Bio-Pharma: China A Look at The FUTURE: 4 th & 5 th Generation Global Strategies

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1 Global Strategy Global Challenges Executable Solutions Bio-Pharma: China A Look at The FUTURE: 4 th & 5 th Generation Global Strategies France Houdard Managing Director January 2010

2 Table of Contents Corporate Series (Part 2 of 6) BIOPHARMA: China Preface Overview of the China Life Science Industry The PAST: Evolution of Biopharma Foreign Investment into China The FUTURE: Virtual Integrations 4 th & 5 th 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 2 nd Largest Economy (PPP); 400 MM in Middle Class Future Operating Models ( ): 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 ( ): 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

3 The PAST: Evolution of Biopharma Foreign Investment into China COST REDUCTION REVENUE / MARKET INNOVATION EFFICIENCY 2) REVENUES 3) INNOVATION Sales Engineering Marketing IT F&A Back Office HR Procure R&D Distribution Production Sourcing RESEARCH & DEVELOPMENT RESOURCES 1) COSTS SALES & MARKETING PRODUCTION / SOURCING DRIVING Shareholder Value 3

4 The FUTURE: Virtual Integrations 4 th & 5 th Generation Strategies REVENUES INNOVATION Sales Engineering Marketing IT F&A Back Office HR Pro c R&D CONTRACTS, PARTNERSHIPS Distribution Sourcing SHARED SERVICE CENTERS Production RESEARCH & DEVELOPMENT SALES & MARKETING RESOURCES COSTS PRODUCTION / SOURCING DRIVING Shareholder Value 4

5 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 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 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. 5

6 The OPPORTUNITY: Virtually Integrated Pharma Company (VIPCO s) FIPCO MODEL VIPCO MODEL (CSO, CMO, CRO, PC-CRO, INSTITUTIONS) FIPCO (Fully Integrated Pharma Co.) Sales & Distribution VIPCO (Virtually Integrated Pharma Co.) Sales & Distribution Partnerships CSOs Manufacturing Manufacturing CMOs Clinical & Regulatory Research Technology Clinical Development Preclinical Support R&D CROs Preclinical CROs Academia, Scientific, Institutions Source: G. S. Burrill, Biotech 2008: A 20/20 Vision to 2020, The Burrill Indiana Life Sciences Meeting, October

7 Bio-Pharma ( ): Next Generation Operating Models 7

8 1. COSTS: Where is Big Pharma Producing Today in China? COST INFRASTRUCTURE TALENT SUPPLY CHAIN IPR China Big Pharma Production Source: All Publically Available Information, Company Websites 8

9 2. REVENUES: China Already World s 2 nd Largest Economy (PPP) GDP PPP (2008) Germany (5) 11,8 trillions de $ US (1) 6,4 trillions China (2) de $ 3,6 trillions de $ India (3) 3 trillions de $ Japan (4) EU-27 UK (7) France (6) $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 Source: IMF; EIU, CIA World Factbook; F Houdard 9

10 2. REVENUES: How large is China s Middle Class? CHINA MIDDLE CLASS: 300 million (2010) 500 million (2015) Urban Population (millions) Middle Class Income Bands for Urban Population Urban Household Income (US$ PPP-Adjusted) Global > US$107,800 Affluent US$ 3, ,800 Upper Middle US$21,501 53,900 Lower Middle US$13,500 21,500 Poor < US$13, F 2015F 2020F 2025F Upper Middle Class Lower Middle Class Sources: Urbanization Rates, Population based on UN, World Urbanization Prospects 2007; MGI Consumer Demand

11 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 Source: A. DiMasi and HG Grabowski: Managerial & Decision Economics 28 (2007); Zinnov LLC 11

12 3. INNOVATION: Big Pharma Migrating R&D Functions to China COSTS DISEASE DIVERSITY RESEARCH DEVELOPMENT CLINICAL TRIALS Pharma Research & Development Operations in China Source: All Publically Available Information, Company Websites 12

13 3. INNOVATION: China Mobilizes all Resources to Develop Talent CHINA SCIENCE and ENGINEERING GRADUATES: 1.6 MILLION per YEAR University Natural Sciences Degrees ( ) USA China Thousands Sources: National Science Board, Science & Engineering Indicators

14 4/5. CLINICAL TRIALS: Drivers for Increasing Future Extensions to China COST (50%) TIME (50%) INFRASTRUCTURE TALENT PATIENTS COSTS China cost of clinical trials approximately 50% Western 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. TECHNICAL TALENT China graduating roughly 10x science grads than the US. Large pool of highly trained nurses, physicians, technical personnel Strong IT skills and vast pool of IT engineers. TIME Fast speed of patient enrollment; savings up to 30% on enrollment time. US FDA has established an office in China to help in oversight of trials. PATIENT POOL Vast, diverse, unique diseases across China s heterogeneous population. Huge numbers of flexible and untested patients concentrated in all major cities, very quick and efficient patient recruitment. Sources: Exolus Research; PWC, The changing dynamics of pharma outsourcing in Asia (2008) 14

15 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%. Pfizer CRO Extended Cases GSK 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. 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. Sources: Goldman Sachs: Healthcare Services: CROs, December 2007; Exolus Research 15

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