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See Appendix A-1 for Analyst Certification, Important Disclosures and non-US research analyst disclosures.Citi Research is a division of Citigroup Global Markets Inc. (the “Firm“), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Certain products (not inconsistent with the authors published research) are available only on Citis portals.Not for distribution in the Peoples Republic of China, excluding the Hong Kong Special Administrative Region and Qualified Foreign Institutional Investors. 15 Jul 2019 19:05:24 ET 66 pages PharmaceuticalsAsiaGlobal Pharma IndustryChina at Inflection Point: Big Opportunity for MNCs, Domestic Leaders China to open sector even further Chinas entry into international organizations for drugs registration and development is catalyzing major reforms in the countrys pharma sector, the second largest in the world, and offers big opportunities to both global players and Chinese firms. We expect its pharma sector to grow at an 8% CAGR in 2018-25E, to Rmb2,708bn (US$393bn), led by 1) innovative drugs (15% from Chinese companies; 19% from foreign players - by value), 2) generics and 3) biosimilars. With the biggest growth driver being innovative drugs, the leading global players cannot afford to ignore China. In this Must C, we analyze each of these growth drivers and identify the biggest potential beneficiaries. Innovative drugs: The underdeveloped innovative drugs market in China is rapidly changing due to faster govt reimbursement and higher commercial insurance for imported innovative drugs. China is adopting global standards in clinical trials, and policy reform is shortening waiting time for drug development top MNCs, domestic companies to gain 3Consolidation to strengthen generics leaders 4Biosimilars market is in its infancy 5Part I: China Market Matters 6China market now #2 and still growing rapidly 6Healthcare expenditure growing at a good pace 7Part II: Seeking Structural Winners in 5 Years 82025 landscape consolidation is key 8Buy sustainable leaders 10Part III: Innovative Drugs in China 12Market opening up benefits multinationals 12Innovative drugs availability in China improving 12Policy supports innovative drugs 15Which MNCs would win in China? 19US-China price interplay 22Innovative drugs affordability in China 23Part IV: Generic Drugs in China 25Leaders strengthened by consolidation 25Raising the bar for generics consolidation 28Volume expansion vs. pricing pressure of generic drugs 28Part V: Biosimilars in China 30China biologics market potential 30Biosimilars pricing pressure is inevitable, cost advantage is key 30China regulatory framework on biosimilars is improving 32Clinical progress of biosimilars in China 33Part VI: Conclusion Welcome to Chinas Post ICH Era 34Appendix-1 Evaluating China Pharma 2019-28E Earnings CAGRs with Pipeline Impact 36Appendix-2 China PD-1 Market Estimates 40Appendix -3 Drug Sales before/after NRDL Inclusion 48Appendix-4 Citi Est. originator/generic landscape changes 52Appendix-5 Sales Analysis of 1st Batch of Govt Centralized Procurement 55Appendix-6 Biosimilar Regulatory Framework Comparison 59Appendix A-1 61ContentsGlobal Pharma Industry16 July 2019 Citi Research3The rapid transformation in Chinas pharma industry, especially in innovative drugs, will benefit the leading MNCs and domestic companies. The market share of the top 10 multi-national companies (MNCs) will rise to 25% in 2025 (from 16% in 2018), on our estimates, and of the top 10 Chinese companies to 28% (from 15%). MNCs will largely grow through innovative drugs, the biggest growth driver of the sector, and the domestic companies largely through generics and biosimilars. We estimate MNCs patented drugs and Chinas domestic innovation sales to grow at CAGRs of +60%/+50% in 2018-25E. Potential winners would be AZ and Merck among MNCs, and SBP, Hengrui and Hansoh among the Chinese companies.China pharma growing rapidly; top MNCs, domestic companies to gainChinas pharma sector, the second largest in the world, continues to grow rapidly, building on a CAGR of 10% in 2013-17, to Rmb1,558bn (US$226bn). We estimate a market size of Rmb2,708bn (US$393bn) in 2025E. The top 10 MNCs/Chinese companies market shares will rise to 25/28% in 2025E, on our estimates, from 16/15% in 2018. MNCs would acquire market share through innovative product launches in China while Chinese leaders would gain through generics consolidation. Figure 1. Top 10 MNCs/Chinese Companies to Gain Market Share in China 13.%13.2%12.7%12.6%12.8%13.%13.5%14.7%16.2%17.5%18.7%20.%21.3%2.4%23.5%24.7%10.6%1.4%1.9%12.413.013.5%14.5%14.7%15.%16.%18.20.32.5%24.6%26.4%28.0%10%12%14%16%18%20%2%24%26%28%2012012012013201420152016201720182019E20E201E20E203E204E205EMkt Shr (ales)Top 10 MNCTop 10 domestic pharmGSK briery scandl inChina i013China joined ICH in2017: Faster dug aprovalproces fbth MNad omtic phrmNRDLrvisi :Vluxnsi with bt teraputics frable MNC hina focus hiftng towards hig value ivtiedrurhe tn ptnt xpir oignato drugs20 onwards: Expectd structral imprvet ofChina hma indsty: fuldby mre dmestic inovti, genricaktconlidati, andivolent fercil isurce Acelrated implentaion furban employ bsic dicl isurce and wrulortivemdilisrce; itie an resint basic ical inuanImpletaio f1st batch GPO i1 ilot cis: ignicnvolumexpansio tofset prie utSelf-inspection clinal dta curacy nd complt: 80% drug plitionswithrew whil ighrstaoteSource: Citi Research, IQVIAAfter joining the ICH (International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use) in 2017, the Chinese government has initiated major reforms to facilitate commercialization of innovative drugs. Clinical trial requirements and quality are moving towards global standards. All this could mean much faster growth for MNCs with innovative therapeutics, as well as for Chinese R itie an resint basic ical inuanImpletaio f1st batch GPO i1 ilot cis: ignicnvolumexpansio tofset prie utSelf-inspection clinal dta curacy nd complt: 80% drug plitionswithrew whil ighrstaoteSource: Citi Research, IQVIAWe project generics consumption will remain core to Chinas pharma market, contributing more than 40% of sales and 60% of volume going forward. Innovative drugs of MNCs / China companies will however be key growth engines of the market, with sales growth of +60%/+50% and volume growth of +55%/+48% in 2018-2025, on our estimates. TCM and ancillary drugs should contract. Part II: Seeking Structural Winners in 5 YearsGlobal Pharma Industry16 July 2019 Citi Research9Figure 14. China Market Share Breakdown (drug sales) Figure 15. China Market Share Breakdown (drug volume)0%120%340%560%780%910%2152016201720182019E20E201E20E203E204E205EMNC (patent xpired)MNC (patent valid)Domestic inovatieT among the multinationals, AstraZeneca, Merck and Pfizer should further enhance dominating positions.Figure 20. Top 10 MNCs/ China Pharma Manufacturers in China (market share by sales)# Company 2010 2011 2012 2013 2014 2015 2016 2017 20181 Pfizer (辉 瑞 ) 2.1% 2.1% 2.2% 2.3% 2.3% 2.4% 2.5% 2.7% 3.0%2 AstraZeneca (阿 斯 利 康 ) 1.9% 1.8% 1.8% 1.8% 2.0% 2.1% 2.2% 2.5% 2.8%3 Sanofi (赛 诺 菲 ) 1.7% 1.7% 1.5% 1.4% 1.4% 1.5% 1.6% 1.7% 1.9%4 Merck (默 沙 东 ) 1.3% 1.4% 1.3% 1.2% 1.2% 1.4% 1.5% 1.7% 1.8%5 Bayer (拜 耳 ) 1.7% 1.7% 1.6% 1.5% 1.5% 1.4% 1.4% 1.5% 1.7%6 Roche (罗 氏 ) 1.2% 1.2% 1.2% 1.2% 1.1% 1.2% 1.2% 1.3% 1.6%7 Novartis (诺 华 ) 1.1% 1.1% 1.1% 1.2% 1.2% 1.3% 1.3% 1.4% 1.4%8 Novo Nordisk (诺 和 诺 德 ) 1.0% 1.1% 1.0% 1.0% 0.9% 0.9% 0.9% 0.9% 0.9%9 Eli Lilly (礼 来 ) 0.7% 0.7% 0.7% 0.6% 0.6% 0.6% 0.5% 0.6% 0.6%10 Boehringer Ingelheim (勃 林 格 殷 格 翰 ) 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.5% 0.5% 0.5%Total 13.2% 13.2% 12.7% 12.6% 12.8% 13.1% 13.5% 14.7% 16.2%# Company 2010 2011 2012 2013 2014 2015 2016 2017 20181 Yangtze River Pharma(扬 子 江 药 业 ) 1.9% 2.0% 2.0% 2.0% 2.1% 2.0% 2.1% 2.3% 2.5%2 Sino Biopharm(中 国 生 物 制 药 ) 1.3% 1.5% 1.7% 1.7% 1.8% 2.1% 2.2% 2.2% 2.3%3 Hengrui Medicine(恒 瑞 医 药 ) 1.2% 1.3% 1.3% 1.3% 1.4% 1.5% 1.7% 1.9% 2.2%4 Pharma F 1.3% 1.4% 1.4% 1.4% 1.4% 1.5% 1.5% 1.5% 1.3%5 Qilu Phama(齐 鲁 制 药 ) 1.3% 1.5% 1.6% 1.7% 1.8% 1.7% 1.9% 1.8% 1.6%6 Buchang Pharma(步 长 药 业 ) 0.8% 0.9% 1.0% 1.1% 1.1% 1.2% 1.3% 1.3% 1.2%7 CSPC(石 药 集 团 ) 0.7% 0.7% 0.7% 0.7% 0.8% 0.9% 1.0% 1.0% 1.1%8 Hansoh(翰 森 制 药 ) 0.7% 0.7% 0.7% 0.7% 0.7% 0.8% 0.8% 0.9% 1.0%9 Sihuan(四 环 医 药 ) 1.0% 1.0% 1.0% 1.1% 1.2% 1.1% 1.3% 1.1% 1.0%10 Huadong Medicine (华 东 医 药 ) 0.4% 0.5% 0.4% 0.5% 0.6% 0.7% 0.8% 0.8% 0.9%Total 10.6% 11.4% 11.9% 12.4% 13.0% 13.5% 14.5% 14.7% 15.1%Source: Citi Research, IQVIA
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