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How EY’s Global Life Sciences Sector can help your business Life sciences companies — from emerging start-ups to multinational enterprises — face new challenges in a rapidly changing health care ecosystem. Payers and regulators are increasing scrutiny and accelerating the transition to value and outcomes. Big data and patient-empowering technologies are driving new approaches and enabling transparency and consumerism. Players from other sectors are entering health care, making collaborations increasingly complex. These trends challenge every aspect of the life sciences business model, from R&D to marketing. Our Global Life Sciences Sector brings together a worldwide network — more than 7,000 sector-focused assurance, tax, transaction and advisory professionals — to anticipate trends, identify their implications and develop points of view on responding to critical issues. We can help you navigate your way forward and achieve success in the new ecosystem.
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
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EY Life Sciences Sector UpdateAsia-Pacific and Japan
April 2016
2 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
Contents
04 Market insights: Asia-Pacifi c and Japan
12 Featured articles 12 To combat pricing challenges, biopharmas need
new models 14 Optimizing supply chain effectiveness in Asia
with trade analytics
18 Mergers and acquisitions (M&A)
22 Financing and IPOs
28 Appendix 28 EY thought leadership 30 Contacts
New mobile-friendly site for life sciences executivesHave you visited EY’s Vital Signs?For one-stop access to EY’s breadth of materials published on the life sciences industry — reports, research, articles, guest perspectives, blog posts, presentations, infographics, surveys, charts and analysis — visit Vital Signs (ey.com/VitalSigns).
Browse the easy-to-use navigation to quickly fi nd the latest insights and perspectives on the topics most important to pharmaceutical, biotech, medtech and specialty pharma companies.
While visiting Vital Signs, click on “subscribe” to receive once-a-week email alerts (“eAlerts”) when new publications are posted on Vital Signs.
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34 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
38 CFDA website, accessed 10 February 2016, http://www.cde.org.cn/news.do?method=viewInfoCommon&id=313425; Cornelia Zou, “China’s reforms aim to speed drug approvals,” BioWorld, via NovaMedica, 31 August 2015; “China drug approval backlog jumped by a third last year,” Reuters, 13 March 2015.39 “China Healthcare & Pharmaceuticals A healthy future,” Barclays, January 2016, via ThomsonONE.com.40 “Healthcare – Overall How to tackle tender pressure?,” CIMB, 11 October 2015, via ThomsonONE.com; “China Healthcare & Pharmaceuticals A healthy future,” Barclays, January 2016, via ThomsonONE.com.41 “China Healthcare & Pharmaceuticals A healthy future,” Barclays, January 2016, via ThomsonONE.com.42 “China Healthcare & Pharmaceuticals A healthy future,” Barclays, January 2016, via ThomsonONE.com.43 “Prioritize stable growth and also factor in elasticity,” Haitong Securities, August 2015, via ThomsonONE.com; “China hospital reform: Don’t sweat the impact on prescriptions,” HSBC Global Research, 29 May 2015, via ThomsonONE.com; “China healthcare – missing a beat,” Financial Times, 14 December 2015. 44 “China FDA Announces Implementation Scheme to Improve the Drug Approval System,” Ropes & Grey, November 2015.45 “Xi out to make China a manufacturing powerhouse,” Nikkei Asian Review, 22 December 2015.46 “China FDA signs off on 3-D printed hip implants,” Fierce Medical Devices, 3 September 2015.47 “China Healthcare & Pharmaceuticals A healthy future,” Barclays, January 2016, via ThomsonONE.com.48 Paresh Jain Lokesh MS, et al., “API for global & Indian markets: Regulatory perspective,” Pharmabiz.com, 8 October 2015; “New India initiatives to impact global API scenario,” Pharmabiz.com, 8 October 2015. 49 “India’s fi rst dedicated medical device park to come up in Andhra Pradesh,” Pharmabiz.com, 8 October 2015.50 Nandita Vijay, “Centre extends barcode implementation for export of drugs & maintaining parent-child relationship in packaging,” Pharmabiz.com, 14 January 2016.51 Peethaambaran Kunnathoor, “CDSCO to have Central Drugs Testing Lab in Indore, plans offi ces in all states: Dr K Bengaru Rajan,” Pharmabiz.com, 31 October 2015.52 Suja Nair Shirodkar, “IPC inducts 29 new ADR centres under PvPI programme bringing total number of ADRs to 179,” Pharmabiz.com, 28 September 2015.53 Ashwani Maindola, “DoP initiates measures to regulate MRP on imported medical devices,” Pharmabiz.com, 26 November 2015.54 Sushmi Dey, “Govt to sell 439 key drugs at low prices,” The Times of India, 27 January 2016.55 “Health Ministry to set up govt-private task force to ensure universal access to quality healthcare,” Pharmabiz.com, 11 December 2015. 56 “Centre unveils National Biotechnology Development Strategy 2015-2020,” Pharmabiz.com, 8 January 2016. 57 Shardul Nautiyal, “CDSCO to review guidelines on biosimilars to meet healthcare needs,” Pharmabiz.com, 19 December 2015. 58 Ramesh Shankar, “CDSCO launches IT enabled system for online submission of applications & monitoring of clinical trials,” Pharmabiz.com, 10 September 2015. 59 Ramesh Shankar, “Health ministry to do away with repeat animal testing for permission for new drug or clinical trial,” Pharmabiz.com, 8 October 2015. 60 “ ’Huge Seller’ Re-Pricing Targeting Hep C Drugs Will Dampen Innovative Market,” Pharma Japan, 14 December 2015, via Factiva.61 “Generic Use Rate at 54.7% in July-September 2015: JGA,” Pharma Japan, 11 January 2016, via Factiva.62 “130 Million Yen Earmarked to Boost PMDA Staffers for Accelerating Review: FY2016 Budget,” Pharma Japan, 28 December 2015, via Factiva.63 EJ Lane, “ ’Japanese NIH’ launches April 1 with focus on devices and drugs,” Fierce Pharma Asia, 31 March 2015. 64 “FY2016 Draft Budget Includes 82.5 Bil. Yen to Promote Creation of Innovative New Drugs and MedicalDevices,” Pharma Japan, 28 December, 2015, via Factiva.65 Matthew Driskill, “Korean biosimilars making a splash on world stage,” Fierce Pharma Asia, 19 January 2016. 66 EJ Lane, “South Korea’s Samsung Bioepsis gets EU nod for Enbrel biosimilar,” Fierce Pharma Asia, 19 January 2016; EJ Lane, “Samsung Bioepsis wins South Korea nod for SB4, etanercept biosimilar,” Fierce Pharma Asia, 8 September 2015. 67 EJ Lane, “Samsung Bioepsis wins South Korea nod for SB4, etanercept biosimilar,” Fierce Pharma Asia, 8 September 2015. 68 “South Korea’s science ministry to invest USD68.5 mil. in biotech sector,” IHS Global Insight Daily Analysis, 19 November 2015, via Factiva.69 Matthew Driskill, “South Korea’s Hanmi signs $4.2B diabetes deal,” Fierce Pharma Asia, 6 November 2015; “Hanmi Pharmaceutical heading to best year ever with mega deals,” Yonhap English News, 24 November 2015, via Factiva.70 “South Korea’s top-10 drug makers to increase R&D investment by 10–20% in 2016,” IHS Global Insight Daily Analysis, 8 December 2015, via Factiva.71 “Korean pharma fi rms set to tap halal market,” The Korean Herald, 3 November 2015, via Factiva.
Sources
3EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
To our clients and friends:
Welcome to the fi rst edition of our EY Life Sciences Sector Update for Asia-Pacifi c and Japan.
During the past year we have had the pleasure of spending considerable time connecting with clients and companies throughout Asia. Feedback about our annual reports, Beyond borders and Pulse of the industry, is very positive. But it’s also clear the community is hungry for more detailed analysis of how these life sciences trends play out in the dynamic Asian market.
We heard you. The new normal in the Asia-Pacifi c region is rapid change. Just staying abreast of sector developments can be tough. We understand the need for frequent in-depth analysis presented in an easy-to-digest format. We hope the EY Life Sciences Sector Update fi ts your needs. In this issue, we address a diverse array of topics you’ve signaled are of interest. The information is presented in an easy-to-read format, and we hope this report strikes the right balance between “detailed analysis” and “digestible content.”
The fi rst section of the document, Market insights, highlights a number of sector trends and provides brief yet informative updates on various regulatory and legislative trends for a number of key markets in Asia. Our Mergers and acquisitions and Financing and IPOs sections provide helpful summaries of recent global and local trends via charts and short captions.
In addition, we’re also very excited to include two featured articles, both written specifi cally for this publication.
The fi rst article, authored by EY’s Lead Analyst for Life Sciences, Ellen Licking, examines the implications of ongoing concerns about high drug prices. In addition to outlining the pressures many pharmas face, Ellen discusses how stakeholders in Asia are addressing the issue.
The second article, coauthored by EY’s Global Leader for Trade Analytics, Marc Bunch, and EY’s Asia-Pacifi c Life Sciences Tax Leader, Rick Fonte, outlines how companies can use data analytics to achieve signifi cant supply chain benefi ts and win in the global — and Asian — marketplace. To colleagues in fi nance, tax and operations, we strongly urge you to read this article and think about how it may apply to your organization.
We hope you enjoy this fi rst issue. You’ll fi nd this market update — and much more — at our new digital home, Vital Signs, and you can engage with us via Twitter (@EY_LifeSciences) or email. Your comments are critical as we continue to refi ne this report to improve its overall value.
Rick Fonte Patrick FlochelAsia-Pacifi c Life Sciences Tax Leader Global Pharmaceutical Sector Leader
4 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
Market insights: Asia-Pacifi c and Japan
In this edition, we highlight key sector, regulatory and legislative trends for the following markets:
ASEAN• Malaysia
• Indonesia
• Vietnam
• Thailand
• Singapore
Australia
China
India
Japan
South Korea
Life sciences contacts
Japan Hironao Yazaki Assurance Tokyo [email protected] +81 3 3503 1566
Jonathan Stuart-Smith Tax Co-Leader Tokyo [email protected] +81 3 3506 2426
32 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
Greater China
5EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
Key highlights• India and China have introduced initiatives to strengthen
domestic manufacturing. The Indian government has prioritized a “Make in India” campaign aimed at bulk drugs and medical devices. In China, biopharma and advanced medical devices have been positioned as the priority sectors under the government’s Made in China 2025 plan. Meanwhile, 12 countries, including Japan, Malaysia, Singapore and Vietnam, have signed the Trans-Pacifi c Partnership. This pact will help improve the export potential of these countries by reducing import barriers.
• The government bodies continue to promote local innovation, primarily through increased funding support. For example, the Australian government has recently announced plans to invest US$184 million in a biomedical research fund to help commercialize breakthrough discoveries. Japan has also undertaken several measures to boost innovative research. This includes a special premium for innovative drugs and setting up funding agencies that promote R&D in pharmaceuticals and medical devices.
• Curbing health care expenditures, in particular drug prices, is another pivotal area for many nations in the Asia-Pacifi c region. Both China and India have revisited their pricing policies to impose stricter controls. Japan, meanwhile, has been the most aggressive in its reforms, announcing its decision to impose direct price controls on “high-selling” drugs. At the same time, the country has set ambitious targets for increasing generic drug utilization. Other geographies such as India and China have revisited their pricing policies to impose stricter controls.
• Regulatory reform is another area of focus in this region. China, India and Japan have undertaken reforms designed to maintain quality and safety standards while streamlining drug approvals.
• Identifying new growth opportunities is another theme. The specifi c strategy adopted is highly dependent on the given market, but across the region, executives in Asia-Pacifi c are experimenting with new types of life sciences businesses. These include medical marijuana (Australia), halal-certifi ed drugs (South Korea, Malaysia), online pharmacies (India), stem-cell therapy (Indonesia) and biosimilars (South Korea).
ASEAN Malaysia: Focus on increasing the export capabilities of the industry
The signing of the Trans-Pacifi c Partnership (TPP) has put Malaysia in the spotlight. Recall that the legislation gives innovator companies an additional period of data exclusivity for patented products when there are regulatory delays. This statute has angered patient advocates in Malaysia who believe the law will delay access to affordable generics. The government, meanwhile, argues it can use compulsory licensing to make sure patients have access to needed medicines.
Since it reduces trade barriers, the TPP should benefi t exporters of both drugs and medical devices.1 In particular, the pact will encourage the local production of medical devices, especially higher-value technologies. Malaysia, striving to become the regional export hub for medtech, has recently approved 11 medical technology projects with an investment of more than US$120 million.2
Like South Korea, Malaysia also wants to become a leader in halal drug manufacturing. As of August 2015, the country had nearly 110 halal-certifi ed pharmaceutical manufacturers.3 However, lack of formal guidelines is acting as an impediment for the players operating in this fi eld.4
Important recent regulatory shifts include new medtech guidelines related to mandatory incident reporting, device labeling and harmonization with foreign regulatory assessments. In addition, the ministry of health is studying the effi cacy of the world’s fi rst licensed vaccine for dengue, Sanofi ’s Dengvaxia.5, 6
Indonesia: Coping with the increased demand through domestic manufacturing
Indonesia’s universal health care plan has spurred demand for pharmaceuticals and medical devices. However, the shortage of locally manufactured drugs, along with rising import costs, hampers the progress of this plan.7 Consequently, the government is planning to introduce economic stimulus packages to strengthen domestic production, especially of raw materials. In addition, the government is contemplating relaxing foreign ownership laws.8 Meanwhile, domestic companies in Indonesia continue to boost their manufacturing capacity to keep pace with the increasing demand.
Building a sustainable health system has become a priority as the country implements its universal health care programs. To rein in escalating costs, the government has proposed a co-payment initiative that will allow the private insurers to supplement the universal health care policy.9
The Indonesian government intends to participate in the TPP.10 As in Malaysia, Indonesia’s pro-TPP stance has resulted in protests about possible delayed access to generics.
On the innovation front, Indonesia is making progress in stem-cell research. Its Stem Cell and Cancer Institute will initiate preclinical trial for allogeneic stem cells (cells that come from another person) for treatment of osteoarthritis sometime later in 2016.11
Market insights: Asia-Pacifi c and Japan
6 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
Vietnam: Emphasis on immunization amid increasing quality concerns
Vietnam has stepped up its efforts to strengthen its extended program on immunization, which expands pediatric coverage and enhances quality of inoculations.12 This is expected to offer greater opportunities to both foreign and domestic manufacturers with high-quality vaccines.
On the regulatory front, the ministry of health has launched an online drug registration service to ease administrative procedures, while tightening drug quality standards.13, 14 In addition, the government is developing a draft decree to more strictly manage medical devices.15
Thailand: Moving toward direct price controls and tackling the growing protests on TPP
The country is attempting to fi x nonuniform pharmaceutical pricing in public and private hospitals.16 One solution for this includes the government’s proposal to include drug pricing within the approval framework for patented drugs, introduced as part of Thailand’s drugs bill. This will require innovator companies to submit their pricing structures as part of the registration process. In another move, Thailand’s Internal Trade Department, Public Health Ministry and the Food and Drug Administration (FDA) have mandated the display of drug prices on the packaging to stop private hospitals from overcharging patients. These moves are being strongly opposed by various parties, including political outfi ts, private hospitals and multinational pharma companies. These bodies argue that the different cost structures of private and public hospitals justify the differential pricing and that bureaucracy may increase if pricing details are included in the approval process.17
From an intellectual property aspect, Thailand’s signing of the TPP is worrying a large faction of the local industry and consumer groups. The clause of “data exclusivity” (DE) after patent protection is the biggest challenge that the local industry has cited. DE will allow the innovator companies to extend its exclusivity period and thus hamper the growth of local generics players and result in increased drug prices.18 It may also limit the country’s ability to issue compulsory licenses.19
In the biotech industry, the focus is on developing hubs in the country. Currently, a panel of members is creating a national strategy for biotech and to attract investments into the sector.20
Singapore: Providing funding support to nurture novel start-ups
Singapore is focused on bolstering its R&D expertise. One of the key areas here is indigenous drug development of novel biologics. Working with Duke University, Singapore’s Agency for Science, Technology and Research (A*STAR) has discovered its fi rst clinical candidate, ETC-159, an anti-cancer agent.21 Singapore is also increasing funding for translational medicine: via the National Research Foundation of Singapore, the government has allocated US$13 billion over the next fi ve years to advance academic research into the commercial setting.22 Most of the funds will go to collaborative laboratories that conduct research; funds will also be used to train scientists.23
Singapore has also made two major investments to spur growth of its domestic medtech industry.24 EDBI, the corporate investment arm of the Singapore Economic Development Board, has invested an undisclosed sum in Massachusetts-based life science tools company Rapid Micro Biosystems. In another initiative, the homegrown accelerator JFDI has partnered with Germany’s Medical Innovations Incubator to augment medical technology start-ups. Both of these initiatives are expected to result in technology transfer and job-creation opportunities in Singapore.
Singapore is also investing in digital health opportunities. EDBI has joined forces with Philips to jointly invest in digital health companies that are working on population health management tools for the Asian market.25 Meanwhile, the pan-Asian insurance group AIA and Japanese tech builder Konica Minolta have formed a new Singapore-based incubator for digital health companies.26
Gamini MartinusOceania Life Sciences [email protected]+61 2 9248 4702
31EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
Contacts
Rick FonteAsia-Pacifi c Life Sciences Tax [email protected]+65 6309 8105
Hugo WalkinshawAsia-Pacifi c Life Sciences Advisory Center [email protected]+ 65 6309 8098
Bernard NgAsia-Pacifi c Life Sciences Transactions [email protected]+86 21 2228 2005
Patrick FlochelGlobal Pharmaceutical Sector LeaderTokyofl [email protected]+81 3 3503 1542
Life Sciences sector leaders
30 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
Market insights: Asia-Pacifi c and Japan
7EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
Australia Reforms to fuel industry growth and improve accessibility appear to be the government’s near-term agenda.
After several rounds of negotiations over 10 years, the Trans-Pacifi c Partnership (TPP) was fi nalized in October 2015. It establishes a preferential trade zone among 12 member countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam.27 The trade pact is a victory for the Australian government as it restores the fi ve-year patent protection term for biologics, with a provision for extending this period.28 At the same time, the deal paves the way for increasing exports. Note that changes in import tariffs used to protect the interests of the local companies might negatively impact the domestic industry.29
Australia is taking strides to improve its R&D environment. The nation has identifi ed biotechnology as a potential future growth opportunity. The government has recently announced plans to invest US$184 million in a biomedical research fund to help commercialize breakthrough discoveries.30 The Biomedical Translation Fund is expected to become operational in 2016. Similarly, private investors have set up a Medical Research Commercialisation Fund worth US$139 million.31
To improve patient access to medicines, the Australian government has earmarked US$1 billion in subsidies for hepatitis C drugs such as Sovaldi (Gilead), Harvoni (Gilead), Daklinza (Bristol-Myers Squibb) and Ibavyr (Pendopharm).32 As a result of these subsidies, which are effective March 2016, treatment costs could fall to just AU$37.7 (vs. AU$100,000) for the members (patients) of the country’s Pharmaceutical Benefi ts Scheme (PBS).33, 34 To create budget to cover the hepatitis C medicines, the federal government has removed 17 nonprescription drugs from the Pharmaceutical Benefi ts Scheme, a step that is forecasted to save roughly half a billion Australian dollars over the next fi ve years.35
Medical marijuana is also emerging as a new opportunity for Australian life sciences companies. In October 2015, the federal government lifted its ban on growing cannabis for medical purposes and is currently amending its Narcotics Drugs Act.36 The government also plans to establish a body for regulating cultivation and importation of the drug.37 Victoria is set to become the fi rst state to legalize marijuana cultivation, with other states also expected to follow this path.
Market insights: Asia-Pacifi c and Japan
8 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
ChinaThe Chinese life sciences industry is in the middle of major health care reforms. Streamlining the regulatory environment, improving quality, curbing health care costs and boosting the domestic industry are the key drivers of these reforms.
The China Food and Drug Administration (CFDA) has instituted several initiatives designed to expedite the drug approval process. The integral aspects of the reforms include:
• Simplifying approval of clinical trials
• Allowing simultaneous country clinical studies by multinational corporations
• Expanding the fast-track approval to many new categories of drugs (e.g., pediatric/geriatric drugs, drugs treating China-prevalent diseases and internationally innovative drugs)
These efforts are designed to reduce the drug approval time frame from 6–8 years to 2–3 years. By 2016, the CFDA aims to eliminate the current backlog of 18,000 drug applications.38
Improving the quality of its products is another goal of CFDA. Manufacturers bear greater responsibility for submitting review applications and must verify clinical trial data. Violations carry strict penalties, including a potential three-year delay in a drug application.39 Generics that meet international standards will also be prioritized.40
Pricing reforms are another priority in China as the government aims to reduce overall health care costs. Provincial tenders now occur annually, and the CFDA’s role is limited to monitoring — not setting — prices.41 These changes create an opportunity for pharma to interact directly with hospitals, empowering local health systems to negotiate pricing.42
At the local level, provincial governments are working to reduce the contribution of drug sales to hospitals’ revenue. As part of this initiative, they have already implemented a zero markup policy on drug sales for the hospitals in 100 major cities.43 These reforms separate drug prescription and dispensation while increasing medical service fees to compensate for lost drug sales.
These reforms are designed to promote the domestic industry. The government is encouraging local innovation by launching a three-year pilot program, the Marketing Authorization Holder (MAH) system, across 10 provinces.44 Under MAH, all domestic R&D institutions and research personnel of Chinese nationality can also fi le drugs for approval. Apart from MAH, the government has deemed biopharmaceutical and medical device manufacturing as high priority products for its “Made in China 2025” initiative.45 To further boost the domestic industry, authorities are also offering incentives for hospitals to use domestically produced medical devices.46
Apart from these reforms, increasing health insurance coverage continues to be a priority in China. In August 2015, the country released guidelines on full implementation of critical illness insurance. Through its expansion, the government aims to improve affordability by reducing the out-of-pocket ratio from 34% in 2014 to less than 30% by the end of 2017.47
29EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
Protecting information at life sciences companiesHow to safeguard the assets that matter most: as the life sciences sector continues to become more data-driven, cyberthreats and breaches of data systems are becoming an increasing challenge. Recent incidents involving the loss of protected health information and sensitive information at pharmacies, health systems, providers and payers have shown that attacks continue to become more sophisticated. These attacks also signifi cantly impact an organization’s bottom line, brand and reputation.
Pulse of the Industry medical technology report 2015 In EY’s 8th annual Pulse of the Industry medical technology report, we review the noteworthy fi nancial performance, deal-making and fi nancing trends that surfaced in the last 12 months and discuss the future implications of these trends.
EY’s Life Sciences Tax capabilities: Asia-Pacifi c and Japan EY is continuing to make signifi cant investments in the life sciences sector in Asia-Pacifi c and Japan. Within Tax, such investments have included the further development of an extensive life sciences tax infrastructure and tax leadership team comprised of designated tax sector leaders and specialty practice resources at the Area, Region and member fi rm levels. These resources serve as the backbone of EY’s broader Asia-Pacifi c and Japan Life Sciences tax network, as well as designated single points of contact and coordination for EY account teams and client personnel.
Adapt or fail: changing models in global medtech As published in MedTech Strategist, Parthenon-EY’s Dan Shoenholz and Keyuri Shah outline strategies medical device companies can use to succeed in a new health care landscape or risk being overcome by change.
Firepower index and growth gap report 2016Deal tectonics: at the fault line of growth goals and competitive pressures, mergers and acquisitions (M&A) in the biopharmaceutical industry skyrocketed in 2015, with the value of 2015 announced deals totaling more than US$300 billion, a new record for the industry. As the specialty pharmaceutical sector sees its ability to pursue large acquisitions evaporate, long-promised organic growth from big pharma new drug launches has fi nally arrived. But a renewed focus on value-based pricing, staunch competition across key therapeutic battlefi elds and consolidating payer clout may weaken the industry’s ability to reach revenue targets for both new and legacy therapeutics.
28 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
Appendix
EY thought leadership EY perspective on life sciencesThe following is a sample of recent life sciences-related thought leadership produced by EY. Please visit ey.com/vitalsigns for EY’s full library of industry insights and reports.
Beyond borders 2016 global biotechnology report For the second year in a row, the biotechnology sector’s fi nancing total reached unprecedented heights. Biotechnology companies raised nearly US$71 billion in 2015, easily surpassing the record-setting US$56 billion amassed the year prior. Fueling this best-ever fi nancial picture were record capital raises in three categories: follow-on public fi nancing rounds, debt and venture capital. It was also another stellar year for initial public offerings, with more than US$5.2 billion raised in IPOs, the third-highest total on record.
Financing narrative
Beyond borders 2016Bountiful harvest leaves biotech well prepared for winter
Life Sciences Global Corporate Divestment Study EY’s Global Corporate Divestment Study (GDS), focuses on the lessons corporates can learn from private equity fi rms — from improving portfolio reviews to divestment execution. The study is based on interviews with 900 global C-suite executives and 100 PE executives, plus external market data.
Market insights: Asia-Pacifi c and Japan
9EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
IndiaAn increasing focus on “Make in India” and growth of online sales are shaping the dynamics of the industry.
With the Make in India campaign, the country aims to strengthen its domestic capabilities of manufacturing of active pharmaceutical ingredients (APIs) and medical devices. After convening a task force, “the Katoch Committee,” India created reforms aimed at promoting API manufacturing, simplifying foreign investment, awarding tax benefi ts and fostering industry-academia relationships.48
On the medtech front, the government is building its fi rst dedicated industrial park in Andhra Pradesh. In a separate effort, the Department of Industrial Policy and Promotion and the Ministry of Commerce hope to raise at least US$50 billion in direct foreign investment for medical devices. To streamline device creation and approval, the government has also prioritized creating medtech-specifi c regulations.49
As India puts reforms in place to encourage manufacturing capabilities, it is also focused on enhancing the credibility of its exported products. For instance, it has created a trace-and-track system for exported drug formulations.50 All drugs manufactured by non-small-scale industry will need to adhere to this system by 1 April 2016. To strengthen quality control, India’s Central Drugs Standard Control Organization (CDSCO) plans to set up a Central Drug Testing Laboratory and build offi ces in all states to ensure proper implementation of regulations.51 CDSCO is also recruiting additional drug inspectors to perform quality checks. On the post-market front, the government is setting up new adverse drug reaction monitoring centers under the Pharmacovigilance Program of India (launched in early 2015).52
Improving affordability continues to be a key requirement in India. The country is extending the pricing controls used for pharmaceuticals to imported medical devices such as cardiac stents, pacemakers and implants.53 The central government also plans to expand the Jan Aushadhi program, which provides unbranded generic versions of 439 life-saving medicines and 250 medical devices at lower prices through Jan Aushadhi stores.54 It has also formed a public-private task force to ensure universal access to quality health care by 2030.55
On the biotech front, the government has released its National Biotechnology Development Strategy 2015–2020 to establish India as a world-class bio-manufacturing hub, and the CDSCO is revising its biosimilar guidelines.56, 57
As in other countries, systems to simplify the regulatory approval process are also underway. CDSCO has introduced an IT-enabled system to speed drug approval applications and improve clinical trial monitoring.58 The union health ministry has abolished conducting repeat preclinical or toxicity studies on animals if similar data from another country have been submitted.59
The rise of online medicine sales is yet another area garnering a lot of attention. While the government is developing guidelines to regulate this new segment, the industry associations (e.g., the All India Organization of Chemists and Druggists and the Indian Medical Association) are not happy with this growing trend. A formal regulatory framework that protects the rights of stakeholders and guides online pharmacy sales is urgently needed.
Market insights: Asia-Pacifi c and Japan
10 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
JapanProposed pricing controls for “high-selling” drugs haunt international drugmakers. Ambitious generic targets set by the government are stirring up the market.
To rein in health care spending, the Japanese government has undertaken several measures aimed at reducing drug prices. The most recent one is a controversial rule to reduce prices of “high-selling” drugs. As part of the rule, if a product’s annual sales are in the range of ¥100 billion–¥150 billion and its actual sales are at least 1.5 times projected sales, it will face a price cut of up to 25%. If the drug generates sales of over ¥150 billion and stands at 1.3 times its sales outlook, then it will face a price cut of 50%. Industry bodies have expressed strong opposition to this decision, terming it arbitrary, unreasonable and counter to the government’s agenda of promoting innovation. This rule will most certainly affect prices of the next-generation hepatitis C medicines, which have had strong launches in Japan.60
At the same time, the government aims to increase the volume of generics prescribed from 54.7% of all medicines to 80% by 2020.61 Achieving this target will come at the expense of the long-listed (off-patent) branded drugs, which form a signifi cant part of the business mix of several pharmaceutical companies in Japan. The pressure on the long-listed drugs will have several implications for Japanese pharma companies.
Midsize and small companies with signifi cant exposure to the Japanese market will obviously be more affected than the larger Japanese companies that have a better international mix. Replenishing the R&D pipelines will become a key priority to offset the losses from long-listed drugs. To bolster pipelines, M&A is expected to increase among domestic Japanese pharmas. This scale will also be important, as companies face pressure to globalize to reduce their dependence on in-country drug sales. Increased generics
utilization will also have ramifi cations for drug distributors, which anticipate increased inventory and transaction costs as a result of increases in both the number of suppliers and products carried. As Japanese distributors deal with this new dynamic, identifying new business models and maintaining profi tability will be a priority.
Although the government is keeping a tight leash on drug prices, it is investing to improve the regulatory infrastructure. The Pharmaceuticals and Medical Devices Agency (PMDA) is building large databases to collect and analyze clinical data and real-world medical data, for development of more effective post-marketing safety measures. To meet these requirements, pharmaceutical companies will need to make some adjustments in their IT systems. For example, the drugmakers will need to submit clinical data required for marketing authorization in the Clinical Data Interchange Standards Consortium format. The PMDA is also looking to invest ¥132 million to recruit 13 new full-time PMDA employees to increase the agency’s regulatory and safety review capabilities.62
Bolstering innovation is also a key priority for the government. It has established the Agency for Medical Research and Development (AMED), a Japanese version of the US’s National Institutes of Health and the UK’s National Institute for Health Research.63 The new agency will support and fund new product development in both the pharma and medical devices sectors. The AMED will receive budgetary funding of ¥126.5 billion in FY16 (up 1.3% from ¥124.8 billion in FY15).64 The Ministry of Health, Labor and Welfare has launched a forum in the form of a private panel for the health minister to promote health care start-ups in the country. The government has also decided to continue with the innovation premium for innovative drugs that satisfy certain conditions.
Financing and IPOs
27EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
Just two years after being taken private by China’s CITIC Private Equity, 3SBio became 2015’s largest life sciences IPO. This is 3SBio’s second IPO, as the company originally went public on the US Nasdaq exchange in 2007. The producer of drugs to treat bleeding disorders brought in an impressive US$711 million — nearly seven times its original IPO — and attracted institutional investors such as BlackRock and Singapore’s sovereign wealth fund (GIC). With the exception of WAVE Life Sciences, every other IPO worth more than US$100 million went public on a domestic exchange. WAVE is a Singapore-registered, preclinical genetic medicine company — with primary operations based out of Cambridge, MA, USA — focused on advancing stereopure nucleic acid therapeutics.
Top Asia-Pacific and Japan IPOs, 2015
Company Country Subsector Amount raised (US$m) Exchange
3SBio China Biotech 711 Hong Kong
Shanghai Haohai Biological Technology
China Biotech 305 Hong Kong
Heilongjiang ZBD Pharmaceutical China Pharma 246 Shanghai
Sichuan Maker Biotechnology China Medtech 223 Shenzhen
Alkem Laboratories India Pharma 203 Mumbai
Beijing Science Sun Pharmaceutical
China Biotech 186 Shenzhen
YiChang HEC ChangJiang Pharmaceutical
China Pharma 174 Hong Kong
Caregen South Korea Pharma 154 KOSDAQ
Modern Dental Group Limited China Medtech 135 Hong Kong
Kyongbo Pharmaceutical South Korea Pharma 129 KOSE
Ningbo Medicalsystem Biotechnology
China Biotech 126 Shenzhen
Lionco Pharmaceutical Group China Pharma 123 Shanghai
SanBio Japan Biotech 108 Tokyo
Pharma Research Products South Korea Biotech 107 KOSDAQ
WAVE Life Sciences Singapore Pharma 102 Nasdaq
Chengdu Kanghong Pharmaceuticals
China Pharma 100 Shenzhen
Luoyang Pu-Like Bio-Engineering Company
China Pharma 100 Shanghai
Asia-Pacifi c and Japan IPOs
Financing and IPOs
26 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
While the IPO window in the US and Europe showed signs of closing in 2015, it was thrown wide open in Asia-Pacifi c. Fifty-four Asia-Pacifi c-headquartered companies raised US$4.4 billion in 2014, an increase of 74% over the previous year, and just shy of the US$5.2 billion raised in the US and Europe. Spurred by the largest IPO globally in 2015 — China’s 3SBio — biotech companies garnered the most amount of capital (US$1.78 billion), directly followed by pharmaceuticals (US$1.75 billion) and medical technology (US$915 million).
Chinese life sciences companies dominated the Asia-Pacifi c IPO market with 25 public offerings for more than US$3.1 billion, or roughly 70% of all capital raised in the region. Of the 17 companies that raised more than US$100 million, 11 are based in mainland China. South Korea fi nished a distant second with 12 IPOs for US$567 million, while Australia and Japan each had six IPOs.
Asia-Pacific IPOs by subsector
Sources: EY, Capital IQ
Medical technologyBiotechnology Pharmaceuticals
US$
b
2011 2012 2013 2014 2015
0
1
2
3
4
5
Life sciences IPOs in Asia-Pacific and Japan, 2015
3
3.5
2.5
2
1.5
1
.5
0
35
30
25
20
15
10
5
0
Number of IPOs closedTotal IPO value
US$
b
Num
ber
of IP
Os
China South Korea India Japan Singapore Australia New Zealand
Market insights: Asia-Pacifi c and Japan
11EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
South KoreaBuilding biosimilars and R&D capabilities are the key short-term growth drivers of the industry.
South Korea is racing to become the biosimilars capital of the world and aims to have 22% of global biosimilar market share by 2020. In particular, two companies — Celltrion and Samsung Bioepis — are changing the face of the global biosimilars market.65 Indeed, Samsung Bioepis recently won EU approval for the fi rst Enbrel biosimilar, Benepali. It also has biosimilar versions of Remicade, Herceptin, Lantus and Humira in late stages of development.66 Depending on the strength of the equity markets, Samsung Bioepis plans to raise up to US$1 billion via a listing on the US exchanges in 2016.67 Celltrion also won a nod from European regulators for Remsima, a Remicade biosimilar being reviewed by the U.S. Food and Drug Administration.
Like other countries in the region, innovation/R&D is a top priority for South Korea. The Ministry of Science, ICT and Future Planning has announced its plans to invest US$68.5 million in the biotech sector over the next three years.68 This includes providing fi nancial, marketing and business development support to 10 home-grown
biotech and medical device companies. To develop R&D expertise, domestic biopharmas have pledged to raise their R&D expenditure by 10%–20% in 2016. Many companies hope to follow the example set by Hanmi Pharmaceuticals, which in 2015 signed six licensing deals and collaborative projects, including a US$4.2 billion diabetes deal with Sanofi .69, 70
Outside of biosimilars, Korean pharmas continue to look for growth opportunities in new arenas. One area generating much focus is halal-certifi ed drug manufacturing. Halal-designated products are made using ingredients and manufacturing processes that adhere to Islamic dietary law. Ildong Pharmaceutical is one of the leading players in this new fi eld, becoming the fi rst Korean pharma company to obtain halal certifi cation from the Korea Muslim Federation.71
12 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
Featured article: To combat pricing challenges, biopharmas need new modelsBy Ellen Licking, EY Lead Analyst
The debate about drug pricing has reached a fever pitch. As populations age and the incidence of chronic disease continues to rise, governments, private payers, health systems and patients around the globe are searching for solutions to make health care spending sustainable.
The economic drivers that guide the pricing of televisions, mobile phones or clothing don’t apply to the pricing of drugs. There are multiple reasons for this, including market exclusivities and a disconnect between the economic buyer (the payer) and the end user (the patient). But the primary reason for high drug prices is the structure of the current system, which relies on unit-based pricing, a methodology that is too one-dimensional for the current needs of the marketplace. This structure has resulted in incentives that encourage biopharma companies to make pricing decisions that are driven by what is possible rather than what is rational.
As a result, biopharma companies have taken the following approach when charging for their drugs: establish a public, unit-based list price for the product and then negotiate, on a market-by-market basis, specifi c, undisclosed discounts or rebates based on in-country regulations and health technology assessment (HTA) criteria. This approach has had two benefi ts: 1) it is simple to implement; 2) it preserves pricing fl exibility, especially in markets that use reference pricing.
A model under threatIn the past, this lack of pricing transparency worked to manufacturers’ advantage. However, in today’s environment, where the list prices of drugs are high and publicly available, the public doesn’t discriminate between the perceived cost of a medicine and the amount actually spent. Moreover, the heterogeneity of drug costs globally — for instance, certain cancer drugs can cost half as much in Europe as in the US — reinforces perceptions that pricing practices are “unfair,” fueling the industry’s negative reputation.
Biopharma’s historical pricing model is now under threat. One reason: the temporal misalignment between when drug costs occur and when their benefi ts are realized complicates drug pricing decisions. With very few exceptions, the benefi ts associated with a therapy won’t be measurable until many years in the future. However, companies must still be rewarded for the diffi cult and risky work of innovation, requiring high up-front price tags for many specialty products. Resource-constrained payers, meanwhile, need drug utilization policies that are consistent with tight annual budget cycles.
Hit hard by their own budget constraints, payers are therefore adopting new restrictions that limit the use of newly launched products. As multiple drugs with similar indications and clinical impact compete for share in therapeutic battlefi elds such as oncology or diabetes, it can be diffi cult to differentiate newer entrants from existing players. A fl ood of biosimilars creates additional downward price pressure in categories that have historically enjoyed pricing fl exibility.
In this environment, steep discounts and aggressive rebating strategies to establish market access have become the norm in competitive markets. The more comparable the drugs — or the greater the number of competitors in a particular market — the greater the likelihood payers will act aggressively to rein in drug costs.
We’ve seen it already, especially in the Asia-Pacifi c region, where curbing health care expenditures is a priority for many nations. Both China and India have revisited their drug pricing policies to impose stricter controls. Japan, meanwhile, has been the most aggressive in its reforms, announcing it will impose direct price controls on “high-selling” drugs and change incentives to bolster generic use. Industry groups have already expressed strong opposition to the direct price controls, calling them “arbitrary” and in confl ict with the Japanese government’s agenda to promote innovation. One class of drugs most likely to be affected by the policy shift: the next-generation hepatitis C medicines, which have had strong launches in Japan.
Financing and IPOs
25EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
A drop-off in IPOs in the fi nal quarter of 2015 may signal the beginning of the end for this latest bull run. Regardless of how the IPO market fares in the coming months, it is worth remembering that 78 biotechs went public in 2015, compared with 95 (the all-time record) in 2014. Biotechs raised US$5.2 billion in those 2015 debut offerings, the industry’s third-highest IPO total ever. The average IPO deal value was comparable to 2014’s (US$67 million vs. US$71 million). Top IPO earners were NantKwest in the US (US$238 million) and Adaptimmune in Europe (US$191 million). Most of the IPO activity occurred in the US: 34 biotechs raised at least US$50 million and 13 raised at least US$100 million.
To access more in-depth insights and data from the fi nancing article in Beyond borders 2016, please visit Vital Signs – EY’s perspectives on life sciences, at ey.com/vitalsigns.
The number of early stage venture rounds reached a new high-water mark in 2015, at 235. These seed and Series A fi nancings raised a combined US$3.5 billion, also a new record. Boston Pharmaceuticals, which raised the largest-ever biotech seed investment when it pulled in US$600 million in November 2015, won the honors for the largest venture round of the year. In Europe, the immuno-oncology start-up Immunocore raised US$313 million in a Series A fi nancing that was Europe’s largest-ever venture round. As a result of the fi nancing, Immunocore was valued at US$1 billion.
13EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
The hepatitis C medicines have also been a lightning rod for pricing debates in the US. Recall what happened when AbbVie’s Viekira Pak, an alternative to Gilead Sciences’ all-oral hepatitis C regimens Sovaldi and Harvoni, was approved in 2014. Net prices of the Gilead products dropped as the biotech sought deals that would keep the products on payers’ formularies.
Value is in the eye of the beholderGone are the days when the primary buyer of a drug was the individual physician. In the current cost-constrained environment, payers, whether government or private, have much more infl uence, prioritizing budgetary certainty and the development of evidence-based protocols that enable the delivery of the highest value of care to the greatest number of people. Although patients and caregivers continue to place a high priority on advancements that improve quality of life, the current environment means such innovations may result in nice-to-have, not need-to-have products, depending on how much they cost.
It’s still true that stakeholders value product effi cacy and safety. But as with improvements in quality of life, these attributes are now necessary but not suffi cient. Thus, drivers of value long embraced by European health systems have emerged as drivers of acceptability around the globe:
• �Signifi cant differentiation compared to the standard of care
• �The ability to identify subsegments of the population most likely to benefi t
• �Real-world outcomes
• �Up-front affordability of the medicine
• �Total cost to the health care system
• �The time required to achieve cost savings
One of the critical challenges in developing balanced pricing strategies stems directly from the fact that there is no single defi nition of product value. Even in Europe, where HTA bodies evaluate clinical and cost-effectiveness evidence, there is no standard defi nition of health care value. Not only do the value formulas vary from country to country, but how those formulas are implemented within a given market may not be consistent. In the US, getting a universal viewpoint of value is even more diffi cult since there is greater fragmentation in the US payer community and it is politically unacceptable to use cost-effectiveness measures to arbitrate drug prices.
In Asia-Pacifi c, meanwhile, disparate national policies mean the value of high-priced innovator products will differ from market to market. In Australia, for instance, a product’s value will also be infl uenced by the number of years it has been on the national formulary. This is one mechanism Australia is using to limit the annual price increases associated with branded pharmaceuticals in other parts of the world.
These disparate defi nitions of value have created a business opportunity: the development of third-party tools that compare the effi cacy, side effects and costs of different products. Still mostly a US phenomenon, these value frameworks can’t be ignored; by developing an alternative pricing assessment, these frameworks provide credible pricing alternatives that manufacturers must address head on when trying to justify a product’s value.
New pricing models neededIntuitively, biopharma companies realize that their pricing strategies must take into account how other health care stakeholders defi ne product value. Executives also understand that the current status quo can’t continue forever. Yet, too often, companies still assemble pricing plans that rely on outdated methodologies and fail to account for the downstream consequences the decision may have on the deployment of care.
What is needed is a more systematic approach that optimizes pricing fl exibility across the different markets where the product will be sold. To work, this approach must be grounded in an honest assessment of how other stakeholders, including the payers, value the medicine’s different features. Moreover, companies must acknowledge that because of cost constraints, infi nite resources to support access to innovation no longer exist. Thus, biopharmaceutical companies will be able to design smarter commercial strategies that lead to greater value creation only if they integrate their customers’ value drivers into their pricing decisions at the outset.
In this context, the defi nition of the payer will also shift. Going forward, the payer may be a traditional insurer — either the government or a private organization. But it could also be a physician group that is at risk fi nancially for its prescribing decisions or even an individual patient. Indeed, in an era when the industry has moved to tailoring medicines to individuals’ needs based on specifi c genetic or environmental information, these new pricing approaches, if applied smartly, will allow companies to design pricing arrangements that are tailored to the individual needs of the payer in question.
14 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
Effective trade policies and capabilities are critical for enabling companies to access markets quickly, effectively and cost effi ciently while at the same time maintaining compliance with a myriad of regulatory, customs and indirect tax requirements. Those companies with best-in-class trade capabilities often enjoy a signifi cant competitive advantage compared to their peers. Historically, however, many companies operating in Asia have struggled to achieve desired levels of trade effectiveness and performance or, at the very least, have been unable to identify and capitalize on available opportunities to signifi cantly reduce cost and mitigate risk in their supply chains. This inability to identify and capitalize on such opportunities is often present even at companies with highly effective trade capabilities. That’s because the limitations are often attributable to factors outside the control and visibility of the company’s internal trade and fi nance functions. For many companies operating in Asia, such limitations have related principally to regional complexity and supply chain visibility.
The high degree of operating complexity encountered throughout Asia is one reason it’s more diffi cult to achieve desired levels of trade effectiveness in this region. Unlike in Western markets, there isn’t the same degree of harmonization for regulatory processes, customs procedures and indirect tax requirements. These different requirements, coupled with often restrictive trade barriers, increase the complexity and risk of doing business in Asia. That complexity and risk is also heightened by a lack of standardization in accepted local business practices and ways of working. In such an environment, it is easier to misstep, elevating the level of business risk. In addition, it is often more diffi cult to identify and quantify areas of the potentially signifi cant opportunity.
Supply chain visibility — or lack thereof — is another reason why achieving trade effectiveness in Asia is so challenging. Lack of access to accurate and comprehensive trade data prevents many companies from being able to accurately defi ne, visualize and analyze their import and export transactions. As a result, many companies have to make decisions based on what they believe is happening
rather than what is actually happening. Unfortunately, there can be signifi cant gaps between these two states. Historically, such gaps have resulted principally in lost opportunity. In today’s highly fl uid and evolving regulatory and tax environment, however, such gaps are becoming more likely to result in costly business risks. Such risks include potential underpayment of customs duties and indirect taxes, exposure to underpayment penalties, fi nancial statement errors and reputational risk.
The good news is that processes and tools are now available to help companies overcome these historical challenges. Within the last six to eight months, signifi cant innovation has been made in approaches for obtaining accurate and comprehensive trade data. This access to data, combined with advancements in trade analytics tools and methodologies (i.e., “trade analytics”), is enabling companies to quickly achieve signifi cant improvements in their trade effectiveness. Such improvements have resulted in substantial prospective and retrospective cost savings, trade fl ow effi ciencies, and opportunities to proactively identify and mitigate areas of potential controversy and exposure.
... the customs broker creates a new and unique data set that now resides outside of the company’s ERP systems.
Barriers to trade effectivenessOne of the most signifi cant barriers that companies encounter when attempting to drive trade effectiveness is poor supply chain visibility (i.e., an inability to accurately defi ne, visualize and analyze their import and export transactions). This inability results in large part from a lack of access to accurate and comprehensive trade data. Without access to this data, companies are much less likely to be in a position to identify and capitalize on available opportunities to reduce
Featured article: Optimizing supply chain effectiveness in Asia with trade analytics By Marc Bunch, Global Leader, EY Trade Analytics, and Rick Fonte, Asia-Pacifi c Life Sciences Tax Leader
23EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
Innovation capital in the US and Europe surpassed US$40 billion in 2015
Sources: EY, Capital IQ and VentureSource.Innovation capital is the amount of capital raised by companies with revenues of less than US$500 million.
0
10
20
30
40
50
60
70
80
Innovation capital Capital raised by commercial leaders
In the US and Europe, innovation capital — cash raised by companies with revenues of less than US$500 million — reached its highest-ever total in 2015, cresting at $41.3 billion. This total included all venture, IPO and follow-on deals for the year, as well as a smattering of smaller debt offerings. Large debt offerings by Gilead, Celgene, Amgen and Biogen constituted the vast majority of the $29.7 billion raised by the sector’s commercial leaders.
Financing: Excerpts from Beyond Borders 2016, EY’s global biotechnology report
22 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
For the second year in a row, the biotechnology sector’s fi nancing total reached unprecedented heights. In total, biotech companies raised nearly US$71 billion in 2015, easily surpassing the record-setting US$56 billion amassed the year prior. Fueling this best-ever fi nancial picture were record capital raises in three categories: follow-on public fi nancing rounds (US$21.8 billion), debt (US$32.1 billion) and venture capital (US$11.8 billion). It was also another stellar year for initial public offerings, with more than US$5.2 billion raised in IPOs, the third-highest total on record.
Whether large or small, public or private, biotech companies across the industry have been able to take advantage of the free-fl owing capital over the past two years. During this period, biotechs have fi lled (or refi lled) their coffers with cash to drive future research and development and business development agendas.
Financing and IPOs
15EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
costs, mitigate risk and/or enhance trade fl ow effi ciency. This lack of data access and its implications are often not well understood by key stakeholders within a number of organizations. Yet understanding the origins of the problem and the limitations it creates is critical to fully appreciating why internal trade functions are currently so constrained, and why accessing and analyzing this data can unlock substantial benefi ts.
Each time goods cross a border, companies must fi le a customs entry, usually electronically. The data on the customs entry is legally required to be presented at an invoice line item level and can be in excess of 100 fi elds per import/export line. To complete the entry, the company’s customs broker must combine several sources of data, including importer/exporter Enterprise Resource Planning (ERP) transactional data received from the company, customs broker determinations (e.g., harmonized-system classifi cation determinations, customs valuation adjustments), shipping data and source/destination data. In the process, the customs broker creates a new and unique data set that now resides outside of the company’s ERP systems. It is this unique data that is submitted electronically to the customs authority, but not to the company. Unfortunately, no other single source of data provides the information needed to derive meaningful insights and achieve true trade effectiveness. ERP data is insuffi ciently detailed, and the data attributes that are available are not in a single location; thus, substantial effort is required to collate information that is not fi t for purpose. Meanwhile, other data sources, including data from shipping or logistics systems, are too narrowly focused.
In addition to creating a signifi cant barrier to achieving trade effectiveness, companies’ lack of ready access to this data puts them at greater risk during audit, as they are less able to proactively defend their positions. Keep in mind, a third-party broker submits data to the appropriate government agency on behalf of the company. That scenario results in data asymmetry: the government has full access to the data, but the company, which is legally responsible for the information, does not. This situation increases the company’s risk as the government agencies auditing the company’s customs, indirect taxes and direct taxes are increasingly more likely to have better information and knowledge about the company’s transactions than the company does.
The evolution of trade analytics capabilitiesSignifi cant advancements have recently been made in trade analytics capabilities, and the traditional barriers to achieving trade effectiveness no longer exist. First, data access is no longer an issue. Electronic customs declarations are now required in virtually every country, and it is now possible to access this unique data set. During the last 12 months, well-defi ned processes for requesting, and successfully obtaining, such data directly from customs authorities or customs brokers’ entry systems have been established for virtually every country in Asia. Such data can now be directly and quickly obtained with virtually no involvement from company personnel. By directly accessing this data from external sources, not only can companies now access the complete set of trade data they need to perform meaningful analyses (i.e., the company’s importer/exporter ERP transactional data combined with the customs broker’s data) but they can also avoid the complexities and frustrations of internal ERP data extraction, inaccuracy and data cleansing.
Second, signifi cant advancements in data analytics mean that highly intuitive and robust analytical tools are now available. As previously noted, the data on the customs entry is legally required to be presented at an invoice line item level; thus, even one year of trade data represents an unmanageable volume of data. Given the amount of data to be analyzed, advanced analytics are required to convert such information into actionable insights.
Finally, every company’s supply chains, trade fl ows and products are very different, as are their business and trade priorities, objectives, challenges and opportunities. Data access and analytics tools capable of processing and analyzing trade data are of minimal value unless combined with processes and customized tests designed to identify actionable insights and opportunities specifi c to each company. Just as every available analytical test may not be relevant for every company, nor will every available test necessarily be suffi cient. Consequently, a static analytical tool or engine that simply produces predetermined test results without taking into consideration each company’s unique needs will more often than not fail to identify the insights of greatest potential benefi t. Only by combining the right data, technology and process can a company truly optimize its trade effectiveness. Proven processes, including a rapidly expanding inventory of customized analytics tests developed specifi cally for trade, are now available.
Based on recent developments in trade analytics processes, data can now be obtained and analyses performed for any country in the world.
The power of trade analyticsTrade analytics can inform and support companies on a wide range of supply chain, customs and tax decisions and opportunities in Asia, ranging from macro-strategic to micro-operational. One of the key benefi ts of an effective trade analytics offering is that it requires no effort for companies to obtain the transactional-level trade data they need to accurately defi ne and visualize their import and export transactions, both physical and fi nancial, and for both current and prior periods. Most companies have never had this level of visibility or insight — they have instead relied on what they believe is happening.
Trade analytics offerings utilize advanced data analytics and processes to analyze and model this unique data set, enabling them to identify potentially substantial prospective and retrospective cost savings, trade fl ow effi ciencies and opportunities for risk mitigation. Based on recent developments in trade analytics processes, data can now be obtained and analyses performed for any country in the world. The results are delivered in easy-to-read dashboards that clearly present and summarize the company’s current state profi le, gaps and business opportunities. This makes it easy for companies to identify and prioritize potential investment areas and next steps (see exhibits 1 and 2 on the following page for two sample screenshots of analyses performed for customs duty).
16 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
Featured article
Exhibit 1: Graphical summary of origin of imports, customs duties paid, effective duty rates and trends over time as starting point for identifying areas of potential opportunity
Exhibit 2: Analysis of current trade fl ows where Free Trade Agreement (FTA) opportunity is available but has not been claimed, including quantifi cation of potential benefi t
Source: EY, Capital IQ
y y
Total M&A value Total number of M&As
US$
b
All others Australia India South Korea Japan China
Num
ber
of M
&A
s
350
280
210
140
70
0
45
36
27
18
9
0
Mergers and acquisitions
21EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
Mainland China dominated M&A in 2015. Chinese-based life sciences companies accounted for 81%, or US$42.9 billion, of all Asia-Pacifi c M&A value. Japan and South Korea were tied for a distant second with 5% of M&A value, followed by Australia with 3%. All other Asia-Pacifi c countries accounted for less than 1.5% of the industry’s M&A total.
Of the 532 M&A deals that had announced terms, more than 60% were of companies domiciled in China, and an astonishing 96% of those deals transpired between Chinese buyers and sellers. In fact, only 12% of all Asia-Pacifi c M&A deals involved companies in different countries. Despite the tremendous growth prospects within Asia-Pacifi c, US companies spent less than US$230 million in total to acquire 10 companies in the region. None of them were based in China.
Asia-Pacific and Japan M&As by country, 2015
In 2015, there were 11 M&A deals worth more than US$1 billion, and 27 worth more than US$500 million. Of those 27 deals, 22 targeted Chinese companies. In fact, China was responsible for 9 of the 10 largest deals in 2015, including the top two, which involved investor groups taking public companies private.
In the case of WuXi PharmaTech, a buyout group consisting of its management team acquired the company at an 11% premium and stopped its trading on the New York Stock Exchange. Another NYSE-listed company, Mindray Medical, is currently being targeted by investors aiming to take the imaging and diagnostic company private.
Acquired company Subsector Country Acquiring company Country Deal value (US$b) Status
WuXi PharmaTech Services China Investor Group China 2.9 Completed
Mindray Medical Medical Technology
China Investor Group China 2.5 Pending
Beijing Jialin Pharma
Pharmaceutical China Xinjiang Tianshan Wool Tex
China 1.6 Pending
Hubei Biocause Pharmaceutical
Pharmaceutical China Investor Group China 1.6 Pending
Shaanxi Bicon Pharmaceutical
Pharmaceutical China Jiangsu Jiujiujiu Tech China 1.6 Completed
Mudanjiang Youbo Pharmaceutical
Biotech China Jiuzhitang China 1.5 Completed
Guangzhou Baiyunshan Pharmaceutical
Pharmaceutical China Investor Group China 1.5 Pending
Kaifeng Pharmaceutical
Pharmaceutical China Furen Pharmaceutical China 1.4 Pending
Changchun Changsheng Life
Biotech China LianYunGang HuangHai Machinery
China 1.1 Completed
Boditech Med Inc Biotech South Korea
NH Special Purpose Acquisition Company
South Korea
1.0 Completed
Select Asia-Pacific M&As, 2015
Mergers and acquisitions (M&A) — Asia-Pacifi c and Japan
Sources: EY, Capital IQ
Deal volumeDeal values (US$b)
US$
b
Num
ber
of M
&A
s
2011 2012 2013 2014 20150
10
20
30
40
50
60
0
100
200
300
400
500
600
Mergers and acquisitions
20 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
The total value of Asia-Pacifi c and Japan M&A reached US$53.2 billion in 2015, a jump of 83% from the previous year and a whopping 380% increase since 2011. With the total value of global life sciences M&A reaching US$504 billion in 2015, Asia-Pacifi c and Japan M&A growth rates have actually tripled the global growth rates since 2011. Roughly one-third of all life sciences M&A occurs within Asia-Pacifi c; however, average deal sizes (US$100 million) are still only one-fi fth of the size of global deals.
Asia-Pacific and Japan M&As
Sources: EY, Capital IQ
Medical technology PharmaceuticalsBiotechnology
US$
b
2011 2012 2013 2014 2015
0
10
20
30
40
50
60
The Asia-Pacifi c region has witnessed a signifi cant uptick in M&A in three life sciences subsectors: biotechnology, medical technology and pharmaceuticals. Most of the focus is on buying pharmaceutical companies; 61% of 2015’s regional deal total (US$32.4 billion) was attributed to pharma M&A. Meanwhile, values for biotech deals have increased the most (up 540%) since 2011, followed by medtech M&A (up 356%).
Asia-Pacific and Japan M&As by subsector
17EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
Featured article
Scalable process, actionable insights and benefi tsThe trade analytics process is highly scalable, affording companies signifi cant latitude to defi ne their priorities and areas of focus. Companies have the fl exibility to take a very broad approach and, thus, assess the results from all available analytical tests. They can also be more targeted, choosing to focus on specifi c tests targeting areas they believe are critical for their businesses and/or collaborating on the development of new analytical tests. Companies also have the fl exibility of starting small and piloting the process on a limited number of select countries, or analyzing data for an entire region or regions. In our experience, based on results from more than 100 recent engagements and the outputs of more than 80 customized analytical tests, some of the more commonly identifi ed insights and benefi ts that can be achieved through trade analytics include:
Cost savings and improvements to supply chain effi ciency resulting from supplier rationalization and consolidation, including:
• Identifi cation of regions or countries where supplier clusters are present and thus there is an opportunity to resource goods purchased from both low-cost and high-cost countries
• Identifi cation of instances where signifi cant volumes of the same goods are being imported from suppliers in multiple countries, enabling companies to negotiate more competitive pricing and consolidate suppliers
• Identifi cation of instances where goods are being sourced from an unusually high number of suppliers, and thus, alternate sourcing strategies may be benefi cial
Proactive development and implementation of controversy management and risk mitigation strategies and overall improvements to internal controls upon identifi cation of various reporting and/or operational inconsistencies or errors, including:
• Identifi cation of HS coding inconsistency resulting in the nonpayment or underpayment of customs duties
• Visualizing both fi nancial and physical trade fl ows to identify instances where the company’s actual transactions are inconsistent with the company’s tax operating models and transfer pricing strategies
• Utilization of multiple and inconsistent incoterms, in general, as well as with respect to the same supplier, resulting from weaknesses in internal controls, internal and external compliance issues, and failures by customs brokers to declare the correct incoterms
Scenario modeling to understand the fi nancial impact and scoping considerations for strategic supply chain decisions, including the evaluation of bonded facility implementation, distribution center location analysis, and government trade programs such as inward and outward processing regimes
Customs duty* and GST/VAT/JCT refunds and prospective savings resulting from:
• Identifi cation and correction of Harmonized System (HS) coding inconsistencies that lead to customs duty over- or underpayments, including where the same goods have been classifi ed using different HS codes
• Payments or overpayments of customs duty on importations from free trade agreement countries
• Resourcing of importations where the same goods are being imported from both countries with and without preferential customs duty rates
• Identifi cation of opportunities for customs duty drawbacks where exported goods incorporate both dutiable and non-dutiable imported goods or components
• Reconciliation of import VAT/GST/JCT paid to credits taken in VAT/GST/JCT fi lings to identify missed credits
* Finished pharmaceutical products and certain chemical intermediates are often not subject to customs duties under the World Trade Organization Agreement on Trade in Pharmaceuticals, as part of the zero-for-zero initiative. However, in several Asian countries, duty continues to apply, particularly for those new products not yet updated on the zero-for-zero list. In addition, materials and packaging used for research and development, manufacturing and clinical trials are frequently dutiable and must be considered.
Cost savings and improvements to supply chain operations resulting from correcting compliance and operational errors and ineffi ciencies, including:
• Identifi cation of incoterm noncompliance and double payment of shipping costs to both supplier and shipper
• Identifi cation of use of incorrect invoice currency and/or use of multiple currencies by a single supplier, resulting in violations of company policy, failures by customs brokers to declare the correct currency, and possibly over- or underpayments of customs duties
• Customs broker rationalization allowing companies to decrease the number of parties declaring information to various governments on their behalf and, thus, reduce the risk of unintended reporting errors and noncompliance
• Assessment of customs broker performance, ranging from clearance times to error rates, to identify areas for operational improvement and cost savings, including decreasing the time required for goods to clear customs, thus reducing demurrage and storage fees
• Assessment of business decisions regarding shipping methods utilized (e.g., sea vs. air) and whether such decisions are most cost effi cient
• Preparatory work and process improvement to increase likelihood of success in seeking Authorized Economic Operator status
The appropriate/reasonable way to develop a true appreciation for the advantages trade analytics can provide an organization is to see a demonstration of EY’s Global Trade Analytics offering. For more information, or to arrange for a demonstration, please contact Marc Bunch, Global Leader, EY Trade Analytics, at [email protected].
18 | EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016
Mergers and acquisitions (M&A)
Mergers and acquisitions (M&A) — globalTotal deal value in life sciences reached US$470 billion in 2015, a 22% increase over the prior year and a new record. In addition to nearly 2,000 total announced deals, life sciences was third in overall industry deal value in 2015, trailing only technology and consumer products and retail.
Global M&A activity in life sciences reached new heights in 2015
Source: ThomsonOne
0
400
800
1,200
1,600
2,000
100
200
300
400
500
0
Deal volumeDeal value (US$billion)
US$
b
Num
ber
of d
eals
2011 2012 2013 2014 2015
19EY Life Sciences Sector Update Asia-Pacifi c and Japan | April 2016 |
Driven in part by Pfi zer’s massive acquisition of Allergan, M&A in the pharmaceutical sector drove most of 2015’s deal activity, accounting for nearly 83% of total deal value. There was also a surge in biotech M&A, with total deal value increasing 18% year-over-year. Medtech dealmaking slowed in 2015, dropping nearly 66% year-over-year in dollars committed. This drop was largely an artifact of 2014’s megadeal activity, which saw large medtech acquisitions such as Medtronic’s purchase of Covidien.
Life sciences M&A share by subsector
Biotechnology Medical technology Health research and testing Pharmaceuticals
2011 2012 2013 2014 20150%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Source: ThomsonOne
Sources: EY, Capital IQ
Acquired company Subsector Country Acquiring company Country Value (US$b)
Allergan Big Pharma Ireland Pfizer United States 191.5
Allergan — Generic Drug Business
Generics Ireland Teva Pharmaceutical
Israel 40.5
Pharmacyclics Big Pharma United States AbbVie United States 19.9
Hospira Big Pharma United States Pfizer United States 16.8
Salix Pharmaceuticals Specialty United States Valeant Pharmaceuticals
United States 15.9
Par Pharmaceutical Specialty United States Endo International United States 8
Receptos Biotech United States Celgene United States 7.7
Synageva BioPharma Biotech United States Alexion Pharmaceuticals
United States 7.7
Dyax Specialty United States Shire Ireland 6.6
Sirona Dental Medtech United States Dentsply International
United States 5.5
NPS Pharmaceuticals Specialty United States Shire Ireland 5.1
The yet-to-close Pfi zer-Allergan deal, valued at more than US$190 billion, ranks as the largest-ever life sciences M&A deal. The all-stock merger will create a biopharma juggernaut and shifts Pfi zer’s headquarters to the lower-tax jurisdiction of Ireland. Pfi zer is no stranger to big M&A: in 1999, it acquired Warner-Lambert for US$90 billion, which until the Allergan transaction, held the top spot for the largest life sciences M&A deal. Prior to the Pfi zer deal, Allergan was involved with the year’s largest divestiture as the company sold its generic division — the third-largest player — to Teva, the world’s largest generic drug company by sales. The US$40.5 billion acquisition catapulted Teva into the top ranks of all drugmakers and ended its long, tumultuous efforts to acquire fellow generic company Mylan.
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