Bio-Pharma: China 2010 - 2020

An Expert's View about Medical, Health and Cosmetics Products in China

Last updated: 12 Mar 2010

A Look at The FUTURE: 4th & 5th Generation Global Strategies

Global Global Strategy Challenges Executable Solutions Bio-Pharma: China 2010 - 2020 th th A Look at The FUTURE: 4 & 5 Generation Global Strategies France Houdard Managing Director January 2010 Table of Contents ? Corporate Series (Part 2 of 6) BIOPHARMA: China 2010 ? 2020 ? Preface ? Overview of the China Life Science Industry ? The PAST: Evolution of Biopharma Foreign Investment into China th th ? The FUTURE: Virtual Integrations ? 4 & 5 Generation Strategies ? The PRESENT: Strengths, Weaknesses, Opportunities, Threats (SWOT) ? The OPPORTUNITY: Virtually Integrated Pharma Company (VIPCO?s) ? Next Generation Integrated Global / China Operating Models Traditional Operating Models ? COSTS / PRODUCTION: Big Pharma Production Trends in China nd ? REVENUES / SALES: World?s 2 Largest Economy (PPP); 400 MM in Middle Class Future Operating Models (2010 ? 2020): Value Chain Focus for Virtual Extensions (China) ? INNOVATION / R&D: Big Pharma Research & Development (R&D) Trends in China ? CLINICAL TRIALS: Drivers? Benefits? ? NEXT GENERATION (2010 ? 20120): Who is Migrating to VIPCO Extended Models? ? China?s Economic Future and Implications for Big Pharma ? State of Economy: Corporate, Household Balance Sheets; Health of Financial Sector ? Size, Growth Rate, Robustness across China Economy: Investment / Consumption / Trade ? State of Export Sector and Impact on the Economy ? Summary of Future Opportunities for Big Pharma in 2010 - 2020 Copyright © 2010 Exolus. All rights reserved. 2 The PAST: Evolution of Biopharma Foreign Investment into China ? COST REDUCTION ? REVENUE / MARKET ? INNOVATION ? EFFICIENCY 3) INNOVATION 2) REVENUES Sales Engineering Marketing R&D IT HR Back Office F&A Procure Distribution Sourcing RESEARCH & DEVELOPMENT Production SALES & MARKETING RESOURCES PRODUCTION / SOURCING DRIVING 1) COSTS Shareholder Value Copyright © 2010 Exolus. All rights reserved. 3 th th The FUTURE: Virtual Integrations ? 4 & 5 Generation Strategies INNOVATION REVENUES Sales Engineering Marketing R&D IT HR Back CONTRACTS, Office PARTNERSHIPS F&A Pro?c SHARED SERVICE CENTERS Distribution Sourcing RESEARCH & Production DEVELOPMENT SALES & MARKETING PRODUCTION / RESOURCES SOURCING DRIVING Shareholder Value COSTS Copyright © 2010 Exolus. All rights reserved. 4 The PRESENT: Strengths, Weaknesses, Opportunities, Threats (SWOT) PATENTS ?? PIPELINES ?? COSTS ??? TALENT ?? EMERGING MARKET OPPORTUNITIES ???? ? INNOVATION / TALENT ? Pipeline Productivity Collapse. Big Pharma has doubled investment in R&D during past decade. Yet, the return on this investment has plummeted. Today?s new drug yield is barely ½ the new drug production of 10 years ago - despite a doubling in number of compounds being placed into early-stage clinical testing. ? Globally Transformed Labor Dynamic ? ?World is Flat?. Extremely high priority and focus placed on national development of scientific base and capabilities in China: already 1.6 million science and engineering graduates per year in PRC (China has 10 x size of graduate pool compared to US). R&D heads /integrates East. ? R&D and Clinical Trials head East. China clinical trial benefits include Costs Savings (30-50%); Time Savings (30%); Large Technical Talent Pools; ?Gene Pool? advantages in clients; broad infrastructure. ? REVENUES / MARKETS ? Global Patent Expirations. Tidal wave of patent expiries this decade: USD150 billion between 2005 and 2015. Future for Big Pharma companies rooted in products that are currently under research and development, or have even yet to even be discovered. ? Emerging Markets already Emerged. Fundamental shift in leading global market sizes, from developed to emerging markets ? e.g., BRIC (Brazil, Russia, India, China). Today, China is world?s #5 largest pharmaceutical market and is projected to be the #2 largest in world by 2020 ($120bn); #1 in 2025. ? Massive Middle Class + Aging Population + Disease Divergence + Insurance = Opportunity. Immense revenue opportunities in China rooted in: divergence of disease profiles; fundamental shift in age profile of its population; massive growth in middle class and incomes; expanding healthcare and insurance infrastructure. ? COSTS / VALUE CHAIN ? Healthcare Costs. Massive cost balloon for Big-Pharma across entire global value chain, from Production through R&D. ? Clinical Trial Costs. Costs of Clinical trials in Western countries more than 2X costs in China. ? Global Labor Costs. Western Wages are 5 to 10 times Greater than Wages in China, from production operators to scientists and engineers. Need for cheaper costs, but also the quality ? and IPP. Copyright © 2010 Exolus. All rights reserved. 5 The OPPORTUNITY: Virtually Integrated Pharma Company (VIPCO?s) FIPCO MODEL ? VIPCO MODEL (CSO, CMO, CRO, PC-CRO, INSTITUTIONS) FIPCO (Fully Integrated Pharma Co.) VIPCO (Virtually Integrated Pharma Co.) Partnerships Sales & Sales & CSOs Distribution Distribution Manufacturing CMOs Manufacturing Clinical CROs Development Clinical & Regulatory Preclinical Preclinical CROs Support Research Technology Academia, R&D Scientific, Institutions Copyright © 2010 Exolus. All rights reserved. Source: G. S. Burrill, ?Biotech 2008: A 20/20 Vision to 2020?, The Burrill Indiana Life Sciences Meeting, October 2008. 6 Bio-Pharma (2010 ? 2020): Next Generation Operating Models Copyright © 2010 Exolus. All rights reserved. 7 1. COSTS: Where is Big Pharma Producing Today in China? COST??? INFRASTRUCTURE??? TALENT ??? SUPPLY CHAIN ??? IPR??? China Big Pharma Production Copyright © 2010 Exolus. All rights reserved. Source: All Publically Available Information, Company Websites 8 nd 2. REVENUES: China Already World?s 2 Largest Economy (PPP) GDP PPP (2008) Germany (5) 11,8 trillions de $ France (6) EU-27 US (1) 6,4 trillions China (2) 3,6 trillions 3 trillions de $ UK (7) de $ de $ a Japan (4)Indi (3) $7.8 tr $3.3 tr $4.4 tr $14.9 tr $14.3 tr GDP Nominal (2008) Germany (3) EU-27 US (1) $5.1 tr France (6) UK (4) Japan (2) China (5) IND(9) $14.3 tr $4.9 tr $4.2 tr $17.1 tr $1.2 tr Copyright © 2010 Exolus. All rights reserved. Source: IMF; EIU, CIA World Factbook; F Houdard 9 2. REVENUES: How large is China?s Middle Class? CHINA MIDDLE CLASS: 300 million (2010) ? 500 million (2015) Middle Class Income Bands for Urban Population Urban Household Income 900 (US$ ? PPP-Adjusted) 822 800 756 Global > US$107,800 99 684 700 Affluent US$ 3,800 - 107,800 90 607 600 531 500 53 170 355 400 461 Upper Middle US$21,501 ? 53,900 525 239 300 255 200 157 106 100 73 Lower Middle US$13,500 ? 21,500 Poor < US$13,500 35 0 2005 2010F 2015F 2020F 2025F Upper Middle Class Lower Middle Class Copyright © 2010 Exolus. All rights reserved. Sources: Urbanization Rates, Population based on UN, World Urbanization Prospects 2007; MGI Consumer Demand 2008. 10 Urban Population (millions) NEXT GENERATION: Value Chain Focus for Virtual Extensions (China) COST & TIME to DEVELOP 1 DRUG in WEST: 16 YEARS ? USD1.3 billion drugs Up to 1MM drugs Discovery 10 to 50 Pre-Clinical Testing 4-5 Phase I 2-3 Phase II 1 - 2 Phase III 1 FDA Market 1 Phase IV years 0 2 4 6 8 10 12 14 16 Copyright © 2010 Exolus. All rights reserved. Source: A. DiMasi and HG Grabowski: Managerial & Decision Economics 28 (2007); Zinnov LLC 11 3. INNOVATION: Big Pharma Migrating R&D Functions to China COSTS??? DISEASE DIVERSITY ???? RESEARCH? DEVELOPMENT ?? CLINICAL TRIALS??? Pharma Research & Development Operations in China Copyright © 2010 Exolus. All rights reserved. Source: All Publically Available Information, Company Websites 12 3. INNOVATION: China Mobilizes all Resources to Develop Talent CHINA SCIENCE and ENGINEERING GRADUATES: 1.6 MILLION per YEAR University Natural Sciences Degrees (1985 ? 2005) USA China Copyright © 2010 Exolus. All rights reserved. Sources: National Science Board, Science & Engineering Indicators 2008 13 Thousands 4/5. CLINICAL TRIALS: Drivers for Increasing Future Extensions to China COST??? (50%) TIME??? (50%) INFRASTRUCTURE?? TALENT ??? PATIENTS ???? ? China cost of clinical trials approximately 50% Western costs. COSTS ? China actively incentivizing foreign pharma companies to conduct R&D in country by offering a range of financial and other incentives. ? Numerous world-class medical facilities that meet global requirements for INFRASTRUCTURE clinical testing. ? China graduating roughly 10x science grads than the US. TECHNICAL TALENT ? Large pool of highly trained nurses, physicians, technical personnel ? Strong IT skills and vast pool of IT engineers. ? Fast speed of patient enrollment; savings up to 30% on enrollment time. TIME ? US FDA has established an office in China to help in oversight of trials. ? Vast, diverse, unique diseases across China?s heterogeneous population. PATIENT POOL ? Huge numbers of ?flexible? and ?untested? patients concentrated in all major cities, very quick and efficient patient recruitment. Copyright © 2010 Exolus. All rights reserved. Sources: Exolus Research; PWC, The changing dynamics of pharma outsourcing in Asia (2008) 14 5. NEXT GENERATION: Who Programming to VIPCO Extended Model? MIGRATION to ADVANCED OPERATING MODELS in CHINA: CSO, CMO, CRO China?s CRO Market CSO Extended Cases ? Boehringer Ingelheim ? First Big Pharma to have entrusted a sole distributor for all of its products in China: Sinopharm. ? Sinopharm is China?s largest pharmaceutical distributor by sales and the only China distributor to cover the entire PRC. ? Boehringer Ingelheim?s sales spiked upward by 45% from 2006 to 2007; Sinopharm saw an annual growth rate of 32%. CRO Extended Cases ? Pfizer ? Outsources to Wuxi PharmaTech: synthetic chemistry, parallel medicinal chemistry, and bio-analytical services. It also has a 3-year CRO contract with Wuxi PharmaTech to provide services in the areas of: in-vitro Absorption, Distribution, Metabolism and Excretion (ADME) services. ? GSK ? Outsources to Shanghai Institute of Materia Medica (SIMM) chemistry requirements. ? AstraZeneca ? Invested USD14 million in Wuxi Pharma Tech for the synthesis of 150,000 compounds. Copyright © 2010 Exolus. All rights reserved. Sources: Goldman Sachs: Healthcare Services: CROs, December 2007; Exolus Research 15 Business Consulting ? Life Sciences For Full Report and More Information Please Contact Us: URL: www.exolus.com Email: info@exolus.com www.exolus.com Disclaimer The opinions represented herein were prepared for information purposes only, at the time of publication. The information represented herein is believed to be reliable, at the time of publication, and was obtained by various public sources also believed to be reliable. The opinions were considered to be accurate at the point of creation, and further, any views, forecasts, or estimates contained herein may be subject to change at anytime without notice. The opinions expressed or implied herein may not be the opinions of the author, also Exolus, or any associated affiliates. This report and the information contained herein collectively, is not offered as, and should not be regarded as, used or relied upon as advice on any matter. It shall not constitute or be construed as a recommendation or solicitation on behalf of the author, and no legal commitment or obligation shall arise by reason of this document. Thus, the reader shall make an independent assessment of opinion?s stated herein that shall not be considered a substitute for obtaining advise from the readers? advisors. The author shall not accept responsibility, express or implied, with regards to the accuracy and completeness of the information herein, and the author shall be liable whatsoever and howsoever arising in connection to this publication. The author shall not accept, and hereby disclaim, all responsibility and liability to all persons, entities, or organizations for all consequences arising out of any use or reliance on the whole or any part of this publication. This publication should not be reproduced or distributed without the author?s consent and is not intended for distribution in any jurisdiction in which this would be prohibited. Copyright © 2010 Exolus. All rights reserved. 17
Posted: 12 March 2010, last updated 12 March 2010

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