet European and US certifications such as GMP, GLP, etc. + to have theirproducts certified in developed markets

� In 2013, Chinese pharma companies submitted 172 applications for EDQM in the EU and150 applications within the US FDA. They currently have 420 EDQM certificates and 1116US FDAs

� As for inspections and certifications, the United States are China's key partner: nowhereelse are American commissioners as active in carrying out inspections as in China

ENTITIES IN PHARMACEUTICAL INDUSTRYEntities in Chinese pharmaceutical industry

2009 2010 2011

Pharmaceutical manufacturers 4,881 4,678 4,629

Distribution 13,593 13,463 13,853

End sales 390,542 401,379 426,395

of which

Independent chains (association of owners) 2149 2310 2607

Chain pharmacies 135,762 137,073 146,703

Independent pharmacies (incl. hospitals and TCM) 252,631 261,996 277,085

Changes in the number of drug retailers2012-2013

Revenue 2013 2012 change

USD 800 million 3 0 3

USD 700 million 0 3 -3

USD 500 million 4 5 -1

USD 350 million 3 3 0

USD 200 million 6 8 -2

USD <200 million 16 19 -3

ENTITIES IN PHARMACEUTICAL INDUSTRY

� The Chinese market is very fragmented in production, distribution and sales

� TOP3 distribution companies (control only about 20% of the market (x USA: TOP3

96%)

� That is why the Chinese government actively supports mergers and acquisitions in

all three parts of the business chain, which leads to an intensive search of

acquisition opportunities and comparative advantages (e.g. a foreign partner)

� As for distribution, the government set the objective of establishing one or twonational distribution channels with a value of USD 15 billion and twenty regionaldistributors with a value of USD 1.5 billion

CHINESE HEALTH EXPORT

In 2013, China exported medical goods with a total value of USD 48 billion� USD 23.6 billion for APIs� USD 19.3 billion for medical devices� USD 5.1 billion for finished pharmaceutical goods

= China is strongest in APIs and “raw materials” and weakest in finished goods (only 11% ofthe country's export)

� It is also interesting to note that in the area of APIs, China is at the first stage of the following triad:China – Asian manufacturers – “assemblers“ in target markets (especially in developedeconomies) since 57% of Chinese APIs are bought by Asian manufacturers, particularly fromIndia, Japan, Taiwan and the Philippines

= A substantial part of the products offered in third countries has in fact its origins in Chinese APIs= Finished Chinese goods are then sold to African countries, Canada and the US (!)

While the African buyers use these goods for their end customers, in North America, they are usedfor resale to third countries

FOREIGN ENTITIES ON THE MARKET

Foreign entities on the Chinese market have to face three major challenges:� they have to compete with local players, especially generics manufacturers on the

generics market� many innovative medicines are not included in the official drug lists; that is why they are

not reimbursed by insurance companies� Chinese regulator experiences problems with the implementation of new laws, which leads

to prolongations in the certification procedure

An ideal way to circumvent these problems is to get a local manufacturing partner, in whichcase the Chinese regulator regards the product as a Chinese one

Roche's strategy might serve as a good example: creating a new sub-brand called RocheShanghai, they offer Xeloda, a chemotherapy drug used to treat breast cancer, as a Chinesedrug at a lower price than that on the international market. Thanks to this, the drug wasincluded in the official drug list and is among the TOP10 anticancer drugs in the whole ofChina. This strategy resulted not only in a rapid growth of Roche's profits but also in gaining amarket share at the expense of other manufacturers

CHINESE HEALTH BIZVERSION 2.0

DRUG PRICING� China fundamentally reformed the drugs pricing system� The system of positive lists of drugs was put into practice (the national level sets a recommended

list, regions/towns/cities a binding one)� This should both reduce the costs of reimbursable drugs + curb the business activities of

hospitals in the area of drug sales (until 2002, 40 – 60% of hospitals' incomes were covered bydrug sales)

� The national list of essential drugs includes approximately 300 essential drugs (1/3 TCM, 2/3“western“ drugs) without an extra charge that must be sold at a fixed price

� Thanks to public procurements, the price of these drugs was reduced by 30 – 50%

There are other positive lists on regional level with individual drugs having a different amount ofreimbursement from health insuranceThese positive lists include more than 2000 items in the categories A, B and C� A represents TCM products (approx. 47%), B cheap “western” drugs (approx. 16%, not only

generics) and C more expensive “western" drugs used to treat less frequent diseases (approx.37%)

� These positive lists are revised every three years and regional administrations have the right notto respect 15% of these lists (and replace these 15% with items of their choice)

DRUG LISTS

2009NEDL 2012NEDL Changes

Number of molecules 307 520 213

Western medicines 205 317 112

TCM 102 203 101

Specifications (formula + package) No YES SpecificationsNumber of formulas (western medicines) 780+ 850+ 70

Package variations (western medicins) 2600+ 1400+ -1200

Therapeutic focus Basic drugs

Advanced groups

Oncology, circulatory system, paediatrics

TOP10 drugs of MNCs listed in 2102NEDL

(according to the volume sold)

1 PLAVIX Sanofi

2 GLUCOBAY Bayer3 AVELOX Bayer4 NOVOLIN 30R Novo5 NORVASC Pfizer6 DIOVAN Novartis

7 DIPRIVAN AstraZeneca

8 DIANEAL PD2 Baxter9 ELOXATIN Sanofi10 VOLUVEN Fresenius

PHARMACEUTICAL RETAIL SECTOR

The volume of retail drug market – Total volume increases but the growth rate is slowing downMain reasons: � hospital drugs are sold without profit

� positive lists� hospital pharmacies are not able to cope with market transformation which entails shortfalls in growth

(new players have not yet established themselves yet)� e-commerce is growing rapidly, reducing the market volume of traditional pharmacies

NEW Trends in the Chinese retail pharmaceuticals market

� integration of e-commerce and pharmacies� portfolio expansion (cosmetics, food supplements)

� IPOs� entry of foreign companies and foreign know-how to the Chinese market

� retail reforms (restrictions on hospital pharmacies)� “hospital“ drugs sold without profit

REFORM OF HEALTH RETAIL BIZ

1. Elimination of

internal market barriers

shortening approval

times of new pharmacies

2. Separating health

care delivery from drug sales

expanding the scope

and coverage of

health insurance

3. Support for the

development of retail chains

accepting outpatient

prescriptions

supporting mergers

and reorganizations

sale of baby milk in

pharmacies

2013/5 SFDA published the “Rules for inspection andsupervision over internet-based drug sales”

2013/6 SFDA introduced selling stalls for baby milk inpharmacies. This policy spread from the original testsites in Beijing and Changsha to the whole of China

The regulator also supports

• changes in prescription pharmaceuticals sales• health insurance reimbursement on the Internet• E- prescription

• the establishment of drugstores (as in the US)

REFORM OF HEALTH RETAIL BIZA new system of GSP certification is in preparation – it aims to accelerate the transformation and integration of thesector

X

There is a shortage of pharmacists in China, which slows down the development of the system (the pharmacist iscurrently its "basic building block")

Therefore:

� efforts to reduce the profits from prescribed drugs = basic source of profit of monomeric and hospital pharmacies= pharmacist's salary

� Efforts to require better ability of effective quality control reviews

� higher input costs for security

� large storage rooms with controlled temperature and humidity

� process automation

� energy saving systems

� higher level of IT systems (billing, quality management, claims) – efforts to require an upgrade or a completereplacement of existing IT solutions

REFORM OF HEALTH RETAIL BIZOther new aspects:� new tax system in pharmacy – e - tax and financial management� unification of rates (not only the tax ones) for small, medium and large enterprises, which will further increase

the competitive pressure on small and medium enterprises

The retail drug market went through a period of high gross profit (currently terminated) and enters a newperiod, characterized primarily by:� Professionalization of management� Branding� e-commerce� distribution of health care delivery and drug sales (particularly restrictions of hospital pharmacies)

� The rapid growth of e-commerce� reached a level of 267% p.a. in 2013; the total volume of the online market amounted to USD 650 million,

expected to increase up to USD 1.1 billion in 2014

� The regulator supports the entry of foreign companies to the Chinese pharmaceutical market - know-howand accelerating reorganization of the whole industry while maintaining control (the need of joint ventureswith Chinese partners in larger chains)

RESULTS & IMPLICATIONS

�HEALTH REFORM (INSURANCE, PRIMARY CARE + HOSPITALS, PUBLIC HEALTH)

�SFDA REFORM (REGULATION, STANDARDIZATION, MODERN AND NEW PHARMA)

�GLOBAL HEALTH ECONOMY�AGEING SOCIETY/DEMOGRAPHY�„NEW CUSTOMER“

THANK YOU

jan.ruzicka@czechchina.com