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PHARMERGING MARKETS Julian Thurston Co-Chair Global Lifesciences Group Morrison & Foerster 7 th Floor, Citypoint One Ropemaker Street London EC2Y 9AW Telephone: +44 20 7920 4050. Pharmerging Markets. Who are they? B Brasil R Russia I India C China Mexico South Korea Turkey.

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PHARMERGING MARKETSJulian ThurstonCo-Chair Global Lifesciences GroupMorrison & Foerster7th Floor, CitypointOne Ropemaker StreetLondonEC2Y 9AWTelephone: +44 20 7920 4050

pharmerging markets
Pharmerging Markets

Who are they?

  • B Brasil
  • R Russia
  • I India
  • C China
  • Mexico
  • South Korea
  • Turkey
pharmerging markets1
Pharmerging Markets

IMS predicts:

  • 33% global pharmaceutical sales will be in pharmerging markets by 2011
  • 50% global pharmaceutical sales will be in pharmerging markets by 2020
  • In 2001 this was just 13%
  • Reasons:
    • Growing middle classes
    • Wealth brings Western diseases eg obesity, diabetes
pharmerging markets2
Pharmerging Markets

Classic development in 4 stages:

  • Local generics businesses, no real IP laws
  • IP laws based on TRIPS harmonisation, local science base starts to offer services to other countries – clinical trials/manufacturing (India, China, Brasil). Base line recognition of IP necessary for services contracts. Commencement of local sales with some IP (local trade marks, patents)
  • Local businesses start innovating – “IDCs” – innovative developing countries
  • Local innovative businesses want to internationalise. Just starting in Korea and Brasil.
pharmerging markets strategic and financial impact
Pharmerging Markets – Strategic and Financial Impact
  • No longer the just the “triad” – USA, EU, Japan
  • Strategies developing to capture the value
  • Affect on NPV/DCF models for:
    • Financings
    • Partnerings
    • M&A
china healthcare market
China - Healthcare Market
  • Strong economic growth and increasing demand for better healthcare have made the country one of the most important emerging markets for multinational pharmaceutical companies
  • One of China’s top priorities, as highlighted in its 11th five year economic development plan is the provision of basic healthcare services to the entire Chinese population by 2020.
  • All forecasts indicate that China will become one of the world’s top five pharmaceutical markets by 2015.
the chinese market is big and growing
The Chinese market is big and growing
  • With 1.3 billion people, China accounts for 22% of the world’s total
  • China’s purchasing power is second only to the US
  • In 2006 China ranked fifth worldwide in terms of overall economic power with a total GDP of US$2.5 trillion
  • Chinese consumers spent about $47 billion on drugs in 2006, with spending growing at a compound rate of nearly 20 percent between 2002 and 2006 (compared to global growth rate of only about 5 percent for the same period)
  • By the end of 2007 the total Chinese healthcare market was valued at US$86.8 billion* (compared with the US market at US$ 2.26 trillion**)
  • In 2007, the Chinese healthcare market grew by 25.5%* compared to the previous year surpassing growth for most developed countries
sales to hospitals main players
Sales to hospitals, main players

7.2%

5%

5%

5%

5%

4%

4%

4%

2%

2%

china s pharmaceutical industry
China’s Pharmaceutical Industry
  • China’s pharmaceutical sector is young and still evolving
  • Shanghai, as the country’s main commercial hub, has emerged as the preferred location, helped by the presence of the Zhangjiang Hi-Tech Park.
  • The Industry comprises:
    • Pharmaceutical Manufacturers/Suppliers
    • Other Service Providers
    • Innovators
    • Big Pharma R&D
pharmaceutical manufacturers supplies
Pharmaceutical Manufacturers/Supplies
  • China has developed a vibrant manufacturing industry to supply :
    • lower-priced alternatives to branded pharmaceuticals for sale and use in China, and
    • reliable sources of low-cost active pharmaceutical ingredients (APIs)
  • Generics industry historically promoted by:
    • absence of patent protection in China for pharmaceutical products prior to January 1, 1993 and
    • many key blockbuster drugs not having patents in China
    • therefore local pharmaceutical companies could legally copy new drugs developed and patented in other countries
    • relatively low barriers of entry associated with this work
pharmaceutical manufacturers supplies1
Pharmaceutical Manufacturers/Supplies
  • The majority of manufacturers derive much of their income from domestic sales of finished formulations
  • China has the lowest global cost base for API production and has now become a major producer of API’s for the global industry
  • At the end of 2007 over 6,600 pharmaceutical manufacturers were registered with the State FDA
  • As yet no single firm has emerged as the dominant market leader
pharmaceutical manufacturers supplies2
Pharmaceutical Manufacturers/Supplies

The top 50 local pharmaceutical companies by revenue saw significant

change between 2005 and 2007 as a result of consolidation

2005

  • Yangtze River Pharmacy Group
  • Harbin Pharmaceutical Group Co
  • Shijiazhuang Pharma (CSPC)
  • North China Pharmaceutical Group
  • Xiwang Group Co
  • Shenghua Group
  • Northeast Pharmaceutical Group
  • Shandong Xinhua Pharmaceutical Group
  • Tianjin Zhongxin Pharmaceutical Group
  • Tianjin TASLY Pharmaceutical Group

2006

  • Harbin Pharmaceutical Group Co
  • Shanghai Pharmaceutical (Group) Co
  • Tainjin Pharmaceutical Holdings
  • Guangzhou Pharmaceutical
  • Yangtze River Pharmacy Group
  • Shijiazhuang Pharma (CSPC)
  • North China Pharmaceutical Group
  • XiuZheng Pharmaceutical Group
  • Northeast Pharmaceutical Group
  • Sichuan Kelun Pharmaceutical

2007

  • Yangtze River Pharmacy Group
  • Xiwang Group Co
  • Harbin Pharmaceutical Group Co
  • Shijiazhuang Pharma (CSPC)
  • Shenghua Group
  • Northeast Pharmaceutical Group
  • Xian-Janssen Pharmaceutical
  • North China Pharmaceutical Group
  • XiuZheng Pharmaceutical Group
  • Luzhou Group
service providers
Service Providers
  • As a low cost, high skill centre, China can provide productive and cost effective execution of laboratory tasks, preclinical and clinical testing and manufacturing and will continue to move into processes previously considered the core activities of biotechnology companies
  • With entry into the World Trade Organisation in December 2001 and the subsequent improvement in Intellectual Property Rights protection international pharmaceutical companies became more willing to disclose their technologies to Chinese manufacturers and clinical trial service providers and benefit from lower cost services
  • China\'s effort to improve its laboratory practices resulted in the creation of a Good Laboratory Practices (GLP) system in 1999 - closely modeled on the US equivalent
service providers an example
Service Providers – An Example

WuXi PharmaTech

  • pharmaceutical and biotechnology CRO
  • founded in 2000
  • specializes in laboratory services, preclinical development, and manufacture
  • No speciality in any disease area but tailors service to its clients’ needs
  • more than 700 customers in the US, Europe, and Japan including include Merck and Pfizer
  • August 2007 - raised $185 million through IPO on NYSE
  • has shown robust growth over the past three years

WuXi PharmaTech says it plans to remain a service company. It has a passion for researching possible compounds for new-concept drugs, but no interest in the financial risks associated with the low success rate of candidate drugs.

innovators
Innovators
  • China is just beginning to enter a phase of Innovation and develop innovative products.
  • At present, only about 5% of the medicines on the Chinese market are innovative and patent-protected
  • In some ways China remains an unlikely innovator …
    • its education system remains rigid
    • Chinese culture leans toward conformity rather than imagination
    • intellectual property protection is less than ideal
  • … however:
    • the Government is supportive of innovation
    • costs are low resulting in high productivity
    • there is a flow of Chinese scientists returning to China motivated by entrepreneurialism and ambition who have studied and worked in laboratories in the US
    • some Big Pharma are moving R&D to China and Chinese scientists are rapidly developing the ability to innovate and create their own intellectual property
innovation is on the rise
Innovation is on the rise
  • There has been a marked increase in the number of applications filed in the State Intellectual Property Office in China.
  • In 2006, 570,000 patent applications were filed surpassing the 410,000 patent applications filed in the US Patent and Trademark Office.
  • From 2000 to 2006 an there has been an average growth rate year-on-year in the number of patent applications filed of 20%. Domestic applications experienced higher growth than foreign applications.
innovators1
Innovators
  • Innovation in China is largely funded by continuing to offer manufacturing, clinical trial and contract research services
  • At present relatively few local companies are engaged in the discovery and development of new-concept drugs due both to the high initial capital investment such drugs require and to their high failure rate.
  • In 2008 there are approximately 160 new drug candidates in China’s pipeline, most of which are modest evolutions
innovators2
Innovators
  • Institutes and Universities
    • Main source of novel drugs
    • Lack the funding and personnel for clinical trials
  • Pharmaceutical companies
    • Lack the size, knowledge and resources for innovation
    • May manage clinical trials for Institutions and Universities
  • Biotechnology companies
    • More innovative and efficient than Pharmaceutical companies
  • Industry consolidation
    • consolidation of the industry is looming
    • but this needs paper and finance
supportive governmental policies
Supportive Governmental Policies
  • In general, the climate in China is moving towards favouring innovation
  • In April 2007 China issued its first five-year development plan for its bioindustry 2006 to 2010
    • To build systems to benefit the bioindustry including policy technology innovation, bio-security, industry organisation and service.
    • To increase R&D investment
    • To upgrade the structure of the industry by cultivating biotech enterprises and forming large-scale biotech enterprises
    • To grow industry scale
  • China has acted firmly against corruption with the arrest and execution of the former head of the State FDA. 6 fake medicines approved, bribes of $850.
data exclusivity
Data Exclusivity
  • Undisclosed test data will not be disclosed by authorities prior to approval of market authorisation
  • For a period of 6 years from the date of approval of marketing authorisation, a generics manufacturer cannot refer to the undisclosed test data
  • Authorities will not disclosed undisclosed test data except:
    • As necessary to protect the public
    • Where steps are taken to protect against unfair commercial use
big pharma r d
Big Pharma R&D

Cost Advantages of R&D in China for Big Pharma

  • The push into China is partly a response to the spiralling cost of drug discovery which can reach $1 billion by the time a new drug is approved
  • Generally the cost of R&D in China is about 20 to 25% of the cost in developed countries
  • Generally the cost of conducting clinical trials is about 70% of the cost of conducting such trials in the US.
  • Sample cost savings from ShanghaiBio relative to US:
    • 30-60% on Drug Discovery and Development
    • 50-70% on Pre-Clinical Testing in Animal and In-Vivo Models
government business incentives for r d
Government Business Incentives for R&D
  • Preferential income tax rate of 15% for R&D facilities
  • R&D centers can get their land use fees and land transfer costs refunded for the first three years
  • The Zhangjiang park (Shanghai) offers fast-track approvals for customs and some other procedures
  • Under Chinese law, if a foreign company with an R&D centre in China applies for the approval of a new medicine, it is handled by the relevant provincial level FDA, whereas if a company with no R&D presence in China does so, it is handled by the State FDA which generally takes longer
benefits in penetrating the chinese market
Benefits in Penetrating the Chinese Market
  • Building research centres in China helps foreign companies establish relationships with Chinese physicians and government officials, which can be pivotal when those companies try to launch products and seek regulatory approvals.
  • Having a local presence and ties with the local community can help ensure that intellectual property is better protected.
large high quality inexpensive talent pool
Large, High-Quality, Inexpensive Talent Pool
  • The talent pool in China is improving to a globally competitive level.
  • Many western-trained scientists and engineers have returned to China taking good knowledge of drug discovery and development, leadership skills and especially English language skills.
  • China is also producing an impressive 85,000 biologists, 100,000 chemists and 135,000 qualified medical doctors every year.
big pharma r d investment in china
Big Pharma R&D Investment in China
  • AstraZeneca
    • May 2006, AstraZeneca announced it would invest over $100 million into China-based R&D over a three year period
    • used to build an R&D center that will focus on cancers prevalent in China especially liver and gastric cancers
    • 2006, AstraZeneca also announced a $14 million, two-year compound synthesis pact with WuXi PharmaTech
    • work will focus on lead identification and provide chemical compounds to supplement AstraZeneca’s chemical library
  • Novartis
    • spending $100 million for the design and construction of two R&D facilities
    • focus of research will be virally induced cancers and infectious diseases
r d investment by big pharma
R&D Investment by Big Pharma
  • GlaxoSmithKline
    • spending $40M outfitting a Shanghai-based R&D center to direct its global discovery and development in neurodegeneration
    • building up drug discovery capabilities related to disorders such as multiple sclerosis, Parkinson’s disease, and Alzheimer’s disease
    • expected to become one of GSK’s bigger facilities when it is completed p
    • redicted that in 10 years it will employ more than 1000 scientists
  • Roche
    • January 2004, Roche established an R&D center in Shanghai with a $11 million investment
    • medicinal chemistry research for lead generation and optimization
r d investment by big pharma1
R&D Investment by Big Pharma
  • Lilly
    • In 2007, Lilly announced a $100 million investment into R&D in China over five years
    • will invest into Chinese partners for chemistry and biology projects instead of establishing wholly owned facilities
  • Pfizer
    • October 2005, Pfizer announced the establishment of an R&D center in Shanghai
ipo enthusiasm
IPO Enthusiasm
  • Industry watchers highlight the need for caution around Chinese IPO’s
  • Chinese pharmaceutical companies have been rushing to IPO in the U.S. before the enthusiasm disappears
mergers and acquisitions
Mergers and Acquisitions
  • The highly fragmented pharmaceutical industry seems like a natural candidate for M&A
  • Consolidation is underway as hotshots with IPO cash have started scooping up smaller rivals
    • Only five months after its April 2007 NYSE listing, Simcere took a $15 million, 51 percent stake in fellow drug maker Boda. In late November, Simcere paid $4.4 million for Master Luck, majority owner of Nanjing Tung Chit Pharmaceutical, which makes cancer drugs.
    • In September 2007, a subsidiary of Tongjitang, which listed in March 2007, bought Guizhou Long-Life Pharmaceutical Company for $5.6 million in cash.
mergers and acquisitions1
Mergers and Acquisitions

In perhaps the biggest and boldest deal …towards the end of 2007, after its successful IPO,

WuXi PharmaTech signed a definitive agreement to acquire US-based AppTech Laboratory Services (AppTec) for approximately $151M

WuXi assumes AppTec debt totaling approximately $11.7M

The purchase expanded WuXi\'s offerings to include biologics services and enabled WuXi to gain a significant US operational footprint, and expand its customer base and addressable market size.

brasil some key facts
BRASIL, SOME KEY FACTS
  • 2007 GDP (purchasing power party) $1.836 trillion
  • Growth 5.4%
  • Population 191 million
  • Middle Class 22.5 million
  • Fixed line phones 33.8 million
  • Cellphones 99 million
  • Imports and Exports approx 9% to China
  • 50% of all fuel sold for cars is ethanol
  • CLEANTECH IS BIG IN BRASIL
  • 5TH largest landmass in the world – huge natural resources
  • Has 10% of world population of dentists!
brasil pharmaceutical market
Brasil – Pharmaceutical Market
  • In 2007 the pharmaceutical market grew 9% to $10.1 billion growing at 7.1% per annum projected to be US$18.3 billion by 2012
  • 200 pharmaceutical companies – consolidation opportunities
  • More than 300 biotech companies in Brasil, more than 50% 7 years old
  • BDNES authorised to consider more healthcare investment
pharmaceuticals key focus areas
Pharmaceuticals – Key Focus Areas
  • Manufacture of vaccines – Fiocruz
  • Neglected diseases
  • Stem cell therapy $12.1 m funding 2008/2009 (embryonic stem cells, individualised adult stem cells etc)
sensitivity to ip value
Sensitivity to IP Value
  • Until 8 years ago, PhD students in Brasilian universities had no tuition about patenting and other issues. Now it is an integral part of the course.
  • Brasilian businesses may have patented in Brasil and possibly the USA. Otherwise no focus on export.
sensitivity to export markets
Sensitivity to Export Markets
  • Until a few years ago, the maximum investment a Brazilian business could make overseas in a single year was $5 million. This created a climate of little international trade, the focus being on imports (high tariffs) and local manufacture.
  • Only the largest companies exported.
  • But many smaller businesses had products for the Brazilian market.
  • SMEs now just beginning to realise the value of export markets and/or international partnering.
capital markets
Capital Markets

BOVESPA: 100 IPOs in 2006 and 2007, 64 in 2007. After a quiet first semester, IPO activity now picking up again in second half of 2008.

The two lead banks – Credit Suisse and UBS require international advisors, and most listings now have an international element such as s.144A registration at the same time. Many more banks, private equity houses and VCs in Brazil

vision of the future
Vision of the Future?

Pharmaceutical and med-tech markets are becoming more and more international

This means more

  • Complexity
  • Strategy
  • Execution
  • IP issues
  • Regulatory Issues
  • Disputes
  • This is a world in which international legal services are essential

MoFo “joining the dots” for technology, products and finance

contact
Contact

Julian Thurston – Co-Chair Global Lifesciences Group

Morrison & Foerster

Citypoint

One Ropemaker Street

London

EC2Y 9AW

Telephone: +44 20 7920 4050

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