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ASIA INVESTMENT OPPORTUNITIES IN PHARMACEUTICALS: RISK/REWARD ANALYSIS
Asia Investment Opportunities In
Pharmaceuticals: Risk/Reward
Analysis
Published by: BMI Research
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kind as to the accuracy or completeness of any information hereto contained.Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
CONTENTS
Asia Pacific Pharmaceuticals: Multitude Of Risks And Rewards To Characterise Region ..................... 3
Main Regional Features And Latest Updates .............................................................................................................................................................. 4
Outperformers: High-Reward And Low-Risk Markets ................................................................................................................................................ 5
Underperformers: Low-Reward And High-Risk Markets ............................................................................................................................................ 6
New Innovative Pharmaceuticals Risk/Reward Index ................................................................................................................................................. 9
China - Q1 2018 .............................................................................................................................................. 11
Headline Expenditure Projections ............................................................................................................................................................................ 11
Headline Pharmaceuticals & Healthcare Forecasts (China 2015-2021)............................................................................................................. 11
Risk/Reward Index .................................................................................................................................................................................................... 11
BMI Economic View ................................................................................................................................................................................................. 12
BMI Political View.................................................................................................................................................................................................... 12
India - Q1 2018 ............................................................................................................................................... 13
Headline Expenditure Projections ............................................................................................................................................................................ 13
Headline Pharmaceuticals & Healthcare Forecasts (India 2015-2021) .............................................................................................................. 13
Risk/Reward Index .................................................................................................................................................................................................... 13
BMI Economic View ................................................................................................................................................................................................. 14
BMI Political View.................................................................................................................................................................................................... 14
South Korea - Q1 2018 .................................................................................................................................. 15
Headline Expenditure Forecast ................................................................................................................................................................................ 15
Headline Pharmaceuticals & Healthcare Forecasts (South Korea 2015-2021)................................................................................................... 15
Risk/Reward Index .................................................................................................................................................................................................... 15
BMI Economic View ................................................................................................................................................................................................. 16
BMI Political View.................................................................................................................................................................................................... 16
Australia – Q1 2018........................................................................................................................................ 17
Headline Pharmaceuticals And Healthcare Forecasts (2016-2022) .................................................................................................................... 17
Risk/Reward Index .................................................................................................................................................................................................... 17
BMI Economic View ................................................................................................................................................................................................. 18
BMI Political View.................................................................................................................................................................................................... 18
Methodology .................................................................................................................................................. 19
Pharmaceutical Expenditure Forecast Model ........................................................................................................................................................... 19
Healthcare Expenditure Forecast Model .................................................................................................................................................................. 19
Notes On Methodology.............................................................................................................................................................................................. 20
Innovative Pharmaceuticals Risk Reward Index ....................................................................................................................................................... 21
Indicators - Rationale And Sources...................................................................................................................................................................... 23
© Business Monitor International Ltd Page 2Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Asia Pacific Pharmaceuticals: Multitude Of Risks And
Rewards To Characterise Region
BMI View: The Asia Pacific market will remain a key commercial opportunity for multinational
drugmakers, presenting a diverse range of opportunities for innovative pharmaceutical firms. While some
markets have high growth potential or favourable regulatory environments, it is vital that companies
appreciate the varying levels of investment risks and rewards that are present in the markets in Asia
Pacific. BMI's Innovative Pharmaceuticals Risk/Reward Index tool, which provides a globally
comparative and numerically based assessment of a market's attractiveness for companies looking to
launch a high-value drug, was established to address this.
Asia Pacific: A Mixture Of Opportunities And Risks Across The Region
Asia Pacific Innovative Pharmaceuticals Risk/Reward Index
Note: Scores out of 100; higher score = lower risk. Source: BMI's Innovative Pharmaceuticals Risk/Reward
Index
© Business Monitor International Ltd Page 3Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Main Regional Features And Latest Updates
The Asia Pacific average in our Innovative Pharmaceuticals Risk/Reward Index (RRI)
outperforms the global average by a small margin. This is because the region comprises two of
the world's largest pharmaceutical markets (Japan and China), and is boosted by the significant
growth potential of several emerging markets.
The region's aggregate attractiveness to innovative drugmakers masks substantial heterogeneity
within its markets. Broadly, the region can be segmented into two distinct groups: developed
countries and emerging markets. The former are characterised by high per-capita pharmaceutical
spending and score highly for access to, and demand for, innovative medicines; however, we
have seen some emphasis on cost containment, driven by high levels of government-financed
spending on healthcare. In emerging markets, affordability and access are key issues leading to
low-cost generic drugs becoming increasingly dominant.
With regard to assessing rewards, the RRI identifies industry-specific factors, such as the size of
the pharmaceutical market, and country-specific factors, such as the size of the pensionable
population, which represent opportunities for potential investors. Japan scores the highest for the
Rewards component of the index due to its large medicine market, high per-capita medicine
spending and the size of its pensionable population. Meanwhile, Laos scores the lowest in the
region.
With regard to assessing risks, we identify industry-specific dangers, such as a country's pricing
regime, and those emanating from the state's political and economic profile which call into
question the likelihood of anticipated returns being realised over the assessed time period.
Focusing on the Risks component of the index, Myanmar has the lowest score among the Asia
Pacific markets due to low levels of patent respect, which are further exacerbated by the
significant political and economic risks facing firms operating in the country. Singapore scores
the highest in the subsector.
© Business Monitor International Ltd Page 4Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Asia Pacific: Emerging Markets Are High-Risk Markets
Asia Pacific Innovative Pharmaceuticals Risk/Reward Index
Note: Scores out of 100; higher score = lower risk. Source: BMI's Innovative Pharmaceuticals Risk/Reward
Index
Outperformers: High-Reward And Low-Risk Markets
Asia Pacific markets are among the more attractive destinations for firms seeking to launch innovative
medicines. Japan, ranked first in the Asia Pacific region and second globally, is the most attractive within
the region by a significant margin. Australia, which is ranked second in the region, is ninth place in the
global rankings - reflecting the gap between the two markets. Scoring in the Innovative Pharmaceuticals
RRI favours larger markets with greater sales potential for multinationals. Both Japan and Australia have
sizeable pharmaceutical markets relative to the rest of the world, though the former's is considerably
larger.
Fundamentals underpinning demand for novel pharmaceuticals in Japan are strong. The country has a
large pensionable population, a preference for branded medicines, a strong drug approval process and a
robust medical system that provides high levels of healthcare access. Similar factors are also at play in
Australia, with further improvements in the approval process likely to encourage the launch of innovative
treatments in the country. However, this strong demand for pharmaceuticals, coupled with significant
government contribution towards total drug spending, has incentivised authorities to introduce cost
controls, resulting in greater pricing pressures. This is more acute for Japan, which scores significantly
below the regional and global average for the Pricing Regime indicator. Australia scores above the global
average, but below the region's.
© Business Monitor International Ltd Page 5Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Japan's Ministry of Health, Labour and Welfare (MHLW) has stated its intention to remain
highly focused on maintaining the population's access to medicines in the face of an already
stretched healthcare system and a limited budget. To rein in rising pharmaceutical and healthcare
spending, in view of the demographic shift and spiralling healthcare costs in the country,
Japanese authorities proposed creating a more structured cost-effectiveness assessment scheme
and introducing a larger role for value-based medicines by 2018. The MHLW is also
implementing reforms such as annual drug price reviews and reduction in prices of generic drugs
to increase utilisation rates of low-cost drugs. The proactive role taken by the government will
create commercial opportunities that will encourage innovative drugmakers to strengthen their
generics business in Japan.
As part of the Australian budget for FY2017/18, the Australian government stated that it will
continue to enforce drug price controls and promote the consumption of lower-value generic
medicines in place of patented medicines as a means of reducing pharmaceutical expenditure. As
a result, the listing of high-value pharmaceuticals on the Australian Pharmaceutical Benefit
Scheme (PBS) will remain challenging, and the pressure on the pricing of pharmaceuticals will
grow as the government seeks to meet the demands for new innovative treatments while
maintaining a sustainable level of medical and healthcare expenditure. The government aims to
work with Medicines Australia through a collaborative five-year compact providing one-off
price reductions for certain medicines that have been on the PBS for 10 and 15 years, lowering
more PBS drug prices over the longer period of the compact and supporting the uptake of lower-
cost generic and biosimilar medicines.
Underperformers: Low-Reward And High-Risk Markets
Laos and Myanmar sit at the bottom of the Asia Pacific Innovative Pharmaceuticals Risk/Reward Index.
Both countries are characterised as low-reward, high-risk markets.
Reflective of its least developed country status, Myanmar has a small medicine market with the
lowest per-capita pharmaceutical spending in the region. Intellectual property protection in the
country is also minimal, a reflection of the nascent nature of the regulatory regime, and
highlighted in Myanmar's Patent Respect score. The country is also plagued by significant
economic and political risk, both in the short and long term, underpinning Myanmar's low score
for these indicators. The country ranks 101st out of the 110 markets in the Innovative
Pharmaceutical Risk/Reward Index.
Urbanisation is minimal in Laos and, together with low purchasing power, this indicates weak
demand for, as well as limited access to, innovative medicines. The resulting small aggregate
pharmaceutical market means that opportunities for innovative drugmakers are limited, and
results in the country ranking 103rd out of the 110 markets in the Innovative Pharmaceutical
© Business Monitor International Ltd Page 6Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Risk/Reward Index. From a Country Risk perspective, the main impediment is the country's
economy, with Laos scoring the lowest on both the long-term and short-term economic risk
indicators among the Asia Pacific markets.
Asia Pacific Innovative Pharmaceuticals Risk/Reward Index
Rewards & Risks Scores
Source: BMI
© Business Monitor International Ltd Page 7Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Asia Pacific Innovative Pharmaceuticals Rewards
Industry Rewards & Country Rewards Scores
Note: Scores out of 100; higher score = lower risk. Source: BMI's Innovative Pharmaceuticals Risk/Reward
Index
© Business Monitor International Ltd Page 8Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Asia Pacific Innovative Pharmaceuticals Risks
Industry Risks & Country Risks Scores
Note: Scores out of 100; higher score = lower risk. Source: BMI's Innovative Pharmaceuticals Risk/Reward
Index
New Innovative Pharmaceuticals Risk/Reward Index
In Q4 2017, we overhauled our Innovative Pharmaceuticals RRI methodology to more accurately capture
the different elements that impact the overall investment attractiveness of a country's pharmaceutical
sector for companies looking to launch a new high-value medicine. We increased the number and variety
of indicators that make up the final index score and re-assessed the weightings of the Reward and Risk
indicators to ensure that the most accurate reflection of the Risk/Reward environment is reflected through
© Business Monitor International Ltd Page 9Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
our matrix. The RRI uses a combination of our proprietary industry forecasts and analyst assessments of
the regulatory climate. As regulations evolve and forecasts change, so does the Index score, providing a
highly dynamic and forward-looking result.
© Business Monitor International Ltd Page 10Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
China - Q1 2018
BMI View: China's evolving demographic and epidemiological profiles will act as key drivers of growth
within the country's pharmaceuticals and healthcare markets over the coming years. While rising chronic
diseases and developments in the healthcare system will support market expansion, tough pricing regime
and a large counterfeit industry pose downside risks for multinational drugmakers. Nevertheless, the size
of the market and the overall trend towards regulatory improvement will continue to prove major draws.
Headline Expenditure Projections
Pharmaceuticals: CNY718.7bn (USD108.1bn) in 2016 to CNY809.9bn (USD118.9bn) in 2017;
+12.7% in local currency terms and +10% in USD terms.
Healthcare: CNY4,394.5bn (USD661.2bn) in 2016 to CNY4,901.6bn (USD719.7bn) in 2017;
+11.5% in local currency and +8.9% in USD terms.
Headline Pharmaceuticals & Healthcare Forecasts (China 2015-2021)
2015 2016 2017f 2018f 2019f 2020f 2021f
Pharmaceutical sales,
USDbn 106.528 108.141 118.942 132.268 143.854 155.378 167.370
Pharmaceutical sales, %
of GDP 0.96 0.95 0.99 1.00 1.01 1.02 1.02
Pharmaceutical sales, %
of health expenditure 17.0 16.4 16.5 16.3 16.0 15.5 15.1
Health spending, USDbn 626.653 661.239 719.771 812.304 901.070 999.685 1,109.983
f = BMI forecast. Source: National sources, WHO, BMI
Risk/Reward Index
China's large and expanding population, increasing burden of chronic diseases and the ongoing reforms
shaping the country's medicine market, results in the country scoring 70.8 out of 100 in BMI's Innovative
Pharmaceuticals Risk/Reward Index and ranking fourth in the region. Despite the government's
commitment to improving healthcare access, the attractiveness of the country's pharmaceutical market to
innovative drugmakers will be weakened by greater pricing pressures and a weak intellectual property
environment.
© Business Monitor International Ltd Page 11Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Latest Updates
The acceptance of the Chinese Food and Drug Administration by the International Council for
Harmonisation of Technical Requirements for Pharmaceuticals for Human Use (ICH) implies
that China's drug regulation will now be in line with international standards and this will
increase the attraction of the challenging regulatory environment for drugmakers.
In October 2017, news sources reported that Chinese authorities are revamping the approval
system for medicines and medical devices to speed up access to new therapies, a potential boon
for local innovators and international drugmakers.
In September 2017, local news sources reported that artificial intelligence (AI) is set to
revolutionise healthcare industry in China. Companies such as Alibaba have started to tap into
the AI-powered medical care market in recent years.
BMI Economic View
High frequency indicators such as fixed asset investment growth and industrial production growth are
pointing towards a slowdown in the Chinese economy. As the government seeks to curb its fiscal
spending in the remaining months of 2017, economic growth will slow towards our 2017 real GDP
growth forecast of 6.6%. Investment growth is set to slow further as the Chinese government pulls back
from its aggressive fiscal support. This is starting to take place with the Ministry of Finance reporting that
government spending growth fell to 2.9% y-o-y in August from 14.5% y-o-y in the first seven months of
2017.
BMI Political View
We expect the pace of reforms in China to pick up over the next five years, compared with the slow pace
previously. That said, the cautious nature of the Chinese state, the need to maintain social stability, and
the aim of reducing any potential loss in state assets mean that reforms will take place at a measured,
rather than rapid pace. The increased pace of reforms will be helped by the recentralisation of the Chinese
government as President Xi Jinping has strengthened his grip over the local governments through a
leadership reshuffle at the provincial level.
© Business Monitor International Ltd Page 12Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
India - Q1 2018
BMI View: India's evolving demographic and epidemiological profile will act as key drivers of growth
within the country's pharmaceuticals and healthcare markets over the coming years. However, the impact
of low levels of patent protection, price cuts, preference for generic medicines and low per capita
pharmaceutical and healthcare spending will pose headwinds to innovative drugmaker opportunities
in the country.
Headline Expenditure Projections
Pharmaceuticals: INR1,176.49 (USD17.51bn) in 2016 to INR1,263.73bn (USD19.15bn) by
2017; +7.4% in local currency terms and 9.3% in US dollar terms.
Healthcare:INR7716.75bn (USD114.85bn) in 2016 to INR8714.38bn (USD132.04bn) by 2017;
+12.9% in local currency terms and +15.0% in US dollar terms.
Headline Pharmaceuticals & Healthcare Forecasts (India 2015-2021)
2015 2016 2017f 2018f 2019f 2020f 2021f
Pharmaceutical sales,
USDbn 16.414 17.510 19.147 20.971 22.856 24.819 26.915
Pharmaceutical sales, %
of GDP 0.73 0.77 0.75 0.74 0.73 0.73 0.72
Pharmaceutical sales, %
of health expenditure 15.8 15.2 14.5 14.2 13.9 13.5 13.1
Health spending, USDbn 103.906 114.852 132.036 147.808 165.004 184.091 205.276
f = BMI forecast. Source: AIOCD Pharmasofttech AWACS, Organisation of Pharmaceutical Producers of India (OPPI),
BMI
Risk/Reward Index
The impact of low levels of patent protection, price cuts, a preference for generic medicines and low per
capita pharmaceutical and healthcare spending will pose headwinds to innovative drugmaker
opportunities in India, as reflected in a score of 54.9 out of 100 in BMI's Innovative Pharmaceuticals
Risk/Reward Index, ranking 9th in the region. While there is an increased prevalence of chronic diseases,
the focus on cost-efficiency within the healthcare sector will limit the market's growth potential.
© Business Monitor International Ltd Page 13Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Latest Updates
With the goal of improving the business environment and giving an impetus to 'Make in India'
programme, in August 2017, the Department of Pharmaceuticals (DOP) drafted a new
pharmaceutical policy with the aim to monitor the prices of medicines and medical devices to
prevent profiteering and deliver affordable healthcare to patients. The new draft policy aims to
restructure the National Pharmaceutical Pricing Authority (NPPA) from a price-controlling
regulator to a price-monitoring authority.
In August 2017, the Ministry of Health and Welfare suggested waiving local clinical trials for
drugs that have been approved and marketed for at least two years in the EU, UK, US, Australia,
Canada and Japan with no major adverse effects on patients with the goal of reducing the time
taken by a pharmaceutical company to introduce new drugs in the Indian market from five to six
years to as few as 45 days.
In September 2017, India's drug pricing authority called for better regulation of the country's
large private health care industry to ensure government efforts to cut prices of medicines and
medical devices benefit patients.
BMI Economic View
India will be one of the most positive economic growth stories over the next decade due to a combination
of pro-business reforms, positive demographics, and low base effects. We forecast India real-GDP growth
of 6.5% over 2017-2026, faster than the growth that we expect for China (6.0%) and comfortably above
the emerging market (EM) average of 4.4%. The optimisation of GST system will help spark an
economic recovery over the short term. Rate revisions for hard-hit sectors which initially faced higher
taxes under the GST system should offer relief to stressed businesses and encourage consumer spending.
Over the longer run, the replacement of complicated local tax frameworks - which contributed to a poor
business environment, with a more transparent and efficient federal system, will bolster public finances
and create a better business climate that is likely to be conducive for growth.
BMI Political View
The likelihood of the ruling Bharatiya Janata Party (BJP) and its National Democratic Alliance (NDA)
allies gaining control over the Rajya Sabha (RS) or upper house appear slim, as opposition seat
retirements before the next general elections in April 2019, as well as new alliances, are unlikely to lift
the NDA's seat count from 85 (as of September) to 123 - the requirement for a parliamentary majority.
That said, a lack of control over the upper house is unlikely to significantly hinder the BJP's socio-
economic reforms, some of which have been successfully implemented at a state and local government
level.
© Business Monitor International Ltd Page 14Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
South Korea - Q1 2018
BMI View: The South Korean population's regionally high per-capita pharmaceutical and healthcare
expenditure, as well as the country's highly innovative R&D environment, will ensure the attractiveness
of the pharmaceutical market. The government's support for the pharmaceutical industry, as reflected by
the recent announcement of new legislation to improve medical information transparency and tackle
corruption, bodes well for South Korea's long-term potential as a proposition for pharmaceutical firms.
Headline Expenditure Forecast
Pharmaceuticals: KRW17.6trn (USD15.2bn) in 2016 to KRW17.8trn (USD15.3bn) in 2017;
+0.6% in local currency terms and 0.6% in US dollar terms.
Healthcare: KRW123.7trn (USD106.5bn) in 2016 to KRW131.6trn (USD113.5bn) by 2017;
+6.4% in local currency terms and 6.5% in US dollar terms.
Headline Pharmaceuticals & Healthcare Forecasts (South Korea 2015-2021)
2015 2016 2017f 2018f 2019f 2020f 2021f
Pharmaceutical sales,
USDbn 15.000 15.220 15.318 16.412 16.707 17.298 18.274
Pharmaceutical sales, %
of GDP 1.09 1.08 1.03 1.00 0.96 0.92 0.88
Pharmaceutical sales, %
of health expenditure 14.6 14.3 13.5 12.9 12.3 11.6 11.1
Health spending, USDbn 102.792 106.576 113.506 127.448 136.336 148.614 165.330
Source: Korea Pharmaceutical Manufacturers Association (KPMA), Korea Health Industry Statistics System (KHISS),
BMI
Risk/Reward Index
The South Korean population's regionally high per-capita pharmaceutical and healthcare expenditure will
ensure the attractiveness of the country's pharmaceutical market. Further, its ageing population profile
will also drive greater pharmaceutical consumption, resulting in a score of 74.6 out of 100 in BMI's
Innovative Pharmaceuticals Risk/Reward Index, ranking third in the region. The aggressive pricing
regime and the strength of the domestic generic medicine market, however, will limit attractiveness for
multinational pharmaceutical firms.
© Business Monitor International Ltd Page 15Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Latest Updates
In October 2017, local news sources reported that an increasing number of South Korean
pharmaceutical and biotech companies are setting up branches, joint ventures and subsidiaries
abroad. For example, Boryung Pharmaceutical set up an investment company in Hong Kong in
March 2017 and a local subsidiary in Beijing in the following month.
In the same month, it was reported that Bayer is looking to expand its innovative push in digital
health. This will be achieved through partnerships with South Korea's innovative tech start-ups,
with expertise in 'deep tech' involving complex engineering skills and software expertise.
Also in October, Celltrion Healthcare, a global biopharmaceutical leader with strong marketing
and sales capabilities, and Biomm, announced an agreement to distribute Herzuma in Brazil, a
trastuzumab biosimilar.
In August 2017, South Korea's Samsung group, in partnership with Japan's Takeda
Pharmaceutical, announced their plans to start producing original prescription drugs in 'unmet
disease areas', starting with a treatment for acute pancreatitis, heralding its shift into a risky, but
potentially lucrative, business area.
Also in August 2017, Biogen, a US-based pharmaceutical company launched a new branch
(Biogen Korea LLC) in South Korea, as it takes steps to tap deeper into the local market. The
company established Samsung Bioepis jointly with Samsung Biologics, an affiliate of South
Korea's leading conglomerate, Samsung, in 2012.
BMI Economic View
Advanced estimates indicated that South Korea's real GDP expanded by 3.6% y-o-y in Q317 versus the
2.7% y-o-y recorded in Q217. We have upgraded our real GDP forecasts for both 2017 and 2018 to 3.2%
and 3.0%, respectively (from 2.8% and 2.9% previously), and expect the manufacturing sector to remain
the main driver of growth, while the Pyeongchang Winter Olympics will provide a one-off boost to
tourism. However, we note that structural domestic issues will continue to weigh on domestic demand.
BMI Political View
South Korean President Moon Jae-in's administration will continue to be characterised by slow policy-
making due to his lack of a parliamentary majority, as evidenced by difficulties he has faced in his first
100 days in office. Moon is also likely to face continued pressure to adopt a tougher stance against an
increasingly assertive North Korea amid a more hawkish US Trump administration.
© Business Monitor International Ltd Page 16Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Australia – Q1 2018
BMI View: Against the backdrop of a growing and ageing population and an increasing demand for
medicines, the Australian government will remain highly focused on cost containment within the
pharmaceuticals and healthcare sector. While the listing of new innovative medicines on the Australian
Pharmaceutical Benefit Scheme will improve the commercial opportunities for innovative drugmakers,
the pressure to rationalise pharmaceutical spending remains in place, with rising demand for medical
services and a ruling party that is focused on balancing the country's budget.
Pharmaceuticals: AUD13.5bn (USD10.03bn) in 2016 to AUD13.71bn (USD10.63bn) in 2017;
1.6% in local currency terms and 5.9% in US dollar terms.
Healthcare: AUD169.08bn (USD125.68bn) in 2016 to AUD176.27bn (USD136.61bn) in 2017;
4.25% in local currency terms and 8.7% in US dollar terms.
Headline Pharmaceuticals And Healthcare Forecasts (2015-2021)
Indicator 2015 2016 2017f 2018f 2019f 2020f 2021f
Pharmaceutical sales,
USDbn 9.083 10.034 10.628 10.756 10.930 11.082 11.142
Pharmaceutical sales, %
of GDP 0.74 0.78 0.78 0.77 0.75 0.73 0.70
Pharmaceutical sales, %
of health expenditure 7.5 8.0 7.8 7.6 7.5 7.3 7.1
Health spending, USDbn 121.768 125.676 136.613 141.014 146.475 152.124 156.931
e/f = BMI estimate/forecast. Source: PBS Information Management Section (Department of Health and Ageing),
Australia Self-Medication Industry, The Association of the European Self-Medication Industry (AESGP), local news
sources, BMI
Risk/Reward Index
Against a backdrop of high per capita drug spending and a growing and ageing population, new
opportunities will continue to drive the innovative drug market in Australia. This is reflected in the
country's score of 76.9 out of 100.0 in BMI's Innovative Pharmaceuticals Risk/Reward Index. The
government's commitment to enforce drug price controls and promote the consumption of lower-value
generic medicines in place of patented medicines, as a means to reduce pharmaceutical expenditure, will
pose a significant commercial threat to multinational pharmaceutical firms.
© Business Monitor International Ltd Page 17Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Latest Updates
In the government's announcement on September 30 2017, a list of 1,400 medicines that will be
subjected to the price disclosure cycle from October 1 2017 was disclosed. These medicines will
receive extra subsidies under the Pharmaceutical Benefits System (PBS).
In October 2017, it was announced that Imbruvica (ibrutinib), a tablet for patients living with the
most common form of leukaemia, chronic lymphocytic leukaemia (CLL), will be added to the
PBS from December 1.
In October 2017, it was announced that research into developing new medical technologies and
ways of improving patient care will receive a USD1mn boost from MTPConnect (the Australian
Government funded Medical Technologies and Pharmaceuticals Industry Growth Centre). This
will be matched by USD1mn from the medical sector.
In October 2017, US-based SONIFI Health announced an agreement with the Victorian
Healthcare Association (VHA) to offer its industry leading patient engagement solutions to VHA
member organisations.
BMI Economic View
Australia's real GDP growth rebounded to 3.3% q-o-q on a seasonally adjusted annualised basis in Q217
from 1.3% q-o-q in Q117 as transitory factors such as poor weather improved. Leading indicators are
showing strength due to support from the government's infrastructure investment and rising commodity
prices. We expect the economy to remain on a cyclical upswing, forecasting real GDP growth to come in
at 2.1% in 2017. However, we are downgrading our 2018 forecast to 1.8% from 2.2% previously as we
see risks of a bigger downturn in the elevated housing market, coupled with weakening commodity prices
due to slowing Chinese growth.
BMI Political View
We expect Australia to continue to experience short-term political uncertainty and the Australian dollar to
remain under pressure following the decision by the High Court to rule Deputy Prime Minister Barnaby
Joyce (alongside four other senators) ineligible for office due to his dual citizenship, which he has already
renounced. The ruling Liberal-National coalition would lose its one-seat majority in the 150-seat House
of Representatives if its candidate loses the upcoming by-election, which would be negative for the
country's business environment.
© Business Monitor International Ltd Page 18Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Methodology
Pharmaceutical Expenditure Forecast Model
Historic pharmaceutical market data is collected from a range of sources, including:
regulatory agencies;
pharmaceutical trade associations;
company press releases and annual reports;
subscription information providers;
local news sources;
information from market research firms that is in the public domain.
Currently available data varies in confidence levels, so it is calibrated by BMI's Pharmaceuticals &
Healthcare analysts. In the absence of a complete time series of numbers, intermediate years are
calculated from secondary sources. This 'composite' approach is used to ensure the accuracy and
consistency of historic data, which is crucial for reliable forecasts.
To remove the effect of inflation, real pharmaceutical expenditure figures are then calculated by removing
the annual average consumer price index (CPI).
Real per-capita pharmaceutical expenditure numbers are calculated by dividing by population figures.
A linear regression (see Note 1 for explanation) is then performed on five years of real per-capita
pharmaceutical expenditure against real per-capita final consumption (see Note 2). From analysis of the
top 130 economies, BMI has established a strong statistical relationship between pharmaceutical
expenditure and final consumption expenditure (r = 0.985).
Healthcare Expenditure Forecast Model
Historic public and private healthcare expenditure data is sourced from the World Health Organization
(WHO)'s Global Health Expenditure Database, which contains the National Health Accounts (see Note 1
for methodology).
Data is provided in nominal local currency terms.
To remove the effect of inflation, real healthcare expenditure figures are then calculated by removing the
annual average CPI.
© Business Monitor International Ltd Page 19Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Real per-capita healthcare expenditure numbers are calculated by dividing by population figures.
A linear regression is then performed (see Note 2 for explanation). This is first on five years of real per-
capita public healthcare expenditure against real per-capita government final consumption expenditure
(see Note 3 for definition). This generates a 10-year forecast of future of real per-capita public healthcare
expenditure figures from 'known' projected real per-capita government final consumption expenditure
figures. Another linear regression is simultaneously performed on real per-capita private healthcare
expenditure against real per-capita private final consumption expenditure (see Note 4 for definition).
To generate the nominal public healthcare spending forecast, population and CPI numbers are returned to
both real per-capita public healthcare expenditure figures and real per-capita private healthcare
expenditure figures.
The overall healthcare expenditure forecast is then calculated by combining public and private healthcare
expenditure.
Notes On Methodology
Note 1: National Health Accounts methodology. The global health expenditure database that the WHO
has maintained for the past 10 years provides internationally comparable numbers on national health
expenditures. The WHO updates the data annually, taking, adjusting and estimating the numbers based on
publicly available reports (national health account reports, reports from ministries of finance, central
banks, national statistics offices, public expenditure information and reports from the World Bank, the
IMF, etc). The estimates are sent out to the ministries of health for validation prior to publication, but
users are advised that country data may still differ in terms of definitions, data collection methods,
population coverage and estimation methods used. This database is the source of the health expenditure
tables in the World Health Statistics Report and the WHO Global Health Observatory.
Note 2: Linear regression equation.
y = mx + b
Where y = unknown variable, m = slope of gradient, x = known variable, and b = where the line crosses
the y-axis.
Note 3: Final consumption is the sum of government final consumption expenditure and private final
consumption expenditure. Government final consumption expenditure is the sum of expenditure on final
goods and services by the government. Included in this are public sector salaries, but it does not include
transfer payments such as unemployment benefits or pensions. Private final consumption expenditure is
the sum of all private consumption of goods and services within the economy, including both durable and
non-durable goods. Housing purchases, however, are excluded. Government final consumption
expenditure and private final consumption expenditure are the 'G' and 'C' in this equation:
© Business Monitor International Ltd Page 20Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
GDP = C + I + G + (X - M)
Where GDP = gross domestic product, C = private final consumption expenditure, I = gross investment,
G = government final consumption, X = exports, and I = imports.
Innovative Pharmaceuticals Risk Reward Index
Our Innovative Pharmaceuticals Risk Reward Index (RRI) quantifies and ranks a country's attractiveness
in terms of its pharmaceuticals industry; it balances the Risks and Rewards of launching
innovative medicines in different countries. It should be emphasised that the RRI broadly assess the
rewards and the risks that a company will face when looking to launch an innovative drug in a market.
For example, we do not differentiate between drugs that are a part of different therapeutic groups or
whether the drug being launched is the first to be launched in the market or will be one of the many
different drugs of the same therapeutic class that has been launched in the market.
To form a country's RRI score, we combine industry-specific characteristics with broader economic,
political and operational market characteristics. We weigh these inputs in terms of their importance to
investor decision making in a given industry - in this case that of innovative pharmaceuticals. The result
is a nuanced and accurate reflection of the realities facing investors in terms of the balance between: 1)
opportunities and risk; and 2) sector-specific and broader market traits. This enables users of our RRI to
assess a market's attractiveness in both a regional and global context.
The RRI also encompasses a combination of our proprietary forecasts and analyst assessment of the
regulatory climate, as well as globally acceptable benchmark indicators (eg, the World Bank's Doing
Business Scores and Transparency International's Corruption Perceptions Index). As regulations evolve
and forecasts change, so does the RRI score, providing a highly dynamic and forward-looking result.
The Innovative Pharmaceuticals RRI universe comprises 110 countries.
Benefits Of Using BMI's Innovative Pharmaceuticals RRI
Global Rankings: One global table, ranking all the countries in BMI's universe for the launch of
innovative pharmaceuticals from least (closest to zero) to most attractive (closest to 100).
Accessibility: Easily accessible, top down view of global, regional or sub-regional Risk/Reward
profiles.
Comparability: Identical methodology across 110 countries allows users to build lists of
countries they wish to compare, beyond the confines of a global or regional grouping.
Scoring: Scores out of 100 with a wide distribution, provide nuanced investment comparisons.
The higher the score, the more favourable the country profile.
© Business Monitor International Ltd Page 21Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Quantifiable: Quantifies the Risks and Rewards of doing business in the innovative
pharmaceuticals sector in different countries around the world and helps identify specific
flashpoints in the overall business environment.
Comprehensive: Comprehensive set of indicators, assessing industry-specific risks and rewards
alongside political, economic and operational risks.
Entry Point: A starting point to assess the outlook for the innovative pharmaceuticals sector,
from which users can dive into more granular forecasts and analysis to gain a deeper
understanding of the market.
Balanced: Multi-indicator structure prevents outliers and extremes from distorting final scores
and rankings.
The RRI matrix can be split into two distinct components:
Rewards: This component of the RRI is composed of an evaluation of an Industry's size and growth
potential (Industry Rewards), and also macro industry and/or country characteristics that directly impact
the size of business opportunities in a specific sector (Country Rewards).
Risks: This component of the RRI is composed of an evaluation of micro, industry-specific
characteristics, crucial for an industry to develop to its potential (Industry Risks) and a quantifiable
assessment of the country's political, economic and operational profile (Country Risks).
Assessing Our Weightings
We deliberately afford Rewards a greater weighting (65% of a market's final RRI score) and within this,
the Industry Rewards pillar accounts for a majority 75%. This is to reflect the fact that when it comes to
long-term investment potential, industry size and growth potential carry the most weight in indicating
opportunities, with other structural factors weighing in but to a slightly lesser extent. In addition, our
focus and expertise in Emerging and Frontier Markets has dictated this bias towards industry
size and growth to ensure we are able to identify opportunities in countries where regulatory frameworks
are not as developed and industry sizes not as big (in USD terms) as in developed markets, but where we
know there is a strong desire to invest.
© Business Monitor International Ltd Page 22Asia Investment Opportunities in Pharmaceuticals: Risk/Reward Analysis
Indicators - Rationale And Sources
Indicator Source Rationale
Rewards
Industry Rewards
Denotes breadth of pharmaceutical market. Large markets score
Market Expenditure, higher than smaller ones. Scores are based on annual average
USDbn BMI Forecast expenditure over a five-year forecast period.
Denotes depth of pharmaceutical market. High-value markets score
better than low-value ones. Scores are based on annual average
Spending Per Capita, USD BMI Forecast expenditure over a five-year forecast period.
Denotes sector dynamism. Scores are based on annual average
Sector Value Growth, % BMI Forecast growth over a five-year forecast period.
Country Rewards
Urbanisation is used as a proxy for the development of medical
Urban/Rural Split BMI Forecast facilities. Predominantly, rural states score lower.
Shows the proportion of the population over 65. States with ageing
Pensionable Population, % BMI Forecast populations tend to have higher per capita expenditure.
Fast-growing states suggest better long-term demand and thus
growth for all industries. Scores are based on annual average growth
Population Growth, % BMI Forecast over a five-year forecast period.
Risks
Industry Risks
BMI Subjective Markets with fair and enforced intellectual property regulations score
Patent Respect Indicator higher than those with endemic counterfeiting.
Markets with a free pricing environment score higher than markets
where governments and private-sector payers put downward
BMI Subjective pressure on pharmaceutical prices as a mechanism to control
Pricing Regime Indicator expenditure.
High scores are awarded to markets which have realised the
economic and social benefit of pharmaceuticals, in turn modernising
the provision of healthcare through reforms and essential drug lists
BMI Subjective and encouraging local manufacturing and research and development
Protectionism Indicator by foreign firms.
Source: BMI
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