Asia-Pacific Health Industries Newsletter Keeping you up-to-date with the latest developments

www.pwc.in

News and analysis by PwC industry specialists for pharmaceutical, biotechnology, medical device, diagnostic and healthcare companies and healthcare institutes.

Issue 19, October 2017

PwC’s Global Health Industries network is pleased to present the 19th issue of the Asia-Pacific Health Industries Newsletter. This newsletter aims to keep you informed of the latest developments related to the pharmaceutical and medical device industries, as well as healthcare sectors in the region.

As the Goods and Services Tax (GST) has become a major area of interest and focus within the Asia-Pacific pharma industry, in the first section of this issue, we present a special report on the impact of GST on the Indian pharma industry.

Our section on Compliance includes an update on the Taiwan government’s plans to streamline its drug evaluation system.

In the Regulatory section, we outline Singapore’s IP Development Incentive (IDI) to encourage innovation.

In our section on Pricing developments, we focus on China’s national drug price negotiations and how they will usher new market access opportunities for innovative drug companies.

Further, the M&A section highlights new policy developments that are spurring biomedical M&A activity in Taiwan.

We hope that our timely updates and analysis are of use to you and your organisation.

Nisha A Bhatia nisha.a.bhatia@in.pwc.com Editor

Editor’s note Inside this issue

2 PwC

Special issue India: Impact of GST on the Indian pharmaceutical industry.............................. 4

Compliance Taiwan: Streamlining the drug evaluation system......................................................... 7

Regulatory Singapore: IP Development Incentive introduced to encourage innovation............ 8

Pricing China: The national price negotiation mechanism offers new market access opportunities for innovative drug companies................................................... 9

M&A Taiwan: Government policy spurring M&A............................................ 11

Welcome to the 19th Edition of our Asia-Pacific Health Industries Newsletter.

In this issue, we focus on the introduction of GST, one of the biggest indirect tax reforms undertaken by the Indian government since Independence. GST is expected not only to transform the tax system in India but also to have a far-reaching impact on businesses as a whole, including the Indian pharmaceutical industry.

In addition, there is an update on China’s national drug price negotiations and how they will usher new market access opportunities for innovative drug companies.

While the Taiwan government is planning to streamline its drug evaluation system and encourage more M&A in the biomedical space, Singapore is working on the IP Development Incentive (IDI) to encourage innovation.

I would also like to take this opportunity to convey my gratitude to my PwC colleagues across various territories for their active engagement and excellent contributions to our newsletter.

I am delighted to take up the role of the Asia-Pacific Pharma Leader from my colleague John Cannings. I’m looking forward to working with you and bringing all of PwC’s health resources to assist you in your businesses.

I trust that you will find the enclosed newsletter of use and interest to your businesses. As always, we welcome your thoughts or feedback on any of the issues and priorities it raises for your organisation.

Yours sincerely,

Sujay Shetty PwC Asia-Pacific Pharmaceuticals and Life Sciences Leader

Asia-Pacific Health Industries update

Asia-Pacific Health Industries Newsletter 3

Special issue

India Impact of GST on the Indian pharmaceutical industry

Comparative tax structure

Overview

The introduction of the Goods and Services Tax (GST) has undoubtedly been one of the biggest indirect tax reforms undertaken by the Indian government since Independence. GST is expected not only to transform the tax system in India but also to have a far-reaching impact on businesses as a

whole, including the Indian pharmaceutical industry. The Indian healthcare and pharmaceutical industry is one of the leading contributors of revenue and employment and, in turn, revenues from taxes. Moreover, India is a principal supplier of generic drugs all over the world.

Prior to the introduction of GST, multiple transaction taxes were applicable. The Central Government levied excise duty on the manufacture of goods, service tax on the rendition of services, customs duty on the import of goods, central sales tax on the interstate sale of goods, etc. Similarly, state governments levied value-added tax (VAT) on the sale of goods, entry tax on the entry of goods in a state, entertainment tax on the provision of specified entertainment activities, etc. This multiplicity of taxes led to the creation of a complex indirect tax structure.

To simplify this tax structure and to allow the free flow of credits, the Indian government replaced the earlier indirect tax regime with the GST regime. GST has subsumed a majority of such taxes into a single tax, thereby eliminating multiple tax legislations and various inefficacies in the earlier indirect tax

regime. Considering the federal structure of India, the Indian GST model is a dual one, comprising Central GST (CGST) levied by the Central Government and State GST (SGST) levied by the state government. The intrastate supply of goods and services is subject to both CGST and SGST, while interstate supply is subject to Integrated GST (IGST).

Most of India’s federal and state taxes have now been replaced with one uniform tax, thereby eliminating the complications arising out of multiple taxes. This is a means to rationalise the Indian indirect tax structure and optimise distribution. Further, industry will be able to pass on the benefits of a reduction in the cost of production and distribution to consumers and thereby become more competitive in the domestic as well as international market.

4 PwC

Asia-Pacific Health Industries Newsletter 5

Challenges faced by industry and the impact of GST

Realignment of the supply chain

The Indian pharmaceutical sector is highly fragmented, with more than 20,000 registered units. At the same time, the supply chain structure is complex and involves multiple storage locations, leading to complex tax issues. Further, time-bound delivery is extremely important.

The implementation of GST is expected to result in an efficient supply chain. Most pharma companies are in the process of realigning their distribution models by reducing the dependency on multiple states and increasing the focus on regional hubs. This will not only make the process lean and alleviate the complexities involved but also reduce supply chain management costs considerably.

The impact of IGST on stock transfers is prompting pharmaceutical companies to re-examine their supply chain network in order to study the optimal number of warehouses, locations and linkages.

Seamless flow of credits

Many pharmaceutical companies have been working on the ‘traders-of-goods’ model. This means that before GST was implemented, the services availed of by these companies became a cost for them due to the service tax implications involved. However, the seamless credit mechanism introduced by GST now credits the taxes paid on services by these companies, thus allowing them to save costs.

Inverted duty structure

The pharmaceutical sector suffers from an inverted duty structure, where the rate of taxes on inputs is higher than the rate on outputs. Under GST, the tax rate on bulk drugs (raw material) has been fixed at 18%, while that on finished products is 12%. As part of GST, the government has introduced a credit refund mechanism to curb the inverted duty structure issue.

Taxability and valuation issues

The pharmaceutical industry is facing another set of challenges in respect of the impact of GST on the valuation of free drug samples/physician

samples, existing bonus schemes, movement of expired products, and valuation and movement of promotional items. Free supplies to related persons are subject to GST. The industry is grappling with the issue of taxability and valuation of such free supplies, physician samples and movement of expired stocks. Further, input tax credit is not available on any free samples which are not subject to GST.

No clarity on the continuity of area-based exemptions

The average VAT rate for most pharmaceutical products was around 5% and 12.5% for their formulations. Further, the excise duty charged on pharmaceutical products was 12.5%. However, the government provided relief on excise to pharmaceutical product manufacturers by introducing excise-free manufacturing zones. These excise-free zones were a crucial step in providing relief to small manufacturers in remote places, as they allowed them to stay compete in the national market. Under GST, no clarification has been provided by the government on the issue of manufacturers operating in excise-free manufacturing zones paying more GST. However, it is likely that the government will provide relief to such units by providing a post-facto refund of certain taxes till the validity of such schemes as per law and bind themselves with benefits provided under the earlier tax regime.

PwC observations

Compliance burden

In some states, VAT on pharmaceutical products was charged on the maximum retail price (MRP) at a single point. Therefore, the distribution channel did not pay any tax or file tax returns. The payment of timely taxes and filing of 37 returns under GST is going to be a daunting task for distribution channels in their respective states. Since the distribution channel was not involved in paying tax or filing tax returns, they will now need to get registered and file a minimum of 37 returns annually, as required under GST.

Withdrawal of certain exemptions and increase in tax rates

Apprehensions have been expressed that GST will have a negative impact on the prices of certain medicines that were taxed hitherto at the rate of 5% under VAT but are now subject to 12% tax post GST. The spike in the costs of active pharmaceutical ingredients and raw materials is expected to compound this problem. In the GST era, many exemptions from excise and customs duties on such medicines and services are no longer available.

In general, the impact of GST on the pharmaceutical segment has been positive. Further, the pharma industry is confident that the implementation of GST will lead to a win-win situation for customers in the medium to long term. The industry is expected to profit from GST implementation as it will diminish the complexities and obstacles in the growth of business. Most importantly, business decisions will not be driven by only tax laws going forward.

6 PwC

Discuss this withSumit Lunker sumit.lunker@in.pwc.com +91 (22) 66891420

Asia-Pacific Health Industries Newsletter 7

Compliance

TaiwanStreamlining the drug evaluation system

In February 2017, Taiwan’s cabinet approved a draft bill to upgrade the existing Centre for Drug Evaluation (CDE) into a financially independent national organisation. The move is intended to help streamline the review process for obtaining licenses to market pharmaceutical drugs and medical devices in Taiwan.

The CDE was established in 1998 by the Department of Health (now the Ministry of Health and Welfare). This non-profit body currently assists the Taiwan Food and Drug Administration (TDFA) with technical reviews of new drugs and medical devices to enhance the quality and efficiency of the evaluation system.

Both foreign and domestic drug makers, however, have complained about the relatively lengthy and slow review process. On average, the review of half of new chemical entity (NCE) new drug applications is completed within 360 days, while in the case of 41% of the generics applications, the review is completed in 180 days. Thus, the review time varies from case to case.

After the upgrade, the CDE will take over full responsibility for all evaluation reviews of drugs and medical devices, allowing the TFDA to concentrate entirely on policy. The change is expected to increase the percentage of reviews of NCE new drug applications completed within 360 days from 50% to 90%, and the percentage of reviews of generic drug

applications completed within 180 days from 41% to 90%.

In addition to its product review responsibilities, the upgraded CDE will provide clinical and non-clinical guidance and consultation services to domestic drug developers with a view to promoting Taiwan as a key player in the global biotech R&D industry. The enabling legislation to create the new national-level organisation is currently undergoing parliamentary review and awaiting final approval.

The proposed establishment of a national drug evaluation centre will help to create a more efficient system for the review of drugs and medical devices and expedite new product launches in Taiwan.

PwC observations

Discuss this withLilly Wong lily.wong@tw.pwc.com +886 (02) 2729 6703

8 PwC

Innovation is one of the key pillars and intellectual property (IP), a key component. Against that backdrop, the introduction of the IP Development Incentive (IDI), which focuses on IP commercialisation, is aligned with Singapore’s strategy for the next phase in encouraging innovation.

Under the IDI, qualifying income will be taxed at a rate lower than the normal income tax rate of 17%. While super deductions for R&D expenditure focus on the ‘front-end’ of IP creation, the new IP regime will centre on the ‘back-end’ of the IP life cycle.

A detailed legislation is expected to be released later in the year. However, the IDI will incorporate the

Base Erosion and Profit Shifting (BEPS) compliant modified nexus approach. The Organisation for Economic Co-operation and Development (OECD) has undertaken an anti-BEPS initiative in which profits should be taxed where substantial activities are present and value is created. This initiative sets out the features needed in a preferential tax regime without harming tax practices. For an IP regime, it clarifies that preferential treatment should be granted only to income arising from IP, where actual R&D activities are undertaken by the taxpayer in-country. This is referred to as the ‘modified nexus approach’.

Moving IP income from the existing incentives to a separate regime illustrates Singapore’s commitment to the OECD’s BEPS rules.

The introduction of the IDI should encourage the commercialisation of IP and boost the performance of valuable R&D activities in Singapore. The implementation of the scheme is important and is expected to be administered based on negotiations.

When we compare this with regimes in some other countries, where taxpayers who meet the prescribed conditions automatically benefit from the preferential tax treatment, the administration of the IDI could add greater complexity to what is already a complicated incentive regime.

IP Development Incentive introduced to encourage innovation

PwC observations

8 PwC

Regulatory

Singapore

Discuss this withLoh Pei Shan pei.shan.loh@sg.pwc.com 6236 7252

Asia-Pacific Health Industries Newsletter 9

The national price negotiation mechanism offers new market access opportunities for innovative drug companies

China’s Ministry of Human Resources and Social Security (MOHRSS) completed its second round of national drug price negotiations in July 2017. The negotiations resulted in 36 important drugs becoming cheaper, with an average reduction of 44% in prices. The drugs whose prices were slashed are those that have been in high demand due to their demonstrable efficacy, but had previously been considered prohibitively expensive. Moreover, half of these drugs are used to treat different kinds of cancer.

The second round of national drug price negotiations had some differences from the pilot round, which was completed in May 2016. One of the key differences was the increase in the number of drugs covered during the negotiations from 3 to 36. Also, while the National Health and Family Planning Commission (NHFPC), which is responsible for healthcare service management, took charge of the initial round of negotiations, the MOHRSS was given the reins for the second round, functioning as the main payer in China’s healthcare market. Further, following the negotiations in July, all the 36 drugs have automatically entered into both the National Reimbursement Drug List (NRDL) and each of the Provincial Reimbursement Drug Lists (PRDLs).

This settles a big concern for pharmaceutical companies regarding market access to these drugs.

The negotiations resulted in a win-win situation by reducing payers’ economic burdens and expanding market options for pharmaceutical companies. However, the latter still face some challenges and uncertainties. For example, the notion that selling more products at lower prices will be advantageous has to bear out in the real world. If there are minor changes in product detailing, physician education, and medical expense control for prescriptions, sales growth might not achieve the original targets. Another concern is that hospitals could attempt to bargain for an additional discount in hospital listings in order to save on drug purchasing costs. Of course, there is also the possibility that the new prices could be reduced further in the future. Prices may be adjusted when contracts between the Government of China and drug manufacturers expire at the end of 2019. In addition, drug prices could be subject to change even before the contract expiry date if generics are approved for the market, or the actual prices of innovative drugs become lower than the national negotiation prices.

To deal with national price negotiations, innovative drug companies will have to enhance their relations with the MOHRSS, the most important stakeholder. Drug companies should also begin building a pharmacoeconomics capability internally. Moreover, a chain of evidence has to be collected and analysed during clinical trials as well as post-market surveillance. In conclusion, it is important for the pricing strategy and business forecast model for innovative drugs to be reviewed in accordance with new initiatives relating to Chinese healthcare reforms.

Pricing

China

Discuss this withJIa X Xu jia.x.xu@cn.pwc.com +86 10 6533 7734

PwC observations

10 PwC

Asia-Pacific Health Industries Newsletter 11

M&A

Taiwan

PwC observations

Government policy spurring M&A

Discuss this withLilly Wong lily.wong@tw.pwc.com +886 (02) 2729 6703

The Taiwan government has included the biomedical sector in its ‘five plus two’ innovative industries programme for innovation-led growth. To facilitate the sector’s development, the government launched a biomedical promotion plan in November 2016 to position Taiwan as a hub for biomedical R&D in Asia.

A key objective of this strategic initiative is to build domestic biopharmaceutical firms into large health-related flagship corporations by encouraging enterprises

to make mutual investments, cooperate with venture capital and private equity firms, and initiate mergers and acquisitions (M&A) activity.

To kick-start a wave of M&A, the government-run National Development Fund (NDF) has earmarked TWD 100 billion (USD 3.3 billion) for an industrial innovation and transformation fund established in July 2016, which will be used to help finance domestic companies’ acquisitions at home and abroad. The NDF will provide up to 20% of an M&A’s total investment value, capped at TWD 10 billion for individual deals.

The supportive investment policy framework is helping to spur M&A activity by Taiwanese drug and medical device makers. This trend is also being driven by domestic market consolidation as well as overseas expansion plans intended to reduce reliance on a small home market and to tap the growing Chinese market, by benefiting from bilateral agreements between drug regulators in Taiwan and China.

For instance, in November 2016, TaiGen Biotechnology, a leading research-based biotech company in Taiwan, partnered with Hong Kong-listed Yichang HEC Changjiang Pharmaceutical to establish a new company in China for the joint development, manufacturing and commercialisation of direct-acting antiviral agent (DAA) treatments for chronic hepatitis C virus infections in the Greater China Region.

This Chinese joint venture marks a significant development in cross-strait cooperation on new drug development based on simultaneous clinical trial evaluation. In April 2016, Taiwan and China agreed to mutually recognise data from clinical trials conducted in both jurisdictions, shortening the approval process for drug makers. Given Taiwan’s internationally recognised strength in clinical trials, more multinational pharmaceutical companies targeting the Chinese market may choose to partner with Taiwanese firms.

Taiwan’s medical device makers are also looking to expand in order to meet the growing healthcare needs of ageing populations around the world. In March 2017, Taiwan-based United Orthopedic Corporation (UOC), a leading manufacturer of orthopaedic implants and instruments, purchased the emerging medical device company A-Spine Asia (ASA) for about USD 20 million. ASA has a leading position in the spinal implant market in Taiwan, and UOC has acquired the company to generate complementary product synergies for growth.

Taiwan is an attractive destination for biopharmaceutical investment thanks to the government’s industry promotion policy and support for related M&A, including acquisitions conducted jointly with foreign companies. Consequently, we expect to see an acceleration in biomedical M&A activity in Taiwan.

12 PwC

Recent healthcare publications

Healthcare reform: Why the stars are finally aligning (2016)

In Australia, the conditions for genuine healthcare reform appear to be emerging. This report discusses how environmental factors, combined with more powerful and integrated technologies are creating opportunities to significantly improve Australia’s healthcare system.

Digital Health: Australia can see further by standing on the shoulders of giants (2016)Driving digital transformation by adopting ‘Meaningful Use’ legislation

This paper explores the significant benefits that patients and providers could experience if Australian healthcare providers were better incentivised to move away from a paper-based system. It is widely acknowledged that a move to digital healthcare would lead to a higher quality of care by clinicians – whether public, private, acute, primary, community, aged care, metropolitan, rural or remote – and make rich data readily accessible to inform patient care delivery, and to enhance developments in research and innovation.

Beyond 2020: Building strategic coherence in the New Health Economy (2016)

The competitive landscape for pharmaceutical and life-science companies around the world is changing rapidly, and those shifts are likely to accelerate. These changes require a new strategic approach – one that enables companies to understand market trends, develop the right strategy in response, and build the internal capabilities needed to execute. We contend that strategy requires distinct capabilities, meaning a specific focus, expertise and set of skills that can position a company ahead of its competitors.

www.pwc.in

October 2016

ContentsExecutive summary p2/ Introduction p5/ Current state of the Indian pharmaceutical industry p8/ A vision for India p12/ Recommendations to unlock India’s pharmaceutical potential p16/ Policy prioritization p41 / Potential impact p44 / Conclusion p45

Vision 2025Unlocking India’s potential for leadership in pharmaceutical innovation

Vision_report_v3.indd 1 19/10/2016 3:45:12 PM

Vision 2025: Unlocking India’s potential for leadershipin pharmaceutical innovation (2016)

This report presents a vision for an innovative pharmaceutical industry in India, showing how developing a robust, innovative ecosystem can improve the health and productivity of patients in India and around the world while also generating economic benefits by making India an attractive place and destination for investment in R&D. This will create more value-added jobs and drive a higher research output of global significance.

Asia-Pacific Health Industries Newsletter 13

Asia-Pac Health Industries Newsletter (2016) - December issue

In this issue, we highlight important developments around electronic medical records (EMR) in both South East Asia and China as a special feature, in addition to our regular topics around Compliance, Pricing, M&A, Regulatory Affairs and Tax. The development of EMR in Asia poses many challenges, yet we are certain that the benefits of EMR interoperability and integration will bring remarkable cost savings by improving productivity, minimising lapses in patient safety, and allowing for optimal and timely delivery of care.

www.pwc.com/pharma

Issue 18, December 2016

News and analysis byPwC industry specialistsfor pharmaceutical,biotechnology, medicaldevice, diagnostic andhealthcare companiesand healthcare institutes.

Asia-Pacific HealthIndustries Newsletter

Keeping you up-to-date withthe latest developments

Asia-Pac Health Industries Newsletter (2016) - April issue

In the April issue, we included articles ranging across activities in health and safety in New Zealand and the healthcare industry in Malaysia, as well as regular topics around tax, accounting and pricing within the Asia-Pacific region.

Asia-Pac Health Industries Newsletter (2016) - August issue

In the August issue, the topics included health industries update in Australia which covered Health Economics Update and Digital Health as well as Brexit Impact for the pharma industry in the Asia-Pacific Region, in addition to usual topics: accounting, Pricing, M&A, as well as Regulatory in the Asia-Pacific region.

Other publications

These and other publications can be found on PwC’s Pharmaceuticals & Life Sciences and Healthcare websites at www.pwc.com

pwc.inData Classification: DC0

This document does not constitute professional advice. The information in this document has been obtained or derived from sources believed by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take.

© 2017 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.

VB/October2017-10393

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 2,23,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com

As a global leader serving Pharmaceutical and Life Sciences companies, PwC has extensive experience working with organisations across the industry, including: proprietary and generic drug manufacturers, specialty drug makers, medical device and diagnostics suppliers, biotechnology companies, wholesalers, pharmacy benefit managers, contract research organisations, and industry associations. We have aligned our practice with the broader health industries market to ensure that our people are well versed in the relationships between suppliers, providers, payers, and customers.

Visit us at www.pwc.com/pharma and pwc.com/healthcare

©2017 PwC. All rights reserved.

Key Asia-Pacific Health Industries country contacts

Australia Nathan Schlesinger +61 (2) 8266 0990 nathan.schlesinger@pwc.com

China Jia Xu +86 10 6533 7734 jia.x.xu@cn.pwc.com

India Sujay Shetty +91 22 6669 1305 sujay.shetty@in.pwc.com

Indonesia Ay Tjhing Phan +62 21 5289 0658 ay.tjhing.phan@id.pwc.com

Japan Kenji Mitsui +81 90 7189 5031 kenji.mitsui@strategy and.jp. pwc.com

Korea Hyung-Do Choi +82 2 709 0253 hyung-do.choi@kr.pwc.com

Malaysia Yennie Tan +60 3 2173 0551 yennie.tan@my.pwc.com

New Zealand Hadley J Slade-Jones +64 9 3558141 hadley.j.slade-jones@nz.pwc.com

Philippines Benjamin Azada +63 2 459 3011 benjamin.azada@ph.pwc.com

Singapore Abhijit Ghosh +65 6236 3888 abhijit.ghosh@sg.pwc.com

About PwC

South East Asia David McKeering +65 6236 4828 david.mckeering@sg.pwc.com

Taiwan Lily Wong +886 2 2729 6703 lily.wong@tw.pwc.com

Thailand Charles Ostick +66 23 441 167 charles.ostick@th.pwc.com