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 Download Report Here https://cfainst.is/3fufojT KEYNOTE Eunice Chu, FCCA Head of Policy, ACCA Hong Kong Life Sciences and Healthcare industry By Eunice Chu Head of Policy, ACCA Hong Kong © ACCA Public Overview 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 © ACCA Public Three categories . Drug producers Demand . Health care providers Patients . Medical equipment and supplies manufacturers © ACCA Public Megatrends – the 3 Cs 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 © ACCA Public Long-term drivers: the 3 Ds Demographics Diseases Development . Aging population . Diabetes, heart . Technologies attack , stroke, . Co-payment system cancer – on the rise . Computerized . Step-down care health records © ACCA Public • Level of demand • Dominant player? • R&D convert into • Future growth • Barriers to entry patentable • Population mix • Competitive edge products • History of failure drugs recall? 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 © ACCA Public 9 Analysis of Three Segments © ACCA Public 1. Drug Producers 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 © ACCA Public 2. Medical Equipment & Supplies manufacturers Equipment Supplies . 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 © ACCA Public 3. Healthcare Providers - hospitals, specialist facilities, hospices, drop-in centres 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 © ACCA Public Thank you By Eunice Chu Head of Policy, ACCA Hong Kong © ACCA Public Presentation Dr JiaXi Xu Managing Director & Deputy Head of Research, China Industrial Securities Co. Ltd © ACCA Public Little Suggestions Under the ‘New Normal’ 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,