Replies to post #97509 on Biotech Values

[DewDiligence]

A Tale of Two Chinas

[See #msg-49465915, #msg-48221898, and #msg-51490876 for related stories.]

http://finance.yahoo.com/news/A-Tale-of-Two-ms-4048610208.html?x=0&.v=1

›By Meera Venu (Morningstar Healthcare Observer)
Friday August 6, 2010, 7:00 am

Rich, poor. Urban, rural. East coast, western interior. The disparities in China's health-care market are striking for a country that values egalitarianism. Some critics even claim that China's current health-care crisis is more dramatic than the U.S. crisis, and when we dig into the figures, we can see validity in that claim. Reform efforts are underway in China, and in this article we explore the government's goals and the market opportunities that could be created as a result of those reform efforts.

Demographics Beginning to Mirror the U.S.

The sheer size of the potential Chinese market is difficult to ignore. With 1.3 billion people, China stands head and shoulders above any country in terms of potential patients. However, a closer look at the composition of China's populace reveals a much smaller, albeit still very large, likely patient pool. About 600 million people are considered urban residents, while over 700 million are considered rural residents. Some critics even claim that this statistic overestimates the urban population several times over by including some relatively small population centers where most people likely can't afford substantial care. Either way, the urban and rural distinction is important because the rural population is disadvantaged in terms of access to and quality of care.

However, even without significant uptake in rural patients, China's health-care market could continue growing at a blistering pace. With improving nutrition and better control of infectious diseases, life expectancy has risen dramatically from the mid-30s in 1950 to over 70 in recent years. Given this rise in life expectancy and the one child per couple policy, China's population is aging in a similar pattern as developed countries with similar disease trends. China's elderly population looks on the verge of exploding, and the incidence of chronic diseases associated with aging such as Type II diabetes, heart disease, cancer, and osteoarthritis could surge in the coming years. Industry leaders in the treatment of several chronic, more Western-style disease states, such as Johnson & Johnson (NYSE:JNJ), Novo Nordisk (NYSE:NVO), Pfizer (NYSE:PFE), Roche (RHHBY.PK), and Zimmer (NYSE:ZMH), could all stand to benefit from targeting opportunities in China [duh].

Insurance Coverage Levels Still Low

In our opinion, America's insurance coverage problems look tame compared to China's dilemma. While many wealthy, urban people in China carry insurance, a huge portion of the population remains uninsured, particularly the rural poor.

Coverage for catastrophic events is limited primarily by wealth in China; about half of all health expenditures are paid out of pocket. Insurance in China primarily covers hospital care and still requires large deductibles. The burden of health care in China is largely on individuals, and rising costs--driven by increasing utilization of technology such as drugs and devices--have priced many people out of the market.

Profit-Driven Delivery System Highlights Differences in Urban versus Rural Care

Since the government has largely privatized care, Chinese caregivers run on a for-profit, fee-for-service basis similar to the U.S. system. While the government has maintained tight controls over routine services, it permits caregivers to earn significant profits on new drugs, tests, and other technology. With new technology serving as the key profit center for caregivers, prescription levels of these products and services can be quite high. Critics of China's system claim that drugs are often prescribed for unintended uses to pad the profits of caregivers.

We think this profit-driven mentality has led to care levels that correlate with patient wealth levels. Today in China, wealthy, urban patients who can afford it are demanding modern medicine practices with high-priced new technology that is highly profitable for caregivers. Many rural patients don't have the means or insurance to receive such care. Caregiver incentives appear to be reinforcing the have/have-not dynamic in Chinese health care, and China's health-care system can be characterized as swollen in urban centers and razor-thin in rural areas as a result.

Reform Should Increase Demand for Drugs and Devices

The problems above and rising medical costs are fueling health-care reform efforts. The Chinese government will spend about $125 billion by 2011 to accomplish several goals. First, China wants to cover 90% of the population with medical insurance by 2011 and cover the whole population by 2020. The government will try to equalize the disparity between its basic urban and cooperative insurance for rural citizens and increase the subsidies to $18 per year to help citizens deal with the cost.

Another initiative involves improving the quality of rural care. This reform involves building more hospitals, especially in rural areas, and purchasing medical equipment with the goal of each county having one standardized hospital. The sharing of medical expertise will also bolster care in these local hospitals. The reform bill mentions training programs and moving personnel to rural areas. We think medical device and equipment companies that can win a bid in the tender process at either the provincial or central level can benefit from this increased construction and demand.

China will attempt to increase access to pharmaceuticals by building a list of essential medications and mandating their availability in rural areas. The government will select these drugs based on considerations like disease prevalence and cost, and insurance schemes will cover these drugs at a higher rate. The government will set prices and oversee the distribution of these medicines. Efforts to mediate drug prices should limit a hospital's incentive to profit from prescribing expensive and unnecessary drugs. In return, hospitals could get government subsidies or charge additional fees. We think firms that make generic drugs will benefit from this provision.

However, skepticism still remains about the effects of reform. In particular, critics worry whether government subsidies and regulation will be enough to change hospitals' incentives to profit from prescriptions or tests. Some wonder what the new reimbursement will be like and how much will be paid out of pocket. For now, it seems too early to tell whether these reforms can dramatically improve the disparity in care between rural and urban areas. However, we think that it will positively impact the demand for drugs and devices for companies that effectively invest in China.‹

[DewDiligence]

[OT] China’s Hollow ‘Straddling Bus’ Carries 1,200 Passengers

[It takes up two lanes of traffic and runs on electricity and solar power. Click on the link below to see a rendering of the vehicle.]

http://www.nytimes.com/2010/08/18/business/global/18bus.html

›August 18, 2010
By BETTINA WASSENER and ANDREA DENG

HONG KONG — What do you do if your roads are congested and polluted? Try designing a vehicle that takes up no road space. And make it partly solar powered.

A company in the southern Chinese town of Shenzhen has done just that. To address the country’s problems with traffic and air quality, Shenzhen Huashi Future Parking Equipment has developed a decidedly odd-looking, extra-wide and extra-tall vehicle that can carry up to 1,200 passengers.

Though it is called the “straddling bus,” Huashi’s invention resembles a train in many respects — but it requires neither elevated tracks nor extensive tunneling. Its passenger compartment spans the width of two traffic lanes and sits high above the road surface, on a pair of fencelike stilts that leave the road clear for ordinary cars to pass underneath. It runs along a fixed route.

Huashi Future Parking’s outsize invention — six meters, or about 20 feet, wide — is to be powered by a combination of municipal electricity and solar power derived from panels mounted on the roofs of the vehicles and at bus stops.

A pilot project for the vehicle is in the works in Beijing, and several other Chinese cities have shown interest.

The company says the vehicle — which will travel at an average speed of 40 kilometers an hour, or about 25 m.p.h. — could reduce traffic jams by 25 to 30 percent on main routes.

The straddling bus could replace up to 40 conventional buses, potentially saving the 860 tons of fuel that 40 buses would consume annually, and preventing 2,640 tons of carbon emissions, said Youzhou Song, the vehicle’s designer.

“I had the idea when I was doing research on the road for the designs of innovative parking slots for bikes and cars,” Mr. Song, who founded the company with several partners in 2009, said by phone last week. “I saw the traffic jams and wondered if it’s possible to make buses high up in the air as well.”

The design highlights a range of issues that have come with China’s explosive economic growth.

The nation’s urban population has expanded rapidly in recent years. In a report last year, the consulting firm McKinsey estimated that an additional 350 million people — more than the population of the United States — would move to [China’s] cities by 2015. More than 220 cities will have more than one million people. By comparison, Europe has 35 such cities now.

All this has caused a vast need for urban infrastructure, with McKinsey estimating that 170 new mass transit systems could be built in China by 2025.

At the same time, rising affluence has caused the number of cars — and traffic jams — to soar [#msg-51490876].

China is the world’s largest polluter, and Beijing is eager to reduce carbon emissions. The authorities have been pushing solar power and fuel-efficient transportation.

Huashi’s invention appears to have received a preliminary seal of approval from Beijing. The capital’s Mentougou district is testing the technology and plans to start building nine kilometers of route at the end of this year. If the test is successful, about 116 miles would be put in place.

“Mr. Song’s design is in line with our concept of green transportation and our vision of the future. We hope to start the construction and operation as soon as possible,” said Wenbo Zhang, head of the science and technology commission of Mentougou district, though he added that the necessary approvals would take time and investment.

Shijiazhuang, in Hebei Province, and Wuhu, in Anhui Province, have also applied to obtain financing for straddling bus systems, Mr. Song said, while Luzhou in Sichuan Province has shown interest.

The vehicles will be built by the China South Locomotive and Rolling Stock Corporation starting at the end of this month, Mr. Song said.

The cost of construction — 50 million renminbi, or $7.4 million, for one bus and about 25 miles of route facilities — is roughly one-tenth what it costs to build a subway of the same length, he said.‹

[DewDiligence]

Abbott Looks to India for Shot in Arm

[#msg-50473238 is a must-read companion piece.]

http://online.wsj.com/article/SB10001424052748704540904575451760938636760.html

›India's market leader in medicines will soon be based near Lake Michigan

AUGUST 26, 2010
By JONATHAN D. ROCKOFF

Abbott Laboratories will hold the biggest share of India's pharmaceuticals market, about 7%, when the company closes as early as next month on a $3.7 billion takeover of the drugs business of Piramal Healthcare Ltd. After committing more than $10 billion since February on such deals, Abbott Chief Executive Miles White said he has assembled a business in fast-growing countries that the company will count on for a big part of its growth.

"Where do you think the growth in the world is going to come from?" Mr. White asked during an interview at his suburban Chicago office, a few miles from Lake Michigan. "Would you bet on the U.S.? Would you bet on Western Europe? It's going to come from emerging markets."

Not long ago, many health-care giants like Abbott all but ignored the developing world and focused almost exclusively on the big U.S. and European markets for sales and growth. But struggles to replace aging product pipelines, generic competition and cost-conscious government and commercial payers have stalled growth on their home turf.

Now, the fast-growing emerging-market economies are much more attractive. Expanding middle classes in such countries as Brazil, South Korea and Turkey are not only spending more on health care, but their rising affluence has contributed to increasing rates of diabetes, heart disease and other conditions that once had been limited to developed markets. Some governments, notably China's, are beginning to provide insurance to pay for health care.

Abbott and its rivals face challenges building a lucrative emerging markets business. Critics said Abbott overpaid to catapult past Cipla Ltd., Daiichi Sankyo Co.'s Ranbaxy Laboratories and GlaxoSmithKline PLC into the No. 1 position in India. Abbott must also learn to make profits without charging Western-level prices that India's new middle class still can't afford.

Yet drug makers can still command a price premium for respected brands in emerging markets, and costs are much lower than in the U.S. Last year, drug sales in 17 "pharmerging markets" were $126 billion, up from $42.7 billion in 2000, IMS Health said. Sales in the countries are growing three times as fast as in developed markets, and should account for 70% of global growth over the next five years, according to Credit Suisse.

The result is a kind of pharmaceuticals gold rush in Asia, Eastern Europe and South America. Mr. White said he was one of several Big Pharma executives to pay a visit to Mumbai last summer in the hunt for potential partners or takeover targets. Companies including Daiichi Sankyo and Sanofi-Aventis SA have spent a total of $6 billion in India in the past two years on health-care acquisitions, according to PricewaterhouseCoopers LLP.

Meantime, big drug makers like Pfizer Inc. and Glaxo are selling some branded treatments to emerging-market customers at lower-than-Western prices, and they are licensing therapies from local firms in order to build portfolios of affordable products. Merck & Co., which said last month it is negotiating a marketing agreement with the Chinese firm Sinopharm Group Co., says it expects a quarter of its drug and vaccine revenue to come from emerging markets by 2013, up from 17% currently.

"Clearly the emerging markets will be a significant factor in determining the winners and the losers in the pharmaceutical industry over the next decade," Kenneth Frazier, Merck's president, told investors in May.

India is a compelling battleground. PricewaterhouseCoopers says pharmaceutical sales will triple to $30 billion by 2020, compared with $11 billion last year. To capture some of the market, drug makers must adopt a different business model than the one they're used to, said Peter Tollman, of Boston Consulting Group. The impact of lower prices needs to be offset by their taking advantage of lower manufacturing, distribution and marketing costs.

Patients, doctors and pharmacists are brand-conscious. By volume, so-called branded generics account for 90% of drug sales in India, said Sujay Shetty, India pharma leader at PricewaterhouseCoopers. That's a daunting hurdle for companies seeking to break into the market with new products.

Abbott's presence in India dates back a century, when a Chicago pharmacist who founded the company added an outpost there. More recently, Mr. White sought to expand in the country in 2001, through the acquisition of Knoll Pharmaceuticals, which provided such branded generics as the thyroid medicine Synthroid and the antacid Digene that are now popular in India.

But size matters in emerging markets, said Mr. White, who began eyeing an expansion five years ago. In 2007, Abbott held a board meeting in Shanghai so Mr. White could get the company's directors and managers focused on developing countries. Later, he hired McKinsey & Co. for advice on how to become a leader in five high-growth countries, including China and India. The consultants told him it would take 10 years unless he acquired companies, he recalled.

But he lost out on the bidding for one early target, a Chinese nutritional products company that would have given Abbott a strong foothold in China.

"I looked at India and said, 'We're not going to let what happened to us in China happen in India,"' he said.

The result: Just this year alone, Abbott obtained branded generic drugs in a $6.6 billion acquisition of the drug unit of Belgium's Solvay SA; it licensed at least 24 medicines from Indian firm Zydus Cadila; and in May, it agreed to acquire Piramal's drug business, which brought 6,000 sales representatives and 350 brands and trademarks, including such well known names in India as the anti-infective Omnatax and the topical steroid Lobate.

Not all of the companies that Abbott has acquired are in India. But these companies have products that are on the market in India or are suitable for sale there, as well as in other fast-growing markets.

Mr. White rejects criticism that he overpaid for Piramal, saying it was an opportunity to become the leader of a "cornerstone market."

For now, no other deals are planned. "We have the pieces. Now we just have to execute."

Abbott expects $8 billion in sales, about 20% of its total, from emerging markets this year, with a target of exceeding $14 billion over the next five years.‹

[DewDiligence]

WHO says number of global cancer cases will increase 75% between now and 2030:

http://in.reuters.com/article/2012/05/31/us-cancer-global-prediction-idINBRE84U1HM20120531

This is a consequence of not only the projected increase in global population, but also the increasing affluence in emerging markets, which will foster the adoption of Western lifestyles (#msg-51490876).

[DewDiligence]

[OT]—Blurb on China’s urban migration and GDP growth that’s simple and notable:

http://online.barrons.com/article/SB50001424052748704882404578382541810970924.html

China grows by moving people from the farms to the cities, and every time someone moves off the farm into the city, they contribute six times more to GDP than they did on the farm. If you do this 10 or 20 million times per year, you get 6% to 8% GDP growth just out of the demographics.

[DewDiligence]

The rising influence of rising affluence, updated for the changes to China’s economy:

#msg-116533684