MORGAN STANLEY RESEARCH ASIA/PACIFIC Morgan Stanley Asia Limited+ Bin Li [email protected] +852 2239 7596 Yolanda Hu [email protected] +852 2848 5649 Isabella Zhao May 19, 2013 [email protected] +852 2848 5887 Tender Watcher – Drugs Guangdong tender rules Tender is a distinctive pricing mechanism for medical products in changed again (for worse?) China and an important lead indicator for product sales and corporate earnings. We launched Tender Watcher to provide updates on a regular basis. Déjà Vu Anhui + Fujian model? The much anticipated Guangdong (GD) provincial drug tender has taken another turn. Based on the newly issued draft guidelines, the GD tender could look like the combination of Anhui, Related Reports Fujian and Chongqing tenders. The good news is our BHC 92 Time to Watch Fujian Tender Price for Non-EDL Drugs industry experts do not believe this current proposal (i.e., August 25, 2011 more focus on price than quality) will be implemented, BHC 93 Key Takeaways from Expert Call on Fujian Drug Tender because this is the first draft for public opinion and will September 27, 2011 likely draw much pushback from the pharma industry, as BHC 98 Jiangsu EDL Tender Shows Positive Signs (Albeit Early) the Anhui model did in 2011. We plan to monitor the November 7, 2011 progress closely, given the importance of Guangdong. BHC 103 Anhui Model Sequel: EDL Marches to Big Hospitals December 6, 2011 What’s new: Guangdong govt. issued the draft TW 10 Tenders May Come In ‘12 guidelines for non-EDL and EDL drugs on May 17, and February 21, 2012 confirmed plans to use the Medicine Exchange for future TW Anhui Non-EDL Tender May Be Modified In Positive Direction tenders (see “Tender Watcher: Surprising twist in February 24, 2012 Guangdong - Bye to tender?”, March 20, 2013). TW Guangdong Non-EDL Tender Signals a Positive Trend April 2, 2012 Key messages from the Guangdong guideline: For TW New EDL Tender Model Emerges from Guangdong non-EDL drugs: 1) No. of groups by formulation is only June 12, 2012 20, similar to Fujian model; 2) five quality layers: TW Anhui Model V.2 – A Positive Transformation patent, original, independent pricing, high-price/ October 9, 2012 high-quality (incl. differentiated drugs), and normal GMP; TW No Major Tenders Before NPC & CPPCC 3) the ceiling price is the average tender price in other March 5, 2013 provinces and the lowest for exclusive drugs; 4) most TW Surprising twist in Guangdong - Bye to tender? importantly, drugs with the lowest bidding price in each March 20, 2013 quality layer will win, similar to Anhui model; 5) the bidding will be conducted every three months. For EDL drugs: 1) Incl. 520 national EDL drugs and local EDL drugs in GD; 2) same purchase prices for grass-roots institutions and higher-tier hospitals; 3) only one group with no quality layer; 4) double envelope system: Total score = 10% of quality + 90% of price. Morgan Stanley does and seeks to do business with Implications on drug and distribution companies: If companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may the current draft is implemented, large drug makers have a conflict of interest that could affect the would see more hits than small ones, as small players objectivity of Morgan Stanley Research. Investors would have better prospects of winning the tender with should consider Morgan Stanley Research as only a low-priced (and low-quality) drugs. Large distributors single factor in making their investment decision. like Sinopharm and Shanghai Pharm would benefit For analyst certification and other important significantly, as all distributors would be required to disclosures, refer to the Disclosure Section, cover all regions in Guangdong province, and hospitals located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be could assign only one distributor for each drug. associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. MORGAN STANLEY RESEARCH May 19, 2013 Tender Watcher – Drugs Exhibit 1 Ongoing Provincial Non-EDL Drug Tenders Province Tender Stage Latest Status Remarks Anhui 2012 non-EDL tender for announcement stage completed - chemical drugs price cut: ~15% county-level hospitals - TCM price cut: <5% Hubei 2012 non-EDL tender announcement stage batch 2 results released - price cut: ~15% Hainan 2012 non-EDL tender bidding stage information verification - 4 quality layers - 40+ types of formulation - no more than 4 winners for one drug (same generic/formulation/dosage) Shandong 2013 non-EDL tender for pre-tender stage soliciting public opinions for tender guideline - double-envelope system county-level hospitals - 2 quality layers Guangdong 2013 non-EDL tender pre-tender stage soliciting public opinions for tender guideline Hunan 2013 non-EDL tender pre-tender stage soliciting internal opinions for tender guideline (6th draft) Source: Government data, Morgan Stanley Research Exhibit 2 Ongoing Provincial EDL Drug Tenders Province Tender Stage Latest Status Remarks Beijing 2012 EDL tender reviewing stage experts review - incl. new EDL drugs Shaanxi 2013 EDL sppl. tender bidding stage - incl. new EDL drugs Guangdong 2013 EDL tender pre-tender stage soliciting public opinions for tender - incl. new EDL drugs guideline - double envelope: 10% quality + 90% price - one group with no quality layer Source: Government data, Morgan Stanley Research Exhibit 3 Exhibit 4 Upcoming Provincial Non-EDL Drug Tenders Upcoming Provincial EDL Drug Tenders Province Last Tender Period of Last Tender Province Last Tender Period of Last Tender Jiangsu 2009 provincial tender 2010/05/01 - 2011/04/30 Anhui 2010 EDL tender 2010/09/20 - 2011/09/20 Heilongjiang 2009 non-EDL tender 2010/08/01 - 2011/07/31 Hubei 2011 EDL tender 2011/06/08 - 2012/06/07 Zhejiang 2010 provincial tender 2010/10/20 - 2011/10/19 Shanghai 2010 EDL tender 2011/06/10 - 2012/06/09 Hunan 2010 provincial tender 2010/12/31 - 2011/12/31 Heilongjiang 2011 EDL tender 2011/06/26 - 2012/06/25 Henan 2010 provincial tender 2011/01/01 - 2012/01/01 Henan 2011 EDL tender 2011/07/01 - 2012/06/30 Liaoning 2009 provincial tender 2011/01/20 - 2012/01/20 Liaoning 2011 EDL tender 2011/09/10 - 2012/09/09 Shanghai 2010 municipal tender 2011/01/20 - 2012/01/20 Yunnan 2011 EDL tender 2011/09/30 - 2012/09/29 Guizhou 2010 provincial tender 2011/07/25 - 2012/07/24 Hebei 2011 EDL tender 2011/10/01 - 2012/09/30 Beijing 2009 provincial tender 2010/11/30 - 2012/11/30 Jilin 2011 EDL tender 2011/10/24 - 2012/10/23 Hebei 2010 provincial tender 2011/03 - Hunan 2011 EDL tender 2011/12/15 - 2012/12/14 2009 municipal tender Gansu 2011 EDL tender 2011/09/30 - 2012/12/31 Tianjin 2009/03/01 - Source: Government data, Morgan Stanley Research Jiangsu 2011 EDL tender 2012/01/25 - 2013/01/24 Tianjin 2011 EDL tender 2012/03/26 - 2013/03/25 Source: Government data, Morgan Stanley Research 2 MORGAN STANLEY RESEARCH May 19, 2013 Tender Watcher – Drugs Exhibit 5 Provincial Non-EDL Drug Tenders Province Status Execution Status Execution Period Status Execution Period Status Execution Period Anhui county complete2013/01/01 - 2013/12/31 - - -- Beijing - - -- Chongqing Medicine Excha 2011/02/17 - - - Fujian - - completed 2012/01/01 - 2013/06/30 Gansu - - sppl. completed 2012/06/01 - 2013/05/31 - - Guangdong Medicine Excha 1 year - - - - - - Guangxi - - - - completed 2011/04/01 - next tender Guizhou - - - - completed 2011/07/25 - 2012/07/24 3 MORGAN STANLEY RESEARCH May 19, 2013 Tender Watcher – Drugs Exhibit 6 Provincial EDL Drug Tenders 2013 2012 2011 2010 Province Status Execution Status Execution Period Status Execution Period Status Execution Period Anhui - - - - completed 2010/09/20 - 2011/09/20 sppl. 2011/02/18 - 2011/09/20 Beijing in process 1 year - - - - Chongqing - - Medicine Excha 2012/07/11 - completed 2010/07/01 - 2011/06/30 Fujian - - - - completed 2010/05/10 - next tender Gansu - - completed 2011/09/30 - 2012/12/31 - - Guangxi sppl. completed - - - completed 2011/08/01 - next tender Guangdong in process 1 year sppl. completed - completed 2012/07/01 - 2013/06/31 - - Guizhou sppl. completed - sppl. completed 1 year completed 2010/05/18 - 2011/05/17 Hainan - - completed 2012/03/01 - 2013/08/31 - - Hebei - - completed 2011/10/01 - 2012/09/30 completed 2010/07/28 - 2011/09/30 Heilongjiang - - completed 2011/06/26 - 2012/06/25 - - Henan - - completed 2011/07/01 - 2012/06/30 - - Hubei - - completed 2011/06/08 - 2012/06/07 - - Hunan - - completed 2011/12/15 - 2012/12/14 - - Inner Mongolia - - completed 2011/12/16 - 2012/12/15 -- sppl. 2012/07/15 - 2013/07/14 Jiangsu - - completed 2012/01/15 - 2013/01/14 sppl. Jiangxi sppl. completed 2012/12/22 - completed 2011/11/01 - 2012/10/31 - - Jilin - - completed 2011/10/24 - 2012/10/23 completed 2010/11/01 - 2011/10/23 Liaoning - - completed 2011/09/10 - 2012/09/09 - - Ningxia sppl. completed 2012/12/27 - 2013/12/26 sppl. completed 2011/06/20 - 2012/06/19 - - Qinghai sppl. completed 2012/08/30 - 2013/08/30 completed 2011/11/21 - 2012/11/20 - - Shaanxi sppl. In process sppl. completed - - - sppl. completed 2010/12/01 - 2011/12/01 Shandong sppl. completed 1 year completed 2011/07/01 - 2012/06/30 -- sppl.completed 2011/05/01 - 2012/04/30 Shanghai sppl. completed 1 year - - completed 2011/06/10 - 2012/06/09 Shanxi sppl. completed - completed 2011/12/30 - 2012/12/29 completed 2010/02/25 - 2011/02/24 Sichuan - - completed 2011/04/01 - next tender Tianjin - - completed 2012/03/26 - 2013/03/25 completed 2010/04/10 - 2011/03/31 Xinjiang - - completed 2012/01/01 - 2014/01/01 completed Yunnan - - completed 2011/09/30 - 2012/09/29 completed 2010/02/25 - 2011/02/24 Zhejiang - - completed 2011/11/30 - 2012/11/29 - - Tibet -- -- -- Source: Government data, Morgan Stanley Research 4 MORGAN STANLEY RESEARCH May 19, 2013 Tender Watcher – Drugs Disclosure Section The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte.