Investing in China HealthcareSector Outlook

2014

By Teenie Fung

1

The Healthcare industry in China

Pharmaceutical market

($80.9 bn) 35% of Asia Pacific, CAGR 17%.

Medical equipment and supplies market

($26.6bn) - 35%, CARG 16.5%

Medical biotechnology market

($13.3bn) 17%, CARG 16%

Healthcare industry is expected to grow from $375bn in 2011 to $1 trillion in 2020.

2

Overview & Key facts:

The Chinese government has spent >$371bn today in healthcare reform, 3 times as planned in 2009.

A population of over 1.3 bn in China, will become the 2nd

largest market in 6 years.

Increase in demand: Hospital bed utilization rate up from 36% to 88%.

Health insurance surged from 30% in 2003 to 95% in 2011.

3

Ample room for growth: Countrys spending on healthcare per capita is still half that of the developed market

expected to increase by 7% by 2020!

4

Drivers

12th Five-Year Plan (FYP) Policy support: 1) increase public funding, R&D and medical infrastructural investment. 2) expand medical insurance coverage 3) promote investment in private hospitals with favourable policies.

Favourable demographics: Rising disposable income, urbanization and aging population, shift of disease pattern from infectious to chronic disease which now accounts for 80% of deaths in China.

Increase in demand for healthcare services

and quality of care.

5

2014 Global health care outlook Shared challenges, shared opportunities 19

Like many health care systems around the world, funding, provider reimbursement, regulatory uncertainty, and rapid technological change are among the issues facing Australia in 2014. The country also is challenged by workforce shortages; the ratio of doctors to patients was an estimated 2.8 per 1,000 in 2012, fairly low for an industrialized nation.117

To address these challenges, health care providers and payers in Australia should consider changing their care and business models to focus on innovation, efficiency, and safety; regulatory compliance and strategic risk management; personnel recruitment, retention, and development; and technology investments.

China

Market Fact: Chinas rapidly rising income level and dramatic increase in Internet and mobile phone usage are increasing patients ability to pay for treatment and driving new expectations for quality of care.

Health care spending in China is expected to near $890 billion a year by 2017, growing by an average rate of 13.8

percent annually in local currency terms from 2013-2017. Total spending is forecast to reach the equivalent of 5.9 percent of GDP by 2017, up from an estimated 5.3 percent in 2012.118 The central government spent an additional $125 billion in health care expenses above and beyond its planned expenditures over the past three years.119 To address the huge divides in the quality of health care provision, the percentage of spending in rural areas (e.g., clinics, insurance, equipment and drugs) will rise faster than that in urban areas. However, total urban health care spending will remain far higher than rural expenditure in 2013-2017.120

Looking at demographic trends, Chinas population is aging (Figure 5), bringing attendant health conditions and creating demand for health care services and life sciences products. In addition, China is becoming increasingly urbanized the proportion of urban population has grown from 36 percent in 2010 to 52.6 percent in 2012.121 Urbanization and continued westernization of the population have driven lifestyle changes centered on an increasingly western diet, high prevalence of smoking, and increased pollution, which have materially changed the profile of disease in China.

117 Ibid118 Healthcare Briefing and Forecasts: China: Healthcare and Pharmaceuticals Report, Economist Intelligence Unit, June 7, 2013119 Global life sciences outlook: Resilience and reinvention in a changing marketplace, Deloitte Touche Tohmatsu Limited, 2013 120 Healthcare Briefing and Forecasts: China: Healthcare and Pharmaceuticals Report, Economist Intelligence Unit, June 7, 2013121 Global life sciences outlook: Resilience and reinvention in a changing marketplace, Deloitte Touche Tohmatsu Limited, 2013

Figure 5: Chinas aging population vs. global comparison group

2008 2009 2010 2011 2012 2013 2014 2015 2020 China US Japan UK Malaysia S. Korea Germany

107 111 113118 121

126 129136

171

8.28

120.9

42.430.1

10.71.5 6.0

16.9

Aging population in China(20082020F)

Comparison of population 65+ Number in Million (2012)

% of population aged 65 and over Population aged 65 and over

Source: Economist Intelligence Unit Monitor Deloitte Analysis

Population aged 65 and over

8.50 8.608.90 9.10

9.40 9.60

12.40

10.10

Chinas elderly population exceedsthe combined elderly population in this comparison group.

Demand in healthcare is much higher in China when compared to developed countries

Source: Economist Intelligence Unit Monitor Deloitte Analysis 6

Players in the market:

Chinese prescription market is dominated by MNC >60% of top 20 pharma companies in China are global MNC.

Most domestic companies are generic drug manufacturers.

7

Challenges Slower consumption due to anti- corruption actions and reduced

disposable income due to slower economic growth.

Profit margin squeezed: Costs in raw material rise and competition stiffens, followed by price-cut policy reform.

Fragmented logistic market: the three largest Chinese distributors

including Sinopharm, comprise less than 30% of the domestic Chinese market. (e.g. UPS and Sinopharm)

8

Chinese pharmaceutical market: Strong growth amid slower economic growth and government crackdown

Largest emerging drugs market and is set to be the global number two overall within three years, according to consultancy IMS Health.

Outperformed Indian and Japanese market by about 13% and 4% respectively. 50%

expected growth in the next 5 years to over $100bn.

EDL Tendering will favour local companies, rather than MNCs, to supply the bulk

of generic drugs in China.

Demand surged in outsourcing activities due to appealing factors of cost, market

opportunity and higher international standard commitment. Increasing exports of Chinese pharmaceutical contract manufacturing with 23% annual growth. E.g. AstraZeneca alone spent US$9bn per year on purchasing.

Leading multinational companies in China such as AstraZeneca PLC (LON:AZN) and Pifzer Inc (NYSE:PFE).

9

Health expenditure per capita (US$)

Source: World Bank

Rising Chinas expenditure per capita, but still lower than the worlds expenditure. Reforms will be boosting the market through improved affordability and accessibility

10

Health Care equipment & Supplies in China:Slow but growing - $52bn by 2017. Imports lead the high-end marketIncreasing wealth in China supports market shift

China - Health Care Equipment & Supplies 0099 - 2067 - 2012

MARKETLINE THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED Page | 8

MARKET DATA Market value The Chinese health care equipment & supplies market grew by 20% in 2012 to reach a value of $26.6 billion.

The compound annual growth rate of the market in the period 200812 was 16.5%.

Table 1: China health care equipment & supplies market value: $ billion, 200812

Year $ billion CNY billion billion % Growth 2008 14.4 91.1 11.2

2009 15.5 97.6 12.0 7.1%

2010 19.0 120.0 14.8 23.0%

2011 22.2 139.9 17.3 16.6%

2012 26.6 167.8 20.7 20.0%

CAGR: 200812 16.5%

SOURCE: MARKETLINE M A R K E T L I N E

Figure 1: China health care equipment & supplies market value: $ billion, 200812

SOURCE: MARKETLINE M A R K E T L I N E

GLO B AL WE ALT H RE P ORT 20 13_48

China

Tenacious growth

Wealth per adult in China has grown robustly since 2000, almost quadrupling from USD 5,700 to USD 22,230 in 2013. Wealth fell by approximately 20% as a result of the financial crisis, but soon recovered and despite recent uncertainties is well above its pre-crisis peak. The level has increased more in US dollars than in yuan, due to the appreciation of Chinas currency since 2009; but most of the rise in wealth reflects real growth.

Total household wealth in China is the third highest in the world, just 2% behind Japan and 56% ahead of France (in fourth place). Due to a high savings rate and relatively well developed financial institutions, a high proportion (46%) of Chinese household assets are in financial form compared with other major developing or transition countries. At the same time, privatized housing, new construction and rural land are very important forms of wealth in China, accounting for much of the USD 12,900 in real assets per adult. Debt averages USD 1,400, equivalent to 6% of gross assets. While this is relatively low, personal debt has been rising at a fast rate in recent years.

Although significant inequality is created by the strong urban-rural divide in China, at the turn of the century overall wealth inequality was low both by broad international standards and in comparison to other transition countries. This was due to factors such as the virtual absence of inherited fortunes, and relatively equal division of both rural land and privatized housing. Inequality has been rising strongly, however, with the increasing wealth of successful entrepreneurs, professionals and investors. China now has over one million millionaires, and more residents with wealth above USD 50 million than any other country except the USA.

Country summary 2013

Population 1,357 million

Adult population 998 million

GDP 8,380 USD per adult

Mean wealth 22,230 USD per adult

Median wealth 8,023 USD per adult

Total wealth 22.2 trillion USD

Dollar millionaires 1,123 thousand

Top 10% of global wealth holders 36,595 thousand

Top 1% of global wealth holders 1,644 thousand

Quality of wealth data fair

Figure 1

Wealth per adult over time

Figure 2

Composition of wealth per adult

Figure 3

Wealth distribution relative to world (in %)

Source: James Dav ies , Rodr igo L luberas and Anthony Shorrocks , Cred it Su isse G loba l Wea lth Da tabook 2013

USD 0

USD 5,000

USD 10,000

USD 15,000

USD 20,000

USD 25,000

2000 2002 2004 2006 2008 2010 2012Wealth per adult

Wealth per adult at constant exchange rate

-USD 5,000

USD 0

USD 5,000

USD 10,000

USD 15,000

USD 20,000

USD 25,000

F inancial Real Debts Net worth

58.4

39.1

2.4 0.1 0

10

20

30

40

50

60

70

80

USD 1m

China World

Source: Credit Suisse AG, Research Institute

Increasing competitiveness - Migration from Mass-market to high-end market: Domestic manufacturers are upgrading their equipment by substantial R&D investment, less high-tech imports are expected over time.

Greater affordability in high-priced treatments as the population becomes wealthier

despite slower economic growth.

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Market opportunity especially in mobile health care devices, due to rapid growth in the number of mobile users China and US are predicted to be the largest mHealth markets in 2017.

24 C E N T E R F O R T E C H N O L O G Y I N N O VAT I O N a t B R O O K I N G S

GSMA estimates that in 2017 the countries with the largest mHealth markets will be the United States and China. They predict the market shared by these two counties will account for more than one-third of the worldwide market (see Figure 26).51

The research firm iiMedia found that the Chinese mobile medical applications market is growing rapidly. They estimate the size of the Chinese mHealth market is about 1.86 billion RMB, which is up to 17.7 percent over the last year. They also predict the mobile medical market in China will exceed 10 billion RMB by the end of 2017 (as shown in Figure 27).52

They also predict rapid growth in the Chinese wearable medical devices market. iiMedia data shows that in 2012 the wearable medical equipment market in China reached 420 million RMB, and will exceed 5 billion RMB by 2017 (see Figure 28).53

Figure 27 mHealth Market in China

0

20

40

60

80

100

120

140

2017E2016E2015E2014E2013E201220110

10%

20%

30%

40%

50%

60%

70%

80%

Growth Rate

Market Scale

17.7%

15.8 18.622.1

28.4

42.3

71.8

125.3

18.8%

28.5%

48.9%

69.7%74.5%

MA

RK

ET

SC

AL

E(1

00

mill

ion

RM

B)

GR

OW

TH

RA

TE

Figure 26 Top 10 Countries Based on mHealth Revenue (U.S. $ billion), 2017

Othe

rsIta

lyIn

dia

Cana

da

Braz

il

Russ

ia

Fran

ce

Germ

any

Japa

nCh

ina

Unite

d St

ates

5.9

2.5

1.41.0 0.8 0.8 0.7 0.6 0.6 0.5

8.1

Remote monitoring devices represent a fast-growing part of the mHealth sector. Ac-cording to a report jointly author by GSMA and PricewaterhouseCoopers (PwC), the Chinese medical monitoring services market will reach $1.2 billion by 2017, with over 90 percent of the revenues coming from chronic disease management solutions.54

They also predicts that monitoring services will dominate the worldwide mHealth market. They predict that by 2017 monitoring services will reach about 15 billion (US dollars). The next two largest market sub-sectors are diagnosis and treatment (see Figure 29).55

Figure 28 Market Scale of Wearable Mobile Medical Equipment in China

Figure 29 Global mHealth Market Opportunity by Service Categories, US$ billion, 2017

0

10

20

30

40

50

60

2017E2016E2015E2014E2013E201220110

20%

40%

60%

80%

100%

120%

Growth Rate

Market Scale

20.0%

3.5 4.2 5.68.0

11.9

23.7

47.7

33.3%42.9%

48.8%

99.2% 101.2%

MA

RK

ET

SC

AL

E(1

00

mill

ion

RM

B)

GR

OW

TH

RA

TE

Monitoring | $15 billion | 65%

Emergency Response | $0 | 0%

Health Practitioner Support | $1.1 billion | 5%

Health Surveillance Support | $0.1 billion | 0%

Wellness | $0.7 billion | 3%

Prevention | $0.2 billion | 1%

Diagnosis | $3.4 billion | 15%

Treatment | $2.3 billion | 10%

Administration | $0.1 billion | 1%

Chronic Disease Management and Post Acute Care

IndependentAging

29%

71%

Note: Total worldwide market size (2017E): US$ 23 billionSource: PwC analysis

m H E A LT H I N C H I N A A N D T H E U N I T E D S TAT E S 25

12

Biotechnology market: Increased regulatory uncertainty and pressure on drug pricing lead to hold back in investment

Greater impact on profit reduction on High-tech drugs than generics.but obtain better financial position through M&A activities in LR in search of discovering Biotech Blockbuster - costly and lengthy with high risk R&D investment.

In 2017, the market is forecast to have a value of $27.5 bn, an increase of 106.8% since 2012. Healthcare accounts for 95%, largest segment of the biotechnology market in China.

13

Trend: Growing foreign investors confidence in FDI reforms. Deal activities in underperforming healthcare sector increase gradually over years, predominately in China and India

The Chinese state built over 100 life science parks that employ 55.8mn scientific and

technological personnel.

Leading China-originated companies in China such as Shanghai Kehua Bio-engineering Co., Ltd (002022:CH) and Sinovac Biotech Ltd. (SVA:NASDAQ GS)

5/26/2014 Global Healthcare Private Equity Report 2014 - Bain & Company - Publications

http://www.bain.com/publications/articles/global-healthcare-private-equity-report-2014.aspx 3/14

and JLR Medical Group in Orlando to the platform. Waud Capital saw the fruits of its buy-and-build strategy in 2013 when thefirm exited CarePoint Partners, a specialty pharmacy provider built through 16 acquisitions and organic growth, via a sale toBioScrip.

Geographic trends

Global

Section highlights

Large deals were mainly clustered in North America and Europe

Asia-Pacific and the rest of the world continued to drive growth in deal count

Provider and services was the most active sector in all regions

North America and Europe continue to lead investment activity within healthcare private equity, with North American targetsaccounting for seven out of the top 10 deals in 2013. However, growth in activity in Asia-Pacific and the rest of the worldoutpaced these regions (see Figure 4). While the number of buyout deals grew at a compound annual rate of 5% in NorthAmerica and 3% in Europe over the last five years, it has grown by more than 45% in the Asia-Pacific region and the rest of theworld. Asia-Pacific also saw a rare billion-dollar deal via Panasonics carve-out of 80% of its healthcare business. The top 10deal list followed historical patterns, with the majority of deals occurring in the US and Europe; however, in 2013 there wassome geographic diversity by way of deals in Japan and Canada. By sector, provider and services was the most active acrossall of the regions, while medtech shrank a bit in each of the regions compared with 2012 (see Figure 5).

North America

Section highlights

Uncertainty surrounding US healthcare reform persisted

Capital continued to flow toward assets with a cost-containment angle

Robust equity markets made purchases harder but opened up an exit window

Services assets in a few key niches drove significant interest

Macro environment

14

Investment Strategy Healthcare is still a defensive sector. However, the sector is overvalued

(22x MSCI Healthcare PE) compared to 9.7x MSCI PE.

5/26/2014 China stocks leap higher on reform euphoria - FT.com

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China, China - Politics & Policy, China SocietyRELATED TOPICS

One popular stock pick is Biostime, a Hong Kong-listed baby milk producer that sawits share price rise 5.9 per cent on Monday, taking its year-to-date gain to 180 percent. It now trades on a price to book ratio of almost 12 and a price to currentearnings ratio of about 32, compared with an average of 8.2 times for the wider H-share market.

In the healthcare sector, shares in Shandong Weigao maker of single-use medicaldevices such as syringes have leapt by more than 40 per cent since Wednesday,also aided by better-than-expected third-quarter earnings. After recent gains,MSCIs China healthcare index now trades on a price to earnings ratio of 22 times,compared with just 9.7 for the index providers broad China index.

Those excessive valuations have prompted Mr Sanft to downgrade a number ofpopular sectors including healthcare, internet and consumer staples.

5/26/2014 China stocks leap higher on reform euphoria - FT.com

http://www.ft.com/intl/cms/s/0/002a1652-5006-11e3-8e99-00144feabdc0.html#axzz32pViggEY 2/2

Printed from: http://www.ft.com/cms/s/0/002a1652-5006-11e3-8e99-00144feabdc0.html

Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others.

THE FINANCIAL TIMES LTD 2014 FT and Financial Times are trademarks of The Financial Times Ltd.

China, China - Politics & Policy, China SocietyRELATED TOPICS

One popular stock pick is Biostime, a Hong Kong-listed baby milk producer that sawits share price rise 5.9 per cent on Monday, taking its year-to-date gain to 180 percent. It now trades on a price to book ratio of almost 12 and a price to currentearnings ratio of about 32, compared with an average of 8.2 times for the wider H-share market.

In the healthcare sector, shares in Shandong Weigao maker of single-use medicaldevices such as syringes have leapt by more than 40 per cent since Wednesday,also aided by better-than-expected third-quarter earnings. After recent gains,MSCIs China healthcare index now trades on a price to earnings ratio of 22 times,compared with just 9.7 for the index providers broad China index.

Those excessive valuations have prompted Mr Sanft to downgrade a number ofpopular sectors including healthcare, internet and consumer staples.

15

Focus on industry leaders with strong M&A capabilities:M&A activities outstripped 2013 look for drugmakers with advantages of scale, low-cost production or unique, in-demand products. Competition will drive out small companies that cannot sustain their products at low price. Focus on quality companies with 1) limited negative exposure to policy e.g. price-cut 2) strong product portfolio (branding and exclusive price) 3) high earnings visibility E.g. Hutchison China MediTech (HCM: LSE, TP 8.45) due to their minimal exposure to government cost controls and potential negative investor sentiment. Recently, it formed new joint venture with Sinopharm in April.

Focus on the non-EDL drugs, which account for 80% of the market:

The long-term value creators such as Sino Biopharm (1177.HK, TP 6.65) and China Medical Systems (0867.HK, TP 9.36) could still grow faster than peers because they are best positioned for the industry evolution (e.g. relying more on R&D) and will likely have minimal impact from current drug policy changes due to their exclusive rich non-EDL product portfolio.

16

Conclusion

Strong and persistent growth in Healthcare sector remains attractive.

Growth of all 3 sectors pharmaceutical, medical equipment/supplies and biotechnology will decelerate in the near-term but is expected to rebound and continue to grow faster than developed countries.

Strategic investment focus on market leaders with M&A capabilities and limited negative exposure to policy.

17