THE CHINA PHARMACEUTICAL MARKET

By: Pradeep Kumar Mudusu

Completion of Clinical Trials

Application for Drug Marketing Review by SFDA Review Report Onsite inspection by the SFDA Onsite inspection report Evaluation by Center for Drug Evaluation (CDE) Compliance on one production lot (three for biological products) with the drug standard verified by the testing institute

Feasibility and reasonability of drug standard verified by the testing institution Nomination of the applicant Onsite manufacturing inspection by the CDE

Comprehensive evaluation by CDE New Drug Certification (Only) For applicants other than drug manufacturing companies

Inspection by the SFDA

Drug License

Inspection by the SFDA

Growing and distinctive Chinese pharmaceutical market

China is one

of the largest pharmaceutical markets in the world, because of the size of the population combined forces of economic and demographic development, government stimulus, enhanced health awareness among the public, market consolidation, and improving R&D capability may help the country to grow into a more sophisticated market within the next decade

The

China's pharmaceuticals market expected to see strong growth overall

Experts such as the Economist Intelligence Unit (EIU) and IMS

Health are unanimously upbeat about the prospects for China's pharmaceutical market, and the view extends to all points along the value chain, although the growth pace for each one may vary slightly

Key drivers of market expansion are the rising health care awareness

and needs fueled by economic growth, large and aging population, increasing total and per capita heath spending, and the ongoing healthcare reform and 12th Five-Year Plan supportive measures

Pharmaceutical sales growth in China has outstripped that of

healthcare expenditures overall. Sales grew at a CAGR of 25.9 percent from 2007 through 2010, and are expected to continue strong but more modest growth from 2010 through 2015, at a CAGR of 15.5 per-cent

Chinese Pharmaceutical Industry Value Chain

Raw material manufacturer Pharmaceutical Company

Drug Distribution Company

Medical service provider

Healthcare buyer

Raw material Active Pharmaceutical Ingredients (API)

Traditional distributors 85%

Special types distributors 10% Others: Direct marketing, etc. 5%

Intermediates

Hospitals (Public/arm y/Private) 80%

Government - subsidised insurance programme (three BMI) 94%*

API

Pharmaceutical

Drug stores Chain/indivi dual) 20%

Commercial healthcare insurance programme

Pharmaceutical sales in China, 20072015

120 107.1 100 85.1 96

Pharmaceutical Sales

80

74.8 63.5

60 52.2 42.1 40 33.1 26.2 20

Pharmaceutical Sales Linear (Pharmaceutical Sales)

2007

2008

2009

2010

2011 Year

2012

2013

2014

2015

China has the largest elderly population in the world

By

2016, EIU projects that the population of China will reach 1.36 billion, the largest in the world, slightly larger than India's The senior population (over 65 years) will still remain proportionally smaller, but in 2016 it is expected to be 9.7 percent, rising from 8.4 percent in 2011 The aging population will generate higher demand for health care services, since elderly groups have weaker immune systems, resulting in a higher incidence of illness. Currently, the elderly population makes up 23 to 40 percent of the prescription drug market and 40 to 50 percent of the over-the-counter (OTC) drug market

Healthcare expenditures expected to grow rapidly over the next five years

Out-of-pocket and private insurance healthcare payments rose steadily from 2007 through 2010, at a CAGR of 13.5 per cent The above payments are expected to continue rising, but at a lower rate of 8.5 per cent through 2015

Private healthcare expenditure in China, 20072015

1400 1241 1200 1062.8 1152.1 1329.5

1000 886
Expenditure 802.8 800 701.8 606

974.1

Expenditure Linear (Expenditure)

600

400

200

0 2007 2008 2009 2010 2011 Year 2012 2013 2014 2015

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Private healthcare expenditure in China, 20072015

Historically,

government healthcare payments in China have been lower than personal and private-sector payments, but they have been rising more rapidly, and are forecast to equal or exceed private payments in 2013 CAGR for government payments was 17.9 percent from 2007 through 2010, and they are forecast to grow at 12.1 percent from 2010 through 2015

The

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China government healthcare expenditure, 20072015

1600 1422.6 1400 1283.7 1200 1029.2 1000 Expenditure 804.8 800 693 615.3 600 490.7 400 Linear (Expenditure) Expenditure 913.4 1152.7

200

0 2007 2008 2009 2010 2011 Year 2012 2013 2014 2015

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Healthcare expenditure per capita in China, 20072015

China's per capita healthcare expenditures, having grown at a CAGR

of 19.3 percent from 2007 through 2010, are forecast to continue rising at a CAGR of 12.2 percent through 2015, reaching US$437 per head in 2016
In the Asia-Pacific region, this figure places China ninth, between

Malaysia (8) and Thailand (10), and far behind Australia at US$6,185 per capita for healthcare
However, due to China's world-leading population, her projected

overall healthcare expenditures of US$593.4 billion in 2016 are forecast to top all other Asia-Pacific nations.5 Second is Japan, whose per capita expenditures of US$4,656 are forecast to exceed a multiples of 10 times the expenditures per person in China

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Healthcare expenditure per capita in China, 20072015

450 350

400 300

350 250
Healthcare Expenditure 300 200 330.3 298.5 268.6 150 214 186.1 100 109.5 50 164.5 143.1 50 Per-capita Income

250

Healthcare Expenditure Per Capita Income

200

150

240.2
100

0 2007 2008 2009 2010 2011 Year 2012 2013 2014 2015

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Market opportunities are rising in rural and suburban areas

Although healthcare infrastructure expansion and the hiring of

physicians have lagged, the net income and private healthcare expenditure of rural households have grown sharply over the past two decades
In 2009, the average annual net income was USD 833.58, 7.5 times

that in 1990
The proportion of expenditure on healthcare and medical services

rose from 3.2 percent to 7.2 percent over the same period

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Rising net income and healthcare spending of rural households

%
8 7.2 6.6 6 5.2 4,000 6.7 5,000
RMB

6,000 Healthcare and medical spending (% of total consumption)

Per capita annual net income of rural households

Per capita annual net income

4
3.3 3 3.2

3,000

Healthcare and medical spending (% of total consumption)

2,000 2 1,000 1

0 1990 1995 2000 Year 2005 2008 2009

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The New Co-operative Medical Scheme

The New Co-operative Medical Scheme (NCMS) is a public insurance

plan to provide healthcare coverage to around 80 percent of the rural population by 2010
The scheme covered 179 million people in 2005, which was equal to

just 76 percent of the population in the rural counties covered by the NCMS in the same year
The coverage was expanded to 94 percent in 2009,6 and 96 percent in

2011 according to the latest news release by the MOH.7

According to a Ministry of Finance official, central and local

government subsidies will be raised from the current USD 19.41 to USD 32.35 per capita in 2011

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The New Co-operative Medical Scheme

2005 Number of counties implementing the NCMS Number of enrolees (millions) Enrolment rate (%) Total fund raised at current year (RMB billion) Per-capita preminums (RMB) Pay-out at current year (RMB billion) 678 2006 1451 2007 2451 2008 2729 2009 2716

179

410

726

815

833

76 7.5

81 21.4

86 42.8

92 78.5

94 94.4

42.5

52.1

58.9

96.3

113..4

6.2

15.6

34.7

66.2

92.3

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In addition, the NDRC and the MOH jointly launched a rural health

service system enhancement plan, in which USD 5.2 billion will be invested over the next three years, to support construction of 2,176 county- level hospitals nationwide
Covered treatment and the infrastructure improvements and of

underserved populations are expected to boost the pharmaceutical market in China's rural and suburban areas
Some observers might think that the drugs prescribed in rural areas

differ greatly from those in urban areas. On the contrary, according to the data from the National Statistics Bureau of China (NSBC), malignant tumors, heart disease, and cerebrovascular disease were the top three causes of death in both urban and rural areas in 2009
That said, deaths caused by heart disease and cerebrovascular disease

in rural areas increased notably from 2008 to 2009, which may suggest changes to product marketing strategy options for pharmaceutical companies who want to further explore rural areas

19 Urban Area 2009 Change 08-09 2009 Rural Area Change 08-09

Malignant Tumour
Heart Disease Cerebrovascular Disease Diseases of the Respiratory System Trauma and Toxicosis

167.6
128.8 126.3 65.4 33.5

0.6
7.8 5.5 -7.8 2.2

159.2
112.9 152.1 98.2 54.1

2.4
25.8 17.9 -6.0 1.1

Endocrines, Nutritional & Metabolic Diseases

Diseases of the Digestive System Diseases of the Genitourinary System Diseases of the Nervous System Infectious Disease (not including Respiratory Tuberculosis)

20.3

-0.8

11.3

0.2

16.6 7.3

-1.0 0.4

14.6 7.2

-1.8 1.5

6.9 4.4

0.6 -0.3

5.1 5.0

0.7 0.3

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Generic drug sales in China, 20072015

RMB (bn)

%
100 614.8

700

600 557.7 92% 90% Generic drug sales 400 320.7 300 257.7 203.6 200 162.9 90% 90% 89% 382.1 88% 87% 86% 445.6 501.1

95

500

90

Generic Drug sales % of total pharmaceutical sales

Generic drug sales Generic drug sales % of total pharmaceutical sales

85% 85

80

100

75

0 2007 2008 2009 2010 2011 Year 2012 2013 2014 2015

70

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Generic drug sales % of prescription sales

Generic drug sales % of prescription sales
88 87% Generic drug sales % of prescription sales 86 86% 86% 86% 85% 84 84% 83% 82 81% 80 80% Generic drug sales % of prescription sales

78

76
2007 2008 2009 2010 2011 Year 2012 2013 2014 2015

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Patented drug sales in China, 20072015

120 112.7 25

100 93.8 19% 17% 80 15% Patent drug sales 14% 14% 14% 14% 62.4 13% 11% 10% 10% 8% 28 21.4 20 14.7 5 10% 36.7 48.7 12% 10 14% 16% 77 15 16% 20% 20

Patented drug sales %

Patented drug sales Patented drug sales % of prescription sales Patented drug sales % of total pharmaceutical sales

60

40

0 2007 2008 2009 2010 2011 Year 2012 2013 2014 2015

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The biotech sector has been targeted as a key development sector the government
There are certain subsectors that will benefit specifically from

provisions relating to the Five-Year Plan

Although biologics and bio-similars together only account for 10

percent of the total pharmaceuticals market in China, their recent annual growth rate of 32.2 percent has been quite impressive
Genetic drugs and diagnostic reagents are the main applications for

biotechnology in the life sciences industry, accounting for 65 percent of the market share of biologics and bio-similars in 2010

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Biologics and bio-similars in China, 20062010

120 106 100 50 50 60

42% 80 Revenue Gross profit 75

41%

40

33 60 25% 40 21 35 29% 45

64

33

33 30

Growth rate

Revenue
Gross Profit Growth rate (%) Growth rate (%)

20 17%

20 6 8 10

15 4

10

0 2006 2007 2008 Year 2009 2010

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Biologics and biosimilars in China, market shares by sales, 2010

8%

11.90%

44.90%
15.60%

Genetic Drugs Diagnostic reagent Antibody Vaccine Blood products

19.60%

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Regulatory regime and policy development

National authority & legislation: The China State Food and Drug Administration (SFDA) is the national supervising authority for the pharmaceutical sector in China Pharmaceutical regulation in China is based around the Drug Administration Law (DAL) The SFDA has a number of departments to executive its different responsibilities, and the most industrial-related are the following threethe Department for Drug Registration, the Department of Drug Safety & Inspection, and the Department of Drug market Compliance Drug registration, approval, and manufacturing: Drug approval applications are initially reviewed by provincial and municipal authorities, and then passed to the SFDA for approval. The entire approval procedure generally takes between 18 and 26 months

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Domestic clinical trials are mandatory for all drugs which are new to the Chinese market required by the Good Clinical Practice (GCP) guidelines. If a drug has not been approved in China or anywhere else, permission for the trial must be granted by the SFDA and the MOH, and it normally takes 12 months for the trial process The product must undergo a quality test, once the clinical trials have been completed and the quality tests may take around three months Although using a Chinese firm may make the process easier, overseas manufacturers may apply direct to the SFDA For imported drugs, documents must first be submitted to appropriate customs authorities. The customs inspection authorities will evaluate the application and then pass it to the central SFDA office Including Chinese traditional medicines(TCM), must be approved by the SFDA, although TCMs are exempt from the normal licensing procedure. Testing institutions are set up by the SFDA and the provincial or equivalent Food and Drug Administrations (PFDAs) to test drugs, which are evaluated both in terms of quality and conformance to standards. Importantly, only drug companies registered in the PRC are allowed to apply for a New Drug Certificate and Drug License R&D companies can only apply for the New Drug Certificate, which they may later transfer to a qualified drug manufacturer, who may then apply to the SFDA for a Drug License

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Pricing
Reimbursement

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Conclusion:
Based on the above information, Hetero Labs Limited concludes that The combined effect of China's healthcare reform and growing market has been to offset continuing concerns about regulatory challenges and IP protection, giving confidence to those international pharmaceutical companies that seek to take advantage of the opportunities presented
Those opportunities comprise research, OTC, distribution, and

biotech subsector development, as well as the overall growth of China's market, and particularly rural and suburban market growth due to healthcare reform
Foreign companies are making the most of these opportunities by

ramping up M&A activity, as China's LSHC industry enters its next and greatest phase of growth yet

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