China Pharmaceutical Sector 2019 Q4

CHINA PHARMACEUTICAL SECTOR 2019 Q4

An EMIS Insights Industry Report

API Active Pharmaceutical Ingredients

CFDA China Drug and Food Administration

CPIA China Pharmaceutical Industry Association

EDL Essential Drug List

GAC General Administration of Customs

GQCE Generic Quality Consistency Evaluation

MOHRSS Ministry of Human Resources and Social Security

NDRC National Development and Reform Commission

NHFPC National Health and Family Planning Commission

NRDL National Reimbursement Drug List

pp Percentage Point

RMB Chinese Currency Renminbi

TCM Traditional Chinese Medicines

YYTJ China Pharmaceutical Statistics

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01 EXECUTIVE SUMMARY

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Sector in Numbers

No.1 No.1 No.2 API Producer API Exporter Pharmaceutical Globally Globally Market Globally

RMB RMB RMB 2,399bn 309bn 3,591bn Sales Total Total Revenue Profit Assets

2.8mn 8,782 1,257 tonnes Number of Number of Conventional Enterprises Loss-Making Enterprises Drugs Output

Note: Data for 2018. Source: YYTJ, GAC, CEIC, NBS, IMS Health

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Sector Overview

China is the world’s second largest pharmaceutical market after the US and the largest producer and exporter of active pharmaceutical ingredients (APIs) globally. Since it is the world’s most populous country, with a large share of ageing population, the healthcare and pharmaceutical industries are of key importance to the government, which has launched a series of reforms in both sectors over the last few years. The pharmaceutical sector is going through transformation and liberalisation, which are expected to narrow the price gap between local and foreign drug manufacturers and increase competition and sector consolidation. Along with the removal of the price cap on drugs in 2015, the government has increased its supervisory role.

Entry Modes Since 2015, China’s government has implemented a series of major reforms in the pharmaceutical sector, which lowered the entry barriers and reshaped the sector’s business model. The most significant change was the liberalisation of drug prices, which had been regulated by the government since 2000. In 2015, the government also took measures to accelerate the registration process for new pharmaceutical companies, as well as the approval procedures for new innovative drugs, which are supported by the government in line with the plan to transform China into an innovation-led manufacturer of high-quality and high-tech products in the coming years. However, local governments have set cost reduction requirements for hospitals, which put pressure on drug manufacturers.

Segment Opportunities Local generic pharmaceuticals have high sales volumes and lower prices but are of poorer quality than imported off-patent medicines, and this is the major segment of competition for foreign companies. Previously, this segment used to enjoy large sales directly to hospitals, generating good profits for companies. With the implementation of a zero-markup policy on drugs at all public hospitals in 2017 the share of branded generics in total sales decreased sharply. The launch of a centralised drug procurement scheme with minimum sale quantities in China’s major cities at the end of 2018 is expected to accelerate the replacement of originator drugs with generics. There are lucrative opportunities in the development of innovative drugs, due to high profitability.

Government Policy The pharmaceutical sector is largely dependent on government policies and on the reforms which the healthcare industry has been undergoing since 2009. The government is trying to guarantee the sector’s healthy development through various measures, such as drug price liberalisation, encouragement of consolidation among local companies, anti-bribery measures and providing support for innovations in drug development and manufacturing.

Source: NDRC, IMS Health, NBS, CEIC

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Sector Snapshot China Pharmaceutical Sector

PRODUCTION 2.8mn tonnes 2.6mn tonnes Conventional Drugs Chinese Patent Drugs

EXPORTS USD 8.9bn Export Value IMPORTS FINANCIAL RESULTS Sales Revenue: RMB 2,399bn* USD 27.8bn Total Profit: RMB 309.4bn* Import Value

KEY PLAYERS’ NET REVENUES WESTERN CHINESE 1. Shanghai Pharmaceutical: RMB 159bn MEDICINES MEDICINES 2. Baiyunshan Pharmaceutical: RMB 42bn Sales Revenue: Sales Revenue: 3. China National Medicines: RMB 39bn RMB 1,500bn RMB 637bn 4. Shenzhen Neptunus: RMB 38bn 5. Nanjing Pharmaceutical: RMB 31bn Total Profit: RMB 205bn Total Profit: RMB 78bn

*NBS Revised Data Note: Data for 2018. Source: YYTJ, GAC, CEIC, NBS, Company Data

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Sector Snapshot China Pharmaceutical Sector

In 2018, the value added in China’s pharmaceutical sector grew by 9.7% y/y, compared with a 12.3% y/y growth in 2017. The slowdown came as the sector witnessed a significant decline in the output of pharmaceuticals, compared with the previous year. In 2018, the production of conventional pharmaceutical products declined by 20% y/y to 2.8mn tonnes, while the output of Chinese patent drugs dropped to 2.6mn, representing a decrease of 27.8% y/y. According to the National Bureau of Statistics (NBS), in 2018 China’s pharmaceuticals manufacturing capacity utilisation rate declined to 77%, compared with 79.1% in 2017. In 2018, many pharmaceutical producers were affected by the ongoing reform of the chemical drugs classification system, and also by the process of verification of drug clinical trial data. The manufacture of pharmaceutical is also subject to more stringent environment protection requirements introduced with the new Environment Protection Law that took effect on January 1, 2018. Environmental inspection campaigns held by the Ministry of Environmental Protection (MEP) led to capacity reductions or closures among the API plants, which are the largest contributors to pollution among all pharmaceutical manufacturers. This resulted in API price increase, which pushed some smaller drug producers that were unable to bear higher production costs to reduce their output or even stop production.

Despite the drop in China’s output of pharmaceuticals, in 2018 the sector witnessed a significant y/y growth in sales revenue, which increased by 12.6% y/y to RMB 2,399bn. The main reasons for the revenue growth include the increased prices of some pharmaceutical products, the larger quantities of certain drugs procured through centralised tendering, as well as the implementation of the two- invoice system throughout China in 2018. According to the two-invoice system, maximum two invoices are allowed in the distribution process of medicines to hospitals, which simplified the supply chain of drugs and increased distribution transparency. The increased number of drugs eligible for reimbursement improved some drugs’ affordability. In the version of the National Reimbursement Drug List (NRDL) released in 2017, there were a total of 339 newly-added drugs. In October 2018, another 17 cancer drugs were added in the NRDL.

The Chinese government’s continuous pressure on drug prices, pharmaceutical companies’ increasing investment in research and development of new drugs, as well as the rising production costs are the main reasons for the weakening growth of the sector’s total profit. In 2018, the total profit growth rate of China’s pharmaceutical sector was 9.5% y/y, compared with 17.8% y/y in 2017.

Source: YYTJ, GAC, CEIC, NBS, Xinhua

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Driving Forces

China’s pharmaceutical manufacturing sector is of key importance for the most populous country in the world. The sector is driven by China’s numerous ageing population and the increasing incidence of chronic diseases, as well as by the rising income of the Chinese and their improved access to healthcare services. The government has launched a series of reforms over the last few years, aimed to transform the pharmaceutical sector into a more high-tech and market-oriented one.

External China’s ageing population is the sector’s main driver. There are estimates that in 2020 a third of the population will be aged over 50. The incidence rates of chronic diseases are also rising. Local experts from the Ministry of Healthcare warn about slower economic growth by 2050 due to high disease incidence rate and death rate. In recent years, the government has taken a number of measures to improve the access to healthcare services, which has led to expansion of the healthcare system coverage. In 2017, China achieved full enrollment of the population into basic medical insurance schemes. The government has spent over RMB 3tn on the medical reform in the last five years, increasing the health insurance coverage, building new healthcare infrastructure and improving the access to medical services and medicines. Another driver for the sector is the fast urbanisation process, which is the main factor behind the growing middle class and overall per capita income. China’s urban population reached 50% in 2010 and this share has been increasing ever since, rising to 59.6% in 2018, according to the NBS. China’s rapidly rising urban incomes are the major driver for the growth in healthcare expenditure, which in 2017 accounted for 6.2% of the country’s GDP. The government’s continuous efforts to lower the percentage of out-of-pocket payments in total health expenditure are improving the affordability of drugs, which is another driver for the sector.

Internal The government’s support for the development of private healthcare and the liberalisation of the pharmaceutical sector has led to increasing competition and consolidation across the sector. In the 13th Five-Year Plan released in March 2016, the government nominated remote healthcare, internet and technology to be the keys to solving the numerous problems of China’s healthcare system. Increasing competition is the main reason for the improvement of product quality and for the narrowing gap between the prices of local and foreign drugs, which is essential for the sector’s sustainable development. The new policy for centralised drug procurement with minimum sales volume which was announced at the end of 2018 is likely to lower patients’ drug costs, reduce transaction costs for enterprises and regulate drug use by institutions, thus optimising the drug pricing system.

Source: NDRC, MOH, NHFPC, NBS

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Restraining Forces

Despite the pharmaceutical sector’s significant growth in recent years, China is still far behind the developed markets, such as the US and the EU, since most local pharmaceutical enterprises are not as competitive as the sector’s multinational companies. Chinese drug manufacturers are focused on lower-cost generic drug production, while the higher-quality medicine market is dominated by foreign brands. Local companies’ investment in R&D of innovative drugs is relatively low, compared to that of pharmaceutical manufacturers from the developed countries.

External China’s healthcare sector has been undergoing a number of reforms recently, some of which can be considered inhibitors of the sector’s development. In May 2015, the 15% mark-ups that Chinese hospitals had typically applied on drugs were removed, allowing the hospital administrations greater freedom to negotiate with suppliers. The main goal was to reduce the incentives for prescribing more expensive drugs, which affected the profitability of hospitals and resulted in lower demand for branded generic drugs. At the same time, the government introduced stricter regulations on hospitals’ drug budgets, limiting the use of expensive off-patent drugs and gradually eliminating the opportunities for foreign companies and for some local ones, too. The Chinese government has been applying various measures to lower drug prices, both retail and at centralised procurement tenders. The forced decrease of tender prices is the reason for drug shortages and closures among pharmaceutical companies which could not cover their basic costs because of the artificially low prices. This problem is expected to be solved to some extent through the newly-announced pilot scheme for tendering with minimum volume commitment, which was introduced in 11 major cities in China at the end of 2018. Under the scheme, the bidder offering the lowest price is awarded a one- year contract with guaranteed sales volume. The government’s determination to lower drug prices is a great challenge for pharmaceutical companies, considering the increasing production costs.

Internal One major factor which inhibits the sector’s transformation into a more high-tech and modern one is the relatively low level of investment in R&D by local companies. The local producers rely mainly on generics and low-cost prescription drugs. The situation is improving slowly, with an increasing number of Chinese companies entering joint ventures with foreign research institutes or setting up new research centres for innovative drugs. However, there is still a long way to go.

Source: NDRC, State Council, Xinhua, China Daily

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02 SECTOR IN FOCUS

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China Pharmaceutical Manufacturing 2019 Q3

11.1% 12.1% Total Profit, Product Inventory, y/y change y/y change 8% 86.6% 26.5% Sales Revenue, Export Value, Import Value, y/y change y/y change y/y change -47% -44.2% Production Volume, Sales Volume, y/y change y/y change

2.3 595.7 2.3 8.4 78.2

551.5 7.1 70.4

Sales Revenue, Total Profit, Exports, Imports, RMB bn RMB bn USD bn USD bn

Q3 2018 Q3 2019

Source: GAC, CEIC, NBS

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Quarterly Summary

In the third quarter of 2019, China’s pharmaceutical production volume declined by 47% y/y to 304,000 tonnes, while the sales of pharmaceuticals dropped by 44.2% y/y to 322,700 tonnes. The centralised drug procurement scheme which had been launched in China at the end of 2018, resulted in a notable decline in drug prices. Many producers experienced significant drop in profits and some even suffered financial losses, that made production economically senseless, and finally resulted in drug shortages. Furthermore, there was a high pressure to limit the output of some heavily polluting API plants due to environmental concerns, which also had a negative effect on drug production.

During this period, the revenue of China’s pharmaceutical sector totalled RMB 595.7bn, representing an 8% y/y increase, while its total profit amounted to RMB 78.2bn, up by 11.1% y/y.

In Q3 2019, the exports of pharmaceutical products remained almost flat compared to the same period of 2018, amounting to USD 2.3bn. The positive growth in the export value of China’s major exporting product – the antibiotics – offset the falling export prices of vitamin C and ready-prepared TCM. In Q2 2019, the imports of pharmaceutical products rose by 18% y/y to USD 8.4bn, boosted by the reduced domestic production of pharmaceuticals.

At the end of Q3 2019, a total of 8,672 enterprises operated in China’s pharmaceutical sector, compared to 8,739 at the end of Q3 2018. The number of loss-making enterprises in the sector witnessed a significant increase, reaching 1,565 at the end of Q3 2019 from 1,445 in September 2018. The fast increase in the number of loss-making enterprises was a result of the rising prices of raw materials used in chemical dugs and TCM manufacturing, on the one hand, and, on the other, of the government’s efforts to lower drug prices, giving drug manufacturers a hard time.

Source: State Information Center, GAC, CEIC, NBS, Xinhua

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Sector Outlook

Comments China’s rapidly ageing population, higher healthcare demands and the ongoing drug regulation reforms will be the main factors behind the transformation of the sector towards high-quality and innovation-driven pharmaceutical manufacturing. A new version of the National Reimbursement Drug List (NDRL) is expected to take effect on January 1, 2020, introducing 148 new drugs eligible for reimbursement. In August 2019, China revised its Drug Administration Law and it became effective on December 1, 2019. It puts forward more stringent measures applicable to the entire industry chain, including the research and development, manufacturing, sales, use and management of drugs. The law introduces a mechanism for complete traceability of drugs and increases the limits of the penalties for counterfeit drugs production and distribution. According to EMIS Insights forecasts, China’s total revenue of pharmaceutical manufacturing in 2019 will be nearly RMB 2.5tn, up by 6% y/y. The sector is expected to expand at an average annual growth rate of 7.3% between 2019 and 2023. The government will continue to encourage M&As between domestic enterprises, as well as the R&D of biological and innovative drugs. At the same time, it will continue to support the domestic generic drug manufacturers encouraging them to increase output while improving product quality and pricing.

Annual Revenue Forecast, RMB bn Quarterly Revenue Forecast, RMB bn

8.5% 9.0% 8.0% 8.0% 7.0% 7.0% 6.5% 6.6% 6.0% 5.0% 675 3,298 678 3,026 2,618 2,802 2,455 640 637 625

2019f 2020f 2021f 2022f 2023f Q4 2019f Q1 2020f Q2 2020f Q3 2020f Q4 2020f

Sales Revenue, RMB bn y/y change Sales Revenue, RMB bn y/y change

Source: EMIS Insights

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Sector Highlights

Injectable Generic Drugs Quality and Efficacy Consistency Evaluation On September 30, 2019, the General Department of the State Food and Drug Administration (SFDA) released its Technical Requirements for the Quality and Efficacy Consistency Evaluation of Injectable Generic Drugs (Discussion Draft) and Requirements for the Declaration of the Quality and Efficacy Consistency Evaluation of Marketed Injectable Generic Drugs (Discussion Draft). The public was invited to provide comments on both documents until November 15, 2019. The release of the two documents aims to facilitate the evaluation campaign for the quality and efficacy consistency of generic drugs, which was initiated in 2016 by the State Council.

Drug Administration Law Revision On November 2, 2019, China’s National Medical Products Administration (NMPA) gave a conditional approval of a new Alzheimer’s drug named Oligomannate, which is the first such approval in 17 years. The new drug, which is derived from marine seaweed, is a product of the Shanghai-headquartered Green Valley Pharmaceuticals Co Ltd (Green Valley). The research of the drug’s efficacy is still ongoing, and the approval might be withdrawn in case of safety issues. Green Valley planned to release Oligomannate in China by the end of 2019. In 2020, the company is to carry out phase three trials abroad and apply for approval to market the drug in the US and Europe.

New Fund to Support Domestic Healthcare Innovation Enterprises On November 5, 2019, Britain's AstraZeneca announced that it is launching a USD 1bn Healthcare Industrial Fund together with China International Capital Corporation Limited (CICC). The fund will support domestic small- and medium-sized healthcare innovation enterprises, as well as international companies looking to establish presence in China. It will be the first and largest-scale healthcare industrial fund established by AstraZeneca. Among the first startups to receive financial support are companies from a life-sciences park in Wuxi city which was established earlier with the participation of AstraZeneca.

Source: Xinhua, Reuters, South China Morning Post, NMPA

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Main Sector Indicators

Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

Real GDP, % y/y change 6.5 6.4 6.4 6.2 6.0

GDP, nominal, RMB bn 22,950 25,360 21,343 23,750 24,687

Value Added, Medical & Pharmaceutical Product Sector, % y/y 8.7 7.5 6.9 6.9 7.7 change

Consumer Price Index (CPI), Western Medicine Products, % y/y 5.2 5.3 5.2 4.8 4.0 change

Consumer Price Index (CPI), Traditional Chinese Medicine 5.8 6.3 6.2 5.2 4.3 Products, % y/y change

Producer Price Index (PPI), Pharmaceuticals, % y/y change 3.4 3.2 2.3 2.3 1.4

Foreign Direct Investment (FDI), Medical & Pharmaceutical Product 273.0 285.5 n/a 850.0* n/a Sector, USD mn

Exchange Rate RMB/USD, period-end 6.9 6.9 6.7 6.9 7.1

Product Inventory, period-end, RMB bn 168.4 179.6 170.6 185.6 188.7

Pharmaceutical Sector Revenue, RMB bn 551.5 587.1 598.1 624.6 595.7

Pharmaceutical Sector Total Profit, RMB bn 70.4 78.8 75.3 84.2 78.2

Pharmaceutical Production, thou tonnes 573.0 725.0 720.0 924.0 304.0

Chinese Patent Medicine Production, thou tonnes 517.0 608.0 665.0 816.0 374.0

Pharmaceutical Product Sales Volume, thou tonnes 578.5 706.3 700.5 905.6 322.7

Pharmaceutical Imports, USD mn 7,114 7,578 7,360 8,489 8,398

Pharmaceutical Exports, USD mn 2,289 2,219 2,086 2,397 2,295

* FDI Data is for H1 2019.

Source: MOFCOM, GAC, YYTJ, CEIC, NBS

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Main Sector Indicators (cont’d)

Production Production, thou tonnes

In Q3 2019, the output of conventional medicines 924 in China decreased by 47% y/y to 304,000 tonnes, 816 while that of Chinese patent medicines (CPMs) 725 720 went down by 27.7% y/y to 374,000 tonnes. This 665 608 was a result of the drop in drug prices, due to the 573 517 implementation of the pilot centralised drug procurement scheme. In Q3 2019, the utilisation 374 304 rate of China’s pharmaceutical manufacturing capacity was 75%, down by 1.5 pp over the same quarter of 2018. The value added of the sector rose by 7.7% y/y in Q3 2019, compared to 8.8% y/y Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 growth in the same period of 2018, on the back of reduced output and lower drug prices. Pharmaceutical and Medicine Chinese Patent Medicine

Sales Sales Revenue of Pharmaceutical Sector

According to the NBS, in Q3 2019, the revenue of China’s pharmaceutical enterprises above 13.8% designated size rose by 8% y/y to RMB 595.7bn, compared to a 13.8% y/y growth in Q3 2018. The growth slowdown was caused by the lower prices 9.2% 9.4% of drugs procured through centralised tendering. 7.7% 8.0% 598.1 624.6 587.1 595.7 551.5

Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

Sales Revenue, RMB bn y/y change

Source: YYTJ, CEIC, NBS

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Main Sector Indicators (cont’d)

Exports Pharmaceutical Product Exports

In Q3 2019, China’s exports of pharmaceuticals 21.9% marked a slight decline of 0.2% y/y, totalling USD 2.3bn. The export value of the three major export pharmaceutical products – antibiotics, vitamin C 13.8% and ready-prepared TCM – amounted to USD 874mn, USD 107.1mn and USD 67.5mn, 7.4% 2,397 respectively. While the export value of antibiotics 2,295 recorded an increase of 1.3% y/y, vitamin C and 2,289 0.2% 2,219 ready prepared TCM posted y/y declines of 45.6% -5.0% and 2.1%, respectively. During this period, China 2,086 exported 34,452 tonnes of vitamin C, down by Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 11.9% y/y, while the export volume of antibiotics rose by 6.8% y/y to 21,301 tonnes and that of ready prepared TCM increased by 22.4% y/y to Ex ports, USD mn y/y change 3,552 tonnes.

Imports Pharmaceutical Product Imports China’s imports of pharmaceuticals reached almost USD 8.4bn in Q3 2019, up by 18% y/y, 21.4% driven by short supply of some drugs in China. In 19.6% 18.0% this period China imported 2,794 tonnes of 15.1% 15.7% antibiotic preparations, representing a decline of 13.2% y/y. The import value of antibiotic 8,489 preparations was USD 419.6mn, down by 14.5% 8,398

y/y. The imports of antibiotics other than 7,578 7,114 7,360 preparations dropped in both volume and value terms. In Q3 2019 China imported 244,000 tonnes of antibiotics (excluding preparations) worth USD Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 200.7mn, representing an increase of 15.1% y/y in volume and 80.9% y/y in value. Imports, USD mn y/y change

Source: GAC, CEIC

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Top M&A Deals

Top M&A Deals in China’s Pharmaceutical Sector, Q3-Q4 2019

Region of Deal Value, Stake, Date Target Company Deal Type Buyer Buyer USD mn % Hong Kong 4-Sep-19 Zhejiang Hisun BioRay Pharmaceutical Co Ltd Acquisition PAG 529.2 52 SAR, China

5-Nov-19 Bloomage BioTechnology Corp Ltd IPO Institutional Investor(s) n/a 336.7 10.3

24-Jul-19 Asymchem Laboratories (Tianjin) Co Ltd Minority Stake Institutional Investor(s) n/a 334.4 10

Hong Kong Shandong Luye Pharmaceutical Co Ltd; Luye 1-Dec-19 Shandong Boan Biological Technology Co Ltd Acquisition SAR, China; 205.7 98 Pharma Group Ltd China China Resources Sanjiu Medical & 28-Nov-19 Aonuo China Pharmaceutical Co Ltd Acquisition China 199.2 100 Pharmaceutical Co Ltd China National Pharmaceutical Investment Co 10-Dec-19 Beijing Strong Biotechnologies Inc Minority Stake China 170.5 16.7 Ltd

24-Sep-19 Sirio Pharma Co Ltd IPO Institutional Investor(s) n/a 153.9 25

Hong Kong 27-Jul-19 Genor BioPharma Co Ltd Minority Stake HH CT Holdings Ltd 138.5 25.3 SAR, China Shanghai Yongdasheng Business Consulting 10-Jul-19 Hubei Baike Hengdi Pharmaceutical Co Ltd Acquisition China 111.7 100 Co Ltd Suzhou Novartis Pharmaceutical Technology 5-Sep-19 Acquisition Zhejiang Jiuzhou Pharmaceutical Co Ltd China 110.4 100 Co Ltd

9-Nov-19 Great Chinasoft Technology Co Ltd Minority Stake Undisclosed Investor(s) n/a 91.6 16.6

4-Nov-19 Shanghai Medicilon Inc IPO Institutional Investor(s) n/a 91.4 25

5-Jul-19 Chengdu List Pharmaceutical Co Ltd Acquisition Shanghai Fosun Pharmaceutical Group Co Ltd China 84.3 75.9

Hong Kong 27-Jul-19 Genor BioPharma Co Ltd Minority Stake HH CT Holdings Ltd 74.3 13.6 SAR, China

27-Sep-19 Beijing Hotgen Biotech Co Ltd IPO Institutional Investor(s) n/a 64.2 25

HighLight Capital; Zhuhai Huajin Capital Co 28-Oct-19 Suzhou Kintor Pharmaceutical Inc Minority Stake Ltd; Shanghai Free Trade Zone Equity China 45.0 n/a Investment Fund Management Co Ltd Shanghai Yongdasheng Business Consulting 10-Jul-19 Jingmen Tianmao Chemical Co Ltd Acquisition China 27.4 100 Co Ltd

22-Aug-19 Jiangxi CONBA Chinese Medicine Co Ltd Acquisition Zhejiang Conba Pharmaceutical Co Ltd China 24.2 100

Jiangxi Yongfeng Kangde Pharmaceutical Co 12-Jul-19 Acquisition Fusen Pharmaceutical Co Ltd China 8.7 51 Ltd Jiangsu Jihua Medical Technology Co Ltd; 1-Oct-19 Jiangsu Kangbeide Pharmaceutical Co Ltd Acquisition China 6.1 62.1 Zhejiang Jihua Group Co Ltd

Source: EMIS DealWatch

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M&A Activity

Number and Value of Deals Deals by Type, Q3-Q4 2019

Minority 23 Stake Purchase 30%

13 12 12 5,234 8 3,295

1,661 Acquisition 937 1,146 50% IPO 20% Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019

Value of Deals , USD mn Number of Deals

Deals by Region of Investors, Q3-Q4 Deals by Value, USD, Q3-Q4 2019 2019

0-50mn 25%

Hong Kong SAR, China 29% China 50.1-100mn Mainland 25% 71%

100.1- 1,000mn 50%

Source: EMIS DealWatch

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03 COMPETITIVE LANDSCAPE

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Highlights

Overview Competition in China’s pharmaceutical industry is becoming increasingly tough. The number of pharmaceutical enterprises has been steadily increasing, showing that the sector is still in the growth stage of its lifecycle, despite recent industry consolidation and decreasing profitability. Enterprise consolidation, the more restrictive government regulations, the low-price pressure, the introduction of tenders for basic medicines and the higher raw material prices have all resulted in lower profitability and increased competition.

Main Players Shanghai Pharmaceuticals Holding Co Ltd is the largest listed pharmaceutical producer and distributor in China in terms of sales revenue. It is a large state-holding enterprise incorporated in 1994, with over 47,590 employees as of end-2018. The group’s sales revenue reached RMB 159.1bn in 2018. The second largest listed pharmaceutical manufacturer, Guangzhou Baiyunshan Pharmaceutical Holdings Co Ltd with RMB 42.2bn sales revenue in 2018, is a state-holding company that employs 23,131 people and was established in 1997. The third largest listed pharmaceutical company in China is China National Medicines Corporation Ltd with RMB 38.7bn sales revenue in 2018, whose controlling shareholder is China’s largest pharmaceutical products wholesaler and retailer – Sinopharm Group Co Ltd with revenues reaching RMB 344.5bn in 2018.

Market Structure China’s pharmaceutical market is very fragmented, the number of active enterprises reaching 8,651 at the end of March 2019. The vast majority of these are local players but most of them are too small to compete with foreign companies, which are more active in the over-the-counter drugs segment where they offer more innovative and higher-quality products. Domestic enterprises are more prominent in the generic and prescription drug manufacturing.

Market Entries The Chinese pharmaceutical market has attracted the biggest multinational players, which have made large investments in China. Companies such as Sanofi, Eli Lilly, Merck, Novo Nordisk and Bayer are investing heavily in diabetes medicines. To be more competitive, they spend on training, education and R&D activities. Some of the foreign players, including Pfizer, AstraZeneca, Eli Lilly and GlaxoSmithKline, have established JVs with local companies to gain better access to the local market.

Source: SFDA South Medical Economic Research Institute, China Pharmaceutical Industry Information Center, Taizhou Government Bureau of Statistics CHINA PHARMACEUTICAL SECTOR 2019 Q4 23 An EMIS Insights IndustryEMISPDF cbreese Report from 95.175.200.191 on 2020-01-23 13:52:04 GMT. DownloadPDF. Downloaded by cbreese from 95.175.200.191 at 2020-01-23 13:52:04 GMT. EMIS. Unauthorized Distribution Prohibited. 03 COMPETITIVE LANDSCAPE CONTENTS

Top Pharmaceutical Enterprises

Top Listed Pharmaceutical Enterprises, 2018

Sales Revenue, RMB mn

Shanghai Pharmaceuticals Holding Co Ltd 159,084

Guangzhou Baiyunshan Pharmaceutical Holdings Co Ltd 42,234

China National Medicines Corporation Ltd 38,740

Shenzhen Neptunus Bioengineering Co Ltd 38,381

Nanjing Pharmaceutical Company Limited 31,303

China Meheco Group Co Ltd 31,006

Huadong Medicine Co Ltd 30,663

Yunnan Baiyao Group Co Ltd 26,708

Shanghai Fosun Pharmaceutical (Group) Co Ltd 24,918

Jiangxi Zhengbang Technology Co Ltd 22,113

Fastest Growing Pharmaceutical Non-Listed Pharmaceutical Enterprises Enterprises, 2018 with Highest Investment Value, 2018

Company Company

Jiangxi Jimin Group Co Ltd Xiuzheng Pharmaceutical Group Co Ltd

Humanwell Pharmaceutical Group Co Ltd Sichuan Good Doctor Pharmaceutical Industry Group Co Ltd

Chengdu Brilliant Pharmaceutical Co Ltd Beijing Tide Pharmaceutical Co Ltd

Shanxi Zhendong Pharmaceutical Co Ltd Nanjing Zenkom Pharmaceutical Co Ltd

Shijiazhuang No.4 Pharmaceutical Co Ltd Anqing Huiyinbi Pharmaceutical Co Ltd

Shihuida Pharmaceutical Industry Group (Jilin) Co Ltd Hefei Lifeon Pharmaceutical Co Ltd

Shanghai Hehuang Pharmaceutical Co Ltd Shandong Qidu Pharmaceutical Co Ltd

Guangdong Zhongsheng Pharmaceutical Co Ltd Chongqing Conquer Pharmaceutical Co Ltd

Tianjin Hankang Pharmaceutical Biotechnology Co Ltd Tianjin Institute of Pharmaceutical Research Co Ltd

Guangdong Techpool Bio-pharma Co Ltd Chengdu Baiyu Pharmaceutical Co Ltd

Source: Company Data, China National Pharmaceutical Industry Information Center

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Top Pharmaceutical Exporters

Top API Exporters, 2017 Top TCM Exporters, 2017

Company Company

1 CSPC Pharmaceutical Group Ltd 1 Shanghai Tsumure Pharmaceuticals Co Ltd

2 Apeloa Kangyu Pharmaceutical Co Ltd 2 Jiangsu Aland Nutraceutical Co Ltd

3 Zhejiang Huahai Pharmaceutical Co Ltd 3 Tianjin China Medico Technology Co Ltd

4 Shanghai Acebright Pharmaceuticals Group Co Ltd 4 Chenguang Biotech Group Co Ltd

5 The United Laboratories International Holdings Ltd 5 PureCircle (Jiangxi) Co Ltd

6 Zhejiang Medicine Co Ltd 6 Shanxi Jiahe Phytochem Co Ltd

7 Yifan Pharmaceutical Co Ltd 7 Yunnan Rui Bao Biological Polytron Technologies Inc

8 Tianxin Pharmaceutical CoLtd 8 Beijing Tong Ren Tang Chinese Medicine Co Ltd

9 Zhejiang Chemicals Import & Export Corporation 9 Shenzhen Tsumure Medicine Co Ltd

10 Shandong Xinhua Pharmaceutical Co Ltd 10 Huisong Pharmaceuticals Co Ltd

Top Western Medicines Exporters, 2017 Top Biochemicals Exporters, 2017

Company Company

1 CSPC Pharmaceutical Group Ltd 1 Nanjing King-Friend Biochemical Pharmaceutical Co Ltd

2 Zhejiang Huahai Pharmaceutical Co Ltd 2 Shenzhen Hepalink Pharmaceutical Co Ltd

3 Apeloa Kangyu Pharmaceutical Co Ltd 3 Dongcheng Biochemicals Co Ltd

4 The United Laboratories International Holdings Ltd 4 Novozymes (China) Investment Co Ltd

5 Shanghai Acebright Pharmaceuticals Group Co Ltd 5 ABON Biopharm Co Ltd

6 Zhejiang Medicine Co Ltd 6 Xiamen Kingdomway Group Co Ltd

7 Yifan Pharmaceutical Co Ltd 7 Suzhou Hongda Group Co Ltd

8 Zhejiang Chemicals Import & Export Corporation 8 Hebei Changshan Biochemical Pharmaceutical Co Ltd

9 Tianxin Pharmaceutical Co Ltd 9 Techdow Pharmaceutical Co Ltd

10 Shandong Xinhua Pharmaceutical Co Ltd 10 Meitek Technology Co Ltd

Source: China Chamber of Commerce for Import & Export of Medicines & Health Products

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Shanghai Pharmaceuticals Holding Co Ltd

Quarterly Update In the third quarter of 2019, Shanghai Pharmaceuticals Holding Co Ltd (Shanghai Pharmaceuticals) achieved 15.2% y/y growth in revenue, which exceeded RMB 48bn. However, the company’s net profit declined by 13.9% y/y to RMB 1.3bn, as a result of the high base figures in Q3 2018. During that period Shanghai Pharmaceuticals increased its interest in the biopharmaceutical company Techpool Bio- Pharma Co Ltd (Techpool), recording significant non-recurring gain. Excluding the impact of the non- recurring gain, in Q3 2019 the non-consolidated net profit of Shanghai Pharmaceuticals marked an increase of 12.3% y/y to a total of RMB 479mn.

On September 12, 2019, Shanghai Pharmaceuticals and the Russian enterprise Biocad Pharmaceutical agreed to establish a joint venture to develop, manufacture and market cancer and autoimmune disease drugs in China. Shanghai Pharmaceuticals will invest USD 200.4mn for 50.1% equity in the JV company, which will be named SPH-Biocad (HK) Co Ltd. For the remaining equity share, Biocad's Hong Kong subsidiary Biocad Holding Hong Kong Ltd will pay USD 29.94mn and contribute exclusive commercial rights to intellectual property valued at USD 199.6mn.

Income Statement, RMB mn

1,502 1,376 1,375 1,293 48,042 46,568 499 46,007 41,723 41,654 41,482 39,884 39,403 36,056 35,534

Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

Operating Revenue Operating Cost Net Profit

Source: Company Data, Yicai

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Shanghai Pharmaceuticals Holding Co Ltd (cont’d)

Highlights In 2018, the sales revenue of Shanghai Pharmaceuticals reached RMB 159.1bn, up by 21.6% y/y. The company’s net profit increased by 9.8% y/y to almost RMB 4.5bn, while its EBITDA rose by 11.9% y/y to RMB 7.9bn. The revenue from pharmaceutical manufacturing reached RMB 19.5bn, an increase of 29.9% y/y, while the revenue from pharmaceutical distribution was RMB 139.6bn, up by 20.5% y/y.

New developments in the company’s core therapeutic areas helped Shanghai Pharmaceuticals achieve a significant increase of 28.5% in sales revenue for 60 of its key products. The company continued to invest heavily in research and development. In 2018, its R&D expenses reached RMB 1.4bn, accounting for 7.1% of its manufacturing sales revenue. In pharmaceutical distribution, the full implementation of the two-invoices system helped the company take a bigger share of the drug distribution business.

In 2018, Shanghai Pharmaceuticals’ total assets increased by 34.5% y/y to RMB 126.9bn. In particular, its non-current assets increased by 30.7% y/y to RMB 33.6bn, while the current assets rose by 36% y/y to RMB 93.3bn.

Income Statement, RMB mn Balance Sheet, RMB mn

5.4%

1.9

5.1% 46,433 126,879 159,084

4.9% 39,676 36,834 130,847 94,344 120,765 82,743

1,504 0.5 15,052 7,850 7,015 6,108 4,456 3,830 4,058 0.2 3,194

2016 2017 2018 2016 2017 2018

Operating Revenue EBITDA Total Assets Shareholders Equity Net Profit EBITDA Margin Net Debt Net Debt / EBITDA

Source: Company Data

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Shanghai Pharmaceuticals Holding Co Ltd (cont’d)

Company Background Revenue by Segment, 2018

Shanghai Pharmaceuticals was founded in 1994 by the state-owned Shanghai Pharmaceuticals (Group) Co Ltd, which is its controlling shareholder. It was listed on the Shanghai Stock Exchange in the same year and on the Hong Kong exchange in 2011. Manufacturing 11.7% Drug manufacturing accounted for 11.7% of the Distribution company’s revenue in 2018, with the remainder 83.8% coming from drug distribution, retail and others. Retail 4.3% Shanghai Pharmaceuticals is China’s third biggest Others 0.2% drug distributor, with a distribution network covering more than 20,000 healthcare institutions in 31 provinces, municipalities and autonomous regions in China. The company has production bases in ten provinces, including Manufacturing Business Revenue by factories for API, TCM and fine chemical reagents. Treatment Field, 2018 It produces on a regular basis 700 varieties of drugs in over 20 dosage forms. The retail Treatment Field Revenue, RMB mn Share, % business of Shanghai Pharmaceuticals comprises a chain of over 2,000 pharmacies in 16 provinces Cardiovascular System 482,239 24.8% with its subsidiary Shanghai Huashi Pharmacy Digestive System and Metabolism 195,630 10.1% being one of the largest retailers in East China. Systemic Anti-Infection 202,770 10.4% In 2018, Shanghai Pharmaceuticals completed the acquisition of the US pharmaceutical company Neurological System 84,782 4.4% Antineoplastic and Immunomodulatory Cardinal Health’s distribution business in China 109,283 5.6% Drugs for USD 800mn. That year the company also took a controlling stake in the biopharmaceutical Musculoskeletal System 94,625 4.9% company Guangdong Techpool Bio-Pharma Co Ltd Respiratory System 113,396 5.8% (Techpool) from its former joint venture partner in Techpool – Japan’s Takeda Pharmaceutical Co Ltd. Others 662,445 34.1%

Source: Company Data

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Guangzhou Baiyunshan Pharmaceutical Holdings Co Ltd

Quarterly Update In the third quarter of 2019, the revenue of Guangzhou Baiyunshan Pharmaceutical Holdings Co Ltd (Baiyunshan) rose by 11.2% y/y to RMB 16.7bn, while its net profit declined by 17.4% y/y to RMB 702mn. The reason for the negative growth of the company’s net profit lies in the high base figures in the same period of 2018, when the drug manufacturing segment recorded strong performance boosting the company’s net profit. On the other hand, in Q3 2019, Baiyunshan launched a number of new products, which led to higher marketing expenses.

In September 2019, the company’s Cefuroxime Ester Tablets were included in the first batch of generic drugs which are part of the national drug cetralised procurement scheme. Also in September, the company’s Menantine Hydrochloride Tablets were approved for drug registration, making Baiyunshan the first domestic company to pass the consistency evaluation for this drug. In October 2019 Baiyunshan announced that Ceftriamidine Sodium for injection, which is qualified as a class 1 new drug, has officially proceeded to Phase I clinical trials.

Income Statement, RMB mn

1,465

1,213

850 702 18,055 16,721 15,286 15,036 13,545 13,293 12,358 12,349 12,184 9,929

25 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

Operating Revenue Operating Cost Net Profit

Source: Company Data

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Guangzhou Baiyunshan Pharmaceutical Holdings Co Ltd (cont’d)

Highlights In 2018, the sales revenue of Baiyunshan increased to RMB 42.2bn from RMB 21bn in the previous year, as a result of two major acquisitions. In May 2018, the company completed the acquisition of a 30% stake of Guangzhou Pharmaceutical Co Ltd, increasing its total shareholding stake in it to 80%. In September 2018, Baiyunshan acquired a 48% stake of Guangzhou Wanglaoji Pharmaceutical Co Ltd, raising its shareholding in the company to 96%. Following the acquisitions, at the end of 2018 the financial results of the two companies were consolidated in the annual financial statements of Baiyunshan. These two acquisitions resulted in additional revenue of RMB 20.3bn.

In 2018, the net profit of Baiyunshan was nearly RMB 1.5bn, recording an increase of 58.1% y/y, while the EBITDA margin declined from 13% in 2017 to 10.1% in 2018.

At the end of 2018, Baiyunshan had 76 retail chain pharmacy outlets, of which 32 specialised in TCM, 30 specialised in western medicines and medical equipment, and 13 direct-to-patient (DTP) pharmacies.

Income Statement, RMB mn Balance Sheet, RMB mn

13.0%

10.1% -2.0 8.5% 23,144 19,263 17,654 -4.2 51,482 42,234 28,315 25,897 20,954 20,036 4,276 3,534 2,716 2,119 1,710 1,559 -7.3 8,506 -

2016 2017 2018 11,453 12,527

2016 2017 - 2018 -

Operating Revenue EBITDA Total Assets Shareholders Equity Net Profit EBITDA Margin Net Debt Net Debt / EBITDA

Source: Company Data

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Guangzhou Baiyunshan Pharmaceutical Holdings Co Ltd (cont’d)

Company Background Revenue by Segment, 2018

Guangzhou Baiyunshan Pharmaceutical Drug Holdings Co Ltd (Baiyunshan) was incorporated Manufacturing in 1997 after the merger of eight traditional 23.0% Chinese medicine (TCM) production companies and three pharmaceutical trading companies, Natural which were subsidiaries of the state-owned Products Manufacturing Guangzhou Pharmaceutical Holdings Ltd. and Sales Baiyunshan was listed on the Hong Kong Stock 22.6% Exchange in 1997 and on the Shanghai Stock Exchange in 2001. Drug Trading Others 0.3% The company is engaged in wholesale and retail 54.2% of western medicines, TCM and medical equipment, which in 2018 generated 54.2% of the company’s total revenue. Baiyunshan is also involved in R&D, production and sales of TCM, active pharmaceutical ingredients (APIs), natural Manufacturing Business Revenue by medicines and biological medicines in the drug Product, 2018 manufacturing segment, which had a 32% share of the total revenue in 2018. The remainder of the company’s total revenue was generated by R&D, production and sales of beverages, food and health products, carried out by its TCM 39.9% subsidiaries Guangzhou Wanglaoji Great Health Industry Co Ltd and Guangzhou Wanglaoji Pharmaceutical Co Ltd. Baiyunshan produces the Wanglaoji herbal tea, one of the most popular tea drinks in China, and is owner Chemical of the Wanglaoji brand valued at RMB 108bn. Drugs 60.1%

Baiyunshan has a total of 25 pharmaceutical manufacturing enterprises.

Source: Company Data

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China National Medicines Corporation Ltd

Quarterly Update China National Medicines Corporation Ltd (CNMC) closed the third quarter of 2019 with revenue of RMB 11.7bn, recording a 16.8% y/y increase. Its net profit rose by 7.2% y/y to RMB 375.8mn. During this period, the company continued to strengthen its core business of drug distribution in high-level hospitals and also worked to develop further its medical device distribution segment.

In Q3 2019, CNMC received level C in the Foreign Investors Rating. This shows that there was little or almost no foreign investment in the company, which is usually considered less attractive to foreign institutional investors.

Income Statement, RMB mn

583 546

376 324

12,996 286 11,688 11,063 10,973 9,273 10,769 9,962 10,049 7,204 6,973

Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

Operating Revenue Operating Cost Net Profit

Source: Company Data

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China National Medicines Corporation Ltd (cont’d)

Highlights In 2018, the sales revenue of CNMC amounted to RMB 38.7bn, an increase of 6.8% y/y. The net profit of the company was RMB 1.6bn, up by 19% y/y, and its EBITDA reached almost RMB 2.1bn, which was an increase of 15% y/y. Both sales revenue and net profit grew at a weaker pace in 2018, following the implementation of the two-invoices system in Beijing, which is the company’s major market, generating 97.5% of its total revenue in 2018.

The company’s total assets increased by 6.7% y/y to RMB 21.5bn in 2018. Its current assets rose by 5.5% y/y, reaching RMB 19.3bn, or 89.8% of total assets. The non-current assets increased by 18.2% y/y to RMB 2.2bn.

In March 2018, CNMC announced plans to invest RMB 14.7mn to acquire 70% of Lanzhou Shengyuan Pharmaceutical Co Ltd – a company, engaged in wholesale of TCM, chemical raw materials, chemical preparations, antibiotic preparations, biological products, narcotic drugs and psychotropic drugs.

Income Statement, RMB mn Balance Sheet, RMB mn

5.4% 10,610 5.0% 9,456 7,269 21,510 20,166 16,660 -1.5 38,740 36,285 34,611 4.6% -1.9 2,091 1,818 1,594 1,593 1,339 1,209 -2.2 2,328 - 4,006 4,084 - - 2016 2017 2018 2016 2017 2018

Operating Revenue EBITDA Total Assets Shareholders Equity Net Profit EBITDA Margin Net Debt Net Debt / EBITDA

Source: Company Data

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China National Medicines Corporation Ltd (cont’d)

Company Background Revenue by Segment, 2018 China National Medicines Corporation Ltd (CNMC) was established in 1999 by the state-owned China National Pharmaceutical Group Co Ltd (CNPGC) known as Sinopharm. The company was listed on Distribution the Shanghai Stock Exchange in 2002. Its 97.2% controlling shareholder is CNPGC’s Hong Kong listed subsidiary Sinopharm Group Co Ltd, which is the largest wholesaler and retailer of Manufacturing 2.3% pharmaceuticals, healthcare products and medical devices in China. Logistics 0.5% CNMC is primarily engaged in the distribution of pharmaceuticals. Its main products include TCM, chemical medicine preparations, western medicines, biochemical drugs, biological products, vaccines and health food products. Pharmaceutical distribution generated 97.2% of its total sales revenue in 2018. CNMC is the Revenue by Region, 2018 largest distributor of narcotic and psychotropic drugs in China with a market share of over 80%. The company is also involved in the production of pharmaceuticals and the provision of Beijing warehousing and logistics services. Region 97.5% In 2017, CNMC completed its major asset restructuring programme, acquiring 100% of Sinopharm Holding Beijing Konruns Biology Huainan Medical Co Ltd, 100% of Sinopharm Group Beijing Region 2.5% Co Ltd, 60% of Sinopharm Medicine Holding Beijing Huahong Co Ltd and 51% of Beijing Tianxingpuxin Sinopharm Holding Co Ltd.

Source: Company Data

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Shenzhen Neptunus Bioengineering Co Ltd

Quarterly Update In the third quarter of 2019, the revenue of Shenzhen Neptunus Bioengineering Co Ltd (Neptunus Bioengineering) went down by 4.1% y/y to RMB 9.9bn. Its net profit, however, rose by 69% y/y to RMB 280.4mn. During this period, the company improved its business structure and reduced its accounts receivables, significantly improving its operating cash flow.

Neptunus Bioengineering was one of the two pharmaceutical companies included in the 2019 Top 100 Private Enterprises in Guangdong Province list, which was announced on November 28, 2019. It ranked 22nd in the list, while it also held the 31st position in the 2019 Top 500 Enterprises in Shenzhen ranking. The two lists were published by Guangdong Provincial Enterprise Confederation and Guangdong Provincial Association of Entrepreneurs, and Shenzhen Enterprise Confederation and Shenzhen Association of Entrepreneurs, respectively.

Income Statement, RMB mn

280

202

166 174 9,029 10,557 10,545 10,273 10,306 9,851 9,309 8,967 8,879 8,506 77

Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

Operating Revenue Operating Cost Net Profit

Source: Company Data, EMIS DealWatch

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Shenzhen Neptunus Bioengineering Co Ltd (cont’d)

Highlights In 2018, the sales revenue of Neptunus Bioengineering jumped by 53.9% y/y to RMB 38.4bn. The growth was driven by the positive performance of the company’s pharmaceutical distribution segment, which generated sales revenue of RMB 30.2bn, an increase of 54.7% over 2017. The revenue of the medical equipment segment also marked significant growth of 52.5% y/y to RMB 2.7bn, while the drug manufacturing segment’s revenue remained almost the same as in 2017.

In 2018, the company’s net profit fell by 16.6% y/y to RMB 693.3mn, while the EBITDA increased by 28.4% y/y to almost RMB 2.1bn. The net profit decline was a result of the sale of Neptunus Bioengineering’s subsidiary, which reduced consolidated profit, to obtain investment income. The transaction generated more than RMB 150mn revenue for investment.

In 2018, the total assets of Neptunus Bioengineering rose by 33.3% y/y to RMB 41.1bn. Its current assets, which accounted for 81.7% of total assets in 2018, grew by 34.4% to RMB 33.6bn. The non- current assets also increased, by 9.6% y/y to RMB 7.5bn.

Income Statement, RMB mn Balance Sheet, RMB mn

5.6 6.9% 6.5%

5.5%

2.6 41,127 38,381 11,803 30,864 24,940 7,119 6,467 5,878 4,169 16,661 2,093 1,630 13,606 945 821

693 0.6 499 579

2016 2017 2018 2016 2017 2018

Operating Revenue EBITDA Total Assets Shareholders Equity Net Profit EBITDA Margin Net Debt Net Debt / EBITDA

Source: Company Data

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Shenzhen Neptunus Bioengineering Co Ltd (cont’d)

Company Background Revenue by Segment. 2018

Shenzhen Neptunus Bioengineering Co Ltd was founded in 1989 in Shenzhen, Guangdong province. Its shares were listed on the Shenzhen Medical Stock Exchange in 1998. The company Equipment manufactures pharmaceuticals and biochemical 17.5% drugs, as well as healthcare products and health food. The value of its core brand Neptunus was Food and Healthcare RMB 68.6bn as of end-2018. Drug Products Distribution 1.7% In 2003 Neptunus Bioengineering acquired the 78.8% purchasing and supply platform of Shandong Drug Manufacturing Weihai Pharmaeutical Group Co Ltd and officially Other 1.2% stepped in the drug distribution business, which Operations currently represents 78.8% of its total revenue. 0.7%

The industrial segment of Neptunus Bioengineering includes two major product groups – pharmaceuticals and maternal and Revenue by Product, 2018 child nutrition products. The company has nearly 500 drug registration approvals, and more than 100 varieties of drugs it produces are listed in the NRDL. The maternal and child nutrition products business is conducted by its subsidiary Shenzhen Neptunus Health Technology Development Co Ltd. The company's pharmaceutical R&D is carried out Purchased Products Own by its subsidiary Shenzhen Haiwang 96.3% Products Pharmaceutical Science and Technology Research 2.9% Institute Co Ltd. Other Operations In 2016, the company set up Shenzhen Zhongmei 0.7% Haihui International Medical Development Co Ltd as a JV with the US company Provision Healthcare LLC to operate Provision Healthcare’s proton therapy system in China.

Source: Company Data

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Nanjing Pharmaceutical Co Ltd

Quarterly Update In the third quarter of 2019, the sales revenue of Nanjing Pharmaceutical Co Ltd (Nanjing Pharmaceutical) increased by 24.9% y/y, reaching almost RMB 9.8bn. During this period, the company’s net profit almost doubled to RMB 154.5mn.

On December 11, 2019, Nanjing Pharmaceutical announced that it completed the acquisition of a 70% stake of Jiangsu Nhwa-Run Medicine Co Ltd (Nhwa-Run Medicine) from Jiangsu Nhwa Pharmaceutical Co Ltd (Nhwa Pharmaceutical) and the natural person shareholder Chen Zhiyuan for RMB 72.24mn.

Income Statement, RMB mn

155

117

94 89 78 9,778 9,178 9,160 8,736 8,707 8,552 8,181 8,082 7,829 7,355

Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

Operating Revenue Operating Cost Net Profit

Source: Company Data, Reuters

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Nanjing Pharmaceutical Co Ltd (cont’d)

Highlights In 2018, the sales revenue of Nanjing Pharmaceutical increased by 8.7% y/y to RMB 31.3bn from RMB 28.8bn in the previous year. The company’s net profit was RMB 345.8mn, compared to RMB 284.5mn in 2017, and the EBITDA increased by 13.5% y/y to RMB 603mn. In 2018, the two-invoices system was implemented in Jiangsu and Hubei provinces, which are among Nanjing Pharmaceutical’s largest markets. This had a positive effect on the company’s performance in 2018.

The total assets of Nanjing Pharmaceutical reached almost RMB 19.6bn in 2018, up by 18% y/y. Its current assets, which accounted for 90.5% of the company’s total assets, grew by 18.4% compared to the previous year.

Income Statement, RMB mn Balance Sheet, RMB mn

7.2

1.9% 1.8%

1.3% 31,303 28,810

2.8 19,555 26,721 16,576 4,109 13,962 3,830 3,285 3,069 1.3 967 787 603 531 347 346 239 284

2016 2017 2018 2016 2017 2018

Operating Revenue EBITDA Total Assets Shareholders Equity Net Profit EBITDA Margin Net Debt Net Debt / EBITDA

Source: Company Data

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Nanjing Pharmaceutical Co Ltd (cont’d)

Company Background Revenue by Segment, 2018

Nanjing Pharmaceutical was established in 1951 as a state-owned company and was restructured and listed on the Shanghai Stock Exchange in 1996. Nanjing Pharmaceutical’s major shareholder is Nanjing Pharmaceutical Group Co Ltd with a 23.22% stake as of end-2108. Wholesale Nanjing Pharmaceutical is one of the largest 95.8% wholesalers of western and Chinese medicines in Retail 3.9% China. It distributes drugs to more than 46,000 customers in over 70 cities across the country. In E-commerce 2014, Alliance Healthcare Asia Pacific became the 0.3% second-largest shareholder of Nanjing Pharmaceutical after acquiring a 12% stake in the company. As of end-2018 it held 13.88% of Nanjing Pharmaceutical. After the strategic cooperation agreement, to comply with the new shareholder’s requirements, Nanjing Pharmaceutical completed the process of asset Revenue by Region, 2018 stripping of its manufacturing unit, in line with the company’s new development strategy. Northern Jiangsu At the end of 2018, Nanjing Pharmaceutical had 18.1% more than 60 subsidiaries and about 4,470 Anhui 22.7% employees. Fujian 14.4%

Hubei 9.0%

Others 0.9%

Nanjing 34.9%

Source: Company Data

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05 REGULATORY ENVIRONMENT

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Government Policy

Main Regulatory Bodies The pharmaceutical sector in China is regulated by the China Food and Drug Administration (CFDA), which replaced the former State Food and Drug Administration after its restructuring in 2013. CFDA is directly subordinate to the State Council and is in charge of the food, drugs, medical devices and cosmetics regulations and supervision. It is also responsible for drug and medical device registration, inspection and advertising. One of the key documents concerning drug distribution, the Essential Drug List (EDL), is issued by the Ministry of Health (MOH) every three to four years. The other key document, the National Reimbursement Drug List (NRDL), is issued by the National Development and Reform Commission (NDRC), CFDA and the Ministry of Human Resources and Social Security (MOHRSS), which are responsible for updating it every four to five years. Drug prices used to be regulated by the NDRC until June 1, 2015, when the government cancelled the restriction on drug prices covered by the government pricing system, with the exception of narcotics and some psychotropic drugs, as one of the government reforms aimed at liberalisation of the pharmaceutical sector.

EDL and NRDL The Essential Drug List (EDL) includes western and traditional Chinese drugs considered to be essential to China’s healthcare system, providing treatment for the most common illnesses in China. Most small public clinics and medical centres are required to purchase only essential drugs from this list, while large hospitals are also allowed to use non-essential drugs. The latest EDL, issued in 2018, contains 685 drugs, including 417 chemical and biological products and 268 TCM. Compared to the 2012 version, a total of 165 drugs were added, representing an increase of 31.7%. Among the newly added medicines, there are 12 cancer drugs and 22 pediatric medicines for clinical use, as well as a new drug for the hepatitis C virus.

The latest revision of the National Reimbursement Drug List (NRDL) was released in 2017 and it includes drugs which are fully or partly reimbursed by the government. There are 1,238 traditional Chinese medicines (TCM) and 1,297 western medicines in the 2017 revision of the list. Compared to the 2009 version, a total of 339 drugs were added, of which about 40% manufactured by non-Chinese pharmaceutical companies. In October 2018, China National Healthcare Security Administration announced that 17 cancer drugs were added in the NRDL, bringing the total number of cancer drugs in the list to 35. Out of the 17 newly-included drugs, there are ten new products which were launched in the market in 2018. The move is part of the government's target to make cancer drugs more affordable to the public.

Source: CFDA, NDRC, MOH, China Daily, State Council, The Economist

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Government Policy (cont’d)

Pharmaceutical Companies Registration The latest amendment of the Drug Administration Law, which took effect in 2015, simplified the registration procedures for pharmaceutical companies. Before the amendment, investors first had to obtain a drug manufacturing licence or a drug distribution licence and then apply for a business licence, while now investors may apply for both licenses after the company has been set up.

GSP, GMP and MAH First issued in 1998, the Good Supply Practice (GSP) is a management system, designed to guarantee the quality of pharmaceutical products, from planned purchasing, storage and sales to after-sales service. Its core purpose is to standardise companies’ behaviour and exercise strict control on the quality of medicines at every stage along the value chain. The Good Manufacturing Practice (GMP) was introduced in China in 2010 for food and drugs manufacturers, in order to impose quality standards on raw material uses, human resources, equipment, production processes, packaging, transportation and quality control. All pharmaceutical manufacturers were obliged to get a GMP certificate by the end of 2013. Since July 1, 2013 for the sterile products, and January 1, 2016 for the other products, the government has stopped granting approvals for any manufacturing contract arrangement with contractors that failed to obtain GMP certification. The government allowed technology transfer of drugs from a non-compliant company to one certified for the GMP standards. Applications for such technology transfer had to be submitted by December 31, 2014 in the case of sterile drugs, while December 31, 2016 was the deadline for the other drug types.

On October 23, 2017, the China Food and Drug Administration (CFDA) released the Drugs Administration Law (Revised Draft). The draft proposed the internationally accepted system of Marketing Authorisation Holder (MAH) to be fully implemented in China, and the GMP and GSP certification to be cancelled. One year earlier, in June 2016, the State Council had officially released the Pilot Program for MAH System and launched pilot projects in 10 provinces and cities in China: Beijing, Tianjin, Hebei, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong and Sichuan. These pilot projects lasted three years until November 2018, after which an evaluation report was released. Although the requirement for drug manufacturers and drug suppliers to acquire the respective certificates of GMP and GSP were removed from the draft, both type of enterprises still need to conform to previous requirements for GMP and GSP certificates, while they also need to ensure the continued compliance of manufacturing and supply processes. The proposed draft is still under discussion.

Source: State Council, Xinhua

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Government Policy (cont’d)

Drug Price Liberalisation Starting in 2015, China has launched several key policy reforms to liberalise drug prices, which had been regulated by the government for more than 15 years. The reduction of the direct government control over drug prices and granting more flexibility in price negotiations shifted the government role from controlling prices to supervising the price formation process and penalising illegal pricing behaviours. In May 2015, NDRC issued an Opinion on the Promotion of Drug Price Reform, recommending to remove the government control and let drug prices be set by the market, with the exception of drugs subject to reimbursement by government insurance funds, blood products outside the NRDL, vaccines procured by the government, AIDS drugs provided by the government, narcotics and some psychotropic drugs. The price cap removal took effect on June 1, 2016.

Drug Procurement As a part of the ongoing healthcare reform, China’s government has initiated a series of changes, one of the most positive being the gradual removal of hospitals’ right to mark up drugs sold in their pharmacies. Hospitals in China have a share of about 80% of the total drugs procurement. In 2015, the State Council General Office issued a document called Guidance Opinion on Improvement of Centralised Procurement of Drugs by Public Hospitals. According to it, public hospitals in pilot cities were allowed to procure drugs at prices lower than the provincial bid prices, which means that they could re-negotiate drug prices with pharmaceutical companies or distributors. In 2018, the Central Comprehensively Deepening Reforms Commission (CCDRC) introduced a Pilot Centralised Drug Procurement Scheme in “4+7” Cities, approved by the State Council in January 2019. The new scheme is aimed at drug price reduction through tendering with minimum purchase commitments made by public hospitals. Under the pilot scheme, drug manufacturers must submit bids for 31 generic drugs with guaranteed sales volume for a period of 12 months in 11 cities in China: Beijing, Tianjin, Shanghai, Chongqing, Shenyang, Dalian, Xiamen, Guangzhou, Shenzhen, Chengdu and Xian.

Advertising of Drugs and Medical Devices In April 2015, the Chinese government adopted some amendments in the Advertising Law, which took effect in September 2015. The revised law prohibits the advertising of anaesthetics, psychotropic drugs, and toxic and radioactive drugs, as well as drugs and medical devices that may cause drug addiction. Advertisements for prescription drugs which are not prohibited by the law can only be published in professional medical journals. The contents of advertisements must comply with the instructions and regulations specified by the government.

Source: NDRC, State Council, CFDA, China Daily

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Government Policy (cont’d)

Improving Generic Drugs Quality and Use In March 2016, the State Council released the Opinions on the Promotion of Generic Quality Consistency Evaluation (GQCE). The evaluation proves if a certain generic drug is equivalent to its original counterpart in both quality and efficacy. The document required that 289 types of generic drugs from the 2012 edition of the EDL undergo consistency evaluation by the end of 2018, with the exception of the drugs that need to go through clinical efficacy tests or other special cases, for which the consistency evaluation completion deadline was set at the end of 2021. According to the GQCE, after the first three manufacturers of a certain drug pass the evaluation, no other drug manufacturers will be able to obtain a licence to produce this drug for the following three years. The implementation of GQCE is aimed at domestic market expansion, which would help lower drug prices. According to CFDA, by the end of November 2018, a total of 112 types of drugs had undergone consistency evaluation, of which only 90 were from the 289 types of drugs, required to pass the evaluation by the end of 2018.

In March 2018, the State Council released Opinions on Reforming and Improving the Policy for Supply Guarantee and Use of Generic Drugs. According to the document, China shall encourage the research and development of generic drugs, improve their quality, speed up the implementation of the GQCE, and introduce supporting policies and structural reforms along the supply chain in order to reduce the public's medical costs. Essential drugs that are in short supply will be encouraged to be replaced by generics, especially those for the treatment of major infectious diseases, rare diseases, pediatric healthcare and public healthcare incidents. At the end of December 2018, the Work Plan for Accelerating the Implementation of the Policy for Supply Guarantee and Use of Generic Drugs was released by the State Council. It required the first list of encouraged generic drugs to be issued by June 2019. Starting from 2020, such lists are to be released before the end of each year.

Approval Process for Drugs and Medical Devices On October 8, 2017, the China Food and Drug Administration (CFDA) released the Opinions Regarding Strengthening the Review and Approval System Reform to Encourage Innovation of Drugs and Medical Devices, a summary of the several draft proposals issued previously in May 2017. The CFDA’s key tasks are to simplify the recording regime for clinical trials, accelerate the review and approval process for drugs and medical devices for rare diseases and drugs based on patent compulsory licensing, as well as strengthen the protection of intellectual property rights by establishing a patent linkage regime for drug registration. The Opinions also offer a pilot programme to provide compensatory patent term extension to selected new drugs.

Source: CFDA, State Council, People’s Daily

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Government Policy for TCM

Strategic Plan on Development of Traditional Chinese Medicines In February 2016, the State Council issued the Outline of a Strategic Plan on Development of Traditional Chinese Medicine (2016-2030), according to which TCM development becomes a national strategy of great importance. The key tasks set out in the plan include improvement of the TCM healthcare services and distribution network, the encouragement of innovations in TCM and expansion on foreign markets. According to the plan, the production volume of cultivated Chinese herbs is expected to reach 6.7mn tonnes by 2020. At the end of 2017, it was 4.2mn tonnes, up by 5% over 2016 and by 15.4% over 2015. The plan states that every Chinese citizen will have access to basic TCM services by 2020, while TCM services will cover all areas of medical care by 2030.

TCM Decoctions Quality Remediation In August 2018, the CFDA released the Work Plan for TCM Decoctions Centralised Quality Remediation, according to which all provincial drug regulatory authorities should strengthen the supervision and quality inspection of TCM decoctions. Although the overall quality of TCM has been continuously improving, the problem with many illegal producers of substandard products is still pending. The plan provided for a one-year TCM decoctions quality remediation campaign to be carried out nationwide. The main tasks include strict investigation of violations of regulations related to TCM decoctions; improvement of the technical management system to conform to the characteristics of TCM decoctions; formulation of TCM decoctions processing standards in all regions of China; revision and implementation of the Good Agricultural Practice (GAP) for production of TCM; and formulation of measures to encourage TCM decoctions producers to use GAP bases or fixed production bases to produce traditional Chinese medicinal materials. The provincial drug regulatory authorities were required to complete the remediation work by the end of October 2019 and submit a summary report to the CFDA.

Quality Management Regulations for TCM Production On July 23, 2018, the State Administration for Market Regulation (SAMR) released the Quality Management Regulations for the Production of Traditional Chinese Medicinal Materials (Draft for Comments), which defines the measures for quality management and traceability of the raw materials used in the production of TCM. The draft is based on the Quality Management Regulations for the Production of Traditional Chinese Medicinal Materials (Trial Version), which had been implemented in 2002. The new version encourages the usage of new technologies. Public comments on the draft had to be submitted before August 22, 2018. The official document is yet to be released.

Source: State Council, CFDA, China Daily

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Healthy China 2030

In 2016, China’s Central Government and the State Council issued the Outline of the Healthy China 2030 Plan, a guide to improving the overall health status of the Chinese. The reforms are aimed at enhancing disease prevention and improving health awareness of the population. This mid- to long- term plan focuses on promoting healthy living, strengthening the medical insurance system, improving the drug supply security system, promoting universal access to public health services, encouraging the use of TCM, delivering high quality and efficient medical care, and optimising healthcare services for priority groups.

Healthy China 2030 is comprised of 29 chapters that cover multiple areas, such as public health services, environment management, the medical industry, and food and drug safety. It sets out some specific goals, including:

§ Chinese citizens’ average life expectancy should reach 77.3 years by 2020 and 79 years by 2030;

§ Infant mortality rate should decline to 7.5 per 1,000 in 2020 and 5 per 1,000 in 2030;

§ Under-five mortality rate should decline to 9.5 per 1,000 in 2020 and 6 per 1,000 in 2030;

§ Maternal mortality should drop to 18 per 100,000 in 2020 and 12 per 100,000 in 2030;

§ Premature mortality from major chronic diseases should fall to 17.2% in 2020 and 12% in 2030;

§ The number of licensed doctors or assistants should increase to 2.5 per 1,000 resident population in 2020 and 3 per 1,000 residential population in 2030;

§ Out-of-pocket payment as a share of total health expenditures should fall to 28% in 2020 and 25% in 2030;

§ Total size of healthcare industry should expand to over RMB 8tn in 2020 and RMB 16tn in 2030;

Source: NHFPC, State Council, Xinhua, Family Medicine and Community Health

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Anti-Corruption Policies

In recent years, the National Health and Family Planning Commission (NHFPC) has issued several documents tackling illegal practices and corruption in the national healthcare sector. They were released after the 2013 scandal involving GlaxoSmithKline (GSK), which was fined RMB 3bn following a trial in which the company was found guilty of bribing non-government officials in order to increase its product sales.

Circular 49 In December 2013, the NHFPC and the Administration of Traditional Chinese Medicine (ATCM) jointly issued Nine Prohibitions for Strengthening Ethical Conduct in the Healthcare Industry (Circular 49). The document addresses various anti-bribery and anti-corruption issues, with a special focus on illicit acts, such as: receiving commissions for prescribing medicines; charging higher fees beyond the national standard price cap for medical services and medicines; receiving public donations; being involved in promotional activities for medicines, providing classified data for commercial use; procuring, selling and using medicines through private channels; receiving gifts from patients; and linking doctors’ salaries with revenue from drugs and services. These new rules are aimed at reducing corruption in the healthcare system and lowering drug prices.

Circular 50 Circular 50 took effect in March 2014. Its main objective is to set clear rules for the procurement of medicines, medical devices and medical supplies for healthcare institutions, in a move to prohibit illegal dealings and combat commercial bribery in the sector. It also requires the local authorities to compile lists of all the companies that provided improper benefits to healthcare professionals. If a company is blacklisted, no public or government-funded medical institution will procure any medicines, medical devices and medical supplies from it or from its distributors for two years. For a second violation within five years the ban becomes indefinite.

Circular 163 Circular 163 was issued in February 2014, detailing the responsibilities of NHFPC’s various divisions, establishing a reporting system for the municipal, provincial and national authorities, and setting deadlines regarding the commercial bribery records. Furthermore, a sample integrity contract is included as an annex to the circular, prohibiting healthcare institutions and healthcare professionals from accepting any form of kickbacks, receiving entertainment arranged and paid for by a healthcare company, soliciting cash, securities or valuable gifts, or providing information regarding the usage of specific medicines to any healthcare company or distributor.

Source: NHFPC

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06 CHEMICAL MEDICINES

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Highlights

Overview Chemical medicines is the largest subsector in China’s pharmaceutical industry with 48.6% of the sector’s sales revenue in 2018, while the remainder is held by other subsectors, such as traditional Chinese medicines, biological medicines, sanitation materials and medical devices. The subsector comprises chemical medicine preparations and chemical active pharmaceutical ingredients (APIs). Although traditional Chinese medicines play an important role in healthcare in China, chemical medicines are preferred for infectious diseases, chronic illnesses and surgery. The chemical drugs supplied by multinational pharmaceutical companies, or the so-called brand-name drugs, are considered to be higher-quality products, while the majority of domestic enterprises sell generics, which are much more price-competitive. To deal with high drug selling prices and access to drugs, China’s government is promoting the use of domestically-produced generic medicines.

Challenges Western companies are facing great challenges due to the government’s official requirement for public hospitals to reduce their drug budgets, which has caused many foreign enterprises to withdraw from participation in the hospital tenders where they have to compete with local producers of low- priced generics. Foreign pharmaceutical producers faced additional challenges with the new scheme for centralised drug procurement with minimum sales volume launched at the end of 2018. The bidders offering the lowest prices were awarded contracts for 25 generic drugs with guaranteed sales volume for one year in 11 major cities in China. While many global pharmaceutical companies participated in the bidding, only two successful bids came from foreign drug manufacturers.

Outlook The growth of the chemical medicine subsector will continue to be driven by the increasing burden of chronic diseases that is inherent to China’s ageing population. The 65+ population is expected to reach 170mn people by 2020, increasing the demand for healthcare services. The growing incidence of cancer, heart disease, diabetes and other chronic conditions can be related to China’s environmental problems, as well as to the changing diet and lifestyle of the population. The subsector’s future growth will be defined by the development of innovative drugs. Domestic producers are encouraged to develop, produce and distribute generic drugs with high efficacy and low prices in both domestic and international markets. According to the Healthcare Executive Institute, as of December 24, 2018, Chinese pharmaceutical companies received 77 Abbreviated New Drug Application (ANDA) approvals for generic drugs from the US Food and Drug Administration, compared to 38 in 2017 and 22 in 2016. This number is expected to keep increasing in coming years.

Source: CPIA, NBS, State Council, International Trade Administration of the US, China Daily

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Main Events

§ On February 14, 2018, Harbin Pharmaceutical Group Co Ltd (Harbin Pharmaceutical) announced that it will acquire a 40% stake of one of the largest US nutrition product suppliers, G&D Holdings Limited (GNC), for USD 40mn. Along with this, the two companies will establish a JV in China, in which Harbin Pharmaceutical will hold a 65% stake, and GNC will hold the remainder. The JV will have exclusive rights to operate the GNC business in mainland China. Harbin Pharmaceutical announced that it will invest RMB 700mn in the new venture.

§ On November 22, 2018, China's largest blood product company, Shanghai RAAS Blood Products Co Ltd (Shanghai RAAS) announced that it will acquire 100% of Tiancheng (Germany) Pharmaceutical Holdings AG, which owns about 90% of the German blood products company Biotest AG. The deal is valued at about EUR 589mn.

§ On March 7, 2019, Shanghai RAAS and Grifols Diagnostic Solutions Inc (GDS), the US subsidiary of the Spanish blood product giant Grifols SA, entered into a strategic alliance. According to it, Grifols SA will acquire a 26.2% stake in Shanghai RAAS in exchange for a 45% stake in GDS with 40% voting rights. Upon completion of the deal, Grifols will become the second-largest shareholder in Shanghai RAAS after Creat Group Co Ltd, which owns a 26.7% share. GDS is valued at USD 4.3bn and the price per share of Shanghai RAAS is RMB 7.50. The deal is expected to be closed in the second half of 2019.

Source: Xinhua, Company Data

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Revenue

Comments In 2018, the revenue of China’s chemical medicines subsector registered stable growth of 16.5% y/y, reaching nearly RMB 1,256bn. The revenue from chemical medicine preparations increased by 15.3% y/y to RMB 871.6bn, while that from chemical medicine APIs rose by 19.4% y/y to RMB 384.3bn. The significant growth of revenue from APIs was attributable to the government-led environment inspection campaigns aimed to curb pollution. As a major source of pharmaceutical pollution, API plants were seriously hit with many of them ordered to reduce output or even shut down. This resulted in supply shortages, which were the main factor behind the hike in API prices. According to the Beijing Daily newspaper, at the end of 2018 the prices of some common medicines registered three-digit increases over the same period of 2015, the biggest y/y increase reaching 600%. At the same time, China’s government continued to push manufacturers to lower the prices of drugs supplied to public hospitals, which led to closures among the smaller pharmaceutical enterprises.

China is the world’s largest API producer and exporter, with API exports worth RMB 68bn in 2018, according to the China Pharmaceutical Industry Association (CPIA). In 2018, API exports grew by 9.8% y/y, supported by the global economy recovery. The exports of chemical medicine preparations also enjoyed strong growth, reaching RMB 25.1bn, an increase of 31.6% y/y.

Revenue by Product, 2018 Sales Revenue, RMB bn

1,255.9

Chemical 1,078.0 384.3 Medicine API 949.0 321.9 14.9% 863.9 788.9 279.3 259.5 235.9

871.6 756.1 Chemical 669.7 Medicine 553.0 604.4 Preparations 33.7%

2014 2015 2016 2017 2018

Chemical Medicine API Chemical Medicine Preparations Total

Source: NBS, CEIC, CPIA, Beijing Daily

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Profit

Comments Driven by the growth in sales revenue, the total profit of China’s chemical medicines manufacturing subsector continued to increase. The growth, however, was much weaker than in the previous two years. In 2018, the subsector’s profit totalled RMB 160.3bn, representing an increase of 10.4% y/y, compared with 19.7% y/y growth in 2017. The main reason for the slowdown in total profit growth were the rising production costs. During this period many pharmaceutical companies increased their investment in the development of innovative drugs aiming to reduce the reliance on low-profit medicines. In this period, total profit from chemical drug preparations went up by 10.7% y/y, while the API segment saw a 9.5% y/y growth, compared with growth rates of 22.1% y/y and 13.2% y/y in 2017, respectively.

As a result of more stringent environmental requirements and tightened control over drug quality, the number of loss-making enterprises in China’s chemical medicine subsector witnessed a significant increase, reaching 376 at end-December 2018, compared with 274 in the same period of 2017.

Total Profit, RMB bn Number of Loss-Making Enterprises

160.3 145.2 40.8 37.2 121.3 162 101.4 32.9 148 141 90.2 25.7 132 113 22.2 119.5 107.9 88.4 214 75.7 68.1 158 179 161 161

2014 2015 2016 2017 2018 2014 2015 2016 2017 2018

Chemical Medicine API Chemical Medicine Preparations Chemical Medicine Preparations Chemical Medicine API Total

Source: NBS, CEIC

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07 TRADITIONAL CHINESE MEDICINES

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Highlights

Overview Traditional Chinese medicines (TCM) is the second-largest subsector with a 24.7% share of the pharmaceutical sector’s total revenue in 2018. The subsector consist of two major segments – ready- prepared TCM production, accounting for 73.1% of the TCM subsector revenue, and TCM decoction pieces processing and production, with a 26.9% share of total subsector revenue. The market is very fragmented, with a large number of small enterprises that compete on price rather than quality basis. The lack of a government-set overall industry plan and the inefficiency of the sector’s industrial structure have been the reasons for the industry’s unhealthy development in the past. In 2016, the government declared the development if TCM a national strategy of great importance.

Challenges The main challenge to the TCM subsector is the absence of a unified industrial standardisation and quality control system. In many cases product quality problems are caused by small companies that compromise quality in order to save on costs. A significant share of herb growing is carried out in farmhouses or peasant households, where quality cannot be controlled. The government has been adopting various measures to ban substandard TCM which contain illegal substances and toxic herbs, However, the problem is yet to be solved. Another challenge to the subsector is the lack of knowledge about traditional Chinese medicine, especially among the younger population and abroad. Complex import procedures, which vary from country to country, put restrictions on the subsector’s exports, especially to Europe.

Outlook The major targets for the TCM subsector’s development are included in the Outline of a Strategic Plan on Development of Traditional Chinese Medicine (2016-2030), released in 2016. The key tasks set out in the plan include improvement of related healthcare services and distribution networks, promotion of innovation in the industry and expansion on foreign markets. According to the target laid down in the plan, the production volume of cultivated Chinese herbs is to reach 6.7mn tonnes by 2020, compared with 4.2mn tonnes at end-2017. In 2018, the government introduced several policies to accelerate the TCM subsector’s sustainable development, with a special focus on TCM raw materials and TCM ready products quality standards. The sector is expected to experience robust growth in the coming years with the support of China’s government.

Source: NBS, YYTJ, GAC, CEIC, Chinese Association of Traditional Chinese Medicine (CATCM), Health News

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Main Events

§ On September 7, 2018, one of China’s largest pharmaceutical companies, Guangzhou Baiyunshan Pharmaceutical Holdings Co Ltd (Baiyunshan), completed the acquisition of a 48.05% stake of the TCM and healthy food producer Wang Lao Ji Pharmaceutical Co Ltd. The shares were purchased from Hong Kong Tongxing Pharmaceutical Co Ltd, and upon completion of the deal Wang Laoji Pharmaceutical Co Ltd became a state-holding company. On December 27, Baiyunshan announced its plan to acquire 420 exclusive rights related to the Wang Lao Ji trademark for RMB 1.39bn from its wholly-owned subsidiary Guangzhou Pharmaceuticals Co Ltd.

§ On December 26, 2018, Sichuan New Green Pharmaceutical Industry Co Ltd held the groundbreaking ceremony for its Modern Chinese Medicine High-tech Industrialisation Base Project in Pengzhou City, Sichuan Province. The project requires total investment of RMB 1.74bn, covers total construction area of about 440,000 m2 and includes the construction of workshops for decoction processing, extraction and preparation, as well as an R&D centre. The project is expected to be completed in 42 months.

§ On January 16, 2019, the UK-headquartered multinational pharmaceutical company AstraZeneca Plc signed an agreement with China’s pharmaceutical company Luye Pharma Group Co Ltd to obtain the exclusive rights to promote Luyue Pharma’s cholesterol-control medicine Xuezhikang in mainland China. This is the first time that a global pharmaceutical company has gained exclusive authorisation in China to promote a traditional Chinese medicine, independently developed by a Chinese firm.

§ At the beginning of March 2019, China’s fifth largest TCM producer Jiangzhong Pharmaceutical Co Ltd released details regarding the tender offer from China Resources Pharmaceutical Co Ltd, following the purchase intention agreement signed between the two companies in May 2018. China Resources had announced plans to acquire at least 51% of Jiangzhong Pharmaceutical Co Ltd. It offered to buy 239mn shares at a price of RMB 17.56 per share, or maximum investment of RMB 4.2bn.

Source: China Daily, Company Data, Reuters, Caixin

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Revenue

Comments The sales revenue of the TCM subsector decreased from RMB 790.1bn in 2017 to RMB 637bn in 2018, down by 19.4% y/y. In 2018, the subsector performance was dragged down by low production and sales volumes of ready-prepared TCM, which, combined with the drop in prices of some types of TCM, caused an 18.8% y/y decline in this segment’s sales revenue to RMB 465.5bn. According to the Chinese market consultancy Bosi Data Research Center, in 2018 China produced 2.6mn tonnes of ready- prepared TCM, which was a decrease of 7.7% y/y. The revenue of the other segment of the TCM subsector, processing and production of TCM decoction pieces, shrank by 20.8% y/y to RMB 171.5bn in 2018.

Revenue by Product, 2018 Sales Revenue, RMB bn

195.6 170.0 149.6 216.5 171.5 TCM Decoction Pieces 6.6% 616.7 669.7 Ready- 580.6 573.6 Prepared 465.5 TCM 18.0%

2014 2015 2016 2017 2018

Ready-Prepared TCM TCM Decoction Pieces

Source: NBS, CEIC, Bosi Data Research Center

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Profit

Comments In 2018, the decline in revenue resulted in shrinking profits of the companies in the TCM subsector. Over this period, the subsector’s total profit was RMB 78bn, down by 9.4% over 2017. The ready- prepared TCM segment witnessed a 9.4% y/y decline in total profit to RMB 64.1bn, while total profit from TCM decoction pieces dropped by 9.3% y/y to RMB 13.9bn.

The number of loss-making enterprises rose in both segments of the subsector. In 2018, the number of the ready-prepared TCM manufacturing loss-making enterprises increased to 275 from 211 in 2017, while their number in the TCM decoction pieces processing segment rose from 104 in 2017 to 135. The total number of loss-making enterprises in the subsector as of the end of 2017 was 410, or 14.2% of all enterprises operating in the TCM manufacturing subsector.

Total Profit, RMB mn Number of Loss-Making Enterprises

13.8 15.3 135 12.4 13.9 10.5 104 78 57 45 73.6 66.8 70.7 59.8 64.1 275 198 211 161 185

2014 2015 2016 2017 2018 2014 2015 2016 2017 2018

Ready-Prepared TCM TCM Decoction Pieces Ready-Prepared TCM TCM Decoction Pieces

Source: NBS, CEIC

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