Investing in China Healthcare

Sector Outlook
2014
By Teenie Fung
1
The Healthcare industry in China

Pharmaceutical market
($80.9 bn) 35% of Asia Pacic, 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 2
nd

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
12
th
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, efciency,
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
prole of disease in China.
117
Ibid
118
Healthcare Brieng and Forecasts: China: Healthcare and Pharmaceuticals Report, Economist Intelligence Unit, June 7, 2013
119
Global life sciences outlook: Resilience and reinvention in a changing marketplace, Deloitte Touche Tohmatsu Limited, 2013
120
Healthcare Brieng and Forecasts: China: Healthcare and Pharmaceuticals Report, Economist Intelligence Unit, June 7, 2013
121
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
113
118
121
126
129
136
171
8.28
120.9
42.4
30.1
10.7
1.5
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 8.60
8.90
9.10
9.40
9.60
12.40
10.10
Chinas elderly population exceeds
the 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.
Prot 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 market
Increasing wealth in China supports market shift

China - Health Care Equipment & Supplies 0099 - 2067 - 2012
! #$%&'()*+' THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED Page | 8
MARKET DATA
Market vaIue
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%.

TabIe 1: China heaIth care equipment & suppIies market vaIue: $ biIIion, 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 heaIth care equipment & suppIies market vaIue: $ biIIion, 200812

SOURCE: MARKETLINE M A R K E T L I N E
GLOBAL WEALTH REPORT 2013_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 countri es. 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 Davi es, Rodri go Ll uberas and Ant hony Shorrocks, Cr edi t Sui sse Global
Weal t h Dat abook 2013

USD 0
USD 5,000
USD 10, 000
USD 15, 000
USD 20, 000
USD 25, 000
2000 2002 2004 2006 2008 2010 2012
Wealth 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
Financial Real Debts Net worth
58.4
39.1
2.4
0.1
0
10
20
30
40
50
60
70
80
<USD 10, 000 USD 10, 000 -
USD 100,000
USD 100,000 -
USD 1m
>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.

11
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
CENTER FOR TECHNOLOGY I NNOVATI ON a t BROOKI NGS
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 rm 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
2017E 2016E 2015E 2014E 2013E 2012 2011
0
10%
20%
30%
40%
50%
60%
70%
80%
Growth Rate
Market Scale
17.7%
15.8
18.6
22.1
28.4
42.3
71.8
125.3
18.8%
28.5%
48.9%
69.7%
74.5%

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Figure 26
Top 10 Countries Based on mHealth Revenue (U.S. $ billion), 2017
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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
2017E 2016E 2015E 2014E 2013E 2012 2011
0
20%
40%
60%
80%
100%
120%
Growth Rate
Market Scale
20.0%
3.5 4.2
5.6
8.0
11.9
23.7
47.7
33.3%
42.9%
48.8%
99.2%
101.2%

M
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R
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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 | $0.1 billion | 1%
Chronic Disease
Management and
Post Acute Care
Independent
Aging
29%
71%
Note: Total worldwide market size (2017E): US$ 23 billion
Source: PwC analysis
mHEALTH I N CHI NA AND THE UNI TED STATES
25
12
Biotechnology market: Increased regulatory uncertainty and pressure on
drug pricing lead to hold back in investment

Greater impact on prot reduction on High-tech drugs than
generics.

but obtain better nancial 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 condence 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 scientic 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 the
firm exited CarePoint Partners, a specialty pharmacy provider built through 16 acquisitions and organic growth, via a sale to
BioScrip.
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 targets
accounting for seven out of the top 10 deals in 2013. However, growth in activity in Asia-Pacific and the rest of the world
outpaced these regions (see Figure 4). While the number of buyout deals grew at a compound annual rate of 5% in North
America 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 the
world. Asia-Pacific also saw a rare billion-dollar deal via Panasonics carve-out of 80% of its healthcare business. The top 10
deal list followed historical patterns, with the majority of deals occurring in the US and Europe; however, in 2013 there was
some geographic diversity by way of deals in Japan and Canada. By sector, provider and services was the most active across
all 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 Society RELATED TOPICS
One popular stock pick is Biostime, a Hong Kong-listed baby milk producer that saw
its share price rise 5.9 per cent on Monday, taking its year-to-date gain to 180 per
cent. It now trades on a price to book ratio of almost 12 and a price to current
earnings 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 medical
devices 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 of
popular 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 Society RELATED TOPICS
One popular stock pick is Biostime, a Hong Kong-listed baby milk producer that saw
its share price rise 5.9 per cent on Monday, taking its year-to-date gain to 180 per
cent. It now trades on a price to book ratio of almost 12 and a price to current
earnings 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 medical
devices 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 of
popular 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