China Pharma Sector
Focus on Opportunities in Major Diseases; Initiating on China
Pharm and Fosun Pharma
 Sector Growth ~17% in 2013E — We estimate that the Chinese prescription
market reached a size of ~Rmb548m (~88 billion USD) in 2012 and forecast that
the pharma market could grow ~17% in 2013. We believe the cardio/cerebralvascular,
diabetes and anti-cancer markets could grow faster vs. other categories
with increasing prevalence. We expect leading players with key products/strong
pipelines targeting these diseases could lead the market growth in 2013-2015. We
initiate coverage of China Pharm (Buy) and Fosun Pharma (Neutral). We prefer
China Pharm due to: 1) its shift from API to pharma could drive profitability and
earnings sustainability; 2) growth in key products as short-term driver; and 3)
pipeline poses longer-term growth potential.
 Growth Disparity — We see strong growth momentum in anti-hepatitis and central
nervous system (CNS) drugs with >30% y/y growth in the first three quarters of
2012. Meanwhile, leading categories, such as cardiovascular, endocrine and anticancers
drugs also captured over 20% solid growth in the same period. In this
report we modeled the market size, growth and market share of each major
therapeutic category in the Chinese pharma market.
 Focusing on Major Diseases — We see anti-hepatitis, anti-cancer, cardio/
cerebral-vascular and diabetes markets posing growth opportunities, given 1) large
patient base with low diagnosis/treatment rate; 2) favorable government polices to
support drug innovation targeting those diseases and to improve chronic diseases
management; and 3) rollout of major disease medical insurance (大病医保) in more
cities to enhance the affordability of the treatments. We modeled the patient bases
of five major diseases in China (hepatitis, stroke, diabetes and lung/colorectal
cancer). Please refer to Figure 3~8 for details.
 More on Innovative Drugs — Our analysis of the pipelines of the leading domestic
pharma companies suggests that more drug makers are focusing on developing
more innovative/differentiated drugs through R&D platforms (such as Hengrui.
Simcere, Sino Biopharm) or cooperation with external R&D institutions (such as
Shanghai Pharma, Fosun Pharma and China Pharm). We believe the companies
with established R&D platforms could lead in the upcoming value chain shift in the
industry. (See Figure 9-12 for pipeline summary of leading pharma companies).
 Preferred Pharma Names — We prefer Sino Biopharm (hepatitis franchise and
pipeline), CMS (liver cancer pipeline) and China Pharm (stroke and pipeline) in the
Chinese pharma sector, given their leading positions and pipelines in the four major
disease categories with strong growth momentum.