Asia Pacific Pharmaceuticals: Multitude of Risks and Rewards to Characterise Region

ASIA INVESTMENT OPPORTUNITIES IN PHARMACEUTICALS: RISK/REWARD ANALYSIS

Asia Investment Opportunities In Pharmaceuticals: Risk/Reward Analysis

Published by: BMI Research

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Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

CONTENTS

Asia Pacific Pharmaceuticals: Multitude Of Risks And Rewards To Characterise Region ...... 3 Main Regional Features And Latest Updates ...... 4 Outperformers: High-Reward And Low-Risk Markets ...... 5 Underperformers: Low-Reward And High-Risk Markets ...... 6 New Innovative Pharmaceuticals Risk/Reward Index ...... 9 China - Q1 2018 ...... 11 Headline Expenditure Projections ...... 11 Headline Pharmaceuticals & Healthcare Forecasts (China 2015-2021) ...... 11 Risk/Reward Index ...... 11 BMI Economic View ...... 12 BMI Political View ...... 12 India - Q1 2018 ...... 13 Headline Expenditure Projections ...... 13 Headline Pharmaceuticals & Healthcare Forecasts (India 2015-2021) ...... 13 Risk/Reward Index ...... 13 BMI Economic View ...... 14 BMI Political View ...... 14 South Korea - Q1 2018 ...... 15 Headline Expenditure Forecast ...... 15 Headline Pharmaceuticals & Healthcare Forecasts (South Korea 2015-2021)...... 15 Risk/Reward Index ...... 15 BMI Economic View ...... 16 BMI Political View ...... 16 Australia – Q1 2018 ...... 17 Headline Pharmaceuticals And Healthcare Forecasts (2016-2022) ...... 17 Risk/Reward Index ...... 17 BMI Economic View ...... 18 BMI Political View ...... 18 Methodology ...... 19 Pharmaceutical Expenditure Forecast Model ...... 19 Healthcare Expenditure Forecast Model ...... 19 Notes On Methodology ...... 20 Innovative Pharmaceuticals Risk Reward Index ...... 21 Indicators - Rationale And Sources...... 23

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

Asia Pacific Pharmaceuticals: Multitude Of Risks And Rewards To Characterise Region

BMI View: The Asia Pacific market will remain a key commercial opportunity for multinational drugmakers, presenting a diverse range of opportunities for innovative pharmaceutical firms. While some markets have high growth potential or favourable regulatory environments, it is vital that companies appreciate the varying levels of investment risks and rewards that are present in the markets in Asia Pacific. BMI's Innovative Pharmaceuticals Risk/Reward Index tool, which provides a globally comparative and numerically based assessment of a market's attractiveness for companies looking to launch a high-value drug, was established to address this.

Asia Pacific: A Mixture Of Opportunities And Risks Across The Region

Asia Pacific Innovative Pharmaceuticals Risk/Reward Index

Note: Scores out of 100; higher score = lower risk. Source: BMI's Innovative Pharmaceuticals Risk/Reward Index

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

Main Regional Features And Latest Updates

 The Asia Pacific average in our Innovative Pharmaceuticals Risk/Reward Index (RRI) outperforms the global average by a small margin. This is because the region comprises two of the world's largest pharmaceutical markets (Japan and China), and is boosted by the significant growth potential of several emerging markets.

 The region's aggregate attractiveness to innovative drugmakers masks substantial heterogeneity within its markets. Broadly, the region can be segmented into two distinct groups: developed countries and emerging markets. The former are characterised by high per-capita pharmaceutical spending and score highly for access to, and demand for, innovative medicines; however, we have seen some emphasis on cost containment, driven by high levels of government-financed spending on healthcare. In emerging markets, affordability and access are key issues leading to low-cost generic drugs becoming increasingly dominant.

 With regard to assessing rewards, the RRI identifies industry-specific factors, such as the size of the pharmaceutical market, and country-specific factors, such as the size of the pensionable population, which represent opportunities for potential investors. Japan scores the highest for the Rewards component of the index due to its large medicine market, high per-capita medicine spending and the size of its pensionable population. Meanwhile, Laos scores the lowest in the region.

 With regard to assessing risks, we identify industry-specific dangers, such as a country's pricing regime, and those emanating from the state's political and economic profile which call into question the likelihood of anticipated returns being realised over the assessed time period. Focusing on the Risks component of the index, Myanmar has the lowest score among the Asia Pacific markets due to low levels of patent respect, which are further exacerbated by the significant political and economic risks facing firms operating in the country. Singapore scores the highest in the subsector.

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

Asia Pacific: Emerging Markets Are High-Risk Markets

Asia Pacific Innovative Pharmaceuticals Risk/Reward Index

Note: Scores out of 100; higher score = lower risk. Source: BMI's Innovative Pharmaceuticals Risk/Reward Index

Outperformers: High-Reward And Low-Risk Markets

Asia Pacific markets are among the more attractive destinations for firms seeking to launch innovative medicines. Japan, ranked first in the Asia Pacific region and second globally, is the most attractive within the region by a significant margin. Australia, which is ranked second in the region, is ninth place in the global rankings - reflecting the gap between the two markets. Scoring in the Innovative Pharmaceuticals RRI favours larger markets with greater sales potential for multinationals. Both Japan and Australia have sizeable pharmaceutical markets relative to the rest of the world, though the former's is considerably larger.

Fundamentals underpinning demand for novel pharmaceuticals in Japan are strong. The country has a large pensionable population, a preference for branded medicines, a strong drug approval process and a robust medical system that provides high levels of healthcare access. Similar factors are also at play in Australia, with further improvements in the approval process likely to encourage the launch of innovative treatments in the country. However, this strong demand for pharmaceuticals, coupled with significant government contribution towards total drug spending, has incentivised authorities to introduce cost controls, resulting in greater pricing pressures. This is more acute for Japan, which scores significantly below the regional and global average for the Pricing Regime indicator. Australia scores above the global average, but below the region's.

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

 Japan's Ministry of Health, Labour and Welfare (MHLW) has stated its intention to remain highly focused on maintaining the population's access to medicines in the face of an already stretched healthcare system and a limited budget. To rein in rising pharmaceutical and healthcare spending, in view of the demographic shift and spiralling healthcare costs in the country, Japanese authorities proposed creating a more structured cost-effectiveness assessment scheme and introducing a larger role for value-based medicines by 2018. The MHLW is also implementing reforms such as annual drug price reviews and reduction in prices of generic drugs to increase utilisation rates of low-cost drugs. The proactive role taken by the government will create commercial opportunities that will encourage innovative drugmakers to strengthen their generics business in Japan.

 As part of the Australian budget for FY2017/18, the Australian government stated that it will continue to enforce drug price controls and promote the consumption of lower-value generic medicines in place of patented medicines as a means of reducing pharmaceutical expenditure. As a result, the listing of high-value pharmaceuticals on the Australian Pharmaceutical Benefit Scheme (PBS) will remain challenging, and the pressure on the pricing of pharmaceuticals will grow as the government seeks to meet the demands for new innovative treatments while maintaining a sustainable level of medical and healthcare expenditure. The government aims to work with Medicines Australia through a collaborative five-year compact providing one-off price reductions for certain medicines that have been on the PBS for 10 and 15 years, lowering more PBS drug prices over the longer period of the compact and supporting the uptake of lower- cost generic and biosimilar medicines.

Underperformers: Low-Reward And High-Risk Markets

Laos and Myanmar sit at the bottom of the Asia Pacific Innovative Pharmaceuticals Risk/Reward Index. Both countries are characterised as low-reward, high-risk markets.

 Reflective of its least developed country status, Myanmar has a small medicine market with the lowest per-capita pharmaceutical spending in the region. Intellectual property protection in the country is also minimal, a reflection of the nascent nature of the regulatory regime, and highlighted in Myanmar's Patent Respect score. The country is also plagued by significant economic and political risk, both in the short and long term, underpinning Myanmar's low score for these indicators. The country ranks 101st out of the 110 markets in the Innovative Pharmaceutical Risk/Reward Index.

 Urbanisation is minimal in Laos and, together with low purchasing power, this indicates weak demand for, as well as limited access to, innovative medicines. The resulting small aggregate pharmaceutical market means that opportunities for innovative drugmakers are limited, and results in the country ranking 103rd out of the 110 markets in the Innovative Pharmaceutical

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

Risk/Reward Index. From a Country Risk perspective, the main impediment is the country's economy, with Laos scoring the lowest on both the long-term and short-term economic risk indicators among the Asia Pacific markets.

Asia Pacific Innovative Pharmaceuticals Risk/Reward Index

Rewards & Risks Scores

Source: BMI

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

Asia Pacific Innovative Pharmaceuticals Rewards

Industry Rewards & Country Rewards Scores

Note: Scores out of 100; higher score = lower risk. Source: BMI's Innovative Pharmaceuticals Risk/Reward Index

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

Asia Pacific Innovative Pharmaceuticals Risks

Industry Risks & Country Risks Scores

Note: Scores out of 100; higher score = lower risk. Source: BMI's Innovative Pharmaceuticals Risk/Reward Index

New Innovative Pharmaceuticals Risk/Reward Index

In Q4 2017, we overhauled our Innovative Pharmaceuticals RRI methodology to more accurately capture the different elements that impact the overall investment attractiveness of a country's pharmaceutical sector for companies looking to launch a new high-value medicine. We increased the number and variety of indicators that make up the final index score and re-assessed the weightings of the Reward and Risk indicators to ensure that the most accurate reflection of the Risk/Reward environment is reflected through

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

our matrix. The RRI uses a combination of our proprietary industry forecasts and analyst assessments of the regulatory climate. As regulations evolve and forecasts change, so does the Index score, providing a highly dynamic and forward-looking result.

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

China - Q1 2018

BMI View: China's evolving demographic and epidemiological profiles will act as key drivers of growth within the country's pharmaceuticals and healthcare markets over the coming years. While rising chronic diseases and developments in the healthcare system will support market expansion, tough pricing regime and a large counterfeit industry pose downside risks for multinational drugmakers. Nevertheless, the size of the market and the overall trend towards regulatory improvement will continue to prove major draws.

Headline Expenditure Projections

 Pharmaceuticals: CNY718.7bn (USD108.1bn) in 2016 to CNY809.9bn (USD118.9bn) in 2017; +12.7% in local currency terms and +10% in USD terms.

 Healthcare: CNY4,394.5bn (USD661.2bn) in 2016 to CNY4,901.6bn (USD719.7bn) in 2017; +11.5% in local currency and +8.9% in USD terms.

Headline Pharmaceuticals & Healthcare Forecasts (China 2015-2021)

2015 2016 2017f 2018f 2019f 2020f 2021f

Pharmaceutical sales, USDbn 106.528 108.141 118.942 132.268 143.854 155.378 167.370

Pharmaceutical sales, % of GDP 0.96 0.95 0.99 1.00 1.01 1.02 1.02

Pharmaceutical sales, % of health expenditure 17.0 16.4 16.5 16.3 16.0 15.5 15.1

Health spending, USDbn 626.653 661.239 719.771 812.304 901.070 999.685 1,109.983

f = BMI forecast. Source: National sources, WHO, BMI

Risk/Reward Index

China's large and expanding population, increasing burden of chronic diseases and the ongoing reforms shaping the country's medicine market, results in the country scoring 70.8 out of 100 in BMI's Innovative Pharmaceuticals Risk/Reward Index and ranking fourth in the region. Despite the government's commitment to improving healthcare access, the attractiveness of the country's pharmaceutical market to innovative drugmakers will be weakened by greater pricing pressures and a weak intellectual property environment.

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

Latest Updates

 The acceptance of the Chinese Food and Drug Administration by the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use (ICH) implies that China's drug regulation will now be in line with international standards and this will increase the attraction of the challenging regulatory environment for drugmakers.

 In October 2017, news sources reported that Chinese authorities are revamping the approval system for medicines and medical devices to speed up access to new therapies, a potential boon for local innovators and international drugmakers.

 In September 2017, local news sources reported that artificial intelligence (AI) is set to revolutionise healthcare industry in China. Companies such as Alibaba have started to tap into the AI-powered medical care market in recent years.

BMI Economic View

High frequency indicators such as fixed asset investment growth and industrial production growth are pointing towards a slowdown in the Chinese economy. As the government seeks to curb its fiscal spending in the remaining months of 2017, economic growth will slow towards our 2017 real GDP growth forecast of 6.6%. Investment growth is set to slow further as the Chinese government pulls back from its aggressive fiscal support. This is starting to take place with the Ministry of Finance reporting that government spending growth fell to 2.9% y-o-y in August from 14.5% y-o-y in the first seven months of 2017.

BMI Political View

We expect the pace of reforms in China to pick up over the next five years, compared with the slow pace previously. That said, the cautious nature of the Chinese state, the need to maintain social stability, and the aim of reducing any potential loss in state assets mean that reforms will take place at a measured, rather than rapid pace. The increased pace of reforms will be helped by the recentralisation of the Chinese government as President Xi Jinping has strengthened his grip over the local governments through a leadership reshuffle at the provincial level.

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

India - Q1 2018

BMI View: India's evolving demographic and epidemiological profile will act as key drivers of growth within the country's pharmaceuticals and healthcare markets over the coming years. However, the impact of low levels of patent protection, price cuts, preference for generic medicines and low per capita pharmaceutical and healthcare spending will pose headwinds to innovative drugmaker opportunities in the country.

Headline Expenditure Projections

 Pharmaceuticals: INR1,176.49 (USD17.51bn) in 2016 to INR1,263.73bn (USD19.15bn) by 2017; +7.4% in local currency terms and 9.3% in US dollar terms.

 Healthcare:INR7716.75bn (USD114.85bn) in 2016 to INR8714.38bn (USD132.04bn) by 2017; +12.9% in local currency terms and +15.0% in US dollar terms.

Headline Pharmaceuticals & Healthcare Forecasts (India 2015-2021)

2015 2016 2017f 2018f 2019f 2020f 2021f

Pharmaceutical sales, USDbn 16.414 17.510 19.147 20.971 22.856 24.819 26.915

Pharmaceutical sales, % of GDP 0.73 0.77 0.75 0.74 0.73 0.73 0.72

Pharmaceutical sales, % of health expenditure 15.8 15.2 14.5 14.2 13.9 13.5 13.1

Health spending, USDbn 103.906 114.852 132.036 147.808 165.004 184.091 205.276

f = BMI forecast. Source: AIOCD Pharmasofttech AWACS, Organisation of Pharmaceutical Producers of India (OPPI), BMI

Risk/Reward Index

The impact of low levels of patent protection, price cuts, a preference for generic medicines and low per capita pharmaceutical and healthcare spending will pose headwinds to innovative drugmaker opportunities in India, as reflected in a score of 54.9 out of 100 in BMI's Innovative Pharmaceuticals Risk/Reward Index, ranking 9th in the region. While there is an increased prevalence of chronic diseases, the focus on cost-efficiency within the healthcare sector will limit the market's growth potential.

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

Latest Updates

 With the goal of improving the business environment and giving an impetus to 'Make in India' programme, in August 2017, the Department of Pharmaceuticals (DOP) drafted a new pharmaceutical policy with the aim to monitor the prices of medicines and medical devices to prevent profiteering and deliver affordable healthcare to patients. The new draft policy aims to restructure the National Pharmaceutical Pricing Authority (NPPA) from a price-controlling regulator to a price-monitoring authority.

 In August 2017, the Ministry of Health and Welfare suggested waiving local clinical trials for drugs that have been approved and marketed for at least two years in the EU, UK, US, Australia, Canada and Japan with no major adverse effects on patients with the goal of reducing the time taken by a pharmaceutical company to introduce new drugs in the Indian market from five to six years to as few as 45 days.

 In September 2017, India's drug pricing authority called for better regulation of the country's large private health care industry to ensure government efforts to cut prices of medicines and medical devices benefit patients.

BMI Economic View

India will be one of the most positive economic growth stories over the next decade due to a combination of pro-business reforms, positive demographics, and low base effects. We forecast India real-GDP growth of 6.5% over 2017-2026, faster than the growth that we expect for China (6.0%) and comfortably above the emerging market (EM) average of 4.4%. The optimisation of GST system will help spark an economic recovery over the short term. Rate revisions for hard-hit sectors which initially faced higher taxes under the GST system should offer relief to stressed businesses and encourage consumer spending. Over the longer run, the replacement of complicated local tax frameworks - which contributed to a poor business environment, with a more transparent and efficient federal system, will bolster public finances and create a better business climate that is likely to be conducive for growth.

BMI Political View

The likelihood of the ruling Bharatiya Janata Party (BJP) and its National Democratic Alliance (NDA) allies gaining control over the Rajya Sabha (RS) or upper house appear slim, as opposition seat retirements before the next general elections in April 2019, as well as new alliances, are unlikely to lift the NDA's seat count from 85 (as of September) to 123 - the requirement for a parliamentary majority. That said, a lack of control over the upper house is unlikely to significantly hinder the BJP's socio- economic reforms, some of which have been successfully implemented at a state and local government level.

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

South Korea - Q1 2018

BMI View: The South Korean population's regionally high per-capita pharmaceutical and healthcare expenditure, as well as the country's highly innovative R&D environment, will ensure the attractiveness of the pharmaceutical market. The government's support for the pharmaceutical industry, as reflected by the recent announcement of new legislation to improve medical information transparency and tackle corruption, bodes well for South Korea's long-term potential as a proposition for pharmaceutical firms.

Headline Expenditure Forecast

 Pharmaceuticals: KRW17.6trn (USD15.2bn) in 2016 to KRW17.8trn (USD15.3bn) in 2017; +0.6% in local currency terms and 0.6% in US dollar terms.

 Healthcare: KRW123.7trn (USD106.5bn) in 2016 to KRW131.6trn (USD113.5bn) by 2017; +6.4% in local currency terms and 6.5% in US dollar terms.

Headline Pharmaceuticals & Healthcare Forecasts (South Korea 2015-2021)

2015 2016 2017f 2018f 2019f 2020f 2021f

Pharmaceutical sales, USDbn 15.000 15.220 15.318 16.412 16.707 17.298 18.274

Pharmaceutical sales, % of GDP 1.09 1.08 1.03 1.00 0.96 0.92 0.88

Pharmaceutical sales, % of health expenditure 14.6 14.3 13.5 12.9 12.3 11.6 11.1

Health spending, USDbn 102.792 106.576 113.506 127.448 136.336 148.614 165.330

Source: Korea Pharmaceutical Manufacturers Association (KPMA), Korea Health Industry Statistics System (KHISS), BMI

Risk/Reward Index

The South Korean population's regionally high per-capita pharmaceutical and healthcare expenditure will ensure the attractiveness of the country's pharmaceutical market. Further, its ageing population profile will also drive greater pharmaceutical consumption, resulting in a score of 74.6 out of 100 in BMI's Innovative Pharmaceuticals Risk/Reward Index, ranking third in the region. The aggressive pricing regime and the strength of the domestic generic medicine market, however, will limit attractiveness for multinational pharmaceutical firms.

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

Latest Updates

 In October 2017, local news sources reported that an increasing number of South Korean pharmaceutical and biotech companies are setting up branches, joint ventures and subsidiaries abroad. For example, Boryung Pharmaceutical set up an investment company in Hong Kong in March 2017 and a local subsidiary in Beijing in the following month.

 In the same month, it was reported that Bayer is looking to expand its innovative push in digital health. This will be achieved through partnerships with South Korea's innovative tech start-ups, with expertise in 'deep tech' involving complex engineering skills and software expertise.

 Also in October, Celltrion Healthcare, a global biopharmaceutical leader with strong marketing and sales capabilities, and Biomm, announced an agreement to distribute Herzuma in Brazil, a trastuzumab biosimilar.

 In August 2017, South Korea's Samsung group, in partnership with Japan's Takeda Pharmaceutical, announced their plans to start producing original prescription drugs in 'unmet disease areas', starting with a treatment for acute pancreatitis, heralding its shift into a risky, but potentially lucrative, business area.

 Also in August 2017, Biogen, a US-based pharmaceutical company launched a new branch (Biogen Korea LLC) in South Korea, as it takes steps to tap deeper into the local market. The company established Samsung Bioepis jointly with Samsung Biologics, an affiliate of South Korea's leading conglomerate, Samsung, in 2012.

BMI Economic View

Advanced estimates indicated that South Korea's real GDP expanded by 3.6% y-o-y in Q317 versus the 2.7% y-o-y recorded in Q217. We have upgraded our real GDP forecasts for both 2017 and 2018 to 3.2% and 3.0%, respectively (from 2.8% and 2.9% previously), and expect the manufacturing sector to remain the main driver of growth, while the Pyeongchang Winter Olympics will provide a one-off boost to tourism. However, we note that structural domestic issues will continue to weigh on domestic demand.

BMI Political View

South Korean President Moon Jae-in's administration will continue to be characterised by slow policy- making due to his lack of a parliamentary majority, as evidenced by difficulties he has faced in his first 100 days in office. Moon is also likely to face continued pressure to adopt a tougher stance against an increasingly assertive North Korea amid a more hawkish US Trump administration.

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

Australia – Q1 2018

BMI View: Against the backdrop of a growing and ageing population and an increasing demand for medicines, the Australian government will remain highly focused on cost containment within the pharmaceuticals and healthcare sector. While the listing of new innovative medicines on the Australian Pharmaceutical Benefit Scheme will improve the commercial opportunities for innovative drugmakers, the pressure to rationalise pharmaceutical spending remains in place, with rising demand for medical services and a ruling party that is focused on balancing the country's budget.

 Pharmaceuticals: AUD13.5bn (USD10.03bn) in 2016 to AUD13.71bn (USD10.63bn) in 2017; 1.6% in local currency terms and 5.9% in US dollar terms.

 Healthcare: AUD169.08bn (USD125.68bn) in 2016 to AUD176.27bn (USD136.61bn) in 2017; 4.25% in local currency terms and 8.7% in US dollar terms.

Headline Pharmaceuticals And Healthcare Forecasts (2015-2021)

Indicator 2015 2016 2017f 2018f 2019f 2020f 2021f

Pharmaceutical sales, USDbn 9.083 10.034 10.628 10.756 10.930 11.082 11.142

Pharmaceutical sales, % of GDP 0.74 0.78 0.78 0.77 0.75 0.73 0.70

Pharmaceutical sales, % of health expenditure 7.5 8.0 7.8 7.6 7.5 7.3 7.1

Health spending, USDbn 121.768 125.676 136.613 141.014 146.475 152.124 156.931

e/f = BMI estimate/forecast. Source: PBS Information Management Section (Department of Health and Ageing), Australia Self-Medication Industry, The Association of the European Self-Medication Industry (AESGP), local news sources, BMI

Risk/Reward Index

Against a backdrop of high per capita drug spending and a growing and ageing population, new opportunities will continue to drive the innovative drug market in Australia. This is reflected in the country's score of 76.9 out of 100.0 in BMI's Innovative Pharmaceuticals Risk/Reward Index. The government's commitment to enforce drug price controls and promote the consumption of lower-value generic medicines in place of patented medicines, as a means to reduce pharmaceutical expenditure, will pose a significant commercial threat to multinational pharmaceutical firms.

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

Latest Updates

 In the government's announcement on September 30 2017, a list of 1,400 medicines that will be subjected to the price disclosure cycle from October 1 2017 was disclosed. These medicines will receive extra subsidies under the Pharmaceutical Benefits System (PBS).

 In October 2017, it was announced that Imbruvica (ibrutinib), a tablet for patients living with the most common form of leukaemia, chronic lymphocytic leukaemia (CLL), will be added to the PBS from December 1.

 In October 2017, it was announced that research into developing new medical technologies and ways of improving patient care will receive a USD1mn boost from MTPConnect (the Australian Government funded Medical Technologies and Pharmaceuticals Industry Growth Centre). This will be matched by USD1mn from the medical sector.

 In October 2017, US-based SONIFI Health announced an agreement with the Victorian Healthcare Association (VHA) to offer its industry leading patient engagement solutions to VHA member organisations.

BMI Economic View

Australia's real GDP growth rebounded to 3.3% q-o-q on a seasonally adjusted annualised basis in Q217 from 1.3% q-o-q in Q117 as transitory factors such as poor weather improved. Leading indicators are showing strength due to support from the government's infrastructure investment and rising commodity prices. We expect the economy to remain on a cyclical upswing, forecasting real GDP growth to come in at 2.1% in 2017. However, we are downgrading our 2018 forecast to 1.8% from 2.2% previously as we see risks of a bigger downturn in the elevated housing market, coupled with weakening commodity prices due to slowing Chinese growth.

BMI Political View

We expect Australia to continue to experience short-term political uncertainty and the Australian dollar to remain under pressure following the decision by the High Court to rule Deputy Prime Minister Barnaby Joyce (alongside four other senators) ineligible for office due to his dual citizenship, which he has already renounced. The ruling Liberal-National coalition would lose its one-seat majority in the 150-seat House of Representatives if its candidate loses the upcoming by-election, which would be negative for the country's business environment.

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

Methodology

Pharmaceutical Expenditure Forecast Model

Historic pharmaceutical market data is collected from a range of sources, including:

 regulatory agencies;

 pharmaceutical trade associations;

 company press releases and annual reports;

 subscription information providers;

 local news sources;

 information from market research firms that is in the public domain.

Currently available data varies in confidence levels, so it is calibrated by BMI's Pharmaceuticals & Healthcare analysts. In the absence of a complete time series of numbers, intermediate years are calculated from secondary sources. This 'composite' approach is used to ensure the accuracy and consistency of historic data, which is crucial for reliable forecasts.

To remove the effect of inflation, real pharmaceutical expenditure figures are then calculated by removing the annual average consumer price index (CPI).

Real per-capita pharmaceutical expenditure numbers are calculated by dividing by population figures.

A linear regression (see Note 1 for explanation) is then performed on five years of real per-capita pharmaceutical expenditure against real per-capita final consumption (see Note 2). From analysis of the top 130 economies, BMI has established a strong statistical relationship between pharmaceutical expenditure and final consumption expenditure (r = 0.985).

Healthcare Expenditure Forecast Model

Historic public and private healthcare expenditure data is sourced from the World Health Organization (WHO)'s Global Health Expenditure Database, which contains the National Health Accounts (see Note 1 for methodology).

Data is provided in nominal local currency terms.

To remove the effect of inflation, real healthcare expenditure figures are then calculated by removing the annual average CPI.

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

Real per-capita healthcare expenditure numbers are calculated by dividing by population figures.

A linear regression is then performed (see Note 2 for explanation). This is first on five years of real per- capita public healthcare expenditure against real per-capita government final consumption expenditure (see Note 3 for definition). This generates a 10-year forecast of future of real per-capita public healthcare expenditure figures from 'known' projected real per-capita government final consumption expenditure figures. Another linear regression is simultaneously performed on real per-capita private healthcare expenditure against real per-capita private final consumption expenditure (see Note 4 for definition).

To generate the nominal public healthcare spending forecast, population and CPI numbers are returned to both real per-capita public healthcare expenditure figures and real per-capita private healthcare expenditure figures.

The overall healthcare expenditure forecast is then calculated by combining public and private healthcare expenditure.

Notes On Methodology

Note 1: National Health Accounts methodology. The global health expenditure database that the WHO has maintained for the past 10 years provides internationally comparable numbers on national health expenditures. The WHO updates the data annually, taking, adjusting and estimating the numbers based on publicly available reports (national health account reports, reports from ministries of finance, central banks, national statistics offices, public expenditure information and reports from the World Bank, the IMF, etc). The estimates are sent out to the ministries of health for validation prior to publication, but users are advised that country data may still differ in terms of definitions, data collection methods, population coverage and estimation methods used. This database is the source of the health expenditure tables in the World Health Statistics Report and the WHO Global Health Observatory.

Note 2: Linear regression equation.

y = mx + b

Where y = unknown variable, m = slope of gradient, x = known variable, and b = where the line crosses the y-axis.

Note 3: Final consumption is the sum of government final consumption expenditure and private final consumption expenditure. Government final consumption expenditure is the sum of expenditure on final goods and services by the government. Included in this are public sector salaries, but it does not include transfer payments such as unemployment benefits or pensions. Private final consumption expenditure is the sum of all private consumption of goods and services within the economy, including both durable and non-durable goods. Housing purchases, however, are excluded. Government final consumption expenditure and private final consumption expenditure are the 'G' and 'C' in this equation:

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

GDP = C + I + G + (X - M)

Where GDP = gross domestic product, C = private final consumption expenditure, I = gross investment, G = government final consumption, X = exports, and I = imports.

Innovative Pharmaceuticals Risk Reward Index

Our Innovative Pharmaceuticals Risk Reward Index (RRI) quantifies and ranks a country's attractiveness in terms of its pharmaceuticals industry; it balances the Risks and Rewards of launching innovative medicines in different countries. It should be emphasised that the RRI broadly assess the rewards and the risks that a company will face when looking to launch an innovative drug in a market. For example, we do not differentiate between drugs that are a part of different therapeutic groups or whether the drug being launched is the first to be launched in the market or will be one of the many different drugs of the same therapeutic class that has been launched in the market.

To form a country's RRI score, we combine industry-specific characteristics with broader economic, political and operational market characteristics. We weigh these inputs in terms of their importance to investor decision making in a given industry - in this case that of innovative pharmaceuticals. The result is a nuanced and accurate reflection of the realities facing investors in terms of the balance between: 1) opportunities and risk; and 2) sector-specific and broader market traits. This enables users of our RRI to assess a market's attractiveness in both a regional and global context.

The RRI also encompasses a combination of our proprietary forecasts and analyst assessment of the regulatory climate, as well as globally acceptable benchmark indicators (eg, the World Bank's Doing Business Scores and Transparency International's Corruption Perceptions Index). As regulations evolve and forecasts change, so does the RRI score, providing a highly dynamic and forward-looking result.

The Innovative Pharmaceuticals RRI universe comprises 110 countries.

Benefits Of Using BMI's Innovative Pharmaceuticals RRI

 Global Rankings: One global table, ranking all the countries in BMI's universe for the launch of innovative pharmaceuticals from least (closest to zero) to most attractive (closest to 100).

 Accessibility: Easily accessible, top down view of global, regional or sub-regional Risk/Reward profiles.

 Comparability: Identical methodology across 110 countries allows users to build lists of countries they wish to compare, beyond the confines of a global or regional grouping.

 Scoring: Scores out of 100 with a wide distribution, provide nuanced investment comparisons. The higher the score, the more favourable the country profile.

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

 Quantifiable: Quantifies the Risks and Rewards of doing business in the innovative pharmaceuticals sector in different countries around the world and helps identify specific flashpoints in the overall business environment.

 Comprehensive: Comprehensive set of indicators, assessing industry-specific risks and rewards alongside political, economic and operational risks.

 Entry Point: A starting point to assess the outlook for the innovative pharmaceuticals sector, from which users can dive into more granular forecasts and analysis to gain a deeper understanding of the market.

 Balanced: Multi-indicator structure prevents outliers and extremes from distorting final scores and rankings.

The RRI matrix can be split into two distinct components:

Rewards: This component of the RRI is composed of an evaluation of an Industry's size and growth potential (Industry Rewards), and also macro industry and/or country characteristics that directly impact the size of business opportunities in a specific sector (Country Rewards).

Risks: This component of the RRI is composed of an evaluation of micro, industry-specific characteristics, crucial for an industry to develop to its potential (Industry Risks) and a quantifiable assessment of the country's political, economic and operational profile (Country Risks).

Assessing Our Weightings

We deliberately afford Rewards a greater weighting (65% of a market's final RRI score) and within this, the Industry Rewards pillar accounts for a majority 75%. This is to reflect the fact that when it comes to long-term investment potential, industry size and growth potential carry the most weight in indicating opportunities, with other structural factors weighing in but to a slightly lesser extent. In addition, our focus and expertise in Emerging and Frontier Markets has dictated this bias towards industry size and growth to ensure we are able to identify opportunities in countries where regulatory frameworks are not as developed and industry sizes not as big (in USD terms) as in developed markets, but where we know there is a strong desire to invest.

Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis

Indicators - Rationale And Sources

Indicator Source Rationale

Rewards

Industry Rewards

Denotes breadth of pharmaceutical market. Large markets score Market Expenditure, higher than smaller ones. Scores are based on annual average USDbn BMI Forecast expenditure over a five-year forecast period.

Denotes depth of pharmaceutical market. High-value markets score better than low-value ones. Scores are based on annual average Spending Per Capita, USD BMI Forecast expenditure over a five-year forecast period.

Denotes sector dynamism. Scores are based on annual average Sector Value Growth, % BMI Forecast growth over a five-year forecast period.

Country Rewards

Urbanisation is used as a proxy for the development of medical Urban/Rural Split BMI Forecast facilities. Predominantly, rural states score lower.

Shows the proportion of the population over 65. States with ageing Pensionable Population, % BMI Forecast populations tend to have higher per capita expenditure.

Fast-growing states suggest better long-term demand and thus growth for all industries. Scores are based on annual average growth Population Growth, % BMI Forecast over a five-year forecast period.

Risks

Industry Risks

BMI Subjective Markets with fair and enforced intellectual property regulations score Patent Respect Indicator higher than those with endemic counterfeiting.

Markets with a free pricing environment score higher than markets where governments and private-sector payers put downward BMI Subjective pressure on pharmaceutical prices as a mechanism to control Pricing Regime Indicator expenditure.

High scores are awarded to markets which have realised the economic and social benefit of pharmaceuticals, in turn modernising the provision of healthcare through reforms and essential drug lists BMI Subjective and encouraging local manufacturing and research and development Protectionism Indicator by foreign firms.

Source: BMI