Presented at CBBC China Tomorrow conference, Glasgow Nov 10

1. Life Sciences in China –
Opportunities & Challenges
Martyn Link
Senior Market Analyst
Life Science Foresighting Team
5th
November 2010

2. Overview – Why China?
• China is the great economic success story of the last 25 years
• China has emerged strongly from the global financial crisis. The World Bank recently raised
its 2010 growth forecast for China to 9.5%.
• Rapid urbanisation (75% of Chinese people are expected to live in cities by 2025), massive
infrastructure investment and an increasingly skilled and mobile workforce are creating a
more favourable business environment.
• Opportunities exist for UK companies not just in the major cities but increasingly in China's
regional business centres.
• China has an increasingly large and affluent domestic market. Its estimated 250 million
‘middle-class’ spenders are becoming increasingly brand conscious.
• Healthcare reforms are driving improvements in coverage and quality, but much still remains
to be done
• Historically SDI has focussed on responding to export requests to China – in a country with
such large opportunities can we make more of the relationship?

3. Life Sciences Foresighting Team
• Primary & secondary market research
• Due diligence
• Strategy development & recommendations
• Landscaping & cluster analysis
• Project management & implementation
• Opportunity “Ambassadors”
• Collaboration scoping
• Opportunity identification & assessment
• Competitive analysis
Industry Expertise
Innovative Thinking
Strategic Focus
Commercial Outlook
Companies Market Sectors Technologies Countries
Leading Delivering
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4. Strategic Review of Life Sciences Opportunities in China
• Objectives:
• To provide a strategic analysis of the Life Science industry in China including the
opportunities for, and challenges to, conducting business in the country
• To demonstrate how this relates to Scottish capabilities
• To provide recommendations of areas of opportunity for Scotland and SDI over
the short, medium and long term
• Project brief:
• January – March 2010:
– Primary research – interview Scottish, UK, Chinese business leaders
– Secondary research – market reports, articles, news flow
• Deliverables:
• April 2010: Validate recommendations / proposed strategy during field trip
• November 2010: Awareness raising event in Scotland in partnership with CBBC
– “China Tomorrow” Life Science Conference
• Market Report – launched at conference

5. Trade Visit – April 2010
• >20 meetings, 8 cities in 14 days
• Hong Kong
• Shenzhen
• Beijing
• Jinan
• Shanghai
• Suzhou
• Chongqing
• Chengdu

6. A Changing Patient Population (Section 1.2)
• China has the largest country population in the world at 1.328bn in 2008 ahead of India at
1.169bn.
• However since 1996 the country’s growth rate has been below 1% and currently
stands around 0.58%.
• The growth rate is forecast to continue slowing until 2033, after which point the
population is forecast to begin declining.
• This slowing population growth reflects a decline in the fertility rate in China, following the
implementation of the one child policy in 1979.
• This relatively sudden constriction of the inflow of population is set to have a
dramatic impact on the age demographics of the country in the coming years
• China’s average life expectancy at birth has improved steadily over the last few decades. In
1982 the average life expectancy was only 67.8.
• However, China still has an unacceptably high infant mortality rate. As recently as
1990 there were 32.9 deaths per 1000 births, compared to the OECD average of 11
and 7.9 in the UK
Healthcare
growth
drivers

7. A Changing Patient Population
• China has a geographically dispersed population.
• While the country has 12 cities with populations in excess of 5 million, this still
leaves 62% of its population (800 million) living in rural areas, often far from the
nearest city.
• The rural population are often poorer and less healthy than their urban
counterparts, with mortality rates in China’s least developed areas running four
times higher than their rural counterparts
• As a result of the boom in China’s economy, in last 20 years the disposable income of
China’s urban and rural residents grew twenty fold.
• However, the average medical costs increased by more than 130 fold
Healthcare
growth
drivers

8. A Changing Patient Population
• In terms of epidemiology trends, traditionally, China has had a high use of anti-infectives,.
This trend has been driven by the widespread use, and over-prescription, of antibiotics.
• The strong growth in the overall pharmaceutical market in recent years has been driven by:
• The creation of an Essential Drugs List,
• The increased investment that have been made in the healthcare market and
• The changing lifestyles of the urban Chinese population as they embrace more
Western attitudes and behaviours.
• Thus, while communicable diseases remain important, in recent years China has experienced
an increasing shift towards treating non-communicable diseases.
Healthcare
growth
drivers

9. From Imitation to Innovation (Section 1.3)
• Historically China was seen as the producer of cheap and often imitation goods, but perhaps
lacking the quality and innovation of its Western rivals.
• However, this picture is now changing with China focussed on moving from imitation to
innovation through massive government investment in R&D initiatives, infrastructure
and capacity building activities
• China’s investment in R&D as a percentage of GDP has increased steadily over the last
decade
• LS R&D: Mega New Drug Programme –will funnel over $12bn to companies with innovative
drug discovery and development projects over the next 5 years.
• Talent recruitment: Back in the 1970s the Chinese government encouraged scientists to gain
qualifications and experience across the world. Then in the 1980s it began encouraging them to
bring their skills back to China. According to the MoH, there have been 150,000 returnees in last
three years.

10. From Imitation to Innovation
• Increased IP Activity: in the last decade China has experienced a dramatic increase in the number
of patent families filed. From less than 20 in the early 1990s the country filed nearly 500 patents in
2006, much higher than that of the other BRIC countries. However, this was dwarfed by the number
of patents filed in the US (3%) and UK (29%).
• Encouragingly there has been an increasing focus on Drug Discovery. In 2006, there were 382
New Chemical Entities (NCEs) filed, a 43% increase over previous year. This reflects the
increasing numbers of NCEs being developed in China – both from Western style drug discovery
efforts and the modernisation of the Traditional Chinese Medicine (TCM) market.
• In response to lengthy approval times for innovative drugs, in January 2009 the SFDA established
the so called “Green Channel” to accelerate the application process for innovative new drugs.
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Brazil
China
India
Russia
• This included establishing a
pre-IND application
consultation committee at
the SFDA’s Centre for Drug
Evaluation. The aim of this
new initiative is to enable
companies to receive early
guidance on the regulatory
approval process for their
compound. Hutchinson
was the first company to
use the Green Channel in
mid-2009.

11. From Imitation to Innovation
Third Amendment to the Patent Law (Oct 2009)
• In December 2008 the Chinese Patent Law was amended to replace the “first-to-file” approach
with a requirement for “absolute novelty”. This change brings it more into line with EU and US laws
and came into effect from 1st October 2009.
• New standards for novelty – any previous disclosure in public (internationally)
• Tightened national security regulations – file in China first
• New “invalidity defence” – alleged infringers of patents are now allowed to appeal
• Bolar exemption – regulatory-focussed R&D on patented inventions ahead of the
patent expiry
• Parallel imports permitted
• Minimum damages increased – infringement penalty and statutory damages ceiling
both increased
• Genetic material – original source of the genetic material must be described

12. Healthcare Policy (Section 1.4)
Healthcare Reform (April 2009)
• The government is eager to provide universal healthcare coverage for many rural Chinese that
are not currently covered by an insurance plan, as well as improve the standard of care for those
that are covered. A new 3 year plan was officially launched in April 2009:
• Health insurance for all – targeting universal coverage by 2020
• Establish essential drug system – first part released in August 2009 and contained
307 drugs (67% are Western). Second part will add a further 200-300
• Improve medical service system at grassroots level – invest in infrastructure to
create competent primary care facilities, particularly in rural areas
• Enable universal access to basic health service – aims to increase affordability of
medicines and encourage R&D in TCM industry
• Pilot reform of public hospitals – changing the way hospitals are run and funded

13. Healthcare Delivery (Section 1.5)
• Over the next few years 19,246 country hospitals, 29,000 new rural clinics and 2,000 country
level hospitals are due to be constructed. The hospitals are ranked according to the following
system:
• Level I hospitals (68%) – small hospitals, generally poorly equipped.
• Level II hospitals (27%) – located in mid-sized cities and county capitals, and are
adequately equipped and staffed.
• Level III hospitals (5%) – located in big cities and posses best equipment and
doctors. These hospitals are the most widely used and typically have between 500-800
beds. The number of these hospitals has increased six-fold since 2000
• Skills shortage: a high proportion of staff in
rural clinics are well short of UK-standard
medical qualifications. A 2008 review of
practises in Beijing noted that a third of
medical staff had no qualifications beyond
junior high school.
• The figure illustrates the level of training of the
doctors at community health centres.
Worryingly, over 5% of “doctors” at both these
facilities had no medical training at all.

14. Healthcare Delivery
• Patient costs: for the average urban employee, the medical savings account that they pay into is
sufficient to cover around 3 consultations / year.
• If the cost of treatment is <6x average local wage then the insurance covers 85%,
leaving 15%. If the cost of treatment >6x average local wage, then the patient must
bear 100% of the excess.
• According to the MoH, in 2007 a staggering 70% of patients refused hospitalisation despite a
referral, citing financial problems.
• This study also revealed that more than 54% of patients discharged themselves
against medical advice due to cost reasons.
• For those that do pursue treatment in some instances it can take up to two decades to
financially recover from a serious illness
Medical procedure Price (reduction) /
inflation vs operational cost
Hospital bed and board (25%)
Basic surgical operations (30%)
General examinations (40%)
CT scan 70%
X-ray exam 50%
Pathology test 28%
• Government sets out the price that
hospitals can charge for the various types
of medical provision. Many of these
prices are set well below cost, but many
others are well above.
• This system distorts patient treatment
and incentivises expensive procedures &
drugs

15. • China’s life science industry has undergone significant growth over recent years - it is expected
to become the 3rd largest pharmaceutical market by 2010. In 2009 it was the 3rd largest
market for medical devices (behind USA and Japan). Since 2006 the market has returned a
compound annual growth rate of 9.9% from £21.7bn to £30.7bn.
• In terms of scale, in 2007 China had 200 government-funded biotechnology labs with > 30,000
R&D staff, according to Chen Zhu (MoST), and > 500 biotech companies that employ 50,000
staff. There are also 300 universities and colleges with departments related to life science &
biotechnology – generating 2000 PhDs in life science a year.
Life Science Industry (Section 1.6)

16. Traditional Chinese Medicine
• 2007 TCM sales reached $21bn, 40% of the total Rx market by value and two thirds by volume. It is
the default health treatment for the majority of the population. However, Western medicine is sought
when the patients are certain of the cause of illness or seek quick alleviation of symptoms
• The MoH has attempted to modernise the TCM industry and integrate it more with the national
healthcare system, viewing the development of a strong and innovative TCM industry as a way in
which to increase exports and identify modern applications for TCM-related products
• One of the biggest barriers hindering further
development of the industry is the
inconsistencies in the manufacturing
processes.
• Moreover, there is a lack of unified regulations
and standards for assessing the safety, efficacy
and quality of TCM in clinical trials or for market
approval. There is a need for greater evidence-
based TCM product testing and research in
order to further drive development of the TCM
industry.
• How successful these initiatives will be in making
the TCM industry a driver of growth and an
internationally respected area of competitive
edge remains to be seen.

17. Pharma / Biotech Sector
• The Chinese pharmaceutical market has exploded in recent times, climbing from 10bn RMB
($1.45bn) in 1985 to 446 bn RMB ($64.84bn) in 2005 (US market worth $340bn in 2005). Prior to the
1980s the Chinese pharmaceutical market was based around state owned manufacturers of API and
generics. However, there has been a dramatic increase over the last 10 years in the volume of
generic and branded products on the market, as well as TCM products being sold through the
prescription channel.• Scottish Pharma & Biotech Activity:
• Controlled Therapeutics – launched
core product for induction of labour in
China in 2009 through an agreement with
BMP Sunstone (formerly Beijing Med-
Pharm), a US headquartered company
with a Chinese hospital distribution
business.
• Burdica Biomed – signed a ten-year
deal with Sinopharm to distribute the
company’s products in China in January
2010. Sinopharm has about 3,500 staff
and 12% market share for pharma
products and medical devices
distribution.

18. Medtech Sector
• The Chinese medical devices market is estimated to be worth around $15bn (£9.2bn) and is
predicted to reach $20.6bn by 2012. It is estimated that it currently accounts for around 5% of the
global medical device market, and by 2050 this figure will increase to 25%.
• The medical device market represents a highly attractive market for foreign companies. A number
of Scottish companies have already entered the market and are doing well. Foreign medical devices
are attractive to the rising Chinese middle class due to their reputation for quality.
• Branding is a key determinant of success in the Chinese medical device market, as the more
advanced technologies are unlikely to be reimbursed.
• There are also likely to be competitor copy-cat products that are much cheaper, but a strong brand
profile can provide a strong defence against the cheaper version.
• Scottish Medtech Activity
• Touch Bionics – launched its i-LIMB hand in China in April 2009 through distribution
agreement with Enjoylife Prosthetics & Orthotics Co (the largest privately-owned
prosthetics and orthotics company in China).
• Axis-Shield – in December 2009 Axis-Shield announced plans to increase its number of
Chinese distributors from 4 to 30 in the next 18 months. The company has been active in
China for 10 years with its diabetic tests.
• Aircraft Medical – in January 2010 Aircraft Medical announced it had signed a 5-year
distribution agreement with Gloryway Technology worth £6.2m for its video laryngoscope
in China.

19. Service Sector
• China’s early service offering was mainly in chemistry-based research. However, over the
past decade Chinese companies have begun to offer out-sourcing solutions for the entire
drug discovery and development pipeline, including GLP preclinical outsourcing services and
full-scale clinical trials.
• While the Chinese service industry is highly fragmented, more companies are focussing on
providing a one-stop-shop service in their area. Moreover, many CROs are gaining
international accreditation in order to compete more effectively with Western CROs.
• Scottish CRO Activity
» Charles River – in March 2007 Charles River formed a joint venture with
Shanghai BioExplorer (a preclinical CRO) to form Charles River
Laboratories Preclinical Services – China. The 60,000ft2
preclinical
facility that has been built as a result of the jv was opened in October
2008 and received AAALAC accreditation the following July. It provides
FDA approved GLP and non-GLP toxicology studies.
» In May 2010 CRL entered into an agreement to acquire WuxiApptec,
although it later terminated the agreement.
» Scottish Biomedical – signed a collaboration agreement with Chinese
company Asiapharm to develop new schizophrenia treatments in April
2008.
Lower cost
Talent pool
Patient pool
Primate access
Rapid growth
Biotech clusters
Government support
Regulatory legislations
IP enforcement
Centralised capabilities
Talent retention

20. 0
2
4
6
8
10
Export Potential
Inw ard Investment
Regulatory Barriers
Academic Strength
IP protection
Market size
Technology Adoption
Industrial R&D
China Country Landscape Analysis
• China is a market of contrasts: very
high in market size and potential for
Scottish exports (particularly medical
devices)
• But low in intellectual property
protection, industrial R&D and
inward investment opportunity.
• With a relatively low industrial R&D,
academic strength and technology
adoption, China is reliant on in-
sourcing innovation from other
countries.
• However, it is then weak at protecting
this IP. This creates a dangerous
combination for foreign companies.
• Key to overcoming this issue is having a high quality product, identifying the right distribution
partner and developing strong brand recognition for your product. This will mean that even when
generic alternatives enter the market, the consumers will identify your product as a high quality
foreign product that they will pay extra for the reliability and quality.

21. MARKET
SUPPLY
R&D
Distribution
Manufacture
Diagnostics
Therapeutics
Universities
PATIENT
DEMAND
Industry Devices
Risk Capital
Hospitals
Health
Clinics
Pharmacies
GovernmentInfrastructure
Incentives
Grants Training
Service
Inward investment opportunity
Key:
Export / trade opportunity
Life Science Supply Chain Assessment
• The various parts of the life science industry can be understood as forming a supply chain that feeds
innovations and discoveries from the academic and industrial sector through the product and device
development pipeline, to care providers and thus eventually reaching patients.
• Such a supply chain can be used to illustrate the numerous opportunities for Scottish groups for both
trade and inward investment.

22. Overall Opportunity Assessment
• Inward Investment – although China has currently few companies looking to expand, over
the next 5-10 years this number will begin to increase steadily.
• Strategic Partnerships – working closely together with government, academic or industry
groups to support mutual economic growth and company expansion. Precedent has been set
for engaging with China at this level by a number of English Universities.
• Raising Awareness – a number of Scottish companies have already accessed the Chinese
market, but others are either unaware of the opportunities (and threats) or put off by the effort
required to enter China.
• Research Collaborations – there are a number of areas where Scottish strengths could be
synergistic to Chinese capabilities. Although these are likely to be mainly academic in nature,
others could also involve Scottish companies.
• Export Opportunities – Scotland has a good track record in exporting medical products to
China, which remains an area of growth for the industry.

23. Building Bridges with China – Export Examples
Medical Device Examples:
• Touch Bionics – launched its i-LIMB hand in China in April 2009 through distribution
agreement with Enjoylife Prosthetics & Orthotics Co (the largest privately-owned prosthetics
and orthotics company in China).
• Axis-Shield – in December 2009 Axis-Shield announced plans to increase its number of
Chinese distributors from 4 to 30 in the next 18 months. The company set up an office in
Shanghai in June 2009 in preparation for the expansion.
• Aircraft Medical – in January 2010 Aircraft Medical announced it had signed a 5-year
distribution agreement with Gloryway Technology worth £6.2m for its video laryngoscope in
China.
Therapeutic (Drug Delivery) Examples:
• Controlled Therapeutics – launched core product for induction of labour in China in 2009
through an agreement with BMP Sunstone (formerly Beijing Med-Pharm).
• Burdica Biomed – signed a ten-year deal with Sinopharm to distribute the company’s
products in China in January 2010. Sinopharm has about 3,500 staff and 12% market share
for pharma products and medical devices distribution.

24. Some Key Questions
• Have you assessed the pros and cons of entering China for your company?
• What level of priority do you place on expansion in China?
• Do you know if there a market for your product or service in China?
• Do you know what operating model you would use?
• Do you know how to access the right people in China (partners / distributors)?
• Do you know the regulatory approval process in China?
• Do you know the best region to set up operations?
• Are you aware of the barriers you will need to overcome in doing business in China?

25. Exploring New Horizons
• For Scotland
• Potential inward investment
• R&D collaborations (academic and commercial)
• Export of products
• Out-licensing opportunities
• For China
• Access to innovative drugs and devices
• Access to R&D expertise
• Route into European market

26. Thank you for your time!
感谢聆听！