Life Science and Healthcare Industry

SECTOR ANALYSIS RESEARCH SERIES – LIFE SCIENCE AND HEALTHCARE INDUSTRY Presenters: Eunice Chu, FCCA, Head of Policy, ACCA Hong Kong Alan Lok, CFA, Director, Ethics Education and Professional Standards, Asia-Pacific, CFA Institute Dr Bin Li, Founder & CIO, Lake Bleu Capital Dr Jiaxi Xu, Managing Director & Deputy Head of Research, China Industrial Securities READ THE FULL REPORT

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Eunice Chu, FCCA Head of Policy, ACCA Hong Kong Life Sciences and Healthcare industry

By Eunice Chu Head of Policy, ACCA Hong Kong

Non-discretionary industry 10% of global GDP was spent on it … .. And it is snowballing with aging population

. Producers are competing on efficient services . Consumers are educated and empowered by internet . Governments strikes a balance between overregulation and the free market

. Drug producers

Demand

. Health care providers

Patients

. Medical equipment and supplies manufacturers

Consolidation – M&A Cover – insurance Change . Reduced competition . Price at health . Government policies may push up prices condition thanks to changes greatly affect technologies health care industry

Demographics Diseases Development . Aging population . Diabetes, heart . Technologies attack , stroke, . Co-payment system cancer – on the rise . Computerized . Step-down care health records

Demand\ Market Track Universal Growth Structure Records analysis for healthcare companies • R&D investment • Staff treated \paid • Net margins fairly? • Extended trials for • Medicines are drugs / devices? thoroughly tested & compliant?

Financial ESG Performance Compliance

1. Pipeline of drugs under development

2. Various approvals need

3. Successful rate to convert pipeline drugs into approved treatments

4. Patent portfolio – exclusivity period

5. Strategy to deal with patent expirations & challenges

6. Aware of peers’ pipeline drugs – threaten new products?

7. Brand is crucial

. Product portfolio & . Consumables diversity (bandages, syringes, . Endurable or obsolete in gloves and swabs) view of technological . Frequently use, higher advances sales . Innovator or follower . Disposable nature . Aging population benefit . Dominate the market? products for aged . Long-term contract with people, i.e, mobility aids health board

1. Health care budgets – by government, insurance, individuals

2. Population mix

3. Health care tourism – revenue from overseas patients

4. Reputation – employs world class professionals & best treatment

By Eunice Chu Head of Policy, ACCA Hong Kong

Dr JiaXi Xu Managing Director & Deputy Head of Research, China Industrial Securities Co. Ltd

Dr. XU Jiaxi Managing Director of Industrial Securities Deputy Head of Research Chief Healthcare Analyst Medical Policy Reforms in the Past 10 Years

10 Years of Medical Reform from 2010 to 2019 Key Words in Medical Reform

Anhui Model/Double Envelope System

Quantity Purchase

Reform of NMPA Review and Approval System

Generic Drug Consistency Evaluation

Centralized Purchase of High Value Medical Consumables

Restriction of Adjuvant Drug Use

DRGs Disease Diagnosis Related Group Payment

Public Hospital Reform

Anti Commercial Bribery

17 Progress of the Three Medicine Linkage Reform Is Successively

NHSA in “Progressive NMPA in “Perfect tense” NHC in “future tense” tense”

• Marked by the "722 Incident" • Taking the “4+7" purchase on • After the institutional reform of in 2015, after two years of May 31 and December 7, 2018 the State Council, more reform, the policy framework as the sign, the “Main Force" to attention has been paid to the has been established promote the medical reform at formulation of hospital related present affairs and clinical rules • Joined ICH, accelerated approval, established new drug • The administrative resources • The highest level (the only and authority are enough, but ministerial level in the three classification system, MAH, the manpower is limited. departments), and the largest consistency evaluation… number of provincial, municipal • The task is "urgent, difficult“. and grass-roots personnel • In the future, more policies To expand the quantity purchase will focus on implementation range, try out high-value • Gradually start the and pay attention to details medical devices purchase comprehensive performance pattern, DRGS and adjust evaluation system of public • Pay attention to whether the medical insurance hospitals, but this is also the drug administration system can reimbursement list “Most Difficult Bone to Bite" continuously obtain sufficient administrative resources 18 Some Speculations on Medical Reforms in China

Low Price for Learning Object Problem remains Large Volume

• Although U.S. healthcare • Even for innovative drugs, • Doctors' open income is still system encourages the price in China will be difficult to improve innovation, it is expensive much lower than the dramatically in a short term. and less efficient. international level The income gap between • The model of small • However, relying on China's departments and economies can’t be referred huge patient base, we can professional titles is still to, China has to ensure its still obtain considerable large independent medical market space supplies • The future medical insurance • It seems that the models of market will be dominated by Britain, Germany and Japan Chinese local enterprises in the future are more worthy of reference

19 "Is the price reduction over?" ——Always on the way

Because it is always on the road, don’t worry about it. Just look at the following product line!

20 Performances of Pharmaceutical Sectors and Companies in COVID-19 In the first quarter of 2020, the performance of each sub-sectors in healthcare (from the top: TCM, chemical drugs, API, distribution/pharmacy, bio-products, medical device, medical service）

In general, the performance of the pharmaceutical sector in Q1 was greatly affected by COVID-19, with obvious differentiation within the sector. The performance of API, pharmacies and some equipment companies grew better, and the endogenous growth of leading companies in each sub sector was relatively stable. With the epidemic situation under control, there will be high growth possibility in medical equipment, medical testing, pharmacies, and fast recovery companies such as just needed drugs and vaccines. 21 Healthcare-in-spotlight Will Be a New Normal The first half of 2020 is a "big year" for investment in the pharmaceutical industry. As of May 22, the index of CITIC healthcare industry rose by more than 17%, ranking first. Nearly 8% out of the second place (Food and Beverage). Since 2020, the number of varieties with an increase of more than 100% has reached 5. The number of varieties with more than 50% has reached 43. Some traditional Chinese medicine and biological products related to the epidemic situation were also outstanding. "Double Highs" of Pharmaceutical Sector • As of May 22, the growth rate of pharmaceutical sector ranked first among 29 primary industries. Its valuation premium rate has reached the highest level in 2014. At the same time, the overall status of medicine was maintained in an over matched state (15.03% in Q1 and 8.28% in standard configuration), and its configuration level was in the middle and high level in history (the highest was 17% of Q1 in 2014). To some extent, the high valuation premium rate and institutional positions have restricted the continuous general rise of the board. With the overseas epidemic situation under control and the country reopen, foreign demand industry chain gets considerable attentions, which affects the follow-up performance of the pharmaceutical sector.

22 Medical Device: Golden Decade

China's Medical Device Industry Is Growing Rapidly With the growth of population and the economics, the medical device market will continue to grow in the long run. According to EvaluateMedTec, the global sales volume of medical devices in 2017 was $405 billion, which is expected to exceed $594.5 billion in 2024 with the CAGR at 5.40%. China’s medical device industry has increased from ¥43.4 billion in 2006 to ¥530.4 billion in 2018 with CAGR at about 23.01%. It is estimated that the annual sales volume of China's medical device industry will exceed ¥700 billion by 2020, and the CAGR of China's medical device industry will exceed 10% in the next 10 years. China's Medical Device Industry Is Ready To Go Internal factors such as technological progress and industrial chain maturity and external factors such as policy and capital provide the basis for the development of domestic devices. Domestic medical equipment has broken through technical barriers; specialized industrial clusters create conditions for cost control and expansion of production. Policies also support domestic equipment. The medical equipment market has entered the stage of continuous large-scale. Investment and financing and M&A market is active, providing sufficient funds and resources for excellent domestic enterprises. 23 Wave of Innovation China's Independent Innovation Products Emerge In • To support the development of China's innovative industry, stimulate the innovation potential of medical device enterprises, and meet different clinical needs, China implemented the “Special Approval Procedure for Innovative Medical Devices (Trial)" from March 1, 2014, and formulated a priority review and approval scheme for innovative medical devices • Since the release of “Special Approval Procedures for Innovative Medical Devices", as of 2019.12.31, 236 products have entered the special examination channel of innovative medical devices. 73 innovative products have obtained registration certificates • The Ministry of Science and Technology of China has selected “Catalogue of Innovative Medical Devices (2018)", which includes 87 innovative medical device products, 9 international original products, 55 domestic invention products and 23 major technological upgrading projects. It is expected that a large number of domestic innovative medical devices will come out in 3-5 years. 24 Wave of Innovation

Import Substitution Is the Main Theme of China's Medical Device Industry in the Next Decade Domestic medical equipment has now broken through a number of technical barriers, and has basically realized the import substitution (domestic accounted for more than 50%), including: 1) cardiovascular stent, cardiac occluder, artificial meninges, trauma products in orthopedic implants, etc; 2) monitors and medical equipments; 3) biochemical diagnosis in the field of in vitro diagnosis 4) oxygen generator and sphygmomanometer in household medical equipment. Tracing back to the successful experience in which import substitution has been realized, technology, brand, cost performance, channel and policy are all the magic weapons for domestic enterprises. The critical point of import substitution is: 1) the level of talents and technology is up to standard; 2) the knowledge of users is popularized; 3) the channel access. The best way is: import products have been promoted in key academic fields, but the market share is relatively low, the concentration of domestic enterprises is low, the import substitution is just beginning, and the first echelon in the industry has not yet formed. Domestic enterprises choose to enter at this time. 25 Wave of Innovation

1000000 Implementation of PCI Operations in China in 2017 Province Case Province Case Age distribution of PCI 915256 900000 (City) Number (City) Number 4% 2% 13% 1 Beijing 61709 16 Sichuan 18510 21% 800000 2 Shandong 58024 17 Shanxi 20697 753142 3 Guangdong 43373 18 Yunnan 16504

700000 4 Jiangsu 40000 19 Guangxi 14760 666495 5 Henan 44000 20 Jilin 13017 28% 6 Hebei 41185 21 Fujian 14050 600000 567583 7 Liaoning 29835 22 Xinjiang 14045 8 Hubei 34205 23 Jiangxi 11332 32% 500946 500000 9 Shanghai 38109 24 Gansu 12170 ≤40 41-50 51-60 61-70 71-80 >81 454505 10 Zhejiang 33772 25 Neimenggu 10280 388836 400000 11 Tianjin 23032 26 Guizhou 8538 341069 12 Shanxi 21773 27 Ningxia 5354 284936 300000 13 Hunan 23346 28 Chongqing 5781 14 Heilongjiang 23018 29 Hainan 3780 228380 187000 200000 15 Anhui 21765 30 Qinghai 1576 140000 96000 100000 70000 50000 18345 45 51 75 118 232 343 484 817 1341 1803 3740 4985 8000 11753 0

Domestic Stent Was Approved in 2000 26 Sources: Public information, organized by Industrial Securities Economic and Financial Research Institute 2.4 Domestic Companies Sprouting up in Each Track

Internation Domestic Growth Growth Major international Major Domestic Segments al Market Market Domestic industry pattern rate rate manufacturers manufacturers Capacity Capacity Double Medical、 Orthopedic $37.5 25 billion Import substitute of trauma implants and spine products has reached more than 60% and JNJ，StryKer, WEGO 6% 15% implant billion yuan 40% respectively; while artificial joints are still dominated by imports. SilkRoad24 Tianjin Tianzheng、 AKMedical Domestic first tier (MicroPort, LEPU, JWMS) completed import substitution in their Abbott laboratories, Cardiovas- 88-99 MicroPort, Lepu High value consumables $70 billion 5% 10% first 4 years; Since then, the competitive landscape has remained and solidified for Boston Scientific, cular stent billion yuan Geoway medical nearly a decade so far. Medtronic Medtronic, St.Jude's 20 billion Domestic market penetration rate of pacemakers is low and monopolized by foreign Lepu, Lifetech, Pacemaker $75 billion 6% 20% Boston Scientific yuan brands, which account for more than 80% of the market share. Chuang-ling Bertoli, Solin Group Xintianfu、Guanhao 50-60 The import substitution degree of meninges products is high; the domestic giant's market Meninges 10% JNJ, Braun Biotech, billion yuan share is about 90%. ZH-BIO Oral repair 10 billion Geistlich's market share is about 60%; ZH-BIO are in the initial stage, being domestic $30 billion 5% 30% Geistlich ZH-BIO membrane yuan exclusive, with a market share of about 8%, and a large space for import substitution. Cardiac St. Jude has the largest share of the global market, and First Build technology is the 1 billion St. Jude Lifetech、Starway occlusion $3.4 billion 7% 20% second largest supplier of Quanqiu. At present, domestic giants occupy more than 90% yuan Medical, SHSMA device of the domestic market and achieve import substitution. 6 pp. in Domestic manufacturers occupy the middle and low-end market, while foreign Improve-medical、 Blood BD、Sekisui

Low Value consumablesLow Europe, 59.73 enterprises occupy the high-end market. The Chinese market is mainly occupied by BD, Sanli collection 8% 10% Medical Technology America billion Yangpu Medical, Sanli Group and Gongdong Medical, with a total market share of Gongdong、Ruiqi tube Greiner and Japan 42.3%. Kangjian、WEGO The concentration of disposable medical consumables is low, and the leading enterprise WEGO、Hualin, is domestic Weigao. Except BD Company, Telmo and Braun occupy less than 1/4 share, BD、Terumo Yuyue；Shanghai Catheter 31 billion 12% 11.4 billion 15% the rest are divided by domestic brands. B.Braun Quanta, Jiangxi Hongda Injection Double-dove、WEGO BD、Nipro 27 needles 250 billion 12% Kindly Group accounted for nearly a quarter of the domestic share, ranking the first. Kanglaide、Sanxin, Terumo、B.Braun Hongda 2.4 Domestic Companies Sprouting up in Every Track

International Domestic Growt Growth Major international Major Domestic Segments Market Market Domestic industry pattern h rate rate manufacturers manufacturers Capacity Capacity

WDM is the domestic DR leading enterprises，Angell GE、Siemens, WDM, United Imaging, DR 133 billion 5.4% 18000 20.05% Technology, United Imaging ranks the second and third; Philips Angell Technology The market share of imported brands is low neusoftmedical、 Import substitution is not yet complete, and imported GE、Siemens, CT 39.5 billion 3% 19027 18.00% ANKEBIO brands account for 75% of the market. Philips United Imaging、WDM

neusoftmedical、 GE, Siemens, Philips and Bethesda account for about GE、Siemens, MRI $26.2 billion 2.7% 8289 13.40% ANKEBIO, United 50% of the imported brands. Philips Imaging

GE and Philips have more than 50% market share in GE、Philips、 Ultrasound $69 billion 3.5% 80 billion yuan 15-20% China's ultrasonic market, while Mindray's market HITACHI， Mindray, SonoScape share is gradually increasing. Siemens, Yum

Mindray Medical is the absolute leader, occupying Mindray, Edan 20.2 billion Monitor $27.9 billion 4% 15.4% 64.80% market share, and has realized import Philips、GE Instruments, yuan substitution. BLT Domestic competition is fierce for middle and low Anesthesia $9.5 billion 2% 10 billion yuan 4% grade anesthetics, and import monopoly for high grade Draeger、GE Mindray, AEONMED Machine anesthetics.

28 Biotech: For BIC/FIC in China

Among the crowds of innovative drug related enterprises in the A-share market and Hong Kong Exchange, only a handful really rely their profits on innovative drugs. However, with opening of Hong Kong stock biotechnology sector and STAR board, more and more innovative biomedical enterprises begin to enter the eyes of investors.

Large generic drug companies represented by Hengrui Medicine and China Biopharma have successfully transformed to innovative drug companies through independent R&D, mergers and acquisitions; while the bio-innovative R&D-driven Biotech represented by BeiGene and Innovent, profit after the launch of major products, with the help of venture capital, IPO and other financing.

On the whole, the gap between the R&D level of China‘s pharmaceutical industry and the international level is gradually narrowing. At the research level, the R&D of first-in-class (FIC) innovative drugs is an important way for China to transform from a pharmaceutical power to a pharmaceutical super power. For domestic enterprises, the development of drugs like me-too drugs or me-better based on international new drugs is a relatively feasible innovation path at present. China is experiencing the transformation and breakthrough of "generic drugs – 505b2 product – BIC - FIC".

29 Biotech: For BIC/FIC in China

•During the transform from generic drug enterprise to innovative drug enterprise, a certain degree of "high-level repeated construction” became apparent. Taking biology as an example, judging from the number of domestic IND declarations for bio-innovative drugs as of September 2019, nearly half of the declarations revolve around PD-1/PD-L1 targets.

•Biotech, despite the relative lack of funds and limited sales team scale, stands out for their R&D strength, with their mostly best-in-class (BIC) products.

•The homogeneity of targets directs Biotech at first-in- class (FIC) varieties to enjoy the market exclusive period after product launch. Compared with the pipeline under research, Biotech's early projects are more mostly focused on domestic or global innovative targets or therapies.

30 Big Pharma: 6 Essential Abilities

• Commu- • Target nication Clinica • plan Registr Project • Policy • Business l trials • speed ation structure understa nding

• Health • academy • Ground access insurance market sales promotion • Inquiry • pricing • system

31 3.5 Systemic advantages are becoming more important Plan 1：Chinese style Big Pharma Plan 2: Chinese Style Biotech Feature： strong sales + big targets + Fast Follow Feature： mediocre sales + small-medium targets Position: mainly domestic, but also overseas + aim at Best-in-Class BD focus: License-in Position： mainly overseas, but also domestic BD focus： License-out and License-in

Virtuous capital inner circulation to ensure sustainable growth of R&D investment

Breadth of R&D Financial Strength pipeline

Enterprise Sales Strength Performance

R&D Strength R&D pipeline speed

R&D experience accumulation 32 4.2 Medical Service： The Style of Different Tracks

High Health Surgery Center Stem cell bank checkup Chain Cord blood bank pharmacy Hemodialysis Radiotherapy center Center Reproductive Center Primary diagnosis Vision Center Eye Hospital Rehabilitation hospital Medical and beauty maternity hospital institutions Dermatology Hospital Capital intensive Pediatric hospital Dental clinic Orthopaedic replicability Hospital General hospital

Chinese Cardiovascular hospital Clinic Talent-intensive Cancer hospital Extra Gain Doctors Brain hospital

Source：CITIC PE Fund Threshold High 33 4.2 Medical Service： The Style of Different Tracks

High Health Surgery Center Stem cell bank checkup M&A integratedChain market; Supply without demand; Cord blood bank Invest in leading companies Decisive Capitalpharmacy strength Vulnerable to overcapacityHemodialysis Radiotherapy center Center Reproductive Center Primary diagnosis Vision Center Eye Hospital Branch Partner: Rehabilitation hospital Bottleneck: doctor supply; Specialist chains have TheMedical core of and the beauty maternity hospital Hard to break out in the institutions steadily expanded mechanism Dermatology Hospital short term Pediatric hospital Dental clinic Orthopaedic replicability Hospital General hospital Model to set the threshold Strong specialty, Science education; Chinese Cardiovascular hospital Mechanism to boost stickiness enlarge scale Brand Management Clinic Cancer hospital Extra Gain Doctors Brain hospital

Source：CITIC PE Fund Threshold High 34 Some Takeaways

what kind of business to do？ Suggestion on the capital market •Either be the giant, or leader at niche market • The establishment of modern enterprise • quickly form your competition barrier at fields system vs Diversification of equity untouched by leading companies • What kind of capital market partner to choose? (Resources, information, will to help)

Maintaining sustainability In a few years…

• Medicine: a long-run industry; need to plan ahead for the •After 3 years, the premium of the STAR will gradually 5-10 years disappear, but the valuation differences between listed companies will increase. •Transition; hot spot vs Sustainability •The qualification of listed companies will no longer be a • What is valuable is a usable high market value scarce resource, and the era of mergers and acquisitions will begin

•Necessary to scan and diagnose all aspects of the35 industry (policy trends, opponents, industry management) Thanks for listening. Industrial Securities Healthcare Research Team Jiaxi Xu, Managing Director of Industrial Securities, Deputy Head the Research Institute, chief healthcare analyst, Ph.D. of Life Science School of Fudan University, editorial board member of Progress in Pharmaceutical Science, Shanghai Youth Post Expert, Shanghai Youth Gold talent. In 2011, Dr. Xu joined Industrial Securities. He led the team to win the first place of the Best Analyst of New Fortune, from 2016 to 2019, and the most popular analyst for IAMAC for five consecutive years, from 2014 to 2018. He also won the Crystal Ball Awards, Starmine, Golden Bull Award, Forbes Best Analyst for multiple times.

Yuanyuan Sun - Co-Chief Analyst, Medical Service, Pharmacy, Jiabo Zhang - Medical device Hanyang Huang – big pharma, CRO Nan Dong – STAR Board, IVD, biotech Zhu Xinyan - Chinese medicine, healthcare consumer products Nan Wang - APIs Yingchen Cai - Head of HK healthcare research Wei Li - HK healthcare research

数据来源：中国政府网，兴业证券经济与金融研究院整理 Best Regard! THANK YOU