CitiResearchEquities3January2018│392pagesHealthcareAsiaChinaHealthcareSectorHandbook2018:SurviveandThrive–StrongMomentumContinuesJohnYung,CFA+852-2501-2789ACjohn.yung@CuiCuiAC+852-2501-2439cui.cui@BingyuChenbingyu.chen@SeeAppendixA-1forAnalystCertification,ImportantDisclosuresandnon-USresearchanalystdisclosures.CitiResearchisadivisionofCitigroupGlobalMarketsInc.(the"Firm"),whichdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethattheFirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.Certainproducts(notinconsistentwiththeauthor'spublishedresearch)areavailableonlyonCiti'sportals.

CitiResearchContentsLivzon(1513.HK,Buy)-EvaluationScore:25/30,R&DScore:22/25FosunPharma(2196.HK,Buy)-EvaluationScore:23/30,R&DScore:22/25Luye(2186.HK,Buy)-EvaluationScore:23/30,R&DScore:22/25FDZJ(1349.HK,Buy)-EvaluationScore:22/30,R&DScore:22/25Lee’s(950.HK,Buy)-EvaluationScore:21/30,R&DScore:18/253SBio(1530.HK,Buy/H)-EvaluationScore:26/30Livzon-A(000513.SZ,Buy)-EvaluationScore:24/30QiluPharma(Non-listed,NR)-R&DScore:25/25HisunPharma(600267.SS,NR)-R&DScore:23/25HansohPharma(Non-listed,NR)-R&DScore:23/25HECPharma(1558.HK,NR)-R&DScore:22/25BeiGene(BGNE.US,NR)-R&DScore:20/25LuoxinPharma(Non-listed,NR)-R&DScore:20/25SimcerePharma(Non-listed,NR)-R&DScore:19/25SihuanPharma(460.HK,NR)-R&DScore:19/25BJSLPharma(002038.SZ,NR)-R&DScore:18/25HuadongMedicine(000963.SZ,NR)-R&DScore:17/25HuahaiPharma(600521.SS,NR)-R&DScore:16/25CBPO(CBPO.US,NR)-R&DScore:12/25ChinaHealthcareSectorHandbook2018BuyR&DPharma;DistributorsReviving;BeCautiousonDevices;SellCSOs84041424381)ValuationrallyonindustryaccelerationandstrongcompanyresultsDrugsnewlyaddedto2017NRDLstarttovolumeexpandin4Fasterproductlaunches;moreupsidesurprises3)Higherdrugqualityalignedwithdevelopedworld4)Biotechsectorevenhotterwithsurginginterests4445464647474848494950505152535)China’sfast-growingbasicmedicalmarketbecomingmoreimportant(30%by2020E)146)Two-invoicepolicysettorevivelargedistributorvaluationsin2018151819217)CSOs–2018evenmorechallenging8)OnlySOEsaresustainableleadersinpublichospitalreform9)Near-termpolicyrisksrisingformedicaldevicesWhereAreWeintheGrowthCycle?Lee’s,FDZJandSBPhavebiggeststockpriceupsidesLee’s,SBPandHengruihavethehighestpotentialNPVcontributionfromtheirpipelineSBP,HengruiandCSPChavehighestpipelinesalespotentialHengrui,SBPand3SBioaremostvaluableinnovationleadersEvaluating2017-27EearningsCAGRswithpipelineimpact22252526CorporateScorecard–PharmaceuticalDistributorSinopharm(1099.HK,Buy)-EvaluationScore:30/30,OperationScore:24/25ShanghaiPharma(2607.HK,Buy)-EvaluationScore:26/30,OperationScore:22/25CRPharma(3320.HK,NR)-OperationScore:20/25JointownPharmaceutical(600998.SS,NR)-OperationScore:18/25GuangzhouPharma(874.HK,Neutral/H)-OperationScore:19/25545427285556CitiProprietaryCorporateScorecard3337CorporateScorecard–PharmaceuticalManufacturerSinoBiopharm(1177.HK,Buy)-EvaluationScore:29/30,R&DScore:23/25HengruiMedicine(600276.SS,Buy)-EvaluationScore:28/30,R&DScore:23/25563738395757NanjingPharma(600713.SS,NR)-OperationScore:17/25ChinaNationalAccordMedicine(000028.SZ,NR)-OperationScore:16/25CSPC(1093.HK,Buy)-EvaluationScore:25/30,R&DScore:22/25582

CitiResearchChinaNationalMedicine(600511.SS,NR)-OperationScore:DrugTenderProcedureandSelectionProcessofMedical16/25ShandongRealcanPharma(002589.SZ,NR)-OperationScore:16/25GuangxiLiuzhouPharmaceutical(603368.SS,NR)-Operation585959InsuranceReimbursementListsinChina81PharmaManufacturers:NewGMPABigHurdletoSmallManufacturers82PharmaManufacturers:Govt-LedPriceNegotiation–ToImprovetheQualityofUniversalHealthcareCoverage2013OrganizationalChange:FromSFDAtonewCFDAOrganizationChartofDrugApprovalAuthoritiesinChinaScore:21/25838485CorporateScorecard–HealthcareServices60606061616262CRPhoenix(1515.HK,Buy)-EvaluationScore:28/30AierEyeHospital(300015.SZ,Buy)-EvaluationScore:26/30DiAnDiagnostics(300244.SZ,Buy)-EvaluationScore:23/30Fosun(2196.HK,Buy)-EvaluationScore:23/30KangningHospital(2120.HK,Buy)-EvaluationScore:24/30Topchoice(600763.SS,Sell/H)-EvaluationScore:20/30PharmaDistributor:LayerstoCompress,LargePlayerstoBecomeEvenLargerIndustryIsGravitatingTowardsLargePlayersToughPoliciesForceSmallPlayersOutofGame868686OverviewofChinesePharmaMarket87878889CorporateScorecard–TCMManufacturer6363636464656566GlobalDrugSpendingtoReachUS$1,300Bnby2018EChina:Alreadythe2ndLargestPharmaMarketWorldwideTheBreakdownoftheChinesePharmaMarketYunnanBaiyao(000538.SZ,Buy)-EvaluationScore:27/30Dong-EE-Jiao(000423.SZ,Buy)-EvaluationScore:26/30TRTTech(1666.HK,Neutral)-EvaluationScore:24/30BYS(874.HK,Neutral/H)-EvaluationScore:21/30Tasly(600535.CH,Buy)-EvaluationScore:27/30BJTRT(600085.CH,Neutral)-EvaluationScore:22/30CRSanjiu(000999.SZ,Buy)-EvaluationScore:23/30Section1:Citi’sProprietaryChinaPharmaPipelineDatabaseR&DisKeyinNewEnvironmentandtoSustainGrowthAComprehensiveViewonPipelinesofMajorPharmaSummaryofKeyPharmaApplicationsBreakdownSinoBiopharm(1177.HK,Buy)ComprehensivePipelineCandidatesHengruiMedicine(600276.SS,Buy)ComprehensivePipelineCandidatesCSPC(1093.HK,Buy)ComprehensivePipelineCandidates3SBioPharma(1530.HK,Buy)ComprehensivePipelineCandidatesHansohPharma(Non-listed,NR)ComprehensivePipelineCandidatesSimcerePharma(Non-listed,NR)ComprehensivePipelineCandidatesLuye(2186.HK,Buy)ComprehensivePipelineCandidatesLee’s(950.HK,Buy)ComprehensivePipelineCandidatesLivzon(1513.HK,Buy)ComprehensivePipelineCandidatesFosunPharma(2196.HK,Buy)ComprehensivePipelineCandidatesFDZJ(1349.HK,Buy)ComprehensivePipelineCandidatesHECPharma(1558.HK,NR)ComprehensivePipelineCandidates90909091CorporateScorecardMatrixDefinitionTablePharmaceuticalManufacturerEvaluationMatrixDefinitionPharmaceuticalManufacturerR&DMatrixDefinitionPharmaceuticalDistributorEvaluationMatrixDefinitionPharmaceuticalDistributorOperationMatrixDefinitionHealthcareServicesEvaluationMatrixDefinitionTCMManufacturerEvaluationMatrixDefinition676768697071729297100103105Policies:2017APositiveYearforChinaHealthcarePharmaManufacturers:CFDAApprovalProcessUpgrade–FasterandFairerPriorityReviewtoAccelerateProductLaunchesClassificationofChemicalDrugsinChinaandClinicalTrialRequirement737374108110112114757677787980DrugApprovalProcess–OverviewDrugApprovalProcess–ClinicalTrialApplicationDrugApprovalProcess–NewDrugApprovalProcessDrugApprovalSummaries–ApplicationsReceivedDrugApprovalSummaries–ApplicationCompleted1161181193

CitiResearchSihuanPharma(460.HK,NR)ComprehensivePipelineCandidatesTop-SellingAnti-tumorDrugs–Antimetabolites(抗代謝藥)164165166167168169170121123124125Top-SellingAnti-tumorDrugs–Plantalkaloids(植物藥)Top-SellingAnti-tumorDrugs–Hormones(激素)Top-SellingAnti-tumorDrugs–Platins(鉑化合物類)Top-SellingAnti-tumorDrugs–Antibiotics(抗生素類)DeepDiveintoChineseCancerMarketMostPrevalentCancersinChinaBeiGene(BGNE.US,NR)ComprehensivePipelineCandidatesCBPO(CBPO.US,NR)ComprehensivePipelineCandidatesUnitedLab(3933.HK,NR)ComprehensivePipelineCandidatesLuoxinPharma(8058.HK,NR)ComprehensivePipelineCandidatesTonghuaDongbao(600867.SS,NR)ComprehensivePipelineCandidatesHuahaiPharma(600521.SS,NR)ComprehensivePipelineCandidatesHisunPharma(600267.SS,NR)ComprehensivePipelineCandidatesHuadongMedicine(000963.SZ,NR)ComprehensivePipelineCandidatesBJSLPharma(002038.SZ,NR)ComprehensivePipelineCandidatesQiluPharma(Non-listed,NR)ComprehensivePipelineCandidates126128129131133135136Top10Cancers:LungCancerRemainsNo.1;BreastCancerIsAGrowingThreat170171172173174DisparitiesIncidenceTrendofMajorCancersHigherCancerMortalityinChinavs.DevelopedMarketsCancerIncidence:Chinavs.Europe,USandJapanAgingPopulationDrivesCancerIncidenceInChinaWhatWeCanLearnFromCancerDemographyShiftintheUSCancerDeathRateWellManagedDespiteGrowingIncidenceNumberofCancerDeathsAvertedIncidenceRateofMajorCancersLungCancerIstheMostFatalCancerintheUSAnalysisofLungCancerMarketNSCLC:TheNo.1CancerWithGrowingIncidenceGefitinib/ErlotinibAs1st-lineKeyTherapiesPemetrexedandGemcitabine:DomesticGenericsAreWellAcceptedAnalysisofBreastCancerMarketReimbursementandPatientAssistantProgramsMayLeadtoBetterAffordabilityforHerceptinEndocrineTherapiesAsKeyAdjuvantTherapy:TamoxifenorAromataseInhibitorsAnalysisofColorectalCancer(CRC)MarketGrowingAcceptanceofAvastinAsFirst-LineTherapyAnalysisofLiverCancerMarket176177178179180181181183Section2:DetailedAnalysisofTherapeuticDrugsIdentifyCategoryLeadersandPotentialDrugsKeyFindingsfromOurAnalysisMNCsareFadingLeaders;DomesticPlayersareEmergingTop20DrugManufacturersinChinaTop20Drugs(GenericName)inChinaTopTherapeuticCategoriesTopDomesticPlayersGainingMarketSharesinLargestTherapeuticAreasChangesinMNCStrategiesinChina–SellingOffUnwantedProductsDomesticleaderstogainsharesonoriginatorsOverviewofMultinational/DomesticPharmaPlayersandLeadingDrugs139139139140141142143184185144187147150188190191193194195157158BestsellerLifeCycleComparison:Lipitorvs.KaishiAnalysisofStomachCancerMarketAnalysisofEsophagealCancerMarketAnalysisofAnti-tumorMarket(抗癌癥市場)MajorTypesofCancersinChinaAnti-TumorDrugCategoryAnalysisTop-SellingAnti-TumorDrugsandLeadingManufacturersDomesticPlayersAreEmerging:Roche,HengruiandNovartistheTop3159159160161AnalysisofCardiovascularDrugs(心血管藥)Top-SellingCardiovascularDrugs–OtherCardiovascularSystemDrug(其它心血管系統(tǒng)用藥)196199Top-SellingCardiovascularDrugs–Anti-hyperlipidemics(降血脂)2001624

CitiResearch224Top-SellingCardiovascularDrugs–PeripheralVasodilators(周圍AnalysisofEndocrineDrugs(內(nèi)分泌藥物)血管擴張藥)Top-SellingCardiovascularDrugs–CalciumAntagonist(鈣拮抗劑)Top-SellingCardiovascularDrugs–OtherVasodilator(其它血管擴張藥)Top-SellingCardiovascularDrugs–Anti-anginadrugs(防治心絞痛藥)DeepDiveIntoChineseDyslipidemia(血脂異常)MarketWhyisdyslipidemiaaconcern?201202203Top-SellingEndocrineDrugs–HypothalamicHormone(下丘腦垂體激素)Top-SellingEndocrineDrugs–BoneMetabolism(骨代謝用藥)226227AnalysisofDiabetesMarket(糖尿病市場)CurrentTreatmentParadigmforDiabetesHasManyOptionsCurrentInsulinMarketSizeinChinais~Rmb8-9Billion($US1.3-1.5Billion)PremixedProductsAreBetterSellersintheChineseMarketDiabetes’PrevalenceinChinavs.Global228230204205205231232233234235236237238239Top-SellingDiabetesDrugs–OralAntidiabetic(口服降糖藥)Acarbose:TheLargestOralAnti-diabeticDruginChinaShiftinChineseOralAnti-DiabeticDrugMarketCostComparisonAmongKeyOralAnti-DiabeticDrugsTop-SellingDiabetesDrugs–Insulin(胰島素,Human+Analog)MarketedInsulinProductsinChinaAnnualCostsofInsulinRangesfromRmb1,300toRmb11,000Top-SellingDiabetesDrugs–GLP-1analogues(GLP-1類似物)MajorGLP-1AgonistsWhatisdyslipidemia(血脂異常)?–Increaseincholesterol/TGDyslipidemiaPatientBaseModelStatinsAreTheFirstChoicesforDyslipidemiaTreatmentStatins:MechanismofActionKeyAdvantageofStatins:StrongerEfficacyandGoodPatientTolerabilitySideEffectsofStatinsLiverToxicity-CommonRhabdomyolysis(橫紋肌溶解)-RarebutcouldbefatalSevenStatinsApprovedandMarketedinChinaAtorvastatinIsTheMostPrescribedAmongStatinsWhatDidAtorvastatinDoRightToBe#1:Efficacy/Brand205207208209210211211211212213214214214240241242243244Top-SellingDiabetesDrugs–DPP-4Inhibitors(DPPIV抑制劑)ChineseDPP-4InhibitorsMarketAnalysisofAntibiotics(抗生素)2452482492502511)2)Betterefficacyvs.oldgenerationstatinsStrongerbrandrecognitionvs.rosuvastatin(Crestor)Top-SellingAntibiotics–Cephalosporin(頭孢類)Top-SellingAntibiotics–AntifungalDrugs(抗真菌藥)Top-SellingAntibiotics–Quinolone(喹諾酮類)Top-SellingAntibiotics–Anti-AIDS(抗AIDS藥)AtorvastatinSafetyProfileIsSimilarorSlightlyBettervs.OtherStatinsSideeffectsmaybeless215215AnalysisofCentralNervousSystemDrugs(中樞神經(jīng)系統(tǒng)藥)Top-SellingCentralNervousSystemDrugs–Cerebrovascular(腦血管病用藥)Top-SellingCentralNervousSystemDrugs–DementiaDrugs(癡呆治療藥)216219220AnalysisofBloodSystemDrugs(血液系統(tǒng)藥)Top-SellingBloodSystemDrugs–Anticoagulants(抗凝藥)Top-SellingBloodSystemDrugs–IntravenousInfusionandAdditives(靜脈輸注液及添加劑)252254255256Top-SellingBloodSystemDrugs–Antianemic(抗貧血藥)Top-SellingCentralNervousSystemDrugs–Analgesics(鎮(zhèn)痛藥)221Top-SellingCentralNervousSystemDrugs–OtherNervousAnalysisofAlimentarySystemDrugs(消化系統(tǒng)藥)Top-SellingAlimentarySystemDrugs–Proton-PumpInhibitor(質(zhì)子泵抑制劑)Top-SellingAlimentarySystemDrugs–HepathopathyDrugs(肝病用藥)257259260SystemDrug(其它神經(jīng)系統(tǒng)用藥)222Top-SellingCentralNervousSystemDrugs–Antiepileptic(抗癲癇)2235

CitiResearchTop-SellingAlimentarySystemDrugs–Antiemetic(止吐藥)261AnalysisofContrastAgents(造影劑)AnalysisofDermatology(皮膚科用藥)Top-SellingDermatology–ExternaluseAnti-infective(外用抗感染)Top-SellingDermatology–Anti-psoriasisDrug(抗銀屑病藥)298299AnalysisofAnti-HepatitisDrugs(抗肝炎病毒藥)ProgressionofHepatitisBTreatmentParadigmforHepatitisBinChinaHepatitisBIncidence/MortalityandGrowthofHepatitisBMarket262263264301302265266AnalysisofReproductiveSystemandHormones(生殖系統(tǒng)及性激素)Top-SellingReproductiveSystemandHormones–FertilityDrug(助孕藥)Top-SellingReproductiveSystemandHormones–Progestin(孕激素)LicoriceDerivativesasMajorLiver-ProtectionDrugCategoryEntecavirandTenofovir–BothWillRemainFirst-LineTreatments267303305306AnalysisofImmunomodulators(免疫調(diào)節(jié)劑)Top-SellingImmunomudulators–Immunostimulant(免疫刺激劑)Top-SellingImmunomudulators–Immunosuppressant（免疫抑制劑）269271272Section3-AnalysisofDrugDistributionIndustryLayerstoCompress,LargeDistributorstoPrevailIndustryIsGravitatingTowardsLargePlayersToughPoliciesForceSmallPlayersOutofGameThePharmaDistributionMarketsintheUS,EUandJapanHaveBeenConsolidating307307308310AnalysisofRespiratorySystemDrugs(呼吸系統(tǒng)藥)Top-SellingRespiratorySystemDrugs–AntasthmaticInhalant(抗哮喘藥吸入劑)Top-SellingRespiratorySystemDrugs–Expectorant(祛痰藥)Top-SellingRespiratorySystemDrugs–ChronicObstructivePulmonaryDisease(COPD)(慢性阻塞性肺疾病)273275276311277Section4-Internationalization:PrescriptionforGrowthOverseasM&ACapabilityofMajorChinesePharmaCompaniesRoadAheadforChinesePharmaAbroadChinesePharma’sAdvantages/DisadvantagesinInternationalizationAdvantage:LongerExperienceCompetingwithMNCsDisadvantage:LateMoverDisadvantage:RelativelyYounginTrueInnovationDisadvantage:UncertaintiesinOverseasMarketMajorChinese/Japanese/IndianPharmaOverseasM&AsinRecentYearsM&ABasics–ChinesePharmaCompaniesareStillLearningOverseasM&As–ASimpleFrameworkbutPlentyofChallengesOverseasM&ADueDiligenceFocus–#1TargetManufacturingFacilitiesOverseasM&ADueDiligenceFocus–#2TargetPipelineCandidatesOverseasM&ADueDiligenceFocus–#3TargetMarketedDrugs321CaseStudy–FirstAttemptofaChinesePharmaCompany…Failed312313314AnalysisofMentalDisorderDrugs(精神疾病類藥)278280281282Top-SellingMentalDisorderDrugs–Antidepressant(抗抑郁藥)Top-SellingMentalDisorderDrugs–Antipsychotic(抗精神病藥)Top-SellingMentalDisorderDrugs–Sedative(催眠鎮(zhèn)靜藥)315315315315316AnalysisofBiologicsMarket(生物藥)283284285286287Top-SellingBiologics–MonoclonalAntibodies(單克隆抗體類)Top-SellingBiologics–RecombinantInterleukins(重組白介素類)Top-SellingBiologics–RecombinantInterferons(重組干擾素類)AnalysisofVaccineMarket(疫苗市場)316317317AnalysisofSensoryDrugs(感覺器官用藥)Top-SellingSensoryDrugs–Ophthalmicanti-inflammatory(眼科抗炎制劑)Top-SellingSensoryDrugs–Hypotension/glaucoma(降眼壓藥/青光眼)290292293319320AnalysisofAnesthetics(麻醉藥)Top-SellingAnesthetics–GeneralAnesthetics(全身麻醉藥)Top-SellingAnesthetics–MuscleRelaxant(肌肉松弛藥)294296297322323ChinesePharmatoFurtherInternationalizewithUpgrades6

CitiResearchSection5–Benchmarking:DomesticPlayervs.GlobalPeersAnalysisofKeyFinancialRatios–PharmaceuticalOverallAnalysisofKeyFinancialRatios–GenericDrugsAnalysisofKeyFinancialRatios–BiologicsAnalysisofKeyFinancialRatios–MedicalDevicesAnalysisofKeyFinancialRatios–Distribution324324325326327328UrbanEmployeeBasicMedicalInsurance(城鎮(zhèn)職工基本醫(yī)療保險)OverviewUrbanEmployeeBasicMedicalInsurance–FundingUrbanEmployeeBasicMedicalInsurance–TotalInflowandExpenditure356356357358Section6-HealthcareInfrastructureOverviewofChineseHospitalsOverviewofCounty-LevelHospitalsandPrimaryCareInstitutions(基層醫(yī)療衛(wèi)生機構(gòu))GrowthinHospitalBedsNumberofBedsperThousandPopulationStillBelowGlobalAverageChineseHospitalBedBreakdownStrongGrowthinPrivateHospitalsHealthWorkforceandPatientVisitsMedicalProfessionalStructureSupplyShortageofPhysiciansandNursesinChinaAnalysisofOutpatientVisitsPhysicianDailyBurden329329NewRuralCooperativeMedicalInsurance(新型農(nóng)村合作醫(yī)療保險,新農(nóng)合)NewRuralCooperativeMedicalInsurance–FundingUrbanResidentBasicMedicalInsurance(城鎮(zhèn)居民基本醫(yī)療保359360330331險)361362UrbanResidentBasicMedicalInsurance–FundingUrbanResidentBasicMedicalInsurance–TotalInflowandExpenditure332333334335335336337338339340363364MedicalInsuranceSystem:Chinavs.DevelopedMarketsSection9–OverviewofChinaHospitalSectorBreakdownofHospitalIncomeandExpenditureBreakdownofRevenuefromDrugandMedicalServicesGrowthofPerCapitaMedicalExpensesDrugandDiagnosis/TreatmentFeeas%ofPerVisitExpensesImprovingQualityBasicMedicalCareforUniversalCoverage365365367368369370LengthofStay(LOS)forInpatientsAnalysisofSurgeryCasesSection10–PopulationDemographicsPopulationPyramidBirthRateandDeathRateLaborForcePopulationinChina(1990~2014)RuralPopulationvs.UrbanPopulation(1961~2015)AgedDependencyRatio375375376377378379380Section7-HealthcareExpenditureDynamicsofHealthcareExpenditure341341342GovernmentFundingInadequatevs.GlobalStandardCorrelationAnalysisofGDPPerCapitaandHealthcareExpenditurePerCapitaExpenditurePerCapitavsGlobalBenchmarkGovernmentSpendingDrivingGrowthinNationalHealthExpensesDetailAnalysisofOutofPocketExpenditureDetailedAnalysisofGovernmentSpendingonHealthcareHealthcareExpenditures:Urbanvs.RuralHealthcareExpendituresPerCapita:Urbanvs.Rural343344AgedPopulation:Asiavs.China345346347348349CoverageSummaryInvestmentSummary381382AppendixA-1388Section8-OverviewofMedicalInsuranceSystemFlowoftheMedicalInsuranceFund(醫(yī)療保險基金)MedicalInsuranceExpenditurevs.InflowCaseStudyonProvince-LevelReimbursementDifferentiatedReimbursementRatestoPromotePatientDown-flow3503523533543557

CitiResearchChinaHealthcareSectorHandbook2018BuyR&DPharma;DistributorsReviving;BeCautiousonDevices;SellCSOsWhilepharma/biotechledthesectorrallyin2H17,weexpectthestrongmomentumtocontinuein2018,backedby1)volumeexpansionofnewlyreimbursabledrugsandfasterindustrygrowth,2)fasterproductapprovals,alongwithinvestors’cravingforChineseinnovations.Distributorsunderperformedmanufacturersin2017,givenweakerresultsandsomehedgefundsusingdistributorstockstofundshorts(asconfirmedduringourmarketingtrips);weseeabigcomebackin2018basedonasteadyrecoveryinfinancialsandattractivevaluations.Medicaldevicescouldfacenear-termuncertaintiesfrompricingpressurebutleaderswillprevailinthelongterm.Inhospitals,webelieveSOEs,asthemainforceforpublichospitalreform,shouldbenefit.WereiterateournegativeoutlookonCSOs,seeingbusinessastoughandnewgrowthdriversaselusive.Onpolicies,thepreviousNRDLexpansion,clinicaltrialdatainspection,andthepriorityreviewmechanismhavetriggeredirreversiblepositivechangesforthesector,withhigherquality,moreinnovativedrugsgettingapprovedandgrowingfasterthaninferiorplacebos;theongoingmandatorybioequivalenttests(withfirstbatchdeadlineinYE18)shouldfurtherenhanceindustryqualityandaccelerateconsolidation.Whiletender-relatedpricingpressurewillremainlightfordrugsinmostof2018,pricenegotiationsonmedicaldevicescouldmaterializein1H18.In2018,webelievethe“stage2impact”ofthetwo-invoicepolicy(nowin25provinces)shoulddominate,re-acceleratingrevenuegrowth(withGMexpansion)forlargerdistributors.CitiProprietaryPipelineValuationModel—Ouranalysisestimatesproductlaunchtimeandpotentialpeaksalesbybuildingindependentepidemicmodels.Theanalysisprovides:1)assessmentofpotentialproductlaunchestocompanies’long-termrevenues/earningsgrowthtill2027,2)pipelinevaluequantification,and3)potentialimpactontargetpricesafterfactoringinpipelinevalues.Citi’sProprietaryCorporateScoreCards—Theseevaluatethecompetitivenessof46companies(refertoCorporateScorecardsectiononpage33)intheirrespectivesubsectors,andhelpsinidentifyingstockstoownandtoavoidinourcovereduniverse.–Manufacturers:23companieswithevaluationanalysisand/orR&Danalysis–Distributors:10companieswithevaluationanalysisand/oroperationalanalysis–Healthcareservices:6companieswithevaluationanalysis–TraditionalChineseMedicines:7companieswithevaluationanalysisCiti’sProprietaryPipelineAnalysison23Companies—Throughourproprietarypipelinedatabase,wescreenallCFDAapplicationsof23selectedcompaniesandcreateapipelinesummaryofdomestic/overseasapplicationstatus,indicationandmechanismofeachproductcandidate.Wealsoprovidekeymarketinformationoneachcandidatewith:1)keycompetitiveproductsinthemarket(forgenericapplications),2)othercompetingapplicationsfiledbycompetitors,and3)expectedlaunchdates.8

CitiResearch1)ValuationrallyonindustryaccelerationandstrongcompanyresultsDrugsnewlyaddedto2017NRDLstarttovolumeexpandin4Q17Weobservedvolumeexpansionof2017NRDLincludeddrugshadstartedin4Q17andwillcontinuein2018.WeprojectChinahealthcareindustrygrowthin2018toreaccelerateto10%orhigher;therapeuticdrugs’salesgrowthrateshouldmaintaininmid-teenswhilesalesofancillarydrugsshouldcontinuetocontractunderrestrictivepolicies.WeexpectHK-listedPharma/Biotechstockstoenjoyrichervaluationsin1H18supportedby1)strongreportedquarterlyresults,2)improvedindustrygrowthoutlookand3)mildertender-relatedpricingpressure.ByOct2017,28provinceshadrevisedtheprovincialreimbursementdrugliststo“synchronize”the2017NRDLpublishedinFeb2017.InFebruary2017,MOHRSS(MinistryofHumanResourcesandSocialSecurityofthePRC)publishedthe2017newNationalReimbursementDrugList(NRDL),comprising2,535drugswith1,297Westerndrugs(+133drugsvs.2009NRDL)and1,238TCMfinisheddrugs(+206drugsvs.2009NRDL).NewNRDLhasimposedusagerestrictionsonsomedrugs,whichshowedMOHRSS’sstanceofcostcontroltoprioritizedrugswithprovenefficacyorurgentclinicaluse.FollowingthereleaseofthenewNRDL,inApril,negotiationbatchofNRDLwasannounced,covering44proprietarydrugswithprovenclinicalefficacyandrelativelyhigherprices,indicatedforcriticaldiseasessuchascancer,diabetes,CCVandorphandiseases.Amongthe44selectedproducts,36arewesterndrugsand8areTCM,while19aremanufacturedbydomesticpharmaand25byMNCs.Implications：BUYSinoBiopharm,3Sbio,CSPCFigure1.CitiprojectsChinahealthcareindustrygrowthin2018toreaccelerateto10%orhigherFigure2Revenue/volumeexpansiontracksof2009NRDLincludedproducts2,151RevenueexpansionafterRmbbn1,6001,4001,2001,00080060.0%50.0%40.0%30.0%20.0%10.0%0.0%NRDLinclusion1,968101,790118AnnouncementofNRDLrevisionin4Q0984Newlaunches1,619-40Growthofolddrugs1,498AncillarydrugsNRDLnewaddition600400200-2016A8.3%2017E8.1%2018E10.6%2019E10.0%2020E9.3%2007200820092010201120122013201420152016Mingzheng(Adefovir/SBP)NBPcapsule(Butylphthalide/CSPC)Basalin(InsulinGlargine/Gan&Lee)YoY(%)YoYgrowth-10%+40%+13%N.A.Tianqingqanmei(MagnesiumIsoglycyrrhizinate/SBP)Xuezhikang(Luye)Source:CitiResearchSource:CitiResearch,PharmaDatabase9

CitiResearchFigure3.NRDLincludedproductsfuelsalegrowthSource:Companydata,CFDA,CDE,CitiResearch10

CitiResearch2)Fasterproductlaunches;moreupsidesurprisesWehaveseenfasterCFDAapprovalsforproductlaunchesandclinicaltrialsstartingfrom2H17andweseethetrendassustainablegoinginto2018.Weseethemajorpolicysupporttobenefitonlypharma/biotech/medicaldeviceleaderswithprovenR&Dtrackrecord.In2018,weforesee1)investorsbeingattractedtocompanieswithstrongR&Dpipelines2)valuationgapbetweenR&Dleadersandlaggardscontinuingtowiden,and3)R&Dleadersenjoyingmoreproductcatalystsandupsidesurprisesinrevenue/earnings.OneimportantaspectoftheCFDAwasthe25batchesofpriorityreviewlistsannouncedsinceMar2016,showingthegovernment’sdeterminationtoevaluate/commercializedrugsfor1)urgentclinicaluse,2)proveninnovativenessor3)criticaldiseases.Allproductcandidateslistedaretobeapprovedinanacceleratedmanner(asshortasseveralmonths).SBPhas10productcandidatesgrantedpriorityreviewstatus,namelyBudesonide(asthma),BudesonideFormoterol(COPD),Linezolid(HAP),Gadoxetate(contrastmedium),Ganirelix(ovarianhyperstimulation),Anlotinib(NSCLC),ClopidogrelHydrogen(strokes),Bendamustine(NHL),FosaprepitantDimeglumine(chemo-inducednausea)andAzacitidine(MDS),rankingfirstamongallpharma,followedbyHengrui(10candidateslisted),Qilu(5)andBayerandNovartis(8,highestamongMNCs).OtherkeydrugsincludeHengrui’sAlbuminboundPaclitaxel(breastcancer)andCSPC’sDronedarone(antiarrhythmic).Implications：BUYSinoBiopharm,Hengrui,Fosun,