Life Sciences in China – Opportunities & Challenges

Martyn LinkSenior Market Analyst

Life Science Foresighting Team5th November 2010

Overview – Why China?

• China is the great economic success story of the last 25 years

• China has emerged strongly from the global financial crisis. The World Bank recently raised its 2010 growth forecast for China to 9.5%.

• Rapid urbanisation (75% of Chinese people are expected to live in cities by 2025), massive infrastructure investment and an increasingly skilled and mobile workforce are creating a more favourable business environment.

• Opportunities exist for UK companies not just in the major cities but increasingly in China's regional business centres.

• China has an increasingly large and affluent domestic market. Its estimated 250 million ‘middle-class’ spenders are becoming increasingly brand conscious.

• Healthcare reforms are driving improvements in coverage and quality, but much still remains to be done

• Historically SDI has focussed on responding to export requests to China – in a country with such large opportunities can we make more of the relationship?

Life Sciences Foresighting Team

• Primary & secondary market research

• Due diligence

• Strategy development & recommendations

• Landscaping & cluster analysis

• Project management & implementation

• Opportunity “Ambassadors”

• Collaboration scoping

• Opportunity identification & assessment

• Competitive analysis

Industry Expertise

Innovative Thinking

Strategic Focus

Commercial Outlook

Companies Market Sectors Technologies Countries

Leading Delivering

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Strategic Review of Life Sciences Opportunities in China

• Objectives:• To provide a strategic analysis of the Life Science industry in China including the

opportunities for, and challenges to, conducting business in the country• To demonstrate how this relates to Scottish capabilities • To provide recommendations of areas of opportunity for Scotland and SDI over

the short, medium and long term

• Project brief:• January – March 2010:

– Primary research – interview Scottish, UK, Chinese business leaders– Secondary research – market reports, articles, news flow

• Deliverables:• April 2010: Validate recommendations / proposed strategy during field trip• November 2010: Awareness raising event in Scotland in partnership with CBBC

– “China Tomorrow” Life Science Conference • Market Report – launched at conference

Trade Visit – April 2010• >20 meetings, 8 cities in 14 days

• Hong Kong

• Shenzhen

• Beijing

• Jinan

• Shanghai

• Suzhou

• Chongqing

• Chengdu

A Changing Patient Population (Section 1.2)

• China has the largest country population in the world at 1.328bn in 2008 ahead of India at 1.169bn.

• However since 1996 the country’s growth rate has been below 1% and currently stands around 0.58%.

• The growth rate is forecast to continue slowing until 2033, after which point the population is forecast to begin declining.

• This slowing population growth reflects a decline in the fertility rate in China, following the implementation of the one child policy in 1979.

• This relatively sudden constriction of the inflow of population is set to have a dramatic impact on the age demographics of the country in the coming years

• China’s average life expectancy at birth has improved steadily over the last few decades. In 1982 the average life expectancy was only 67.8.

• However, China still has an unacceptably high infant mortality rate. As recently as 1990 there were 32.9 deaths per 1000 births, compared to the OECD average of 11 and 7.9 in the UK

Healthcare growth drivers

A Changing Patient Population

• China has a geographically dispersed population.

• While the country has 12 cities with populations in excess of 5 million, this still leaves 62% of its population (800 million) living in rural areas, often far from the nearest city.

• The rural population are often poorer and less healthy than their urban counterparts, with mortality rates in China’s least developed areas running four times higher than their rural counterparts

• As a result of the boom in China’s economy, in last 20 years the disposable income of China’s urban and rural residents grew twenty fold.

• However, the average medical costs increased by more than 130 fold

Healthcare growth drivers

A Changing Patient Population

• In terms of epidemiology trends, traditionally, China has had a high use of anti-infectives,. This trend has been driven by the widespread use, and over-prescription, of antibiotics.

• The strong growth in the overall pharmaceutical market in recent years has been driven by:

• The creation of an Essential Drugs List,

• The increased investment that have been made in the healthcare market and

• The changing lifestyles of the urban Chinese population as they embrace more Western attitudes and behaviours.

• Thus, while communicable diseases remain important, in recent years China has experienced an increasing shift towards treating non-communicable diseases.

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From Imitation to Innovation (Section 1.3)

• Historically China was seen as the producer of cheap and often imitation goods, but perhaps lacking the quality and innovation of its Western rivals.

• However, this picture is now changing with China focussed on moving from imitation to innovation through massive government investment in R&D initiatives, infrastructure and capacity building activities

• China’s investment in R&D as a percentage of GDP has increased steadily over the last decade

• LS R&D: Mega New Drug Programme –will funnel over $12bn to companies with innovative drug discovery and development projects over the next 5 years.

• Talent recruitment: Back in the 1970s the Chinese government encouraged scientists to gain qualifications and experience across the world. Then in the 1980s it began encouraging them to bring their skills back to China. According to the MoH, there have been 150,000 returnees in last three years.

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From Imitation to Innovation

• Increased IP Activity: in the last decade China has experienced a dramatic increase in the number of patent families filed. From less than 20 in the early 1990s the country filed nearly 500 patents in 2006, much higher than that of the other BRIC countries. However, this was dwarfed by the number of patents filed in the US (3%) and UK (29%).

• Encouragingly there has been an increasing focus on Drug Discovery. In 2006, there were 382 New Chemical Entities (NCEs) filed, a 43% increase over previous year. This reflects the increasing numbers of NCEs being developed in China – both from Western style drug discovery efforts and the modernisation of the Traditional Chinese Medicine (TCM) market.

• In response to lengthy approval times for innovative drugs, in January 2009 the SFDA established the so called “Green Channel” to accelerate the application process for innovative new drugs.

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• This included establishing a pre-IND application consultation committee at the SFDA’s Centre for Drug Evaluation. The aim of this new initiative is to enable companies to receive early guidance on the regulatory approval process for their compound. Hutchinson was the first company to use the Green Channel in mid-2009.

From Imitation to Innovation

Third Amendment to the Patent Law (Oct 2009)

• In December 2008 the Chinese Patent Law was amended to replace the “first-to-file” approach with a requirement for “absolute novelty”. This change brings it more into line with EU and US laws and came into effect from 1st October 2009.

• New standards for novelty – any previous disclosure in public (internationally)

• Tightened national security regulations – file in China first

• New “invalidity defence” – alleged infringers of patents are now allowed to appeal

• Bolar exemption – regulatory-focussed R&D on patented inventions ahead of the patent expiry

• Parallel imports permitted

• Minimum damages increased – infringement penalty and statutory damages ceiling both increased

• Genetic material – original source of the genetic material must be described

Healthcare Policy (Section 1.4)

Healthcare Reform (April 2009)

• The government is eager to provide universal healthcare coverage for many rural Chinese that are not currently covered by an insurance plan, as well as improve the standard of care for those that are covered. A new 3 year plan was officially launched in April 2009:

• Health insurance for all – targeting universal coverage by 2020

• Establish essential drug system – first part released in August 2009 and contained 307 drugs (67% are Western). Second part will add a further 200-300

• Improve medical service system at grassroots level – invest in infrastructure to create competent primary care facilities, particularly in rural areas

• Enable universal access to basic health service – aims to increase affordability of medicines and encourage R&D in TCM industry

• Pilot reform of public hospitals – changing the way hospitals are run and funded

Healthcare Delivery (Section 1.5)

• Over the next few years 19,246 country hospitals, 29,000 new rural clinics and 2,000 country level hospitals are due to be constructed. The hospitals are ranked according to the following system:

• Level I hospitals (68%) – small hospitals, generally poorly equipped.

• Level II hospitals (27%) – located in mid-sized cities and county capitals, and are adequately equipped and staffed.

• Level III hospitals (5%) – located in big cities and posses best equipment and doctors. These hospitals are the most widely used and typically have between 500-800 beds. The number of these hospitals has increased six-fold since 2000

• Skills shortage: a high proportion of staff in rural clinics are well short of UK-standard medical qualifications. A 2008 review of practises in Beijing noted that a third of medical staff had no qualifications beyond junior high school.

• The figure illustrates the level of training of the doctors at community health centres. Worryingly, over 5% of “doctors” at both these facilities had no medical training at all.

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Healthcare Delivery

• Patient costs: for the average urban employee, the medical savings account that they pay into is sufficient to cover around 3 consultations / year.

• If the cost of treatment is <6x average local wage then the insurance covers 85%, leaving 15%. If the cost of treatment >6x average local wage, then the patient must bear 100% of the excess.

• According to the MoH, in 2007 a staggering 70% of patients refused hospitalisation despite a referral, citing financial problems.

• This study also revealed that more than 54% of patients discharged themselves against medical advice due to cost reasons.

• For those that do pursue treatment in some instances it can take up to two decades to financially recover from a serious illness

Medical procedure Price (reduction) / inflation vs operational cost

Hospital bed and board (25%)

Basic surgical operations (30%)

General examinations (40%)

CT scan 70%

X-ray exam 50%

Pathology test 28%

• Government sets out the price that hospitals can charge for the various types of medical provision. Many of these prices are set well below cost, but many others are well above.

• This system distorts patient treatment and incentivises expensive procedures & drugs

• China’s life science industry has undergone significant growth over recent years - it is expected to become the 3rd largest pharmaceutical market by 2010. In 2009 it was the 3rd largest market for medical devices (behind USA and Japan). Since 2006 the market has returned a compound annual growth rate of 9.9% from £21.7bn to £30.7bn.

• In terms of scale, in 2007 China had 200 government-funded biotechnology labs with > 30,000 R&D staff, according to Chen Zhu (MoST), and > 500 biotech companies that employ 50,000 staff. There are also 300 universities and colleges with departments related to life science & biotechnology – generating 2000 PhDs in life science a year.

Life Science Industry (Section 1.6)

Traditional Chinese Medicine

• 2007 TCM sales reached $21bn, 40% of the total Rx market by value and two thirds by volume. It is the default health treatment for the majority of the population. However, Western medicine is sought when the patients are certain of the cause of illness or seek quick alleviation of symptoms

• The MoH has attempted to modernise the TCM industry and integrate it more with the national healthcare system, viewing the development of a strong and innovative TCM industry as a way in which to increase exports and identify modern applications for TCM-related products

• One of the biggest barriers hindering further development of the industry is the inconsistencies in the manufacturing processes.

• Moreover, there is a lack of unified regulations and standards for assessing the safety, efficacy and quality of TCM in clinical trials or for market approval. There is a need for greater evidence-based TCM product testing and research in order to further drive development of the TCM industry.

• How successful these initiatives will be in making the TCM industry a driver of growth and an internationally respected area of competitive edge remains to be seen.

Pharma / Biotech Sector

• The Chinese pharmaceutical market has exploded in recent times, climbing from 10bn RMB ($1.45bn) in 1985 to 446 bn RMB ($64.84bn) in 2005 (US market worth $340bn in 2005). Prior to the 1980s the Chinese pharmaceutical market was based around state owned manufacturers of API and generics. However, there has been a dramatic increase over the last 10 years in the volume of generic and branded products on the market, as well as TCM products being sold through the prescription channel.• Scottish Pharma & Biotech Activity:

• Controlled Therapeutics – launched core product for induction of labour in China in 2009 through an agreement with BMP Sunstone (formerly Beijing Med-Pharm), a US headquartered company with a Chinese hospital distribution business.

• Burdica Biomed – signed a ten-year deal with Sinopharm to distribute the company’s products in China in January 2010. Sinopharm has about 3,500 staff and 12% market share for pharma products and medical devices distribution.

Medtech Sector

• The Chinese medical devices market is estimated to be worth around $15bn (£9.2bn) and is predicted to reach $20.6bn by 2012. It is estimated that it currently accounts for around 5% of the global medical device market, and by 2050 this figure will increase to 25%.

• The medical device market represents a highly attractive market for foreign companies. A number of Scottish companies have already entered the market and are doing well. Foreign medical devices are attractive to the rising Chinese middle class due to their reputation for quality.

• Branding is a key determinant of success in the Chinese medical device market, as the more advanced technologies are unlikely to be reimbursed.

• There are also likely to be competitor copy-cat products that are much cheaper, but a strong brand profile can provide a strong defence against the cheaper version.

• Scottish Medtech Activity• Touch Bionics – launched its i-LIMB hand in China in April 2009 through distribution agreement

with Enjoylife Prosthetics & Orthotics Co (the largest privately-owned prosthetics and orthotics company in China).

• Axis-Shield – in December 2009 Axis-Shield announced plans to increase its number of Chinese distributors from 4 to 30 in the next 18 months. The company has been active in China for 10 years with its diabetic tests.

• Aircraft Medical – in January 2010 Aircraft Medical announced it had signed a 5-year distribution agreement with Gloryway Technology worth £6.2m for its video laryngoscope in China.

Service Sector

• China’s early service offering was mainly in chemistry-based research. However, over the past decade Chinese companies have begun to offer out-sourcing solutions for the entire drug discovery and development pipeline, including GLP preclinical outsourcing services and full-scale clinical trials.

• While the Chinese service industry is highly fragmented, more companies are focussing on providing a one-stop-shop service in their area. Moreover, many CROs are gaining international accreditation in order to compete more effectively with Western CROs.

• Scottish CRO Activity

» Charles River – in March 2007 Charles River formed a joint venture with Shanghai BioExplorer (a preclinical CRO) to form Charles River Laboratories Preclinical Services – China. The 60,000ft2 preclinical facility that has been built as a result of the jv was opened in October 2008 and received AAALAC accreditation the following July. It provides FDA approved GLP and non-GLP toxicology studies.

» In May 2010 CRL entered into an agreement to acquire WuxiApptec, although it later terminated the agreement.

» Scottish Biomedical – signed a collaboration agreement with Chinese company Asiapharm to develop new schizophrenia treatments in April 2008.

Lower cost

Talent pool

Patient pool

Primate access

Rapid growth

Biotech clusters

Government support

Regulatory legislations

IP enforcement

Centralised capabilities

Talent retention

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Market size

Technology Adoption

Industrial R&D

China Country Landscape Analysis

• China is a market of contrasts: very high in market size and potential for Scottish exports (particularly medical devices)

• But low in intellectual property protection, industrial R&D and inward investment opportunity.

• With a relatively low industrial R&D, academic strength and technology adoption, China is reliant on in-sourcing innovation from other countries.

• However, it is then weak at protecting this IP. This creates a dangerous combination for foreign companies.

• Key to overcoming this issue is having a high quality product, identifying the right distribution partner and developing strong brand recognition for your product. This will mean that even when generic alternatives enter the market, the consumers will identify your product as a high quality foreign product that they will pay extra for the reliability and quality.

MARKET SUPPLY

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Inward investment opportunity

Key:

Export / trade opportunity

Life Science Supply Chain Assessment

• The various parts of the life science industry can be understood as forming a supply chain that feeds innovations and discoveries from the academic and industrial sector through the product and device development pipeline, to care providers and thus eventually reaching patients.

• Such a supply chain can be used to illustrate the numerous opportunities for Scottish groups for both trade and inward investment.

Overall Opportunity Assessment

• Inward Investment – although China has currently few companies looking to expand, over the next 5-10 years this number will begin to increase steadily.

• Strategic Partnerships – working closely together with government, academic or industry groups to support mutual economic growth and company expansion. Precedent has been set for engaging with China at this level by a number of English Universities.

• Raising Awareness – a number of Scottish companies have already accessed the Chinese market, but others are either unaware of the opportunities (and threats) or put off by the effort required to enter China.

• Research Collaborations – there are a number of areas where Scottish strengths could be synergistic to Chinese capabilities. Although these are likely to be mainly academic in nature, others could also involve Scottish companies.

• Export Opportunities – Scotland has a good track record in exporting medical products to China, which remains an area of growth for the industry.

Building Bridges with China – Export Examples

Medical Device Examples:

• Touch Bionics – launched its i-LIMB hand in China in April 2009 through distribution agreement with Enjoylife Prosthetics & Orthotics Co (the largest privately-owned prosthetics and orthotics company in China).

• Axis-Shield – in December 2009 Axis-Shield announced plans to increase its number of Chinese distributors from 4 to 30 in the next 18 months. The company set up an office in Shanghai in June 2009 in preparation for the expansion.

• Aircraft Medical – in January 2010 Aircraft Medical announced it had signed a 5-year distribution agreement with Gloryway Technology worth £6.2m for its video laryngoscope in China.

Therapeutic (Drug Delivery) Examples:

• Controlled Therapeutics – launched core product for induction of labour in China in 2009 through an agreement with BMP Sunstone (formerly Beijing Med-Pharm).

• Burdica Biomed – signed a ten-year deal with Sinopharm to distribute the company’s products in China in January 2010. Sinopharm has about 3,500 staff and 12% market share for pharma products and medical devices distribution.

Some Key Questions

• Have you assessed the pros and cons of entering China for your company?

• What level of priority do you place on expansion in China?

• Do you know if there a market for your product or service in China?

• Do you know what operating model you would use?

• Do you know how to access the right people in China (partners / distributors)?

• Do you know the regulatory approval process in China?

• Do you know the best region to set up operations?

• Are you aware of the barriers you will need to overcome in doing business in China?

Exploring New Horizons

• For Scotland• Potential inward investment • R&D collaborations (academic and commercial)• Export of products • Out-licensing opportunities

• For China• Access to innovative drugs and devices• Access to R&D expertise• Route into European market

Thank you for your time!

感谢聆听！