<p></p><p>Faster China Market Growth May<br/>Require Shift of Resources<br/>Chinese Government to Make Major Expenditure for<br/>the Basic Medical Insurance System Reform<br/>Pharmaceuticals<br/>• Expenditure of Rmb850 billion (roughly &yen;11 trillion) over three years: On<br/>January 22, the Chinese media including the People’s Daily reported that a<br/>meeting of the State Council chaired by Premier Wen Jiabao approved a<br/>medical reform plan to be implemented between 2009 and 2011. They cite<br/>spending of Rmb850 billion over three years to create a universal medical<br/>insurance system, lower the burden on ordinary citizens and improve access to<br/>basic medical and health services.<br/>• Medical equipment manufacturers to benefit at infrastructure stage: We see<br/>the plan as extending the medical reform measures implemented since 2006. We<br/>think manufacturers of mid- and lower-tier standard medical equipment face<br/>substantial opportunities when Beijing starts to broaden medical insurance to<br/>cover all citizens, build infrastructure (mainly public hospitals) and offer equal<br/>public health services. Sysmex (6869) has a China presence, targeting China<br/>sales’ share of total sales to rise to 8.5% in FY2008. It holds volume shares of<br/>50% for high-end hematology (blood-cell count) equipment and roughly 20%<br/>for low-end equipment, positioning it in our opinion for sustained high, doubledigit<br/>growth. However, we think a forte in systems marketing of high-end<br/>equipment to superior-grade hospitals suggests a possible need to broaden its<br/>business scope. Nihon Kohden (6849) generates only 2% of sales in China, but<br/>it has strengthened its marketing and production structures in FY2008,<br/>suggesting potential growth for products including electrocardiographs,<br/>defibrillators, bedside monitors and hematology equipment.<br/>• Growing patient base supports firm drug demand: China’s medical system<br/>has faced the problem that even if insurance coverage were broadened, an<br/>extremely low benefit ceiling prevented the prescription of drugs other than List<br/>A generics on the insurance list and traditional Chinese remedies. We think any<br/>signs of a change to the ceiling would offer medium- to long-term opportunities<br/>to branded drug manufacturers with a certain level of infrastructure, including<br/>Daiichi Sankyo, Otsuka Pharmaceutical, Astellas Pharma and Eisai. We also<br/>estimate that some mid-tier drug manufacturers without a foothold in the US<br/>could use this opportunity to review plans for establishing a US presence and<br/>rethink how they allocate their resources.<br/>Figure 1: Chinese Drug Market Trend<br/>&yen; billion<br/></p>