China Healthcare Industry Challenges & Opportunities

China Healthcare China Healthcare Industry and Market Industry and Market Industry Introduction Challenges & Opportunities

Industry Introduction Huge room for healthcare industry improvement Huge room for healthcare industry improvement 2673 2010 China s Health Expenditure was 5.1% of the GDP 2010 China s Health Expenditure was 5.1% of the GDP 1860 World s average was 6.4% World s average was 6.4% Developed Countries average was 8.1% Developed Countries average was 8.1% China ranked 149 in the world China ranked 149 in the world China s Healthcare Expenditure per person: 12%-13% of increase in future 5 years 1643 1289 394 11.45 Reasons for fast growth of health expenditure Reasons for fast growth of health expenditure 78 78 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12E 12E 15E 15E Macro economy s growth leads to income increase Macro economy s growth leads to income increase China s Health Expenditure: 17.6% of average growth rate in 30 years Urbanization and aged population growth Urbanization and aged population growth Changes of Disease Spectrum: Changes of Disease Spectrum: Death rate increase in: Malignant Tumor, Death rate increase in: Malignant Tumor, C Cardiovascular and Cerebrovascular diseases, ardiovascular and Cerebrovascular diseases, Mental Disorders, Mental Disorders, and Nutrition metabolism and endocrine and Nutrition metabolism and endocrine system diseases system diseases 14000 35% 12000 30% 27.80% 28.60% 26.10% 25.70% 25.60% 10000 25% 22.80% 20.52% 21.40% 20.20% 22.40% 8000 20% 19.50% 16.80% 16.50% 18.00% 16.70% 14.50% 14.60% 15.64% 15.10% 15.30% 6000 15% 13.30% 13.66% 13.20% 13.50% 13.10% 12.91% 11.80% 10.90% 10.00% Government investment increase Government investment increase 4000 10% 9.60% 2000 5% Insurance Insurance 0 0% 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 From WHO statistic yearbook and Tengwei 2013 semiannual summit

Year Year- - on on- - year year Sub Sub Output Output B B RMB % % RMB Industry Industry Healthcare Industry Capability Healthcare Industry Capability 298.5 298.5 15.80% 15.80% 18.23% 18.23% API API Manufacturers: Manufacturers: Chemicals: 3454 Chemicals: 3454 API: API: 1318 1318 Chinese Chinese Medicine: Medicine: 2577 Biotech Biotech: : 202 202 VDR VDR: : 62 62 Chinese drug decoction pieces Chinese drug decoction pieces: :1236 455.2 455.2 24.30% 24.30% 27.79% 27.79% Chemicals Chemicals 166.6 166.6 18.70% 18.70% 10.17% 10.17% Biotech Biotech 2577 140.1 140.1 20.80% 20.80% 8.55% 8.55% Devices Devices 118.0 118.0 24.60% 24.60% 7.20% 7.20% Materials Materials 1236 369.2 369.2 21.50% 21.50% 22.54% 22.54% Chinese Chinese Med Med In In 2012, 2012, China s China s GDP GDP growth growth rate rate dropped dropped to to 7.8% 7.8% Decoction Decoction Pieces Pieces 90.2 90.2 26.60% 26.60% 5.51% 5.51% Healthcare Healthcare Industry Industry Output Output increased increased to to 21.3% 21.3% Total Output Growth Rate 27.2% 27.2% 30% 30% 25.8% 25.8% 24.8% 24.8% 25% 25% 21.3% 21.3% 24.2% 24.2% 20.0% 20.0% 20% 20% 18.7% 18.7% 15% 15% 16378 15707 10% 10% 12349 9946 5% 5% 8381 6718 0% 0% 5340 GDP Healthcare Industry Total Output 2006 2007 2008 2009 2010 2011 2012'1-11 From WHO statistic yearbook and Tengwei 2013 semiannual summit

Healthcare Industry Revenues Healthcare Industry Revenues In In 2012, 2012, Revenue Revenue growth growth rate rate increased increased to 16.23%, to 16.23%, lower lower than than output increase output increase Year Year- - on on- - year year Revenue Revenue B B RMB RMB Sub Sub Industry Industry % % Total Revenue(B RMB) Year-on-year growth rate 54.9% 54.9% 0.02% 0.02% 13.29% 13.29% API API 183.3 183.3 23.2% 23.2% 35.4% 35.4% 26.11% 26.11% 31.04% 31.04% Chemicals Chemicals 434.2 434.2 32.6% 32.6% 25.6% 25.6% 13.7% 16.2% 16.2% 7.01% 7.01% 12.37% 12.37% Biotech Biotech 180.9 180.9 84 15.09% 15.09% 9.23% 9.23% Devices Devices 127.2 127.2 158 157 140 106 62 40 31.13% 31.13% 6.30% 6.30% Materials Materials 86.7 86.7 16.97% 16.97% 23.82% 23.82% Chinese Chinese Med Med 324.4 324.4 Decoction Decoction Pieces Pieces 16.69% 16.69% 3.95% 3.95% 53.7 53.7 From WHO statistic yearbook and Tengwei 2013 semiannual summit

Healthcare Market Service Market Service Market Healthcare Healthcare Service Supply Service Supply Healthcare Service Healthcare Service Demand Demand Service Factor Market Service Factor Market Insurance Insurance HR Supply HR Supply HR Demand HR Demand Medicine Supply Medicine Supply Medicine Demand Medicine Demand Financing Market Financing Market Equipment Supply Equipment Supply Equipment Demand Equipment Demand Insurance Insurance Material Supply Material Supply Material Demand Material Demand Governmental Outcome Governmental Outcome Social Outcome Social Outcome Residential Outcome Residential Outcome From 2009-2013 China Healthcare market report and Industry analysis

Relations Relations Between Between Characters Characters Industry Chain Healthcare Healthcare Insurance Insurance Health services related factors of Health services related factors of manufacture, circulation manufacture, circulation Healthcare Healthcare Services Services Hospitals Hospitals Medical equipment, diagnostic reagents, Medical equipment, diagnostic reagents, medical supplies medical supplies Patients Patients Wholesaler Wholesaler Healthcare Healthcare Insurance Insurance Patients Patients Drugstores Drugstores Middle Middle Products Products Final Final Products Products Raw Raw Material Material Source Source Medicine Medicine Wholesaler Wholesaler Distribution Distribution Source Source Medicine Medicine Producing Producing Final Final Products Products Producing Producing From 2009-2013 China Healthcare market report and Industry analysis

2011 2011 Top Top 5 5 Manufacturers Manufacturers 2011 2011 Top Top 5 5 Distributors Distributors Rank Rank Name Name Sales Sales Income(10K Income(10K RMB) RMB) Rank Rank Name Name China China National National Pharmaceutical Ltd. Ltd. Pharmaceutical Group Group Co. Co. 1 1 China Resources Medications Group Limited China Resources Medications Group Limited 1 1 12456339 12456339 2 2 Harbin Pharmaceutical Group Holding Co Harbin Pharmaceutical Group Holding Co 2 2 4880000 4880000 Shanghai Pharmaceutical (Group) Co. Ltd. Shanghai Pharmaceutical (Group) Co. Ltd. 3 3 Shanghai Pharmaceutical (Group) Co. Ltd. Shanghai Pharmaceutical (Group) Co. Ltd. 3 3 4122375 4122375 China Resources Medications Group Limited China Resources Medications Group Limited 4 4 Shiyao Shiyao Group Co. Ltd. Group Co. Ltd. 4 4 2479820 2479820 Jiuzhoutong Jiuzhoutong Pharmaceutical Group Co. Pharmaceutical Group Co. Ltd. Ltd. 5 5 Yangtzejiang Yangtzejiang Pharmaceutical Group Co. Pharmaceutical Group Co. Ltd. Ltd. 5 5 2013727 2013727 Nanjing Nanjing Pharmaceutical Group Co. Pharmaceutical Group Co. Ltd. Ltd. 2011 2011 Top Top 5 5 Chemicals Chemicals 2011 2011 Top Top 5 5 Chinese Chinese Med Med % Name Name Manufacturer Manufacturer % Name Name Manufacturer Manufacturer Jilin Jilin Changbaishan Changbaishan Pharmaceutical Pharmaceutical Group Ltd. Ltd. 1 1 Kangai Kangai injection injection Group Co. Co. 1.90% 1.90% 1 1 Clopidogrel Clopidogrel Sanofi Sanofi 0.70% 0.70% Beijing Beijing Taide Co., Ltd. Co., Ltd. Taide Pharmaceutical Pharmaceutical 2 2 Alprostadil Alprostadil 0.67% 0.67% Jiangxi Jiangxi Qingfeng Qingfeng Pharmaceutical Pharmaceutical Group Ltd. Ltd. 2 2 Xiyanping Xiyanping injection injection Group Co. Co. 1.81% 1.81% 3 3 Atorvastatin Atorvastatin Liaoning Dalian Pfizer Inc Liaoning Dalian Pfizer Inc. . 0.59% 0.59% Bayer healthcare Co. Ltd. of Bayer healthcare Co. Ltd. of Beijing Beijing Mudanjiang Mudanjiang Youbo Pharmaceutical Pharmaceutical Group Ltd. Ltd. Youbo 4 4 Moxifloxacin 0.56% 0.56% Shuxuetong Shuxuetong injection injection 3 3 Group Co. Co. 1.76% 1.76% Liaoning Jinzhou Liaoning Jinzhou Ahon Pharmaceutical Co Ltd Pharmaceutical Co Ltd Ahon 5 5 Actovegin Actovegin 0.51% 0.51% Shandong Buchang Pharmaceutical Pharmaceutical Group Ltd. Ltd. 4 4 Danhong Danhong injection injection Group Co. Co. 1.46% 1.46% Shenshifuzheng Shenshifuzheng injection injection Guangdong Guangdong Lizhu Inc. Inc. Lizhu Group Group Limin Limin 5 5 1.42% 1.42% SDFA Southern Healthcare Industry Research Public

Retailing: Drugstore Geographic Retailing: Drugstore Geographic Percentage Percentage China has 0.42 million retail drugstores. China has 0.42 million retail drugstores. Guangdong, Sichuan, Shandong, Jiangsu, and Hunan Guangdong, Sichuan, Shandong, Jiangsu, and Hunan possess 38.8% of the total. possess 38.8% of the total. Total Number of Drugstores and growth rate 2008 2009 2010 2011 2006 2007 SDFA Southern Healthcare Industry Research Public

Growth Rate of Local Community Use of Medicine (0.1Billion RMB) 34% of the total market 300 0. 5 Growth Rate of Local Use of Medicine 0.1Billion RMB 44.6% 239 0. 45 250 39.9% 0. 4 184 200 0. 35 168 30.9% 29.9% 0. 3 128.3 150 0. 25 88.7 0. 2 100 63.4 0. 15 800 1. 6 9.5% 703 50 0. 1 149.0% 700 0. 05 1. 4 0 0 600 535 1. 2 2007 2008 2009 2010 2011 2012 500 441 1 400 329 0. 8 254 300 Growth Rate of County Level Use of Medicine (0.1Billion RMB) 0. 6 200 0. 4 34.0% 102 31.4% 29.5% 21.3% 66% of the total market 100 0. 2 0 464 0 500 3. 5 328.4% 2007 2008 2009 2010 2011 2012 3 400 351 2. 5 273 300 2 200.7 165.3 200 1. 5 1 100 38.6 36.0% 0. 5 32.2% 28.6% 21.4% 0 0 2007 2008 2009 2010 2011 2012 SDFA Southern Healthcare Industry Research Public

Treatment Local Distributions Treatment Local Distributions Local Health Institution Charges (RMB) In 2011, there were 3.8 billion visits to local In 2011, there were 3.8 billion visits to local health institutions. It was 60.7% of the total health institutions. It was 60.7% of the total visits. visits. Hospitalization was 37.75 million held 25% of Hospitalization was 37.75 million held 25% of the total number. the total number. 100 100 90 90 87.2 87.2 86.9 86.9 84 84 82.8 82.8 81.5 81.5 80 80 70 70 60 60 50 50 49.5 49.5 Local Community Health Centre s average charge Local Community Health Centre s average charge is 81.5 RMB is 81.5 RMB County Hospital s average is 49.5 RMB County Hospital s average is 49.5 RMB 47.5 47.5 46.2 46.2 42.5 42.5 40 40 39.5 39.5 30 30 20 20 10 10 0 0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 Local Community Health Centre Visits County Hospital Visits 40950 34740.4 8.27 8.74 8.66 8.77 7.59 26080.2 17247.3 12712.4 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 ( ) Visits (0.1B) ( ) Visits (10K) SDFA Southern Healthcare Industry Research Public

Three terminals pattern Three terminals pattern Drugs Retailer Terminals 230 billion RMB 21.4% Local Healthcare Terminals 70.3 billion RMB 6.5% Local community Health Centre, 239, 2.2% 420K stores County Hospitals, 464, 4.3% Hospital Terminals 774.6 billion RMB 72.1% 21979 Hospitals 2012 Drug market cap 1075 billion RMB Urban 6347 59.1% Rural 1399 13% SDFA Southern Healthcare Industry Research Public

Challenges and Opportunities Recovery Recovery of of macro macro economy economy Government Government investment Base propellant expansion and designated Base propellant expansion and designated production The improvement The improvement of of bidding mechanism bidding mechanism investment growth growth production Encourage Encourage innovation innovation Promotion Promotion of of the new version of GMP implementation the new version of GMP implementation Reformation Reformation of of drug Patent protection Patent protection drug technology technology transfer transfer examination examination Supplements and devices development support Supplements and devices development support Shrink Shrink of of external demand external demand Costs pressure Costs pressure Control Control of of hospital hospital costs costs and and 0 0 extra extra fees fees Assessment Assessment of of generic Control Control of of drug drug price generic drugs price drugs quality s consistency quality s consistency

Base Base propellant propellant expansion production production expansion and and designated designated 2009 2012 500 307 First First- -tier equip equip with tier health health institutes with base base propellant propellant institutes are are required required to to Second Second- -tier and and sales sales should tier hospitals base hospitals base propellant should reach reach 40% 40%- -50% propellant usage 50% usage Third Third- -tier and and sales sales should tier hospitals base hospitals base propellant should reach reach 25% 25%- -30% propellant usage 30% usage SDFA Southern Healthcare Industry Research Public

Changes Changes in in bidding bidding mechanism mechanism Main Point Changes 1. 1. Improve Improve drug drug quality quality evaluation evaluation Platform building Innovation of mechanism system, system, figure figure out out an an efficient efficient way way to to lower lower price. price. Quality and price oriented Lower price 2. 2. Expand Expand purchase purchase area, area, put put high high quality quality and and price price materials materials into into Purchasing contract and usage Drug bidding purchasing purchasing list. list. 3. 3. Centralize Centralize essential essential and and non non- - essential essential drugs drugs purchasing. purchasing. SDFA Southern Healthcare Industry Research Public

Innovations Innovations Priority Priority of of making making price price standard standard for for first first generic generic drug drug Innovation and generic drugs have priority The first 3 generic drugs Make price standard can make price Based on level of innovation, set the price 90% price of first generic drug Already on sales 90% and 80% of the first generic drug First will have a higher margin than the second After the first within 5 years,the 2ndand 3rd drug Government set the price After 5 years Market selection Patent protection More than 4 manufacturers Government set the price SDFA Southern Healthcare Industry Research Public

Promotion Promotion of of the implementation implementation the new new version version of of GMP GMP New round of GMP will bring more M&A Eliminated more than 2000 enterprises since last round of GMP New New policies: policies: 5071 5071 5050 5050 4881 4881 4768 4768 4706 4706 4682 4682 4516 4516 4553 4553 4490 4490 Encourage good enterprises produce more pharmaceutical productions 3731 3731 Encourage enterprises get approved quickly Limit registration of enterprises which didn t approve on time 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 13 13 Make approval of producing requirement more strict There are 597 enterprises get approval of new GMP Let the leverage of price be exerted adequately Give bonus for Implementation of centralized drug purchase New GMP pass rate is about 15% New GMP pass rate is about 15% Support GMP project SDFA Southern Healthcare Industry Research Public

Control the growth of healthcare fee Control the growth of healthcare fee Growth rate of visit fee and hospitalization fee shouldn t be higher than local growth rate of GDP Growth rate of visit fee and hospitalization fee shouldn t be higher than local growth rate of GDP (8%) (8%) Results will be recorded into annually audit Results will be recorded into annually audit Lower the purchasing costs Lower the purchasing costs Prepay visit fee; hospitalization fee should based on insurance payment type Prepay visit fee; hospitalization fee should based on insurance payment type Growth Rate of hospitalization Fee Growth Rate of Visit Fee 12.6% 13.5% 10.7% 9.3% 9.5% 8.2% 6.2% 4.3% 2008 2009 2010 2011 2008 2009 2010 2011 SDFA Southern Healthcare Industry Research Public

Assessment of generic drugs qualitys consistency Assessment of generic drugs quality s consistency High quality Generics Regular Generics Low quality Generics Better than original drug Same with the original drug Only about the consistency with the original drug Ingredients, type, standard, safety, efficiency 5 consistencies In the future four years, China is going to finish In the future four years, China is going to finish 570 types of drugs evaluation, with 33 thousand 570 types of drugs evaluation, with 33 thousand approvals and 2400 generics consistencies. approvals and 2400 generics consistencies. SDFA Southern Healthcare Industry Research Public

Drug price control Drug price control Set a ceiling for drugs profit margin Set a ceiling for drugs profit margin Cancel some foreign drugs individual price making policy Cancel some foreign drugs individual price making policy Supervise costs and finished goods price margin Supervise costs and finished goods price margin Support high quality generics Support high quality generics 300 300 250 250 31st average 15% High price drugs 20% 200 200 150 150 100 100 50 50 0 0 97-99 2000 2001 02-03 04-05 2006 2007 2010 2011'3 2011'8 2012'3 2012'9 2013'2 SDFA Southern Healthcare Industry Research Public

Future Future Trends Trends New New medicines medicines are are focusing focusing on on prevention prevention Aging population forces to change the structure of healthcare market Aging population forces to change the structure of healthcare market Chronic Chronic d diseases iseases are are becoming becoming major major factors factors Huge potential Huge potential of of new new rural rural cooperative cooperative medical medical system system