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Bio-Pharma: China 2010 - 2020


A Look at The FUTURE: 4th & 5th Generation Global Strategies

France Houdard
Managing Director
January 2010
Table of Contents – Corporate Series (Part 2 of 6)
BIOPHARMA: China 2010 – 2020
♦ Preface – Overview of the China Life Science Industry
 The PAST: Evolution of Biopharma Foreign Investment into China
 The FUTURE: Virtual Integrations – 4th & 5th Generation Strategies
 The PRESENT: Strengths, Weaknesses, Opportunities, Threats (SWOT)
 The OPPORTUNITY: Virtually Integrated Pharma Company (VIPCO’s)

♦ Next Generation Integrated Global / China Operating Models


Traditional Operating Models
 COSTS / PRODUCTION: Big Pharma Production Trends in China
 REVENUES / SALES: World’s 2nd Largest Economy (PPP); 400 MM in Middle Class

Future Operating Models (2010 – 2020): Value Chain Focus for Virtual Extensions (China)
 INNOVATION / R&D: Big Pharma Research & Development (R&D) Trends in China
 CLINICAL TRIALS: Drivers? Benefits?
 NEXT GENERATION (2010 – 20120): Who is Migrating to VIPCO Extended Models?

♦ China’s Economic Future and Implications for Big Pharma


 State of Economy: Corporate, Household Balance Sheets; Health of Financial Sector
 Size, Growth Rate, Robustness across China Economy: Investment / Consumption / Trade
 State of Export Sector and Impact on the Economy
 Summary of Future Opportunities for Big Pharma in 2010 - 2020

Copyright © 2010 Exolus. All rights reserved. 2


The PAST: Evolution of Biopharma Foreign Investment into China …
COST REDUCTION  REVENUE / MARKET  INNOVATION  EFFICIENCY

2) REVENUES 3) INNOVATION

TS

TA
KE
Sales Engineering

LE
AR

N
M

T
Marketing IT HR R&D
Back
Office
F&A Procure

Distribution Sourcing
RESEARCH &
DEVELOPMENT
Production

SALES &
MARKETING
RESOURCES
PRODUCTION /
SOURCING

1) COSTS DRIVING
Shareholder Value

Copyright © 2010 Exolus. All rights reserved. 3


The FUTURE: Virtual Integrations – 4th & 5th Generation Strategies

REVENUES INNOVATION

TS

TA
KE

LE
AR

N
Sales Engineering

T
Marketing IT HR R&D
Back CONTRACTS,
Office
PARTNERSHIPS
F&A Pro’c
SHARED
SERVICE
Distribution Sourcing CENTERS

Production RESEARCH &


DEVELOPMENT

SALES &
MARKETING

PRODUCTION /
RESOURCES SOURCING

DRIVING
COSTS Shareholder Value

Copyright © 2010 Exolus. All rights reserved. 4


The PRESENT: Strengths, Weaknesses, Opportunities, Threats (SWOT)
PATENTS  PIPELINES  COSTS  TALENT  EMERGING MARKET OPPORTUNITIES 

♦ INNOVATION / TALENT
 Pipeline Productivity Collapse. Big Pharma has doubled investment in R&D during past decade. Yet, the return

on this investment has plummeted. Today’s new drug yield is barely ½ the new drug production of 10 years ago -
despite a doubling in number of compounds being placed into early-stage clinical testing.
 Globally Transformed Labor Dynamic – “World is Flat”. Extremely high priority and focus placed on
national development of scientific base and capabilities in China: already 1.6 million science and engineering
graduates per year in PRC (China has 10 x size of graduate pool compared to US). R&D heads /integrates East.
 R&D and Clinical Trials head East. China clinical trial benefits include Costs Savings (30-50%); Time Savings
(30%); Large Technical Talent Pools; “Gene Pool” advantages in clients; broad infrastructure.

♦ REVENUES / MARKETS
 Global Patent Expirations. Tidal wave of patent expiries this decade: USD150 billion between 2005 and 2015.
Future for Big Pharma companies rooted in products that are currently under research and development, or have
even yet to even be discovered.
 Emerging Markets already Emerged. Fundamental shift in leading global market sizes, from developed to
emerging markets – e.g., BRIC (Brazil, Russia, India, China). Today, China is world’s #5 largest pharmaceutical
market and is projected to be the #2 largest in world by 2020 ($120bn); #1 in 2025.
 Massive Middle Class + Aging Population + Disease Divergence + Insurance = Opportunity.
Immense revenue opportunities in China rooted in: divergence of disease profiles; fundamental shift in age profile
of its population; massive growth in middle class and incomes; expanding healthcare and insurance infrastructure.

♦ COSTS / VALUE CHAIN


 Healthcare Costs. Massive cost balloon for Big-Pharma across entire global value chain, from Production through R&D.
 Clinical Trial Costs. Costs of Clinical trials in Western countries more than 2X costs in China.
 Global Labor Costs. Western Wages are 5 to 10 times Greater than Wages in China, from production operators to scientists
and engineers. Need for cheaper costs, but also the quality – and IPP.

Copyright © 2010 Exolus. All rights reserved. 5


The OPPORTUNITY: Virtually Integrated Pharma Company (VIPCO’s)
FIPCO MODEL  VIPCO MODEL (CSO, CMO, CRO, PC-CRO, INSTITUTIONS)

FIPCO (Fully Integrated Pharma Co.) VIPCO (Virtually Integrated Pharma Co.)
Sales & Partnerships
Sales & Distribution CSOs
Distribution

Manufacturing CMOs
Manufacturing

Clinical
Development CROs
Clinical &
Regulatory
Preclinical
Preclinical CROs
Support
Research
Technology

R&D Academia,
Scientific,
Institutions

Copyright © 2010 Exolus. All rights reserved. Source: G. S. Burrill, ‘Biotech 2008: A 20/20 Vision to 2020’, The Burrill Indiana Life Sciences Meeting, October 2008. 6
Bio-Pharma (2010 – 2020): Next Generation Operating Models

Copyright © 2010 Exolus. All rights reserved. 7


1. COSTS: Where is Big Pharma Producing Today in China?
COST INFRASTRUCTURE TALENT  SUPPLY CHAIN  IPR

China Big Pharma Production

Copyright © 2010 Exolus. All rights reserved. Source: All Publically Available Information, Company Websites 8
2. REVENUES: China Already World’s 2nd Largest Economy (PPP)

GDP PPP (2008)

Germany (5)

11,8 trillions de $ France (6)


EU-27
US (1) 6,4 trillions
China (2) 3,6 trillions 3 trillions
de $ UK (7)
de $ de $
India (3) Japan (4)

$14.3 tr $7.8 tr $3.3 tr $4.4 tr $14.9 tr

GDP Nominal (2008)

EU-27 Germany (3)

US (1)
$5.1 tr
France (6) UK (4)
Japan (2) China (5)
IND(9)

$14.3 tr $4.9 tr $17.1 tr $4.2 tr $1.2 tr


Copyright © 2010 Exolus. All rights reserved. Source: IMF; EIU, CIA World Factbook; F Houdard 9
2. REVENUES: How large is China’s Middle Class?
CHINA MIDDLE CLASS: 300 million (2010) … 500 million (2015)

Middle Class Income Bands for Urban Population


Urban Household Income
900 (US$ – PPP-Adjusted)
822
800 756 Global > US$107,800
99
684
700 Affluent US$ 3,800 - 107,800
90
607
600
Urban Population (millions)

531
500
53 170
400 355 461 525 Upper Middle US$21,501 – 53,900

300 239
255
200
157
100 106
73 Lower Middle US$13,500 – 21,500
0 35 Poor < US$13,500

2005 2010F 2015F 2020F 2025F

Upper Middle Class


Lower Middle Class

Copyright © 2010 Exolus. All rights reserved. Sources: Urbanization Rates, Population based on UN, World Urbanization Prospects 2007; MGI Consumer Demand 2008. 10
NEXT GENERATION: Value Chain Focus for Virtual Extensions (China)
COST & TIME to DEVELOP 1 DRUG in WEST: 16 YEARS … USD1.3 billion

drugs Up to 1MM drugs Discovery

10 to 50 Pre-Clinical Testing

4-5
Phase I

2-3 Phase II

1-2 Phase III

1 FDA

Market

1 Phase IV

years 0 2 4 6 8 10 12 14 16

Copyright © 2010 Exolus. All rights reserved. Source: A. DiMasi and HG Grabowski: Managerial & Decision Economics 28 (2007); Zinnov LLC 11
3. INNOVATION: Big Pharma Migrating R&D Functions to China
COSTS DISEASE DIVERSITY  RESEARCH DEVELOPMENT  CLINICAL TRIALS

Pharma Research & Development Operations in China

Copyright © 2010 Exolus. All rights reserved. Source: All Publically Available Information, Company Websites 12
3. INNOVATION: China Mobilizes all Resources to Develop Talent
CHINA SCIENCE and ENGINEERING GRADUATES: 1.6 MILLION per YEAR

University Natural Sciences Degrees


(1985 – 2005)

USA
China
Thousands

Copyright © 2010 Exolus. All rights reserved. Sources: National Science Board, Science & Engineering Indicators 2008 13
4/5. CLINICAL TRIALS: Drivers for Increasing Future Extensions to China
COST (50%) TIME (50%) INFRASTRUCTURE TALENT  PATIENTS 

• China cost of clinical trials approximately 50% Western costs.


COSTS • China actively incentivizing foreign pharma companies to conduct R&D in
country by offering a range of financial and other incentives.

INFRASTRUCTURE
• Numerous world-class medical facilities that meet global requirements for
clinical testing.

• China graduating roughly 10x science grads than the US.


TECHNICAL TALENT • Large pool of highly trained nurses, physicians, technical personnel
• Strong IT skills and vast pool of IT engineers.

• Fast speed of patient enrollment; savings up to 30% on enrollment time.


TIME
• US FDA has established an office in China to help in oversight of trials.

• Vast, diverse, unique diseases across China’s heterogeneous population.


PATIENT POOL • Huge numbers of “flexible” and “untested” patients concentrated in all
major cities, very quick and efficient patient recruitment.

Copyright © 2010 Exolus. All rights reserved. Sources: Exolus Research; PWC, The changing dynamics of pharma outsourcing in Asia (2008) 14
5. NEXT GENERATION: Who Programming to VIPCO Extended Model?
MIGRATION to ADVANCED OPERATING MODELS in CHINA: CSO, CMO, CRO

CSO Extended Cases China’s CRO Market

 Boehringer Ingelheim
 First Big Pharma to have entrusted a sole distributor for all of its
products in China: Sinopharm.
 Sinopharm is China’s largest pharmaceutical distributor by sales
and the only China distributor to cover the entire PRC.
 Boehringer Ingelheim’s sales spiked upward by 45% from 2006
to 2007; Sinopharm saw an annual growth rate of 32%.

CRO Extended Cases


 Pfizer
 Outsources to Wuxi PharmaTech: synthetic chemistry, parallel
medicinal chemistry, and bio-analytical services. It also has a
3-year CRO contract with Wuxi PharmaTech to provide services
in the areas of: in-vitro Absorption, Distribution, Metabolism and
Excretion (ADME) services.
 GSK
 Outsources to Shanghai Institute of Materia Medica (SIMM)
chemistry requirements.
 AstraZeneca
 Invested USD14 million in Wuxi Pharma Tech for the synthesis
of 150,000 compounds.

Copyright © 2010 Exolus. All rights reserved. Sources: Goldman Sachs: Healthcare Services: CROs, December 2007; Exolus Research 15
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