Healthcare Outlook Asia Pacific Economic Community

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We Accelerate Growth.

Healthcare OutlookAsia Pacific Economic Community

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Introduction

• The credit crisis has contributed to a significant shift in the 2009 regional outlook

• Frost and Sullivan anticipates that global economy will continue to deteriorate in the first half of 2009

• This will be followed by a slow recovery in 2H 2009

• Healthcare in Asia will be affected by the global slowdown although we forecast this will not hit the region as severely as in developed countries

• In the midst of the crisis we forecast Asia will also benefit as healthcare companies in the US and EU come under significant cost pressures

• This presentation will review the current crisis, its impact on the healthcare sector and the opportunities that will be created in 2009

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Overview of the Global Economy

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Factors Contributing to the Financial Meltdown

Asset prices and valuations fall

sharply:

Total Write Downs by Banks to Date:

$1 trillion

Falling Asset Values

Growing Use of Complex Debt Instruments Disperse Risk

Banks Unwilling to Lend Due to Fear of Further Losses

US CDO Market

0

200

400

600

2004 2005 2006 2007

US

CD

O M

ark

et

(US

$, B

)

12 Month Change in LIBOR

RATES

0.0%

1.0%

2.0%

3.0%

4.0%

Jan Mar May Jul Sep Nov

12 m

on

th L

IBO

R R

ate

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The Growing Global Slow Down

• The credit crisis which started in the US housing and financial sector has spread to the broader global economy

• The slowdown can be seen by the sharp falls in global demand and by the increase in unemployment rates in most major economies

Source: Reuters, BNP Paribas

Global Purchase Managing Index (PMI)Global Purchase Managing Index (PMI) US Employment and Payrolls RateUS Employment and Payrolls Rate

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Global Response: Massive Government Stimulus

Global Response • Governments infusing capital into financial institutions• Globally coordinated interest rate cuts• IMF offers bridge loan to meet foreign exchange requirements• Discussions, coordinated efforts (G20 summit)

China: Interest rate cuts; $586 billion stimulus (infrastructure, rural)India: Interest rate cuts; $4 billion stimulus package (infrastructure, exports, textiles)

Japan:Interest rate cuts; $51 billion stimulus package

South Korea:Interest rate cuts and efforts to keep currency stable; $11 billion stimulus package

Taiwan: $31 billion stimulus package (subsidies, tax cuts)

Malaysia: $2 billion stimulus package

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Impact on Sectors of the Economy

• The effects of the downturn has disproportionately affected different segments of the economy

• The healthcare sector has outperformed the broader market

US Market Indices

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Dec-07 Feb-08 Mar-08 May-08 Jul-08 Aug-08 Oct-08 Nov-08

Ind

ice

s v

alu

e (

un

its

)

Dow Jones Industrial Average NasDaq Biotech

NasDaq Financials NASDAQ Transportation

S&P HEALTHCARE INDEX PHLX SEMICONDUCTOR SECTOR INDEX

Healthcare Indices, while declining, have still outperformed the broader market

• This implies that investors expect that, while the healthcare sector will be affected by the downturn, it will still out-perform the general economy

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Factors Impacting Healthcare Companies

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Overview: Impact on the Healthcare Sector

Symptoms of the Downturn

Downturn in capital markets

Increased cost and reduced availability of

debt

Decrease in govt revenues and sharp rise in expenditure

Sharp fall in discretionary

spending

Impact on Healthcare Companies in 2009

Development Stage Pharma/Biotech

Companies

Pharmaceutical and Biotechnology

Companies

Healthcare Services Providers

Medical Technology Companies

• The economic downturn will impact the various segments of the healthcare sector differently in 2009

• Operational decline • Reduced corporate deals

• Reimbursement pressures

• Decline in consumer spending

• Reduced corporate deals



• Working capital constraints



Common Factor: Reduced Access to Capital and Higher Interest Costs

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Change in Interest Expense: Raffles Medical Group

$0

$40

$80

$120

$160

$200

Sep-07 Dec-07 Mar-08 Jun-08 Sep-08

Fin

an

cin

g C

osts

(S

gd

,000)

• The current financial crisis has increased the cost of, and reduced the availability, of debt

• This will have a limited impact on the operations of most Pharmaceutical and Medtech companies

• Hospitals and healthcare providers with weaker free cash flows and a greater reliance on debt will be more affected

Decline in Corporate Debt Markets and Increasing Cost of Debt

Source: Company Reports

• Hospital and healthcare service providers will be more affected by changes in the availability and cost of debt in 2009

Change in Financing Costs: Ramsey Healthcare

Group

$0

$15

$30

$45

$60

Nov-06 May-07 Nov-07 May-08

Fin

an

cin

g C

os

ts (

A$

, M

)

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Government Expenditure and Healthcare

• Over the past decade US healthcare spending has grown 2.5 points faster than GDP. If this trend continues US healthcare spending will account for 30% of GDP by 2030

• Other countries are grappling with similar problems, particularly those with rapidly aging populations such as Japan

Source: Frost and Sullivan

• The current economic crisis and blow out in government debt will put renewed cost pressures on governments to reduce healthcare spending in 2009

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Falling Asset Prices Creates Cost Pressures for Healthcare Insurers

• The crisis has created a series of factors that are adversely affecting insurer profit margins including:

1. Decline in investment incomes: caused by a decline in asset prices

2. Decline in new polices: caused by weak consumer demand

3. Increased cost of debt

5.0%

8.4%

15.3%

10.0%

3.9%

0.5%

4.2%

-0.6% -0.7%

2000

2001

2002

2003

2004

2005

2006

2007

Q1:2

008

Insurer Net Realized Capital Gains**Change in Written Premiums*

* Source: A.M. Best; ISO., **Sources: A.M. Best, ISO, Insurance Information Institute

• Weak healthcare insurer profitability will pressure them into reducing their healthcare reimbursement payments

2.9

4.8

9.9

1.7

6.0

9.2

10.8

13.0

16.2

6.6 6.6

9.0

-0.5-1.2

18.0

3.5

9.79.1

9.8

-$2

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

:Q1

$ Billions

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Declining Discretionary Spending: Is there an Impact?

• Healthcare is typically seen as defensive - products are viewed as non-discretionary goods that should be less affected by cyclical economic events. However not all healthcare products are non-discretionary

• In addition patients are required to pay at least some of the expense of non-discretionary items which will impact on demand for these services

Priva

te

Consum

ption

Em

plo

yment

Both employment and private

consumption have fallen sharply

• Sharp falls in discretionary spending plus moderate falls in non-discretionary spending will reduce healthcare company revenues in 2009

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Impact on Healthcare Companies in Asia

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Development Stage Life Sciences Companies and the Capital Markets

• Inability to raise development capital in the

current market

• Inability to raise development capital in the

current market

• Venture capital company activity has dropped due

to the inability to exit current investments and

raise new capital

• Venture capital company activity has dropped due

to the inability to exit current investments and

raise new capital

• Risk averse investors are selling risky life

sciences stocks

• Risk averse investors are selling risky life

sciences stocks

Increased bankruptcies – In 2008 several biotech companies collapsed, we anticipate this trend to continue in 2009

Increased bankruptcies – In 2008 several biotech companies collapsed, we anticipate this trend to continue in 2009

Job Losses – Staff are cut to reduce costs, which will continue into 2009

Job Losses – Staff are cut to reduce costs, which will continue into 2009

Operational Decline – Cut costs to conserve cash by halting the development of less promising projects

Operational Decline – Cut costs to conserve cash by halting the development of less promising projects

Development Stage Life Sciences

Companies

• 2009 will continue to be challenging for development stage life sciences companies in the region due to the limited availability of capital

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Capital Constraints: Larger Healthcare Companies

Pharmaceutical Companies

• Pharmaceutical companies have strong free cash flows and low debt levels

• Thus the current crisis will have a minimal impact on their continued operations

• It will make it more difficult to raise capital for larger M&A deals but strong opportunity to conduct smaller M&A deals

• Pharmaceutical companies have strong free cash flows and low debt levels

• Thus the current crisis will have a minimal impact on their continued operations

• It will make it more difficult to raise capital for larger M&A deals but strong opportunity to conduct smaller M&A deals

Healthcare Service Providers

• Are facing more difficulty caused by limited access to debt and reductions in government reimbursement payments

• Impact on ability to maintain current operations and make it difficult to fund operational expansions

• Opportunities in REIT market depending on the availability of credit

• Are facing more difficulty caused by limited access to debt and reductions in government reimbursement payments

• Impact on ability to maintain current operations and make it difficult to fund operational expansions

• Opportunities in REIT market depending on the availability of credit

Medical Technology

• Strong on-going M&A opportunities as many of the major players in the sector have strong balance sheets and cash flows

• In 2009 the limited available capital will make it challenging to fund larger deals but strong opportunity to conduct smaller M&A deals

• Strong on-going M&A opportunities as many of the major players in the sector have strong balance sheets and cash flows

• In 2009 the limited available capital will make it challenging to fund larger deals but strong opportunity to conduct smaller M&A deals

• We anticipate it will be challenging to raise capital in 2009 and this will more strongly impact hospital and healthcare providers

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Discretionary vs Non-Discretionary Healthcare Spending

• As noted earlier in developed economies discretionary consumer spending has declined sharply in 2008

• Trade is a significant driver of income in Asia and there is likely to be a flow effect on consumer demand in Asia in 2009

% of Country Trade with the US: 2006

15%

17%

19%

21%

0% 5% 10% 15% 20% 25%

China

Hong Kong

India

Malaysia

• This slow down will affect healthcare companies that:

1. Sell discretionary goods and services (elective surgery and cosmetic treatments)

2. Screening services as these can be deferred

3. Goods and services that have cheaper substitutes

• We note that this forecast decline will not be as sharp as in the developed world and the major Asian economies of China and India are forecast to experience positive growth

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US and EU Healthcare Companies: Dealing with Cost Pressures

Pharmaceutical Companies

• Staff Reductions: particularly sales and R&D staff

• Expand revenue growth in developing world jurisdictions

• Halt the development of less promising therapies

• Reduce debt levels

• Shift manufacturing and research facilities



• Halt the development of less promising therapies



Healthcare Service Providers

• Cut staff, particularly in operations that are unprofitable to run

• Reduce new capital spending

• Increased out-sourcing of back office jobs

• Reduce services and focus on more profitable operations

• Cut staff, particularly in operations that are unprofitable to run

• Reduce new capital spending

• Increased out-sourcing of back office jobs

• Reduce services and focus on more profitable operations

Medical Technology



• Halt the development of less promising projects





• Halt the development of less promising projects



• There are significant opportunities for Asian countries to benefit as EU and US healthcare companies adjust to cost pressures in 2009

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Opportunities in Asia Pacific in the Current Global Climate

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The Asian Healthcare Sector

• In 2009 we anticipate the healthcare sector in Asia will grow by 5-10%

Medical Devices21.2%

Medical Imaging1.5%

Clinical Diagnostics

2.1%

Biotechnology6.7%

HIT2.1%

Pharmaceuticals66.2%

Healthcare Market Revenue (Asia Pacific), 2008

Total: US$ 239.9 billion

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Opportunities in the Asia Pacific Region

Increased corporate activity in the Life Sciences Sector

•Increased smaller (sub $1B) corporate transactions

•Cash rich pharmaceutical companies will use the current crisis to acquire assets cheaply

•Increased smaller (sub $1B) corporate transactions

•Cash rich pharmaceutical companies will use the current crisis to acquire assets cheaply

• The global healthcare industry is experiencing challenging circumstances in 2009 – We anticipate there will be a number of select opportunities in the APAC region

Focus on personalized healthcare

• Increased use of diagnostic tools delivering personalized treatments

• Supported by governments trying to optimize the use of costly medications and achieve higher healthcare cost benefits

• Increased use of diagnostic tools delivering personalized treatments

• Supported by governments trying to optimize the use of costly medications and achieve higher healthcare cost benefits

Greater stress on products with high

cost benefits

• Drugs will be scrutinized more for their relevant cost benefits – use of generic drugs will expand

• Preference for treatments that effectively reduce overall treatment cost

• Drugs will be scrutinized more for their relevant cost benefits – use of generic drugs will expand

• Preference for treatments that effectively reduce overall treatment cost

Increased outsourcing opportunities

• Driven by cost pressures faced by healthcare companies in developed countries

• The areas of focus will be R&D, clinical research and manufacturing

• Driven by cost pressures faced by healthcare companies in developed countries

• The areas of focus will be R&D, clinical research and manufacturing

Asian growth opportunities

• Pharmaceutical and medical technology companies will focus on expanding their sales in the region

• Regional markets will grow quicker than developed world markets

• Pharmaceutical and medical technology companies will focus on expanding their sales in the region

• Regional markets will grow quicker than developed world markets

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Opportunity 1: Corporate Activity and Life Sciences Companies

• Focus on Late Stage Companies

• Focus on life sciences companies with late stage assets (late phase II / phase III)

• Pharmaceutical companies will need access to assets that can provide value in the medium term

• In 2009 we believe there will be an increase in M&A activity between pharmaceutical and Medical Technology companies

• Company Cash Position is Critical

• Companies with low cash positions should be avoided

• Companies with low cash reserves are likely to become insolvent in 6-12 months

• Biotechnology vs Pharmaceutical

• Biologic assets will continue to attract high valuations

• This is due to limited generic competition and high product margins

• Potential Product Cost Benefit

• Strong pressures in 2009 to restrain the growth of healthcare expenses

• In this environment products that provide superior cost benefits will be preferredO

pportunities in the

Life Sciences Sector

• Early stage life sciences companies in Asia will benefit from this trend

• Strong opportunities for companies targeting growth diseases in the emerging markets – Oncology, Cardiovascular Disease and Diabetes

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Opportunity 2: Personalized Healthcare

• We believe the crisis will accelerate the use of personalized healthcare – driven by the ability to generate significant healthcare cost savings

• It is unlikely that full genomic mapping will become commonplace in the near future

• However it is becoming increasingly common to see therapies incorporating some level of genomic testing to optimize their use

• These cost savings are derived from the ability of personalised medicines to address:

A. Appropriateness: Pre-determining efficacy

B. Patient safety: Assess patient responses and avoid costly adverse drug reactions

C. Optimize: Determine optimal dosing

D. Over Utilization: Determine when treatment should be stopped and a new treatment regime adopted

• In 2009 we anticipate products and systems that can deliver cost efficient personalized healthcare tools will become increasingly utilized

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Opportunity 2: Personalized Healthcare

Viral Drug Resistance Testing

• Testing used to optimize drug therapy

• Tests involve sequencing specific parts of the viral genome to identify drug resistance

• Particular focus in Asia on diseases prevalent in the region such as Hepatitis

• Testing used to optimize drug therapy

• Tests involve sequencing specific parts of the viral genome to identify drug resistance

• Particular focus in Asia on diseases prevalent in the region such as Hepatitis

Gene specific sequencing tests

• Gene specific sequencing can be used to understand the performance of a drug in a patient

• Closely linked to IT systems that can analyze and provide a data interpretation

• Strong cost benefit when linked to widely used or expensive drugs

• Gene specific sequencing can be used to understand the performance of a drug in a patient

• Closely linked to IT systems that can analyze and provide a data interpretation

• Strong cost benefit when linked to widely used or expensive drugs

• In 2009 we believe these areas will experience strong growth due to their ability to deliver cost savings in a cost constrained environment

Home Care Model

• Growth of management of patients at home due to cost savings

• Strong opportunity for the development of IT systems that can support the cost effective management of patients at home

• We anticipate strong growth in Japan due to strength of IT infrastructure and rapidly aging population

• Growth of management of patients at home due to cost savings

• Strong opportunity for the development of IT systems that can support the cost effective management of patients at home

• We anticipate strong growth in Japan due to strength of IT infrastructure and rapidly aging population

Patient Record Management Systems

• Drive to implement patient management systems, can achieve significant cost savings

• Initiatives launched by Japan (U-Japan), China (11th 5 Year Plan) & UAE

• Drive to implement patient management systems, can achieve significant cost savings

• Initiatives launched by Japan (U-Japan), China (11th 5 Year Plan) & UAE

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• The cost constrained environment will promote the use of therapies with strong cost benefits

• Governments use different measures to promote the use of generic compounds and we anticipate these efforts will be intensified in 2009

Opportunity 3: Drugs with strong cost benefits

Supply Side Demand Side

Induce Induce priceprice

competitioncompetitionSubstitutionSubstitution CoCo--paymentpayment

PrescribingPrescribingGuidelinesGuidelines

Reference PricingReference PricingIncentives toIncentives to

Pharmacists &Pharmacists &PhysiciansPhysicians

Forecast Growth of the Generic Drug Market in Japan


• Due to their superior cost benefit balance we anticipate the generic drug market will be a growth market in Asia in 2009

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Opportunity 4: Outsourcing and Asian opportunities

• The financial crisis has created profitability pressures that will drive companies to find ways to reduce costs. The outsourcing of operations to low cost centres in Asia is one way to achieve these cost savings

• We anticipate this drive will utilize Asia as a potential source of:

1. Research and Development: by 2009 R&D outsourcing is anticipated to be worth $7.2 billion (Source: Biospectrum). Services utilized include drug discovery, screening and lead product optimization

2. Clinical Trials: Use of CROs with an Asian presence to reduce clinical trial costs and to ensure APAC populations are included in clinical studies

3. Manufacturing: Outsourcing of manufacturing to Asia is still focused on the production of APIs. However Asian centers are developing expertise in biologics manufacturing (e.g. Singapore, India, S.Korea, etc). Additionally, Taiwan, Malaysia, China and Singapore will play an increasing role in medical device manufacturing

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• Of the two big regional players, India continues to grow due to the country’s pool of well educated low cost talent. China’s growth as an out-sourcing destination has been hampered by its weak IP laws though it is being targeted by companies attracted to its ability to conduct low cost clinical trials and R&D

• In particular India and China are the preferred CRO destinations in Asia and are likely to witness substantial growth in this area due to their large populations and growing importance of their local markets

China

• Strong interest in using China as a site for clinical trials due to the availability of a large patient population and in order to access the domestic Chinese market. The China clinical research market was worth US 238 M with a CAGR of 18.6% in 2008

• Several pharmaceutical companies are establishing fully owned R&D operations in China including Novartis, Roche, Astra-Zeneca and J&J in order to reduce their early stage R&D costs

• Strong interest in using China as a site for clinical trials due to the availability of a large patient population and in order to access the domestic Chinese market. The China clinical research market was worth US 238 M with a CAGR of 18.6% in 2008

• Several pharmaceutical companies are establishing fully owned R&D operations in China including Novartis, Roche, Astra-Zeneca and J&J in order to reduce their early stage R&D costs

India

• India has attracted significant interest as an outsourcing destination. Pharmaceutical companies are attracted to the country’s established IP regulations, well trained population, growing patient market and established expertise in pharmaceutical manufacturing

• The contract research & manufacturing market in India was worthabout US $ 900 M in 2008

• India has attracted significant interest as an outsourcing destination. Pharmaceutical companies are attracted to the country’s established IP regulations, well trained population, growing patient market and established expertise in pharmaceutical manufacturing

• The contract research & manufacturing market in India was worthabout US $ 900 M in 2008

Opportunity 4: Outsourcing and Asian opportunities

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Opportunity 5: Focus on Asian growth opportunities

• The geographic balance of the pharmaceutical market will continue to shift away from the US and toward the world's emerging markets – the credit crisis will accelerate this trend by further reducing growth in the US and EU:

1. In 2007 emerging markets represent 17% of the global market growth, but will contribute to 30% of this growth in 2008

2. The US accounted for about 36% of the total growth in 2007, significantly less than the 54% it contributed five years earlier

• Growth in the Asia Pacific region will be driven by the increased availability of healthcare and the emergence of lifestyle chronic diseases (such as diabetes & cardiovascular diseases), more typically found in developed countries

• Global pharmaceutical markets will grow by 4.5 - 5.5% in 2009 as double-digit growth in emerging markets offsets modest growth in major developed markets

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Opportunity 5: Pharmaceutical Markets in 2009

Global Pharmaceutical Sales

700

730

760

790

820

850

2008 2009

Sa

les

(U

S$

)

Growth Rate

4.5-5.5%

Global Pharmaceutical: 2009 Growth Rates

0%

3%

5%

8%

10%

13%

15%

US EU Japan Emerging

Sa

les

(U

S$

)

Source: IMS

Global Pharmaceutical: 2009 Market

Sizes*

US, 302

EU, 172

Japan, 88

Emerging,

115

* All values

are in US$,

Billions

• Growth in emerging country markets will far outstrip growth in the US and EU

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0 10 20 30 40 50

Japan

Australia

Hong Kong

Taiwan

South Korea

China

Singapore

Thailand

Indonesia

India

Malaysia

Philippines

2010

2003

Specific Growth Opportunities: Oncology and Chronic Diseases

Growth of Chronic Diseases in Asia


• Specific disease markets will offer strong growth opportunities in 2009. In particular we believe healthcare expenditure on chronic disease and oncology will continue to grow

• This trend will be driven by lifestyle changes and aging populations in Asia

% of population over 60

Aging of the Population in APAC

% of population with 1 or more chronic diseases

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Summary: Accelerating Change

Changing Business Models

• Accelerate US / EU realigning of business models

1. Sales in Asia

2. Adopt outsourcing models

3. Acquire innovation

Changing Disease Management

• Accelerate use of

1. Home monitoring

2. Generic drugs

3. Other cost saving therapies

• The challenges facing the global healthcare sector in 2009 will accelerate trend changes that will benefit Asia

Changing Regulations


1. Pricing controls

2. Cost benefit analysis

3. Stricter regulatory guidelines

Changing Technology Use


1. Patient management systems

2. IT in personalized healthcare

Opportunities in the Asian Healthcare Market

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Growing with Frost and Sullivan

Name: Mr Simranjit Singh

Title: Associate Director

Healthcare Asia Pacific

Email : [email protected]

Direct : + 65 6890 0954

Mob: + 65 9147 3750

Name: Dr. Louis Payet Title: Senior ConsultantHealthcare Asia PacificEmail : [email protected]: + 65 6890 0987Mob: + 65 9425 2812

• Frost and Sullivan has a team of dedicated healthcare experts with relevant experience in biotechnology, pharmaceutical, medical technology and healthcare financing

• As the Growth Partnership Company, Frost & Sullivan helps organizations develop and maintain a high-performance workforce by providing them with continuous market intelligence and analysis

• Contact us today to discuss how you can become a Frost & Sullivan Growth Partner

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