Stuck In The Middle ?

The Way Forward For Malaysian Pharmaceutical Industry

Disclaimer:All materials are used by permission.Excerpts of data and statements were taken from:

PemanduIMSBMI

GBIReutersMOPI

All the views mentioned in the presentation and in the slides are my own individual and personal opinion and views and do NOT reflect views or opinions of Pharmaniaga Berhad orits affiliates.

Case for change:Current Malaysia Pharmaceutical Snap ShotImport reliance, global dynamics creating opportunity to react

5:1 ratio of imports to exports in Malaysia

10 of the top 15 blockbusters face upcoming patent expiry

Attractive OIC markets, where Malaysia has advantage

6.8

4.7 5.0 5.4

0

2

4

6

8

Import / export ratiofor pharmaceuticals

2009200820072006 0

5

10

15

20

25

'08 sales (B$)

2015

13

Seretidefluticasone

Nexiumesomeprazole

201420132012

17

Diovanvalksartan

Seroquelquetiapine

Singulairmontelukast

Enbreletanercept

2011

27

Lipitoratorvastatin

Plavixcopidogrel

Zyprexaolanzapine

20102009

4

Lovenoxenoxaparin

Prioritize local manufacturers for domestic market

Tap large market for generic version of drugs with newly-expired patents

Leverage European mfg. standard and good reputation among OIC countries to gain market access

0 5 10 15

07 pharma import-export ratio (%)

220

180

5

0

08-’13 pharma market growth (%)

Morocco Iran

Egypt

AlgeriaBahrain

Jordan

Qatar

KSA

Lebanon

UAE

Kuwait

Source: IMS; BMI; ESPICOM; USAID; Press search; BCG analysis

Pharmaceutical market growing in Malaysia, however is mostly from generics and imports

Malaysia Generic market growing at a rate of 12% vs 9% for patented

Imported drugs in Malaysia growing at a rate of 14% vs 12% for local

0.0

0.5

1.0

1.5

2.0

2.5

20132011

USD Bn

2003 20102009200820072006 201220052004

+11%

CAGR('03-'13)OTC

PatentGenerics

9%

12%

13%0

500

1,000

1,500

2,000

20132012201120102009200820072006200520042003

USD BnCAGR('03-'13)

12 %

14%

MYR 1.45Bn spent in 2009 for imported generics

500

650

800

1,200

1,100

4,400

0

1,000

2,000

3,000

4,000

5,000

Public TotalPrivate

MYR Mn

150PrivateLocal

PublicLocal

PrivateImport

PublicImport

Generics Patented

Malaysia global generics strategy

Financial impact (US$ Bn)Context

Proposal

•Incoming challenge from regional players due to ASEAN harmonization

•High reliance on imports– RM$4B of imports, vs RM$ 0.8B of exports in 2009

•High cost base– Portfolio overlap across 32 local players– Low utilization (30%+) – small batches– High raw material cost - small vol. purchase

• Archaic facilities (20+ years), resulting in high operating costs to bring up to GMP standards

• Replicated facilities

GNI

4.3

Net income transfer abroad

0.7

Wages

3.3

EBITDA

1.8

Cost

6.3

Revenue

8.0

Inputs & support required

Job creation

12k jobs

•Estimate based on calculation of FTEs needed for 60 new manufacturing facilities by 2020

MOH

•If drug passes BE test, immediately place on national formulary

•Mutual recognition of standards for drug registration in target markets, allowing direct sale

•Provide access to all data for local players

• More innovative procurement and treatment system

MITIMATRADE

•Review FTAs

Assumptions• Revenue sources include export, import

substitution, and higher-value products from existing manufacturers

• Cost and wages based on local and international benchmark of generic companies

• Net income transfer assuming 40% foreign investment in new manufacturing clusters

Contributionto GNI US$4.3Bn

“High risk high reward”

“Misplaced expansion”Evolve or perish“Space Invaders”

Prof

itab

ility

Footprint

Incubate to upgrade; substitute imports

Where we want to beCapable and profitable pharmaceutical and biopharma industry with a large contributes to GNI

Strong domestic share

OIC countries footprint

Extensive R&D capability

“Best in class” High performance sales

Malaysian generics strategy

'Super'genericsEnhanced generics, e.g. combination, new formulation, etc.(e.g. Panadol ActiFast [2x+ price of Panadol]; amlodipine + tocotrienol)

Generics"Me-too" version of prescription drugs that have lost patent exclusivity(e.g. Panadol; amlodipine)

Network of facilities to coordinate and optimize production of generics

New export-focused manufacturing cluster to complement existing resources

Current Future

Malaysian players largely producing for domestic market

Negligible local participation

Established Malaysian players move up value chain to produce higher value products, e.g. enhanced generics, bio-similars

Increase efficiency to :enable exports, substitute imports, andmove into higher value products

How do we get there?• Incubate to upgrade

• Stay put

• High risk high reward

• Misplaced expansion

Managed risk might fail

Miti

gate

risk

incr

emen

tal s

ucce

ss

Strong domestic share

OIC countries footprint

Extensive R&D capabilities

“Best in class”Sales performance

Moderate domestic share

Regional footprint

Adequate R&D capabilities

Efficient facility Sales performance

Weak domestic share

Domestic footprint

Limited R&D capabilities

Sufficient facility Sales performance

Capacity and capability

Prof

itabi

lity

• Competitive COGS due to best-in-class clustered facilities

• Cheaper, better medicine domestically

• Competitive for export• Sustainable revenue• Generate high value jobs and

large GNI impact

Plan to build a differentiated global business model

•Aggressive expansion via acquisition of local players

•Worldwide coverage

•Mostly organic growth

•Expansion in Germany via acquisition

•Focused on Europe and Central Asia

•Mix of organic growth and acquisitions

•Globally active, supported by acquisitions (eg, Basics in Germany)

•Strong Indian base

Geographicexpansion

Portfolio/Segments

Products/ Pipeline

Valuechain

•Largest operations API and Gx

•Some patented drugs•Animal health division

•Gx drugs largest BU•Cosmetics and animal

health division•Health resorts

•Pure Gx player•2-label strategy

(Aliud)•Acquisitions to

strengthen branded Gx segments

•Gx drugs•Development of new

patent protected drugs

•Large portfolio/pipeline

• Intense patent challenging

•Biologicals/Injectables

•Traditional Gx portfolio

•Plan to strengthen regulatory and development know-how

•Focus: patent-free APIs

•Biosimilars activities via 15% share on Bioceuticals

•Attractive Gx pipeline•Limited biologics

activities via partnerships

•Full coverage incl. R&D for patented/biol. drugs

•Plan for set-up of direct distribution

•So far focus on manufacturing

• Investments in M&S and distribution

•Shift from contact manufacturing to vertically integrated player along value chain

• In-house manufacturing, R&D

• Intense out-licensing of IP to big pharma

Diversified, fast-acting global player

Regional play with traditional portfolio

Multiple activities and geographies(second tier)

Partnership model

• Initially focused on selected OIC countries due to cost competitiveness and MY's reputational advantages

• Initially focused on blockbusters with recent patent expiries

•More focused portfolio (concentrated in highest value therapeutic areas) to gain efficiency

•Focused on manufacturing, with upstream and downstream partnerships

Lean, focused model

Malaysia generics players

Establishment of Centre of Excellence for Pharma R&D can drive innovations

National Center of Excellence for Pharma R&D

Funding options•Mandatory ploughback of

sales by local players•Access on pharma sales•Ploughback from public

tenders•Self-funding in the mid-term,

from fee-for-service and R&D commercialisation

Objectives•Pooling resources (financial and talent) to overcome

coordination failure and high barriers of entry for R&D •Mechanism to drive higher R&D spend to create more

innovative pharma industry•Natural industry consolidation mechanism by raising the

bar for business•Bridge between researchers' focus and industry needs

Services•Development of overall R&D strategy for Malaysia

pharma industry•Fomulation and developmental work on enhanced

generics (e.g. combination products, new delivery systems)

•Administrative, financial and legal advice (e.g. patent law advisory, interactions with venture capital

•Rental of high-cost equipment (e.g. xx)•Help researchers outside their core competency areas

(e.g. grant application)•Potentially a commercialization platform for innovation

Governance and staffing•National Center of

Excellence•Advisory Board comprising

of MOH, MOHE, universities, MOPI, WHO and international key opinion leaders / scientists

•Staffed by key professors and scientists with relevant knowledge and experience

Requires high-level support from both MOH and MOHE, as well as policy changes (e.g. allowing academics to hold equity stakes in companies)

Transformation roadmap for generics industryIncubate local players and create new facilities for globally competitiveness

Starting point"plateau"

2011-2014"incubation"

2014-2020"globally competitive"

5:1 import-export ratio

32 domestic manufacturers with significant portfolio overlap

Outdated facilities below GMP1 standards

Limited export due to lack of cost competitiveness

Low capacity utilization

Large purchase of imported drugs by gov't (~60% of total MOH purchases)

Use localisation to incubate upgrade of existing players' capabilities and facilities

Move into higher value-added products, e.g. enhanced generics and bio-similars

Create a new cluster of export-oriented manufacturing facilities to complement existing resources

Export generic version of recently expired blockbuster products, focusing on OIC markets as a starting point

1. Good Manufacturing Practice for pharmaceutical products

1

2

0123456789

10111213141516

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Biopharma revenue at risk due to patent expiration1 (as % of 2006 revenue)

1. As percentage of 2006 revenues 2. Calculated form 2008 revenuesSource: BCG case experience; Business Insights; BCG analysis

Abbott

Eli Lilly

Amgen

AZ

Upcoming patent expiries create white space for new generics player

BMS

4.6 6.9 3.6 5.1 14.8 12.9 9.8 13.5 7.210.9 9.6

Wyeth

GSK

Merck

Pfizer

S-ARoche

Novartis

SGP

J&J

Industryaverage (%)

US$132 billion2 worth of product by the top 10 pharma companies will face patent expiry by 2014

40% of rev. in single year

Key:

Malaysian generics: US$3.0 B revenue target for blockbusters expiring before 2013

0

5

10

15

NEXIUMPLAVIX

LIPITOR

TAZOCINARIMIDEXLAMICTAL

2004

ARICEPTABILIFY

KEPPRA

CIALIS

FLIXOTIDE

SERETIDE

LOVENOX

PULMICORT

2011

CYMBALTA

2009 20122008 20102007

EFFEXOR

BLOPRESSCASODEXPANTOZOL

PROGRAFMICARDIS

VALTREX

GEMZAR

COZAAR

LOSEC

SINGULAIR

FEMARA

VOLTAREN

XALATAN

ACTOS

REBIF

CELLCEPTZELDOX

TAXOTERE

DIOVANZOMETA

COPAXONE

RISPERDAL

2000

2008 global revenue (US$ B)

Note: Target revenue calculated by forecasting generics market size in 2020 (accounting for baseline growth, as well as price erosion and volume increase as a result of patent expiration) and applying a 1% aspirational global market share1. Actual patent expiration to be confirmed by patent law specialists, as multiple patents are filed on a single product and relevant date is dependent on the generic product, e.g. its physical properties, indication, formulation, etc. patent expiration estimated by adding 12 months to the expiration of the first pediatric patent of a drug Source: FDA Orange book; IMS; BCG analysis

US$50M

2020 revenue targetfor Malaysia Gx

Estimatedpatent expiry1

Malaysian generics: US$2.9 B revenue target for blockbusters expiring 2013-2020

4

3

2

1

2013

CONCERTA

2015 2017 2019 2,020

GLIVEC

HUMALOG

LANTUS

BENICAR

2016

DETRUSITOL

ZETIA

CELEBREX

ZYVOX

LYRICA

SPIRIVA

EVISTA

VIAGRANASONEX

0

CO-DIOVAN

CRESTOR

20142012

VYTORIN

KALETRA

REYATAZJANUVIA

TOPAMAX

2018

2008 global revenue (US$ B)

OXYCONTIN

US$50M 2020 revenue targetfor Malaysia Gx

Note: Target revenue calculated by forecasting generics market size in 2020 (accounting for baseline growth, as well as price erosion and volume increase as a result of patent expiration) and applying a 3% aspirational global market share. Aspirational share of 3% (versus 1% for expiries before 2013) used because new Malaysian facilities would be ready and early market entry more likely to gain significant share1. Actual patent expiration to be confirmed by patent law specialists, as multiple patents are filed on a single product and relevant date is dependent on the generic product, e.g. its physical properties, indication, formulation, etc. patent expiration estimated by adding 12 months to the expiration of the first pediatric patent of a drug Source: FDA Orange book; IMS; BCG analysis

Estimatedpatent expiry1

Malaysia's competitive advantages in the OIC countries

– Malaysia is the only OIC country that adheres to PIC/S guidelines(adopting cGMP)

– Industry is well regulated by NPCB to ensure compliance to cGMP

– Strong existing manufacturing capabilities (i.e. talent, infrastructure)

• Existing manufacturing base for generic products

• Potential increase efficiency in manufacturing that can lead to cost leadership

– Established leader where "Halal" is concerned • Malaysia is taking very strong initiatives in producing "Halal" certified

medicine

• Malaysia has a well structured Islamic banking and financial infrastructure in place—track record of innovation and leadership

– Bilateral arrangements between Malaysia and other OIC countries• Malaysia currently negotiating FTA agreements with the GCC countries

1

2

3

4

5

Halal platform a key differentiator for Malaysia

Unmet need in halal medicine

Halal pharmaceuticals could be worth up to US$500 B, accounting for 22% of global halal products market1

If a halal version of a medicine exists it would be preferred by Muslims, even though medicine is considered lifesaving and hence exempt from halal and haram considerations

Halal medicine in very early stages of development due to difficulty of establishing traceability to the source

Competitors on the move, MY must regain the

initiative

Brunei launched The Brunei Darussalam Guidelines for Manufacturing and Handling of Halal Medicinal Products, Traditional Medicine & Health Supplements in June 2010

Ambition to attract foreign investment to establish halal pharma manufacturing for export to Muslim world• Attracted Canadian OTC

company to establish facilities

Pulau Muara Besar port area to be developed into a Halal Pharmaceutical Hub

Nascent development in MY, need concerted

development

Increasing interest and efforts from Malaysian companies• 9bio, Jakim and OIC SecGen in

discussions with GSK to produce porcine-free meningitis vaccines for the haj pilgrimage; aiming to build R&D and manufacturing facility in Bandar Ensted by 2011

• Bioven partnered with Cuba to develop halal vaccines

1. 5th World Halal Forum, KL, June 2010

High potential to develop into a key competitive advantage and

differentiator for Malaysian pharma export

Needs co-ordinated development + establishment

of Halal drug standard

0 1 2 3 4 5

Algeria

Bahrain

Egypt

Iran

Jordan

Kuwait

Lebanon

Morocco

QatarKSA

UAE

Tunisia

Pharma Size 2013 ($B)

12 attractive countries in the Middle East and North Africa

1. Based on Pharma market attractiveness (60%), Macroeconomic attractiveness (25%), and Ease of doing business (15%) – see backup slidesSource: IMS; EIU; Espicom; BMI; PWC; Expert interviews; BCG analysis

Iraq LibyaOman

Sudan SyriaYemen

Attractivecore countries

Attractive non-core countries

Non-attractive countries

Low

High

Market attractiveness1

Fast growing pharma market in 18 MENA countries...

1. BMI estimates/forecasts for 2008 market sizes 2. Based on IMS data 3. 2007 IMS ex-manufacturers' values projected to 2008 with 9% (CAGR '04-'07), multiplied by 1,3 to convert to retail prices, and assuming 10% hospital sales on top of retail 4. IMS 2005 forecast values for 2008 (ex-manufacturers' prices, including hospitals) multiplied by 1,3 in order to convert to retail prices 5. US Agency for International Development report Source: IMS; BMI, ESPICOM, USAID, Press search; BCG analysis

Total Pharma market size 2008E ($M)

1,6022,111

9321,194

574 564 351 268

1,089

895760

344

278

404 217

459

116117137200267374

650129

323

177

5799

424

68

50

0

1,000

2,000

3,000

4,000

5,000

Algeria1

142

2,531

KSA1

2,231

130

2,171

Iran1Egypt2

1,377

Morocco1

145808

UAE2 Tunisia3

100

500

Lebanon1

53377

Kuwait1

374

Jordan1 Syria4 Libya4

156

2,820

Qatar1 Iraq5 Sudan4 Oman1 Yemen4

68

204

Bahrain1

OTC

Generics

Patented

No breakdown

Pharma market size ($M)

75

2013 additional sales

2008e sales

5.6%CAGR 08-13 15.1%10.0% 10.3%5.3% 4.7%9.0% 7.6%8.5% 4.2%2.6% 8.0%8.9% 6.8%4.3% 4.9%3.9%10.1%

...highly-dependent on pharma imports

98.0 96.0 95.0 91.0 90.0 86.066.0 58.0

33.0 28.0 25.0

% of total domestic market

2.4

Kuwait

19.0

UAE

1.3

Lebanon

6.0

KSA

0.5

106.0

Qatar Jordan

0.3

Bahrain

0.3

Algeria

9.0

Egypt

4.3

Iran

3.0

Morocco

Imports

Exports0

120

150

30

60

90

120

30

60

90

Imports and exports as a % of domestic market - 2007

Source: BMI reports for 2008; Press search; BCG analysis

Total exports for 2007 in $M

Total imports for 2007 in $M

$449M $2,075M $156M $292M $46M $1,366M $571M $495M $284M

$6M $138M $1M $376M $0M $8M $164M $78M $37M$8M

$326M $710M

$138M

Hikma with a plant in Jordan

exporting worldwide

Import markets Mix markets local markets

Market protectionism in 6 core countries call for G-to-G negotiations to gain preferential entry

1. Saudi counsel of ministers resulution NO78 2. UAE Pharmacy federal law No 4, 1983 - article 58 5 3. UAE Federal Law No1 1979Note: Pharma market attractiveness score based on analysis on three axes: IP laws, Govt policy/reimbursement, and Approval process. See details in next slide Source: BMI Q4 2008 report; BCG Analysis

Elements of pharma market protectionism

• Manufacturing: Pre-requisite for at least 51% local ownership for manufacturing and Managing Director or majority of board directors to be UAE nationals2

• Trade entity (medical store): the licensee should be a UAE national3

• Import market: no import/export taxes and all profits can be repatriated

UAE

• Up to 35% tax on imported drugs; 10% for Free Trade Agreement partners i.e. EU, US, Jordan, Egypt, Tunisia, Algeria – to be gradually abolished by 2012

• Cannot import if same molecule locally produced• Local partner legally required, receiving a legal "Rep Fee" of 20%

Morocco

• Plant may be built by foreigner but the technical director has to be a registered national pharmacist1

• Trade entity (medical store) can only be owned by a Saudi national1

• Registration easier for drugs manufactured in MENA (excluding Iran), US, Europe and Japan• Import market: no import/ export taxes and all profits can be repatriated

KSA

• Up to 90% tax for imported drugs if similar drug produced locally• Key to have contacts at MoH for registration and MoC for importation• Drug can be imported once a local doctor prescribes it; more difficult for generics

Iran

• Importer should develop manufacturing presence within 2 years of entry• Up to 30% tax on imported finished good products• Can not import if local production meets demand• Local import/distributor must pledge 45% of all imports to be generics

Algeria

• Local producers favoured by authorities i.e. speed of registration (fast track) and price level approved

• Theoretical import tax ranging from 4% for raw material to 28% for finished products (range not enforced)

Egypt

Highprotectionism

Lowerprotectionism

Local players predominantly focused on domestic market...Exports are only 10% of pharmaceutical sales for manufacturers benchmarked

2

0 150100

3

2008 sales(RM$ M)

50

Local player 10

Local player 6

26

49 0

6

Local player 5

44

1

11

Local player 3

Local player 2

24 1

Local player 7

24

99 12

Local player 1

139 2

Local player 9

Local player 8

57

70 12

13

Local player 4

Domestic revenueExport revenue

2%

11%

15%

16%

23%

0%

18%

3%

4%

56%

Average10%

Export as % of total sales

Note: Manufacturer's name masked due to data confidentiality; prescription drug sales onlySource: MOPI; BCG analysis

2008 sales breakdown

...but domestic market remains dominated by imports

Import growth has outpaced export growth in recent years

In contrast with peers, top 10 players in Malaysia are all MNCs

5.45.0

4.7

6.86.5

0

2

4

6

8

Imports / Exports ratio

20092008200720062005

Malaysia Indonesia Thailand

Merck Kalbe Pfizer

Pfizer Dexa Siam

Sanofi-Aventis Sanbe GSK

GSK Tempo GPO

Astra Zeneca Pfizer Sanofi-Aventis

Roche Soho Novartis

Merck Serono Kimia Farma Biolab

Abbott Pharos Group AstraZeneca

Bayer Bayer Roche

Novartis Sanofi-Aventis Berlin PharmaMNCLocal

1

2

3

4

5

6

7

8

9

10

#

Currentstatus

Game plan

• Import-substitute where possible• Seek market access to ASEAN

countries• Require imports to match

Malaysian player's PIC/S manufacturing standards

• Implement National Medicines Policy—encourage MNCs to outsource production to local players

Some room to import substitute, but potential limited by product fragmentation

333

110 1,048

155

323

89

0

200

400

600

800

1,000

2009 MOH drug purchase(RM$ M)

Patented Local generics Imported generics

Total

37433

489

126 1,048

12% of MOH's drug purchase substitutable by local generics...

...but product fragmentation among imported generics limit potential for import

substitution

APPL1

Contract

47% 41% 12%% of total

1. Approved Pharmaceutical Purchase ListSource: MOH procurement

1.6

0.6

2.2

1.7

1.1

2.5

0

1

2

3

Average value per product(RM$ M)

Imported generics

Local genericsPatented

avg = 1.6

APPLContract

160 33207 6562 149# ofproducts

Localisation policy already in place, partnerships with MNCs need to be formed

"Increase in purchase of local

generics"

NationalMedicines

Policy"Pharma. to be given the

same/equivalent strategic

incentives as to the bionexus companies"

"Identify off-patent imported products that are

viable to be manufactured

locally"

"MNCs to out-source the

manufacturing to Malaysian-

owned manufacturing

companies"

"National self reliance: drugs in NEDL including

antivirals & vaccines"

"Set up national database for

drug supply to encourage domestic

production "

MNCsIdentify and

audit potential local partners

Local playersApproach

MNCs, conform to quality

audits

MOHCreate favourable

conditions, e.g. offer contracts

with longer supply duration

Local industry fragmented, production should be rationalisedOnly 4 players have sales exceeding RM$100 M

233

141

111

10893

68

2009 revenue (RM$ M)

0Tota

lPlayer 7

1,450

Others(~20

companies)

Player 2 Player 9Player 1

5634

Player 3 Player 10

25

Player 4 Player 11Player 8

4915

57

Player 5 Player 12

460

Player 6

500

1,500

Note: Manufacturer's name masked due to data confidentiality. Revenue figures include prescription drugs, over-the-counter drugs, animal health products, TCM, nutraceuticals, and cosmeceuticalsSource: IMS; MOPI; BCG analysis

Migrate to a more focused set of domestic players. Potential levers include:• Bundle multiple adjacent products (e.g. same dosage form, same TA) into large tenders that

need to be fulfilled in its entirety encourage production rationalization and partnerships to fulfill tenders, laying the groundwork for mergers and acquisitions

• Require a minimum % of sales to be ploughed back into R&D, as well as a minimum absolute amount of R&D spend build innovation capabilities and decrease number of players concentrating on lower value-added commodity products

Currentstatus

Game plan