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1MIRAE ASSET LENS ISSUE 6 PART II1 National Health and Family Planning Commission of the People's Republic of China, Citi Research,

Mirae Asset Global Investments (2015)

How to Make Money

in China Healthcare Space

China – Strong Growth So Far, But Still Underpenetrated

The China pharmaceutical market has grown at healthy pace of 22% CAGR over the

last 10 years.1 This was driven by favorable dynamics including growing per capita

income thereby increasing affordability, rising disease incidence driven by lifestyle

changes, an aging population, and early detection of diseases (leading to longer duration

of treatments), among others. Even after this high growth phase, China remains an

underpenetrated market for various therapies and we continue to expect modest to

strong volume growth over the ensuing years.

In this Issue

Part I. China Embraces O2O

Part II. China Healthcare Space

Part III. Asian Financials

Contributors

Mirae Asset Global Investments

(Hong Kong) Limited

Asia Pacific Investment/Research Team

Rahul Chadha

Co-Chief Investment Officer

Ashley Hsu

Senior Investment Analyst

Saniel Chadrawat Senior Investment Analyst

Vineet Thodge

Senior Investment Analyst

Healthcare Demand in China

1/3China's share in diabetes patients globally ( > 110 Mn)

27%China's share in cancer deaths in 2012 (2.2 Mn)

230mn# of cardiovascular diease sufferers in China

Source: Forbes, SCMP, WHO, Mirae Asset

How to Make Money in China Healthcare Space

MIRAE ASSET LENS ISSUE 6 Part II

matthew.morgan

Typewritten Text

2MIRAE ASSET LENS ISSUE 6 PART II

We Prefer Chronic Therapies

Given the nature of diseases, the treatment for chronic therapy

treatments usually span over a number of years. Patients in

general tend to stick with same brand that they have become

accustomed to. Select products in these therapies are complex

in nature – such as inhalers, extended release products,

oncology, long acting injectables – implying low competition

and better pricing power. In addition, the incidence of lifestyle

driven diseases is increasing at a faster pace than overall industry

growth. This coupled with aging population implies a sweet spot

for companies present in chronic therapies.

The therapies include those that treat cardiovascular, hyper-

tension, diabetes, and central nervous system ailments among

others. The charts below highlight a percentage increase of

the population impacted by select diseases over time.

In China, the incidence of lifestyle driven diseases is increasing at a faster pace

than overall industry growth.

Better standards of living and sedentary lifestyles are driving the incidence of related diseases in China over the past two decades.

Lipid Regulators Growth vs. Overall Market Growth

Source: Luye, IMS CHPA

Lipid Regulator Market Growth Overall Market Growth

15

10

5

25

30

35

20

0

YoY Growth (%)

2010 2011 2012 2013 2014

Percentage of Population Affected by Select Diseases

Source: Citi Research, National Health and Family Planning Commission

Cancer Diabetes Cerebrovascular

8.0

6.0

4.0

2.0

12.0

14.0

16.0

10.0

0

Prevalence Rate(%)

1993 1998 2003 2008 2013

Overall China Pharmaceutical Market Trend

Source: National Health and Family Planning Commission of the People's Republic of China, Citi Research, Mirae Asset Global Investments (2015)

1999

2000

2001

2004

2002

2005

2003

2014

2013

2012

2011

2010

2009

2008

2007

2006

500

1,500

2,000

2,500

1,000

0

RMB bn

10

15

25

30

35

5

20

0

%

Growing incomes, rising lifestyle diseases that are detected earlier, and an aging population are driving pharmaceutical sales in China.* Government reported growth rate

YoY Growth* (RHS)Pharmaceutical Sales (LHS)


Longer Development Cycle for New Chemical

Entities & First-to-Market Generics…

Typically a New Chemical Entity (NCE) takes about 7-14+ years

and FTM (first-to-market) generics take about 5-9 years for

their respective development and approval cycle. In addition,

a NCE would enjoy patent protection for several years. Near

term companies whose product portfolio consists of NCEs/FTM

generics would be more resilient given patent protection and

gradual build-up of competitive intensity. At the same time, mid-

longer term companies, which continue to invest in their R&D

pipeline (NCEs/FTM generics), would benefit from the mid-to

long-term trends of mushrooming patient numbers.

….However, We Remain Cautious on Tenders

China follows a tender mechanism for the procurement of

drugs in public hospitals. As a background, every province

follows a tendering process every 3 years or so, favoring lowest

price bidders. Public hospitals (pharmacies dispensing drugs

in hospitals) can purchase only from the winning bidders. We

have witnessed severe price cuts in acute therapies, where

competition has stepped up.

CFDA New Chemical Entities(NCES) First-to-Market(FTM) Generics Generics

Preclinical 1-2 Years

Clinical Trial Application

12-14 Months 26-28 MonthsLonger Vs. FTM

Generics

Clinical Study

Phase 1 / 2 / 3BE / PK Study or Case-By-Case

BE / PK Study

New Drug Registration Production

24-32 Months 34-42 MonthsLonger Vs. FTM

Generics

Entire Process

7-14+ Years 5-9 YearsLonger Vs. FTM

Generics

Commercial Upside

Multi-Year Patent Protection

Premium Pricing Highest Margins

Low Competition High Margins

High Competition Fierce Price Erosion

The multi-year nature of the drug pipeline in China enables first movers to capture profits with greater visibility of new entrants.

Drug Development and Approval Cycle in China

Source: Citi Research, China Food and Drug Administration, Mirae Asset Global Investments (2015)

Cancer Incidence by Age

Source: Citi Research, National Health and Family Planning Commission

Urban Rural

1,000

800

600

400

200

1,400

1,600

1,800

1,200

0<1 1 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85+

As the age pyramid in China shifts into the elder years, the population is facing new health issues.

Age Structure in China

>450-44

2012

1990

69% 31%

79% 21%

Age of 45-50 is

inflection point

Cancer Incidence

Age


How to Identify China Healthcare Winners

The overall industry is benefiting and evolving off the back of

fundamental drivers such as growing per capita income, lifestyle

changes, an aging population, and technological advancements.

The key to capitalizing on this investment theme is to identify

companies with the following:

• Focus on high growth therapies. The diagram below

highlights high potential/ high growth therapies, including

central nervous system, respiratory, biologics, anti-cancer, and

cardiovascular, among others;

• Presence in complex products, with some technical and/

or manufacturing knowhow as an “economic moat” to new

entrants, implying lower competition;

• Products with exclusivities/patent protection. This

reduces the risk of severe price cuts/erosion and provides high

earnings visibility in the near term. Overall the development

cycle for a NCE can be 7-14+ years and for a FTM generics

could be 5-9 years. This provides moderate visibility for the

medium-term;

• Strong R&D capability and ample pipeline of products.

Implementing the above framework, we have identified two key

winners in the Chinese pharma space:

• Luye - Focus on high growth and complex therapies –

oncology, central nervous system, and cardiovascular. In

addition, it has over 80% of 2013 revenues contributed by

7 significant drugs, most of which enjoy patent protection,

exclusivity, and low competition (as per company disclosures).

• CSPC - Business model shift from low margin (antibiotics) to

high margin product portfolio, including CCV (cardio-cerebral

vascular) and oncology.

Note: Figures may not sum to 100% due to rounding.

Luye Revenue Breakdown by Therapy

Source: Mirae Asset Global Investments, Luye Company Filings (2013)

Oncology

Cardiovascular

Alimentary / Metabolism

Others44%

29%

23%

5%

High Contribution from Chronic Therapies

CSPC Revenue Breakdown by Therapy

Source: Mirae Asset Global Investments, CSPC Company Filings (2013)

Cerebro-Cardiovascular

Central Nervous System

Anti-Infection

Others

20%

4%

32%

44%

The pharmaceutical lifestyle commences with high potentials characterized by meteoric growth that reap benefits from an expanded market share and eventually slow down into maturity.

China Pharmaceutical Market Landscape

Source: Citi Research, Mirae Asset Global Investments (2015)

25

20

15

10

5

30

00 2 4 6 8 10 12 14 16 18 20 %

High Potential High Growth Stars Cash cows

Mature

%

2012 Industry Share

2009

-201

2 CA

GR

Respiratory systemBiologics

Mental Disorders

Bone and MuscularNarcotics

Dermatology

Urinary System Endocrine Immunomodulators

Digestive System

Anti-Cancer Drugs

Central Nervous System

Blood system

Cardiovascular

Antibiotics

Sensory Organ

Reproductive


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