Opportunities in China Healthcare Sector

Opportunities in China Healthcare Sector Position paper - web edition, January 2013

Executive summary China represents one of the most rapidly growing healthcare markets in the world and all major drivers point towards long term growth of the medical expenditure for the next decade Opportunities exist in all sectors of China Healthcare: Pharmaceutics, Medical Devices and Medical In many segments foreign companies still enjoy a competitive advantage given by a higher level of know how, being it represented by products, technologies or organization With the 2009 new blueprint for healthcare reforms and the 12 th Five Years Plan (2011 to 2015) the government shifted the focus from quantity to quality in terms of growth and investments The plan emphasizes the role of foreign investments and private capital (also through Private Equity funds) in the development of the healthcare sector New areas of activity have been opened to direct foreign investment (e.g. Medical services) opening to tremendous opportunities for those that will move fast enough to position themselves in such a large and growing market 2

Contents of the document Evolution of China medical expenditure Overview of the Pharmaceutical sector Focus on the Medical Devices sector Opportunities in Medical 3

China healthcare expenditure China represents one of the most rapidly growing healthcare markets in the world and shows large room for further growth Total spending in healthcare sector Key takeaways Unit: Billion Rmb 1,454 1,754 1,992 2,222 CARG (05-11 ) 17% - Total healthcare spending increased at a CAGR of 17% in the last seven years, making China the fifth largest healthcare market in the world Total = 866 984 1,157 - In 2011 healthcare expenditure accounted for 5.1% of China GDP Per capita (in Rmb): 2005 2006 2007 2008 2009 2010 2011 662 749 876 1,095 1,289 1,440 1,620 16% - China healthcare spending reached Rmb 2,222 Bn in 2011 but per capita spending is still low (Rmb1,620) relative to western countries, leaving enormous potential for growth Source: Ministry of Health 4

Drivers for future growth All major drivers point towards long term growth of the medical expenditure for the next decade Drivers Description Impact in the short term Evidence Ageing population - As a consequence of the one child policy, China population is rapidly ageing and the effects will be even strengths in the next years + 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 60 50 40 30 20 10 0 0 10 20 30 40 50 60 Increasing disposable income - The Chinese economy is expected to continue its development. A large pact of this development is transformed into disposable income for the households + + 23,379 7% 25,015 26,766 2009 2010 2011 Unit: RMB, per capita Changing government policies - The government is pushing toward a better medical coverage and improved spending + + + Strengthening of the hospital service network including the development of healthcare infrastructure (hospitals and clinics etc.) 5

Map of hospitals in China In the coastal area around (including, Zhejiang and Jiangsu) 177 hospitals of Level III Level III hospital by provinces Liaoning 86 43.8 2.0 Guangdong 79 104.4 0.8 Shandong 77 95.9 0.8 Zhejiang 76 54.5 1.4 Heilongjiang 69 38.3 1.8 Jiangsu 66 78.7 0.8 Hubei 62 57.3 1.1 Sichuan 56 80.5 0.7 Beijing 51 19.6 2.6 Hunan 48 65.7 0.7 Shaanxi 46 37.4 1.2 Guangxi 46 46.1 1.0 Shanxi 46 35.7 1.3 Henan 44 94.1 0.5 Hebei 44 71.9 0.6 Jiangxi 43 44.6 1.0 Fujian 40 36.9 1.1 Yunnan 37 46.0 0.8 35 23.0 1.5 Inner Mongolia 34 24.7 1.4 Tianjin 34 13.0 2.6 Anhui 33 59.7 0.6 Gansu 28 25.6 1.1 Jilin 25 27.5 0.9 Guizhou 23 Xinjiang 34.8 0.7 18 Chongqing 16 21.9 0.8 Qinghai 10 28.9 0.6 Hainan 6 5.6 1.8 Ningxia 4 8.7 0.7 Tibet 2 6.3 0.6 3.0 0.7 Source: MOH Population mil Hosp./mil ppl Number of Level III hospitals >50 >30, <50 <30 Xinjiang Tibet Qinghai Beijing Heilongjiang Inner Mongolia Jilin Jil Liaoning in Hebei Tianjin Ningxia Shanxi Shandong Gansu Shaanx Henan Jiangsu i Sichuan Hubei Anhui Chongqing Zhejiang Hunan Jiangxi Guizhou Fujian Yunnan Guangxi Guangdong Hainan 6

China healthcare value chain The healthcare Value Chain is characterized by the huge number of players needed to cover such a vast territory and population. Distribution is very fragmented (but it started consolidating already 5,600 manufactures (70% are small size) 16,000 distributors End users 21,415 hospitals and 909,600 Health institution Source: China statistical bureau 7

Contents of the document Evolution of China medical expenditure Overview of the Pharmaceutical sector Focus on the Medical Devices sector Opportunities in Medical 8

China pharmaceutical market outlook The Chinese pharmaceutical market is booming and expected to continue its growth Total sales of pharmaceutical products Market segments 1,400 CAGR 05-11 Total = 708 bn RMB Total= 336 403 470 568 708 836 1,000 1,200 19% TCM materials 3.3% TCM patent prescription 13.8% Other 1.9% Medical devices 2.6% Chemical regent 0.4% 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E Drugs 78% Unit: billion RMB TCM: Traditional Chinese Medicine Key Takeaways - Total market value of pharmaceutical products in China reached 836 billion RMB in 2011, showing a compounded average growth (CAGR) of 19% in between 2006 and 2011 - China pharmaceutical market is expected to keep on growing at 20% from 2012 to 2014 - In 2015 it could overcome Japan becoming the world second largest market Source: MOFCOM 9

Pharmaceutical per capita spend by country During the last year, China climbed one position in worldwide ranking. Considering the population size and the very low per capita expenditure, it has enormous potential for future growth Pharmaceutical market (USD billion, 2010) Population (million) Per capita spend (USD) Pharmaceutical market (USD billion, 2011) (*) Population (million) (**) Per capita spend (USD) USA 373 314 1,187 USA 391 314 1,244 Japan 111 127 870 Japan 119 127 935 Germany 62 81 764 Germany 65 81 802 France 49 66 742 China 61 1,343 45 China 49 1,343 36 France 51 66 770 Italy 34 61 562 Italy 36 61 582 United Kingdom 30 63 469 Brazil 33 206 162 Canada 29 34 853 Canada 32 34 951 Brazil 29 206 140 Spain 30 47 639 Spain 28 47 598 United Kingdom 30 63 473 (*) For all countries except China, 2011 data estimated projecting CAGR on 2010 data. (**) Assumed unchanged Source: Espicom 10

China pharmaceutical market by Region Not surprisingly in coastal regions we find the largest consumption of Pharmaceutical products Regional Pharmaceutical Markets Key Takeaways - East China area accounts for 44% of the market Xinjiang Tibet Qinghai Sichuan Yunnan Ningxia Beijing Gansu Shaanxi Chongqing Guizhou Hubei Guangxi Guangdong Inner Mongolia Liaoning Hebei Tianjin Shanxi Shandong Henan Hunan Anhui Jiangsu Zhejiang Jiangxi Fujian Heilongjiang Jilin Taiwan - Top 10 provinces/cities make up to ~70% of the total market: Beijing Jiangsu Zhejiang Shandong Guangdong Anhui Tianjin Hubei Hebei Hong Kong Macau Low High Hainan Source: MOFCOM 11

Leading distributors of pharmaceutical products A huge number of pharmaceutical distributors but Top 3 players account for 22% of the sales Listed company Company Establish HQ Turnover (Rmb bn) Ownership Main category Sinopharm Pharma China Resources Pharm Jointown Guangzhou Pharm Tianjin Pharm Nanjing Pharm Huayuan Pharm Chongqing Pharm Huadong Pharm Kelun Pharm Tasly Medicine 1998 Beijing 100 SOE drugs, medical device 1986 55 SOE drugs, medical device 2007 Beijing 34.5 SOE drugs, medical device 1985 Wuhan 24 Private drugs, medical device 1951 Guangzhou 20.5 JV drugs, medical device 1997 Tianjin 19 SOE drugs, medical device 1951 Nanjing 15.3 SOE drugs, medical device 1953 Anhui 13.2 SOE drugs 1950 Chongqing 10.7 SOE drugs, medical device 1952 Hangzhou 9 Private drugs 2003 Chengdu 8.6 Private injection 2000 Tianjin 8 SOE drugs Source: Company website, Annual report, ISI 12

Contents of the document Evolution of China medical expenditure Overview of the Pharmaceutical sector Focus on the Medical Devices sector Opportunities in Medical 13

China Medical Devices market A booming market still dominated by imports Evolution of China MD market Total= 32.3 36.1 40.6 47.9 53.1 58.1 CAGR 06-11 13% 63.5 69.6 76.2 83.5 91.3 CAGR 12-16 10% 13% Import Value 74% 76% 75% 75% 76% 77% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Espicom, China Custom, y-o-y exchange rate of foreign currency Key Takeaways - China medical device market is growing at 13% per year and is expected to continue at an only slightly lower pace for the years to come - The market is still dominated by imports that capture 77% of the entire spend - Foreign companies, even those very well established in China, have been reluctant to re-localize, the production of their most advanced technologies; those products are still imported 14

Major manufacturers in China MD market Foreign players captured 77% of the MD market Segmentation by players Siemens Healthcare 3% Johnson & Johnson Medical 25% Baxter International 2% Philips Healthcare 5% GE Healthcare 6% Domestic players 30% 0.00% Yuyue Medical 1% Others domestic players 21% Mindray Medical 4% Microport 1% Shandong Weigao 2% Lepu Medical 1% Medtronic 3% Other foreign players 25% Source: Technavio Insights 15

Contents of the document Evolution of China medical expenditure Overview of the Pharmaceutical sector Focus on the Medical Devices sector Opportunities in Medical 16

China presents today a once in a lifetime opportunity in medical services Only recently Foreign Ventures have been given the green light to establish wholly owned and run businesses in medical services A complete healthcare sector reform was launched in 2009 followed by further changes under the 12 th five-year plan (2011-2015). Under these new policies private capital and foreign investments in medical services are allowed and seen as drivers for change There is a huge gap to be filled in between the public service (almost free of charge but with very poor service) and the few private initiatives (with good service but extremely expensive) In many specialty care areas foreign medical services institutions possess some specific skills in great demand in China (e.g. dental surgery, eye clinics, cosmetic surgery, ) 17

2009 China Health System Reform 2009 healthcare reform opens for opportunities for private medical institutions In April 2009, the Chinese government announced guidelines for healthcare reform aiming at providing universal healthcare to the 1.3 billion residents Chinese government planned to invest US$125 billion on healthcare between 2009 and 2011 Chinese government is encouraging private and foreign capital involvement in China s healthcare sector as part of a health system reform program: Wholly foreign-owned hospitals and clinics are allowed in pilot cities (previously wholly foreign-owned mainland medical service providers were prohibited, and foreign capital in Joint Venture hospitals was limited to a 70% share) Approval, previously coming from the central offices of both MOH and MOFCOM, is moved to provincial government agencies, shortening the approval process Foreign investors are particularly encouraged to set up for-profit and non-profit hospitals in Central and West China Source: Ministry of Health 18

Relevant elements of 12th five-year plan for the healthcare sector 12 th FYP (2011 to 2015) approved by China National People s Congress in March 2011 A key theme of the plan is the emphasis on quality (over quantity) in terms of economic growth and investments The plan includes a provision for improved social safety nets for China s rural population with basic healthcare coverage for the entire population Healthcare related aspects of the new plan are in line with the blueprint for healthcare reforms announced in 2009 The plan emphasizes the role of foreign investments and private capital (also through Private Equity funds) in the development of the healthcare sector Source: National Development and Reform Commission and Ministry of Commerce, KPMG 19

Overview of China Healthcare Institutions The entire healthcare infrastructure is undergoing an historical transformation, private institutions taking a key role in the market Total number of hospitals by ownership in units 17% 83% Public medical service institutions Total = 18,703 19,246 19,852 19,712 20,291 20,918 21% 79% 25% 27% 75% 73% Private medical services institutions 31% 34% 69% 66% 21,979 38% 62% CARG (05-11 ) 3% 17% -2% Key takeaways - China today has 21,979 hospitals with 5.2 million beds, 3.8 beds per thousand people - While public hospitals still outnumber private hospitals and clinics, the later are now the fastest growing 2005 2006 2007 2008 2009 2010 2011 Source: Ministry of Health 20

Examples of private medical services ventures: General hospitals United Family Hospital Enter China in 1997 3 hospitals in, Beijing and Guangzhou Providing comprehensive, integrated healthcare services In 2010, UFH signed a contract to manage the international department at 's Huashan Hospital for three years with a view to attracting expatriates and wealthy local residents Beijing ASGOP Established in 2003 Located in Co-founded by New Life Ob/Gyn Group LLP and Huashun Worldwide Medical Center Offering a full range of women s and children s healthcare services WorldPath Clinic International Established in 2009 Located in Providing a comprehensive range of healthcare services - ranging from simple blood tests to diagnostic scans, from cosmetic surgery to dental services, from hair removal by laser to complex surgery Source: company website 21

Examples of private medical services ventures: Dental & Eye care Kowa Dental Established in 2005 2 clinics in Offering the world's latest development of oral surgery technology including restoration, porcelain crown, orthodontics, implant, cosmetic dentistry PARKWAY Health Enter China in 2005 Based in Singapore, operating 16 hospitals with over 1,200 specialists 7 chain clinics in and 1 in Chengdu Offering quality medical and dental services Chengdu SMILE dental clinic Established in 2005 2 dental clinics in Has the most advanced oral surgery medicals equipments He Eye Hospital HQ in Shenyang Established in 1995 The first private eye hospital approved by the Ministry of Health 2 hospitals in Shenyang, 1 in Dalian and 1 in Huludao Total employees in 1,000+ Huludao Shenyang Dalian Source: company website 22

Examples of private medical services ventures: Checkup Ciming Health Checkup Established in 2002 HQ in Beijing A China-based medical chain institution engaged in physical checkup 33 centers in Beijing,, Dalian, Chengdu, Guangzhou, Jinan, Nanjing, Shenzhen, Tianjin, Wuhan, Jinhua, Dongguan Beijing Dalian Tianjin Nanjing Chengdu Wuhan Jinhua Dongguan Guangzhou Shenzhen ikang Guobin Established in 2000 HQ in An independent healthcare management company in China Offering products covering physical checkups, primary care service & medical management 20 medical facilities in 11 cities, and plans to double that number within the next two years Beijing Nanjing Suzhou Jiangyin Chengdu Hangzhou Nanchang Fuzhou Guangzhou Shenzhen MJ Group Established in 2003 HQ in Taiwan Providing automated health examination services to promote health management. 5 medical facilities in 4 cities (Beijing,, Haikou, Jiangyin Beijing Jiangyin Haikou Source: company website 23

Examples of private medical services ventures: Plastic surgery Yestar Established in 2003 HQ in Invested by Korea Yestar Medical Group 5 hospitals in Wuhan, Changsha, Hangzhou, Wenzhou, Specialized in plastic surgery, anti-aging, micro-surgery, skin care, oral beauty etc. Wuhan Hangzhou Wenzhou Changsha EverCare Medical Institute Established in 1997 A fully licensed, private chain hospital enterprise specializing in plastic and cosmetic surgery, health and wellness, skin care, aesthetics, and clinical obesity 4 hospitals in Beijing, 1 in Tianjin, 1 in Qingdao, 2 in Harbin and 1 in Jinan Beijing Harbin Tianjin Qingdao Jinan Huamei Medical Cosmetology Hospital Established in 1994 Located in Specializing in plastic and cosmetic surgery 8,000 sqft of salable area and 50 beds Source: company website 24

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