The Chinese State Council recently released the no.1 government paper, verbosely titled “Several opinions of the State Council on accelerating the development of modern agriculture to further enhance the vitality of rural development,” which stressed that intelligent agriculture was one of the key government focus areas to develop the “modern agriculture” system in China. The document set 80 tasks that the government should accomplish in 2013 and assigned each task to specific ministries and departments. Among these tasks, a significant portion are focused on developing information technology infrastructure in the rural area to effectively facilitate the development of intelligent agricultural technologies based on “internet of things” (IOT) technologies.
That said, municipal governments are moving quickly according to the State Council guidelines. Just a few weeks after the release of the no. 1 document, the municipal government in Changzhun, the capital city of Jilin province in North East China, signed an agreement with China Unicom to develop an agricultural information system in rural and peri-urban areas around the city. In the system, information such as soil humidity, soil temperature, and carbon dioxide will be collected by the sensors that are installed in the fields and sent to an analytical platform via wireless telecom networks. The government expects to use the platform to guide the precision planting activities, as well as facilitate the decisions on irrigation.
We expect the substantial government initiatives to develop intelligent agriculture will benefit the companies touching this value chain, including telecom infrastructure suppliers, intelligent green house system developers, and relevant components and system suppliers. The infrastructure developers include telecom giants such as China Telecom and China Unicom, while smart green house system developers are relatively small companies, such as Wuxi Kaiyi (client registration required) and Beijing Tiandi Furui (client registration required). In the initial stages, intelligent agriculture projects will be mainly sponsored by the government, as currently observed in the intelligent green house system market in which local governments are today’s biggest buyers. Clients seeking investment targets or business partners in the intelligent agriculture industry in China should consider the government relationships as a key factor when selecting the partners. It is also important to take the long view in business development in China in the agricultural area. Agriculture is now emerging as an investment theme with a view to major opportunities in the coming decades as China’s demographic dividend, urbanization, and affluence converge and demand advanced agriculture technologies and systems to serve China’s population.
China is bifurcated into two distinct health care and biopharmaceutical markets. The urban market is rapidly growing due to young people migrating to cities in search of jobs and government policy mandating the physical relocation of whole regional populations into increasingly urban settings – with the concomitant increase in onset of western syndromes and diseases such as obesity and diabetes. This leaves the rural population, which, while dwindling, is still – and will remain – substantially large, primarily comprised of an aging population still suffering from third-world diseases with less access to health resources.
So where will the greatest future growth occur? Whereas today, total hospital revenue across all Tier A cities exceeds the 1,900+ counties that make up our rural category, by 2020 we predict that rural hospital income will exceed that of Tier A and Tier B hospitals. While hospital revenues in all city tiers are predicted to grow at a healthy 8% to 10% rate over the next five years to seven years, we predict that rural hospital income growth rate will almost double that, to 17.5%. According to 12th Year Plan goals, new hospitals will be primarily added in rural areas, and that the source of growth for the cities will come from capacity expansion resulting from hospital upgrades. In addition, as the infrastructure improves, greater training will be provided for rural health care providers, and clinic and hospital upgrades, including those from Class I to Class II hospitals will occur. Many conditions for which the rural populace are referred to larger city hospitals for treatment today will instead be treated locally driving utilization rates for hospitals to increase from 55% to 85% in rural locations.
While the absolute RMB expenditure in Tier D and rural areas is currently dwarfed by Tier A expenditures, the “make market share” opportunity for novel tech developers focusing on low cost, rapid diagnostics, and simple-to-implement health care IT systems, is tremendous, especially for those with five- to 10-year time horizons.
Source: Lux Research report “China: One Country, Two Health Care Markets (client registration required).”
Recently, Mr. Jianlin Cao, the vice minister of the Ministry of Science and Technology (MoST), mentioned during a meeting that Chinese investment in R&D is now on par with an average developed country. According to MoST, government R&D funding reached RMB 861 billion in 2011, or 1.82% of GDP, an increase of 21.9% from the year before. R&D output has also seen a dramatic increase, with 172,000 patents of invention granted in 2011, a 27.2% increase from 2010. Chinese research publications have also seen solid improvements in both numbers and quality (client registration required), according to the Nature Publishing Group.
However, the outburst of R&D output in publications and research articles have not yet had their impact felt at the industrial level. The reason lies with the Annual Report of Science and Technology Development of China, in which it was pointed out that of the 30,000 “Major Science and Technology Achievements” named by MoST, commercialization attempts were made for only 20%. This number is even lower when it comes to medical technology, a meager 8%. “There lacks a mechanism of technology transfer from universities and research institutes to companies,” as Mr. Jiancong Li, from the Ministry of Education, put it. In the latest Five-Year Plan, plans and efforts were made to change this situation, especially in health care related areas, although it will take time for effects to be felt. For instance, 30 to 50 clinical and research centers for translational research and eight to 10 collaborative networks among relevant medical specialists are to be set up before 2015.
Meanwhile, as China continues its spending on R&D, more and more innovations will be trapped at the R&D level, i.e. universities and research institutes. According to Mr. Cao, China plans to increase the investment in R&D to 2.2% of GDP in 2015 and to 2.5% of GDP in 2020. Bearing this innovation bottleneck in mind, clients should extend their technology scouting beyond commercial organizations in China while keeping in mind the lack of entrepreneurial experience among the Chinese academics and the need for flexibility when negotiating IP rights with academic organizations.
Seeing the rapid growth in China’s insulin market, Sanofi, Novo Nordisk, and Lilly have been squaring off for a big insulin fight. On June 13h, Eli Lilly announced that its second insulin production and packaging facility – Suzhou East Lake plant, which started construction in 2009 at a cost of $60 million – had finished construction and began operations. Earlier in May, Sanofi China opened a new assembling and packaging facility for prefilled insulin devices in Beijing. This manufacturing facility is a $90 million project, located in the Beijing Economic-Technological Development Area. Both companies are trying to catch up with Denmark based Novo Nordisk, the leading diabetes treatment company in China. Novo Nordisk entered the Chinese market as early as the 1960s, and maintains a dominant 60% of Chinese market share in terms of insulin volume. Currently, Sanofi and Lilly have 15% and 11% respectively, followed by two domestic companies – Tonghua Dongbao 5% and Shanghai Fosun 4%.
Among the various diabetes drugs, the long-acting, or basal insulin drugs are attracting the most attention and companies are competing fiercely in this market subsegment. Currently Sanofi’s blockbuster drug Lantus has about 80% of the market for long-acting insulin worldwide, with total sales of around $5 billion last year. Novo’s new insulin called Tresiba is awaiting U.S. approval by July 29, and is also expected to get the green light in Europe in the second half of the year. Lilly also has a new long-acting insulin, LY2605541, in clinical trials, which may still need years before reaching the market. However, the Phase II clinical tests of LY2605541 showed promising indications of helping patients lose weight, which has caused a stir in the diabetes market, since this could give Lilly a unique selling point and competitive advantage against the other companies.
Since 2011, China has passed Germany as the world’s third largest pharmaceutical market, behind Japan and the U.S., with an estimated growth rate of 20% per year through 2010-2015. China is estimated to have 92 million people with diabetes. Some 40% of them are diagnosed, and only 24% of that population are receiving treatment. The Chinese government is currently implementing healthcare reform – including broadened coverage and benefits, strengthened primary care and rural healthcare services, and improved disease prevention and early diagnosis – in order to improve healthcare accessibility and utilization. Thus, we expect to see tremendous and rapid growth of the diabetes market in China in the coming years. China’s booming diabetes market will bring huge profits for drug-making big pharmas, while investors can expect to see multiple opportunities in related industries like medical devices for diabetes drug delivery and diagnostic sensors and devices.