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UBS Investment Research

China Pioneer Pharma Holdings

A leading medical market access partner

We initiate coverage with a Buy rating and HK$5.32 price target China Pioneer Pharma Holdings (Pioneer) is the No. 2 ranked third-party medical product marketing, promotions and channel management service provider inChina. We expect high earnings growth from client Alcon’s robust ophthalmologybusiness and strong new drug promotions.

New products and network expansion to drive high revenue growth We forecast a 2012-15 revenue CAGR of 29.1% driven by: 1) a 20% rise in salesof Alcon’s ophthalmology drugs; and 2) 40% growth in drug promotion sales. Weexpect Pioneer to continue to drive the long-term growth of its drugs promotion business by expanding its sales network and increasing new drug in-licensing.

Change in revenue mix to lead to margin expansion We expect profit margin to expand due to: 1) a shift in revenue mix as high-margin pharma products sold via Pioneer’s promotions platform grow faster than the low-margin channel management service revenue; and 2) modest operational leveragefrom its promotional partner network. As a result, we forecast a 2012-15 net profit CAGR of 34.0% with net margin up from 19.4% in 2012 to 21.7% in 2015.

Valuation: undervalued at 11x 2014E PE with 24% EPS growth in 2015E Our price target of HK$5.32 is based on 16x 2014E PE, or a 20% discount to theprice target multiple we assign to its nearest comparable company, China MedicalSystem (CSM). We believe a 14% discount to CMS’ current trading multiple isappropriate, given Pioneer’s higher earnings growth prospects but smaller size andlack of reporting history.

Highlights (Rmbm) 12/11 12/12 12/13E 12/14E 12/15ERevenues 718 959 1,247 1,571 1,959EBIT (UBS) 121 202 266 364 457Net Income (UBS) 96 186 247 348 431EPS (UBS, Rmb) - 0.19 0.23 0.26 0.32Net DPS (UBS, Rmb) - 0.00 0.07 0.08 0.10 Profitability & Valuation 5-yr hist av. 12/12 12/13E 12/14E 12/15EEBIT margin % - 21.1 21.3 23.2 23.3ROIC (EBIT) % - 38.5 43.4 47.0 46.6EV/EBITDA (core) x - - 13.5 8.3 6.4PE (UBS) x - - 12.2 11.0 8.9Net dividend yield % - - 2.5 2.7 3.4 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of HK$3.65 on 06 Dec 2013 16:56 HKT Shaojing Tong Analyst [email protected] +852-2971 7217

Global Equity Research China

Pharmaceuticals

12-month rating Buy Prior: Not Rated 12m price target HK$5.32/US$0.69 -

Price HK$3.65/US$0.47 RIC: 1345.HK BBG: 1345 HK

9 December 2013 Trading data (local/US$) 52-wk range HK$4.03-3.65/US$0.52-0.47Market cap. HK$4.87bn/US$0.63bnShares o/s 1,333m (ORD)Free float 70%Avg. daily volume ('000) 6,541Avg. daily value (m) HK$25.2 Balance sheet data 12/13E Shareholders' equity Rmb1.41bnP/BV (UBS) 2.1xNet Cash (debt) Rmb0.71bn Forecast returns Forecast price appreciation +45.8%Forecast dividend yield 2.7%Forecast stock return +48.5%Market return assumption 9.5%Forecast excess return +39.0% EPS (UBS, Rmb) 12/13E 12/12 From To Cons. ActualH1 - 0.11 - 0.08H2E - 0.13 - 0.1112/13E - 0.23 -12/14E - 0.26 - Performance (HK$)

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Source: UBS www.ubs.com/investmentresearch

This report has been prepared by UBS Securities Asia Limited ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 39. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

ab

mailto:[email protected]

China Pioneer Pharma Holdings 9 December 2013

UBS 2

Contents page

Investment Thesis 3 — Key catalysts........................................................................................................4 — Risks....................................................................................................................4 — Valuation and basis for our price target ................................................................5 — DCF analysis (UBS VCAM)..................................................................................8 — Upside/downside scenarios..................................................................................9 — Sensitivity analysis ...............................................................................................9

Competitive analysis 10 — Assessment of market attractiveness .................................................................10 — Pioneer’s competitive strengths..........................................................................13 — Management strategy ........................................................................................18

Company analysis 19 — Services provided...............................................................................................19 — Product analysis.................................................................................................21

Financials 26 — Profit and loss ....................................................................................................26 — Balance sheet ....................................................................................................29 — Cash flow...........................................................................................................30

Appendix 34

Shaojing Tong

[email protected]

+852-2971 7217


UBS 3

Investment Thesis

We initiate coverage of China Pioneer Pharma Holdings (Pioneer) with a Buy rating and price target of HK$5.32. Pioneer is leading third-party marketing, promotions and channel management service provider in China for international pharmaceutical and medical device suppliers. Pioneer provides two main services: 1) a comprehensive marketing, promotions and channel management service (33.8%/66.0% of 2012 revenue/gross profit); and 2) channel management and co-promotion services (66.2%/34.0% of 2012 revenue/gross profit). According to Frost & Sullivan, Pioneer was the second-largest, third-party pharmaceutical promotions service provider in China with a market share of 9.4%, based on revenue in China, in 2012.

Solid brand reputation. Pioneer’s marketing and promotions team consists of 219 in-house employees as well as 967 third-party promotions partners covering 21,589 hospitals and other medical institutions as of H113. Pioneer’s extensive network and strong sales track record have ensured a solid brand reputation, which not only drives organic growth but we believe attracts new opportunities for collaboration.

Pioneer’s promotions model. Pioneer’s promotions model leverages the broad experience and geographic reach of its partners and enables the company to market and promote a diverse range of healthcare products across China. This is a cost-effective model, in our opinion.

Focus on partnering with small-and-medium-size international pharmaceutical and medical device companies. Although Alcon (acquired by Novartis in 2011) remains its largest supplier, Pioneer has focused on partnering small-and-medium-size international pharmaceutical and medical device companies. Compared to large multinational companies (MNCs), the former have limited presence and know-how of the China market and are likely to depend on third-party service providers. Therefore we expect Pioneer to have: 1) better contract terms than from an MNC; 2) more support from suppliers; and 3) a deeper partnership rather than merely a transaction-based relationship with suppliers.

Valuation: a market leader. Trading at 11x 2014E PE and with 24% EPS growth forecast in 2015, we believe Pioneer is undervalued. Our price target of HK$5.32 is based on 16x 2014E PE, a 14% discount to China Medical Services’ (CMS) current trading multiple, and a 20% discount to the 20x 2014E PE we apply to CMS to derive our price target. Despite Pioneer’s expected higher near-term earnings growth momentum, we believe it will continue to trade at a moderate discount to CMS, given the former’s smaller revenue size, and lack of financial reporting history.


UBS 4

Key catalysts Pioneer will report 2013 results in March 2014, the first formal financial announcement following its IPO. We expect Pioneer to collaborate with suppliers to obtain new product rights in the next six to 12 months.

Risks The government’s anti-bribery drive. The anti-bribery drive against

pharmaceutical companies presents both risk and opportunity for Pioneer and third-party service providers in China, in our view. On one hand, any company present in the industry may be targeted (eg, Sino Biopharm). On the other, it is possible that MNCs and other overseas medical manufacturers will reconsider their marketing strategies and opt to increase the use of third-party service providers in China.

Government price intervention and other regulations. The government’s reduction of the maximum retail price for pharmaceutical products could negatively affect Pioneer. In addition, central and local governments may issue policy and guidance material on medical insurance coverage (95.3% of Pioneer’s revenue in 2012 came from products covered by national and provincial government medical insurance schemes), and the scope and frequency of use of particular products. Such a decision may affect the sales volume of particular products.

Top supplier concentration. Products purchased from Pioneer’s top five suppliers accounted for 97.1%, 96.7% and 94.5% of total products purchased in 2010, 2011 and 2012, respectively. Alcon is Pioneer’s largest product supplier: revenue derived from Alcon’s products accounted for 70.1%, 72.9% and 66.2% of total revenue in 2010, 2011 and 2012, respectively, followed by Temmler Werke’s products. We believe the risk is manageable, as we expect Pioneer to maintain strong relationships with key partners and to continue to diversify the product portfolio.

New product risk. We believe new products are one of the most important growth drivers for Pioneer and that implementation risk is present in effectively securing and adding new products that meet Pioneers’ product selection criteria. Furthermore, given fierce competition for new products, Pioneer may not be able to secure products at a reasonable price.

Contract renewal risk. The durations of most of Pioneer’s contracts with suppliers are between one and 10 years. Some contracts are automatically renewed if certain performance targets are met while others are renewed based on negotiations. If Pioneer fails to renew a key contract, revenue and profit could be negatively affected. In general, Pioneer has better leverage when negotiating contracts with small-to-medium-size companies than MNCs. Pioneer has had a supply agreement renewal rate of 100% over the past 10 years for products it has chosen to retain. We note that Pioneer renewed its service contract with Alcon for another five years in October 2013.

However it has voluntarily exited a number of product promotion contracts, Bestcall for example, due to changes in the industry environment.

Government policy remains the primary risk for the industry

Dependency on top suppliers’ products

Without new product additions, growth potential is limited

Losing a product contract may significantly lower Pioneer’s growth and profitability


UBS 5

Dependence on promotions partners. Pioneer relies on 967 promotions partners nationwide to conduct daily promotional activities and generate demand from hospitals and pharmacies. Agreements between Pioneer and the partners are primarily based on a profit split, which might be at risk if Pioneer’s competitors are able to offer better incentives.

Foreign exchange risk. Pioneer is strategically focused on imported products; some costs are denominated in euros and US dollars, but revenue is in Rmb. Therefore unhedged appreciation/depreciation of the Rmb against the euro and the US dollar would increase/decrease profits. However, all products supplied by Alcon are settled in Rmb and hence the majority of products procured by Pioneer are not affected by foreign exchange risk.

Asset impairment risk. Pioneer has invested in selected suppliers to enhance strategic relationships and to maximise the company’s chances of securing additional products from them. As of H113, Pioneer had 5.4% and 21.4% equity stakes in NovaBay and Q3, the holding company of QualiMed, respectively. Asset impairment may occur due to operational and market risks.

Valuation and basis for our price target CMS: a comparable company

Given its diverse service offerings, we believe there is no ‘perfect’ comparable group for Pioneer. We view listed third-party pharmaceutical promotions service provider, CMS, as the closest comparable company and use Hong Kong-listed pharmaceutical manufacturers as a reference.

Our price target is based on 16.0x 2014E PE, a 14% discount to CMS’ current trading multiple and a 20% discount to the 20x 2014E PE we apply to derive our price target for CMS. Despite Pioneer’s expected higher near-term earnings growth momentum, we believe it will continue to trade at a moderate discount to CMS in the near future. However, we believe the current valuation of 11x 2014E PE has overly discounted Pioneer’s lower revenue and lack of financial reporting history, while completely neglecting its expected robust near-term growth momentum. Based on our forecast 24% EPS growth in 2015 Pioneer is trading at 0.46x PEG, a 54% discount to the 1x PEG we normally associate with drug companies under our coverage.

In comparison, CMS has traded at an average 14.3x forward PE since IPO in September 2010. CMS underwent a significant re-rating in 2012, as we believe investors began to better understand the third-party promotions business model and confidence in management increased.

Pioneer relies on local promotions partners to drive product demand

Asset impairment may occur due to operational and market risks

We believe there is no ‘perfect’ comparable group for Pioneer


UBS 6

Chart 1: CMS PE band since 2010 Chart 2: CMS P/BV band since 2010

-30%

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5.07.09.0

11.013.015.017.019.021.023.025.0

Sep/10 Sep/11 Sep/12 Sep/13 Sep/14

PE Mean-SD Mean+SDMean EPS growth

Mean+SD 17.8x

Mean 14.3xEPS growth

Mean-SD 10.8x

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PB Mean+SD Mean-SD Mean ROE

ROE

Mean+SD 3.8x

Mean-SD 1.9x

Mean 2.8x

Source: Bloomberg, UBS estimates Source: Bloomberg, UBS estimates

Chart 3: PE versus earnings growth of Pioneer and Hong Kong-listed peer group (2014E)

Chart 4: P/BV versus ROE of Pioneer and Hong Kong –listed peer group (2014E)

CMS TRT Tech

SHP

Fosun

Sihuan

SBP CSPC

Shineway8.0

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2015 EPS Pioneer

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Shineway

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2014 PB

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Pioneer

Source: Bloomberg, UBS estimates Source: Bloomberg, UBS estimates


UBS 7

Table 1: Valuation comparison

Market cap Share price PE (x) ROE YoY PEG (x) Reuters code (US$ m) (LC) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2014E

PIONEER PHARMA 1345.HK 628 3.65 12.2 11.0 8.9 30.1% 21.8% 23.5% 32.3% 41.3% 23.8% 0.46

CHINA MEDICAL SYSTEM HOLDING 867.HK 2,223 7.14 22.8 18.5 15.2 19.5% 20.2% 19.0% 14.6% 22.8% 22.3% 0.83

SHANGHAI PHARMACEUTICALS-H 2607.HK 6,829 18.22 16.8 14.7 12.9 9.0% 9.5% 10.1% 12.1% 14.2% 14.3% 1.03

SHANGHAI FOSUN PHARMACEUTI-H 2196.HK 6,410 19.98 18.6 15.9 13.9 13.5% 14.6% 15.3% 5.6% 17.3% 14.0% 1.13

SIHUAN PHARMACEUTICAL HLDGS 460.HK 4,318 6.47 21.0 16.6 13.7 16.7% 18.8% 20.1% 38.0% 26.6% 21.2% 0.78 SINO BIOPHARMACEUTICAL 1177.HK 3,938 6.18 27.0 22.5 18.6 22.8% 23.7% 24.5% 26.9% 20.3% 20.4% 1.10

CSPC PHARMACEUTICAL GROUP LT 1093.HK 3,746 5.2 24.6 21.6 17.0 14.2% 17.6% 19.2% -46.1% 14.1% 27.0% 0.80

CHINA SHINEWAY PHARMACEUTICA 2877.HK 1,192 11.18 9.9 9.0 8.0 17.0% 17.0% 16.9% 13.5% 9.9% 12.3% 0.73 TONG REN TANG TECHNOLOGIES-H 1666.HK 1,974 23.9 25.5 20.7 16.1 17.2% 18.6% 21.5% 31.1% 23.3% 28.4% 0.73

HK manufacturing average 20.5 17.3 14.3 15.8% 17.1% 18.2% 11.6% 18.0% 19.7% 0.90

JIANGSU HENGRUI MEDICINE C-A 600276.SS 7,573 33.86 37.3 28.3 24.1 20.3% 20.4% 20.6% 14.5% 32.1% 17.1% 0.88

HUNAN ER-KANG PHARMACEUTI -A 300267.SZ 1,303 33.12 41.7 31.1 25.5 13.8% 15.8% 17.2% 24.1% 34.1% 21.9% 0.91 JIANGZHONG PHARMACEUTICAL-A 600750.SS 864 16.89 21.2 16.5 13.5 10.8% 12.6% 13.1% 10.2% 28.2% 22.6% 0.59

JINLING PHARMACEUTICAL-A 000919.SZ 815 9.83 17.6 15.4 13.5 12.3% 12.9% 13.5% 96.6% 14.3% 14.1% 1.08

JIANGSU KANION PHARMACEUTI-A 600557.SS 2,112 30.91 40.1 30.0 22.9 16.3% 18.1% 19.4% 35.1% 34.0% 30.5% 0.88 JIANGSU NHWA PHARMACEUTICA-A 002262.SZ 1,317 24.45 42.5 33.0 25.2 21.8% 23.2% 24.1% 34.8% 28.9% 30.8% 1.14

SHENZHEN SALUBRIS PHARM-A 002294.SZ 3,646 33.92 26.3 21.6 17.0 26.7% 27.9% 27.6% 32.3% 21.8% 27.5% 0.99

ZHEJIANG NHU CO LTD-A 002001.SZ 2,413 20.22 15.6 12.2 9.2 14.6% 17.5% 18.9% 10.5% 28.4% 32.1% 0.43

A-share manufacturing average 30.3 23.5 19.6 17.1% 18.5% 20.1% 32.3% 27.7% 26.1% 0.86

Note: Prices as of 6 December 2013. Source: Bloomberg, company data, UBS estimates


UBS 8

DCF analysis (UBS VCAM) Using our base-case assumptions, UBS’s VCAM model suggests a valuation of HK$5.70, 7.1% above our HK$5.32 price target, which we derive from our forecast PE and PEG ratios. We explicitly forecast revenue growth for Pioneer up to 2017 and assume revenue growth will decline to 11.6% by 2023 and to 4.0% (terminal growth) by 2037. We think our projections are reasonable given IMS Health’s (IMS) estimated revenue CAGR of around 17% over 2011-16 for the Chinese healthcare market, and China’s real GDP growth of 7-8% up to 2020, as projected by UBS economists. We assume Pioneer’s terminal EBIT margin will stabilise at 4.8% by 2038.

Table 2: UBS-VCAM valuation summary for Pioneer Pharma [1345.HK]

Relative year +1E +2E +3E +4E +5E +6E +7E +8E +9E +10EFiscal year 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E

EBIT 266 364 457 559 665 602 646 684 715 736D&A* 2 4 10 16 22 26 30 34 39 43 Capex (24) (115) (103) (102) (93) (86) (93) (99) (104) (108)Chg. in wkg. cap. (76) (97) (113) (116) (139) (114) (124) (132) (139) (143)Tax (operating) (28) (38) (48) (59) (70) (63) (68) (72) (75) (77)Other (9) (10) (12) (13) (14) (13) (14) (15) (16) (17)Free Cash Flow 132 107 192 285 372 352 377 401 420 433

growth -18.8% 78.8% 48.6% 30.4% -5.5% 7.3% 6.2% 4.8% 3.3%

Valuation Long Term Assumptions WACCPV of explicit cash flow 3,913 Relative year +10E +15E +25E Risk free rate 4.50%PV of terminal value (yr. 25) 1,107 Sales growth 11.6% 7.7% 4.0% ERP 5.0%Enterprise Value 5,019 EBIT margin 0.136 0.091 0.048 Beta 0.73

% terminal 22% Capex/sales 2.0% 1.4% 0.8% Debt / equity** 12.6%Associates & other 32 ROIC 27.1% 19.2% 11.1% Marg. tax rate 25.0% - Minority interests 2 Cost of

equity 8.1%Surplus cash** 1,107 Cost of debt 6.4% - Debt*** 494 Valuation-Implied Metrics WACC 8.1%Equity value 5,662 Fiscal year 2013E 2014E 1-yr Fwd.Shares outstanding [m] 1,333.3 18.7x 13.7x 13.9x Terminal AssumptionsEquity per share (HK$/sh) 5.40 EV / EBIT 18.9x 13.8x 14.1x VCH (years) 25Cost of equity 8.1% 2.6% 2.1% 2.2% Impl. FCF gr. 1.8%Dividend yield 0 P / E (PV) 23.0x 16.3x 16.6x Incr. ROIC -23.2%1-year Price Target (HK$/sh) 5.70 24.2x 17.2x 17.5x EV / EBITDA 9.3x

Figures in Rmb m, unless noted otherwise.* Depreciation and non-goodwill amortization** The portion of cash not required to maintain operations*** Assumes market value of equity and includes market value/seasonal adjustments for debt and debt-deemed obligations.

EV / EBITDA

FCF Yield

P / E (Target)

Source: UBS estimates

UBS’s VCAM model suggests a valuation of HK$5.70, 7.1% above our HK$5.32 price target


UBS 9

Upside/downside scenarios Upside scenario—valuation of HK$7.00: we assume: 1) Pioneer

successfully in-licenses two new major products; 2) gains approval and launches Neutrophase in early 2014; and 3) the Alcon business performs better than expected. These could drive well above 40% earnings growth in 2014 resulting in a 2014E PE of 20x.

Downside scenario—valuation of HK$3.70: we assume: 1) Pioneer is unable to secure major new product in-licensing; 2) Neutrophase approval/launch in China is delayed to 2015; and 3) major promotions drugs and Alcon’s drugs face pricing pressure. As a result, Pioneer may only record 20% earnings growth in 2014 and the stock would continue to trade at a discount at 13x 2014E PE.

Sensitivity analysis Our analysis indicates margin improvement will have a bigger impact on our earnings estimates than higher revenue growth. In 2014 we estimate a 2% gross margin improvement, or 2% additional revenue growth, would improve net profit to shareholders 8% or 1%, respectively.

Table 3: Sensitivity analysis of 2014E net profit

2014 revenue growth YoY

22.0% 24.0% 26.0% 28.0% 30.0%

26.9% 285 288 292 295 299

28.9% 312 316 320 324 328

30.9% 340 344 348 353 357

32.9% 367 372 377 382 386

2014

E Gr

oss M

argi

n

34.9% 395 400 405 411 416


Table 4: Changes in 2014E net profit to shareholders

2014E revenue YoY

22.0% 24.0% 26.0% 28.0% 30.0%

26.9% -18.3% -17.3% -16.3% -15.3% -14.3%

28.9% -10.4% -9.3% -8.2% -7.0% -5.9%

30.9% -2.5% -1.3% 0.0% 1.3% 2.5%

32.9% 5.4% 6.8% 8.2% 9.5% 10.9%

2014

E Gr

oss m

argi

n

34.9% 13.3% 14.8% 16.3% 17.8% 19.3%


Our analysis indicates margin improvement will have a bigger impact on our earnings estimates than higher revenue growth


UBS 10

Competitive analysis Assessment of market attractiveness Pharmaceutical promotions

China’s third-party pharmaceutical marketing, promotions and channel management service industry is highly specialised. According to Frost & Sullivan, market growth has significantly outpaced the overall pharmaceutical market. China’s pharmaceutical market recorded a 25.4% sales CAGR in 2008-12 and generated sales of Rmb845bn in 2012. In comparison, the third-party services market recorded a 40.1% sales CAGR from 2008-12 with sales of Rmb9.7bn in 2012.

While market size of the latter in terms of revenue was only c1% of the overall pharmaceutical market in 2012, the growth rate has been much faster. Frost & Sullivan forecasts the marketing, promotions and channel management service market to record a CAGR of 31.2% in 2013-17 compared with 18.5% for the overall pharmaceutical market in the same period.

Chart 5: China pharmaceutical market size Chart 6: China pharmaceutical marketing, promotions and channel management service market size

342 447 558 681 845

1,022 1,216

1,447 1,708

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Market size (LHS) YoY growth (RHS)

(Rmb, bn)

2,509 4,054 5,611 7,764 9,654

12,647 16,567

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Source: Frost & Sullivan Source: Frost & Sullivan

While suppliers are both international and domestic pharmaceutical companies, we believe the main focus for third-party pharmaceutical marketing, promotion and channel management service providers at the current stage of market development remains international companies. As a result, growth of the third-party pharmaceutical marketing, promotion and channel management service industry is highly correlated with growth of imported medical products.

Third-party service market has outpaced the overall pharmaceutical market

Growth of the third-party service industry is highly correlated with growth of imported medical products.


UBS 11

Chart 7: China pharmaceutical import market size Chart 8: China imported medical device market size

26.8 32.6 40.8 49.460.3

74.289.7

108.6

131.9

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100120140160180

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The role of a third-party pharmaceutical marketing, promotions and channel management service provider

A service provider in China specialises in driving pharmaceutical product demand via marketing strategies, educating individual physicians (or detailing) and sub-distributor management. The marketing and promotional activities aim to improve the understanding and awareness of a product among physicians. The service provider is usually contracted by a pharmaceutical manufacturer and rewarded based on demand generated.

Chart 9: Business model of a third-party pharmaceutical marketing, promotions and channel management service provider

The serviceprovider

Distributors

Promotion partners

Hospitals/Pharmacies

Patients

Physicians/Key opinion

leaders

Flow of Products

Flows of procurement information

Flow of Products information

Source: Company data

Product promotion is the core value-added service

Third-party service providers in China usually secure marketing, promotional and sales rights to pharmaceutical products from suppliers and generate revenue from sales to distributors, who then on-sell to hospitals. Thus the service provided includes: 1) managing the product registration process at the request of the supplier; 2) provincial tenders and individual hospital formulary; 3) marketing and promotions; and 4) product distribution (through pharmaceutical distributors such as Sinopharm) and accounts receivable collection.

A service provider in China specialises in driving pharmaceutical product demand

Drive product demand is core value of third-party service providers


UBS 12

Product marketing and promotions, including marketing strategy and pharmaceutical detailing, are the core competency and the most value-added services that pharmaceutical manufacturers consider when selecting a third-party service provider.

Revenue models: supply and representative models

The third-party service provider captures value from two different models: 1) a supply model; and 2) a representative model.

(1) Supply model. The value is captured in the gross margin negotiated for a product. Most third-party promotions service providers, including Pioneer and CMS, take on inventory and accounts receivable and book sales to distributors as revenue, while COGS reflects the purchase price of products from suppliers.

(2) Representative model. Third-party promotions service providers are compensated based on a commission sales model.

Both models affect the top line and expenses booked by suppliers and third-party service providers in different ways. However, they are identical in terms of the economic split between suppliers and service providers.

Growth drivers

We expect more international pharmaceutical manufacturers to outsource marketing and sales to third-party promotions service providers

(1) We expect international pharmaceutical companies to outsource more of their non-core products in a bid to extend product life cycles.

(2) They can better manage compliance requirements by engaging a third-party service provider.

(3) Companies may use third-party service providers to penetrate lower-tier cities in order to improve cost-effectiveness and efficiency.

Small-and-medium-size international pharmaceutical companies need to leverage third-party service providers in China due to:

(1) A lack of resources to develop their own marketing and promotional teams in China.

(2) Insufficient internal capability to market and promote specialised products, which require professional academic detailing and in-depth local market knowledge of policies.

(3) A desire to expand market coverage in a relatively short period in order to maintain a competitive edge over competitors.

Third party service provider revenue models: Supply model or Representative model

Three major growth drivers for service providers: 1) product life cycle extension; 2) cost cutting; and 3) network effect


UBS 13

Leading third-party service providers should continue to consolidate the market

We expect leading third-party service providers to continue to: 1) enhance their marketing, promotional and sales capability; 2) leverage their networks; and 3) engage in more M&A.

Pioneer’s competitive strengths The second-largest pharmaceutical marketing, promotions and channel management service provider in China

Based on Frost & Sullivan data the top-five, third-party pharmaceutical marketing, promotions and channel management service providers had a combined market share of 44.6% in 2012. Pioneer was the second-largest service provider with a market share of 9.4% based on the wholesale value of products sold in 2012. This compares with a market share of 8.7% in 2011. The increase is mainly attributed to strong organic revenue growth and new product additions.

Chart 10: Third-party pharmaceutical promotions service market share breakdown by company

Chart 11: Comparison of revenue growth: Pioneer vs. CMS vs. NT Pharma

16.7% 18.4%

8.7% 9.4%8.5% 7.7%

14.7%5.0%

3.8%4.1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2011 2012China Medical Systems Pioneer PharmaEddingpharm NT PharmaRxmidas

571 718 959887

13601778839

1140479

0500

100015002000250030003500

2010 2011 2012

Pioneer Pharma China Medical Sy stems NT Pharma

(Rmb, m)

Note: The top-five companies’ combined market share contracted due to NT Pharma’s share falling from 14.7% in 2011 to 5.0%. Source: Company data

Source: Company data (CMS and NT Pharma annual reports)

Nationwide marketing, promotional and distribution coverage

Pioneer’s marketing and promotional team comprises 219 in-house staff as well as 967 third-party promotional partners. Collectively Pioneer’s service network covered 21,589 hospitals and other medical institutions as of H113. The company’s extensive network and strong sales track record have ensured a strong brand reputation, which not only drives organic growth but helps attract new opportunities from overseas suppliers.

Table 5: Pioneer’s distributors

Distributors 2010 2011 2012 H113

Number of distributors 522 566 716 689

Number of distributors added 183 286 186 92

Number of distributors that are now not partners 139 136 213 225 Total number of distributors 566 716 689 556


The larger, the better

The company’s extensive network and strong sales track record have ensured a strong brand reputation


UBS 14

Chart 12: Pioneer’s hospital and other medical institutions’ coverage

Chart 13: Pioneer’s distributors

1,092

17,839

49,411 52,471

79,00485,420

1,0921,0681,0102,6582,6362,5692,361

10,3486,7614,273

-

20,000

40,000

60,000

80,000

100,000

2010 2011 2012 1H13Class III hospitals Class II hospitalsClass I hospitals and other medical institutions Pharmacies

Source: Company data Source: Company data

Extensive industry key opinion leader network

Through long interaction and collaboration, Pioneer has established a network of 1,200+ key opinion leaders (KOL, medical professionals that excel and have influence on the therapeutic areas they specialise in). KOL not only offer academic guidance and insights but also act as early adopters of products promoted by Pioneer. We believe many physicians consider KOL prescription behavior as best practice in their field and follow suit.

Cost-effective business model

Pioneer’s promotional model leverages the broad experience and geographic reach of its promotions partners and enables Pioneer to market and promote a diverse range of healthcare products across China. Pioneer’s 219 in-house marketing and promotional employees are primarily responsible for strategy and training. Day-to-day operational activities are mainly carried out by the promotional partners who are located around the country. As of H113, there were 967 third-party partners assisting Pioneer with its promotional work.

One-stop service platform

Pioneer provides a one-stop platform service to international pharmaceutical and medical companies. We believe there is significant demand from small-and-medium-size pharmaceutical/medical companies for a package that includes market access and operational services as: 1) China’s healthcare market is one of the most attractive in the world with significant demand; 2) they lack local presence and expertise to execute a successful entry strategy and subsequent marketing and promotional plans; and 3) it is financially prudent for overseas suppliers to use third-party service providers in non-core markets.

We believe many physicians consider KOL prescription behavior as best practice in their field and follow suit

Pioneer provides a one-stop platform service to international pharmaceutical and medical companies


UBS 15

With an established nationwide promotional network, a solid brand image and relationships with business partners, we believe Pioneer possesses the operational leverage to quickly ramp up sales of products in its portfolio. Product additions can come from existing suppliers who are satisfied with the level of collaboration (eg, Alfa Wassermann offered Pioneer its second product, Neoton, after the success of its Fluxum partnership), or by attracting new suppliers. This creates meaningful incremental revenue with minimum incremental expenses, in our view.

Product sourcing capability to drive long-term growth

Ability to secure product rights is a key strength

We believe Pioneer is one of only a handful of companies in China that are capable of providing promotional and sales services to overseas manufacturers on a national level. Pioneer is also one of the few companies in China that has a track record of successfully securing product rights from overseas manufacturers and selling the products in China. As such, it would be difficult for a new entrant without prior experience and relationships with overseas manufacturers to establish itself and start bidding for product rights.

New products to drive sustainable growth

In addition to Pioneer’s established products (such as Alcon’s series of ophthalmic products, and Fluxum and Difene) that have enabled sustained healthy revenue growth, new products in 2011-12 (Neoton, Budesonide and Sabutamol Easyhaler as well as a number of medical device products) should be the key future growth drivers. Pioneer has a solid pipeline of products currently being registered that should continue to support strong growth in the longer term. The above does not take into account the potential that Pioneer may continue to sign up products that are already registered in China and can be marketed immediately.

Focus on small-and-medium-size suppliers

While Alcon (acquired by Novartis in 2011) remains the largest supplier, Pioneer has focused on partnering small-and-medium-size international pharmaceutical and medical device companies. Compared to large MNCs, the former have limited presence and know-how of the China market and are more likely to depend on third-party service providers. Thus we expect Pioneer to have:

(1) Better contract terms. As small-and-medium-size international suppliers rely on Pioneer to handle each step of the process required to sell their products in China, Pioneer is likely to attain better contract terms such as higher margins, performance-based rebates and longer credit terms.

(2) More academic support from suppliers. In comparison to MNCs, small-and-medium-size suppliers have relatively concentrated product portfolios. Pioneer should receive more support from the latter, eg, small-and-medium-size suppliers are more likely to supply KOL.

Product characteristics decide growth and profitability


UBS 16

(3) Deeper partnership rather than transaction-based relationship with suppliers.

— Long term. Given the dependency of suppliers and the nature of the relationship, we think Pioneer’s contracts are more stable than those with MNCs and more akin to a partnership. Of the company’s current eight major suppliers, two have been supplying products for over 16 years (Alcon and Temmler Werke) and one for almost 10 years (Alfa Wassermann). Pioneer has had a supply agreement renewal rate of 100% over the past 10 years for products that Pioneer has chosen to retain. However, Pioneer did voluntarily exit certain product promotion contracts due to changes in the industry environment (such as Bestcall due to restrictions on the use of antibiotics in China).

Table 6: Long-term relationships with main suppliers

Supplier Relationship between Pioneer and supplier

Alcon 17 years, renewed 13 times

Temmler 16 years, renewed in 2007 for 10-year agreement, renewed for another two years in 2009

Alfa Wassermann Nine years, renewed six times

Fleet Six years, renewed twice Covex Four years since 2009, renewed in 2012

Orion Two years

Polichem Two years since 2011 Wieland Dental One year


— New product additions. Based on its solid track record, we believe Pioneer will obtain additional or new-generation products from existing suppliers. For example Alfa Wassermann, the supplier of Fluxum since 2004, granted Pioneer the marketing, promotional and sales rights in 2012 for a second product, Neoton, targeting certain designated hospitals in five provinces, municipalities and autonomous regions in China.

Furthermore, Pioneer has maintained an uninterrupted business relationship with Alcon since 1996. From 1 January 1997, Pioneer has added 10 Alcon products and currently has 20 Alcon products in its portfolio.

Focus on fast-growing segments of the market with a systematic product selection process

Pioneer primarily focuses on the imported pharmaceutical products and medical device markets, and small-and-medium-size manufacturers. These markets grew faster than the overall China pharmaceutical market in 2007-12. According to Frost & Sullivan, the imported pharmaceutical and medical device markets’ revenue could grow 21.1% and 20.5% in 2013-17, respectively, faster than the overall pharmaceutical market which Frost & Sullivan expects to record an 18.5% CAGR in 2013-17. This is based on:

Of the company’s current eight major suppliers, two have been supplying products for over 16 years

We believe Pioneer will obtain additional or new-generation products from existing suppliers

Pioneer primarily focuses on the imported pharmaceutical products and medical device markets, and small-and-medium-size manufacturers


UBS 17

(1) Imported healthcare products are generally perceived to be of superior quality compared to locally manufactured products.

(2) Imported healthcare products are becoming more affordable in China. Furthermore, imports manufactured by small-and-medium-size overseas manufactures are generally more affordable in China than similar products manufactured by large international companies.

(3) Product selection and sourcing criteria:

— Clinical features: superior clinical profile; improved quality; or formulation and higher imitation barriers.

— Marketing considerations: limited competition; complements Pioneer’s existing product portfolio; track record in other markets or traits that are attractive in the China market.

— Regulatory environment: fulfilled regulatory requirements; lower product registration costs and risks; and less affected by price controls and tender requirements.

— Supplier profile: Europe and North America.

Chart 14: Breakdown of the imported pharmaceutical market in China

Chart 15: Breakdown of the imported medical device market in China

14.6 17.6 21

.4 25.4 32

.6 39.9 48

.1 58

69.9

84.2

12.2 15.1 19

.4 24 27.7 34

.2 41.6 50

.6 62

75.4

0102030405060708090

2008

2009

2010

2011

2012

2013

E

2014

E

2015

E

2016

E

2017

E

Top 50 largets Pharma Small/Medium-sized Pharma

(Rmb, bn)

19.9 25

.4 30.9 37

.2 42.4 48

.1 56.9 67

.1 80.3

95.9

11.4 15 19

.2 24.2 29

.8 35.9 43

.1 53.8 66

81.1

0

20

40

60

80

100

120

2008

2009

2010

2011

2012

2013

E

2014

E

2015

E

2016

E

2017

ETop 20 MediTech Small/Medium-sized MediTech

(Rmb, bn)


Experienced and stable management team

Pioneer’s senior management has an average 15 years of experience in sales, marketing and business development in the Chinese healthcare industry. Besides Mr Li Xinzhou (Chairman and CEO), Mr Zhu Mengjun (CFO) and Ms Huang Wenfei (Vice-President in charge of the Alcon business) have been with the company since 1998.

Superior quality and becoming more affordable


UBS 18

Management strategy Organic growth

Management plans to grow organically, driven by market demand for imported pharmaceuticals and medical products as well as Pioneer’s deeper penetration of hospitals and pharmacies.

Expand hospital and pharmaceutical coverage. Management expects to continue to attract more promotions partners to broaden and deepen its penetration of medical institutions and retail pharmacies, and increase its in-house marketing and sales personnel.

Incrementally add services/designated markets for existing products. Management plans to expand services and designated markets for a number of its products.

New product additions to spur growth

While new product additions are difficult to forecast, management said it expects to add two to three new products each year for the next few years. As Pioneer mainly uses its promotions partners for direct hospital detailing (it can appoint partners based on different therapeutic specialties), Pioneer does not limit itself to a particular therapeutic area.

Margin to improve driven by focus on the promotions business

Margin pressure can be caused by regulatory price cuts. Due to its strategic focus of shifting towards higher-margin comprehensive marketing promotion and channel management services and reducing revenue contribution from lower-margin co-promotion and channel management services, we expect the company’s blended gross margin to expand.

Co-promotion and channel management: the Alcon partnership

We expect stable margins for Alcon products due to:

(1) After the National Development and Reform Commission (NDRC) reduced maximum retail prices for multiple ophthalmology pharmaceuticals, including Alcon’s ophthalmology products (Tobrex ophthalmic solution and ointment) in March 2011, we expect no near-term price cuts for ophthalmology products and the NDRC will start the next round of price cuts only after releasing a new version of the Reimbursement Drug List (RDL).

(2) Alcon will continue to launch new ophthalmic pharmaceutical products, and a product mix shift may increase Pioneers’s profitability.

Comprehensive marketing, promotions and channel management services: small-and-medium-size pharmaceutical/medical device suppliers

While pressure from government price cuts will continue, Pioneer could mitigate the impact through product diversification. Management also plans to expand its portfolio of high margin medical device products to protect/improve the profit margin of its promotion business.

Management plans to grow organically

Product additions decide growth acceleration

Stable margins for Alcon products


UBS 19

Company analysis Financial highlights. Pioneer recorded a revenue CAGR of 29.6% and a net

profit CAGR of 57.3% in 2010-12. We forecast a revenue CAGR of 25.3% and net profit growth of 32.2% in 2013-15. We expect an average 30.8% gross margin and a 21.3% net margin in the same period.

Business model, service and product offerings. Pioneer secures marketing, promotional and sales rights in China from manufacturers of pharmaceutical products. It generates revenue from the sale of those products to distributors, who then sell the products to hospitals. This contrasts with the approach in more developed markets where service providers typically operate a fee-for-service model in which they are remunerated based on a pre-determined percentage of total sales generated.

Pioneer’s business model is largely driven by demand from upstream pharmaceutical product suppliers—small-and-medium-size overseas pharmaceutical companies in particular that do not have a sales force, or are not capable or interested in managing a sales network in China because of the cost and risk profile. Therefore, a service provider with proven capabilities and a consistent track record of offering one-stop solutions is better positioned to attract suppliers, in our view.

Therapeutic focus and key products. Due to its role as a service provider and with a business model that relies on promotions partners, Pioneer has a diversified product portfolio and therapeutic focus. The company carries a broad range of products covering ophthalmology, pain management, cardiovascular, respiratory, gastroenterology, immunology and other therapeutic areas (TAs).

Product insurance coverage and pricing controls. Of Pioneer’s pharmaceutical products, 16 are included in the National Insurance Catalogue and subject to price controls at the national level, and 11 products are included in the relevant provincial insurance catalogues and subject to price controls in the respective province, municipality or autonomous region.

Sales and marketing. Pioneer has a hybrid in-house marketing and outsourced promotion partner structure for sales and marketing, which we believe is more flexible in terms of weathering the business cycle.

R&D and manufacturing. Pioneer does not have in-house R&D and manufacturing functions.

Services provided Depending on a supplier’s capability and capacity in China, Pioneer provides two types of service: 1) comprehensive marketing, promotions and channel management; and 2) co-promotion and channel management services.

Chart 16: Historical net profit growth

96

186

70

0

50

100

150

200

2010 2011 2012

0.0%20.0%40.0%60.0%80.0%100.0%

Net Profit (LHS) YoY growth (RHS)

(Rmb, m)


Pioneer has a diversified product portfolio and therapeutic focus


UBS 20

Chart 17: Revenue breakdown Chart 18:Gross profit breakdown Chart 19: Contribution of promotions business as a percentage of total

171 194 324 478 637 829 400 523 635

768 934

1,130

0

500

1,000

1,500

2,000

2010 2011 2012 2013E 2014E 2015EPromotion Channel management

(Rmb, m)

94 105 203 254 335

431 72 91

104124

151

182

0

200

400

600

800

2010 2011 2012 2013E 2014E 2015EPromotion Channel management

(Rmb, m)

0%10%20%30%40%50%60%70%80%

2010 2011 2012 2013E 2014E 2015ERevenue Gross profit

Source: Company data, UBS estimates Source: Company data, UBS estimates Source: Company data, UBS estimates

Table 7: Key differences between Pioneer’s two services

Comprehensive marketing, promotions and channel management services Versus Co-promotion and channel management services

Suppliers receiving the services Comprehensive marketing, promotions and channel management services

Formulating marketing strategies Pioneer is responsible Supplier is responsible Marketing and promotion personnel Pioneer’s sales force designs marketing strategy and

execute sales activity Pioneer’s sale force executes marketing and promotion

activities in designated customers according to Suppliers’ marketing strategy

Market coverage Nationwide or designated provinces based on contract Usually customers not covered by suppliers’ in-house team

Marketing and promotion activities Academic promotion and sales force training Focus on hospital visiting; supplier provides training Product registration and renewal May provide upon request from supplier No registration and related services

Gross margin Usually higher than 50% Usually teens

SG&A expenses Usually comparable to pharma manufacturers Much lower


Co-promotion and channel management

Pioneer provides co-promotion and channel management services to Alcon and acts as the sole provider of channel management services for all of Alcon’s ophthalmic pharmaceutical products sold in China (excluding ophthalmic equipment, instruments, consumables and contact solutions). For seven ophthalmic products, Pioneer provides a co-promotion service (since January 2010 for six products and an additional product since January 2013) that targets hospitals and pharmaceuticals that are not covered by Alcon’s in-house marketing and promotions team.

Pharmaceutical promotions

Pioneer provides comprehensive marketing, promotions and channel management services to small-and-medium-size overseas suppliers, and is generally the sole provider in China of relevant products. Comprehensive promotional services focus on and include: 1) managing the product registration process at the request of a supplier; 2) formulating marketing and promotional strategies; 3) educating individual physicians on the clinical uses, benefits, side effects and other clinical aspects of products, 4) organising academic conferences, seminars, symposiums and other promotional activities; 5) appointing and managing third-party promotional partners; and 6) channel management.

Pioneer provides co-promotion and channel management services to Alcon

Pioneer provides comprehensive marketing, promotions and channel management services to small-and-medium-size overseas suppliers


UBS 21

Product analysis Product portfolio

Pioneer’s on-market product portfolio consists of 33 pharmaceutical products and medical devices that cover ophthalmology, pain management, cardiovascular, respiratory, gastroenterology, immunology and other therapeutic areas.

Analysis of major products

Difene: diclofenac sodium dual-release enteric-coated capsules

Difene is a diclofenac sodium dual-release enteric-coated capsule, manufactured by Temmler Werke of Germany. It is used to treat arthritis and other inflammatory rheumatic diseases of the spine, pain related to degenerative diseases of joints and the spine, trauma and post-operative swelling or inflammation, dysmenorrhea and post-operative pain or inflammation caused by surgery. According to marketing materials provided by Temmler Werke, Difene has an innovative and unique multiple unit formulation and provides improved safety and tolerability. Difene’s unique dual-release formulation is patented in Europe, the US and many other countries.

Diefene recorded a 2010-12 revenue CAGR of 17.6%, and revenue grew 43.9% YoY in 2012 in China. We attribute the faster-than-market growth to: 1) Difene being listed in provincial essential drug list (EDL) supplementary catalogues; 2) Pioneer’s broad coverage of retail pharmacy stores and basic medical institutions; and 3) Difene’s product quality. Difene took No. 2 market share in 2010-12; Votalin has the dominant market share at c38% due to its originator status. We expect Difene to maintain and even grow market share in 2012-15 based on Pioneer’s stepped-up efforts in provincial tenders, local insurance coverage and channel coverage, as well as operational synergies with Alcon’s OTC products.

Chart 20: Market share of diclofenac products (2012) Chart 21: Revenue growth of Difene (2010-15E)

19%

14%

14%5%

1%

47%

Yingtaiqing (Simcere) Difene (Temmler Werke) Votalin (Novartis)

Diclac (Sandoz) Voren (Yung Shin) Other

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

020406080

100120140160180200

2010 2011 2012 2013E 2014E 2015E

Revenue (LHS) YoY growth (RHS)

Source: Frost & Sullivan Source: Company data, UBS estimates

Portfolio of 33 pharmaceutical products

We expect Difene to maintain and even grow market share in 2012-15


UBS 22

Fluxum: parnaparin

Fluxum is parnaparin, a low molecular weight heparin product manufactured by Alfa Wassermann of Italy. Fluxum is used in anticoagulant therapy for the prophylaxis and treatment of venous thrombosis and its extension, for prevention of post-operative deep venous thrombosis and pulmonary embolism and for the prevention of clotting in arterial and cardiac surgery. Alfa Wassermann launched Fluxum in Italy in 1993. According to Frost & Sullivan, Fluxum is one of the fastest-acting heparin products for the treatment and prophylaxis of deep-vein thrombosis.

Pioneer’s sales of Fluxum recorded a 2010-12 revenue CAGR of 55.2%, and revenue grew 67.0% YoY in 2012. We attribute the robust growth to: 1) Fluxum’s independent pricing status; 2) the marketing and sales strategy focus on second-tier hospitals and cities, which avoids direct competition with market-leading products in the low molecular weight heparin market; and 3) Fluxum’s extensive clinical study data and long on-market track record.

Compared to other imported low molecular weight heparin products such as Fraxiparine (marketed by GSK in China) and Clexane (marketed by Sanofi in China), Fluxum has a much smaller market share. However, we expect Flumum to grow share in 2012-15 as: 1) sales of Fraxiparine may be negatively affected by the recent anti-bribery drive in China; GSK is being investigated by the Chinese government and this may slow down its direct sales efforts; and 2) Pioneer’s more flexible marketing and promotions model may broaden Fluxum’s market coverage from second-tier markets to the top-tier market.

Chart 22: Market share of low-molecular-weight heparin products (2012)

Chart 23: Revenue growth of Fluxum (2012-15E)

30%

26%15%

8%

6%

15%

Fraxiparine (GSK) Wanmaishu (CS Bio)Clexane (Sanofi-Avenis) Fluxum (Alfa Wassermann)Li Mai Qing (Zhaoke Pharma) Other

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

0

20

40

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80

100

120

140

160

2010 2011 2012 2013E 2014E 2015E

Revenue (LHS) YoY growth (RHS)(Rmb,m)


Fluxum achieved a 2010-12 revenue CAGR of 55.2%, and revenue grew 67.0% YoY in 2012


UBS 23

Neoton: creatine phosphate sodium

Neoton is creatine phosphate sodium for injection and is manufactured by Alfa Wassermann of Italy. Neoton is primarily used to treat ischemic heart diseases and cardiomyopathy resulting from various causes. Neoton is added to cardioplegia during cardiac surgery to protect cardiac muscles and is also used to treat metabolic disorders in myocardial ischemic states. Neoton has been patented in Europe and the US.

Creatin phosphate is the one of the best-selling product categories in China with market potential of over Rmb10bn, in our view. We believe Neoton, as a premium and imported product, has clear quality and brand differentiation and hence robust growth opportunities via Pioneer’s dedicated marketing and sales investment and execution.

Chart 24: Market share of creatine phosphate products (2012) Chart 25: Revenue growth of Neoton (2012-15E)

31%

24%

24%

12%

4% 5%

Jin Bo (BJ Lixiang Pharma) Wei Jia Neng (Qili Pharma)NaSiDaXin (Yinglian Bio) Lai Bo Tong (Bo Lai Pharma)Neoton (Alfa Wasserman) Other

0%

50%

100%

150%

200%

250%

300%

350%

0

10

20

30

40

50

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70

2012 2013E 2014E 2015E

Revenue (LHS) YoY growth (RHS)


Creatin phosphate is the one of the best-selling product categories in China


UBS 24

Table 8: Summary of key products under promotion services

Product (EN) Product (CN) Indication Therapeutic area Supplier

Contract signed Geographic coverage Market size Competition

Difene (diclofenac sodium dual-release enteric-coated capsules)

戴芬（双氯芬酸钠双释放肠溶胶囊）

Arthritis or pain or inflammation caused by surgery

Pain mgmt. Temmler Werke, Germany

1997 China nationwide; some south-eastern Asian countries; 40,800 hospitals and pharmaceutics in 31 provinces and 407 cities

The market for oral diclofenac sodium in China was about Rmb885m in 2012 with a CAGR of 15.5% in 2010-12

The 2nd most popular product with market share of 14%

Fluxum (parnaparin) 希弗全（帕肝素）

Treatment and prevention of blood clots in the veins and arteries

Cardiovascular Alfa Wasserman, Italy

2004 China nationwide The market for low molecular weight heparin products was Rmb1,304m with a CAGR of 24.4% in 2010-12

The 4th best-selling product with market share of 8%

Neoton (creatine phosphate sodium)

里尔统（注射用磷酸肌酸）

Cardiac protection, treatment for the disorder of cardiac metabolism

Cardiovascular Alfa Wasserman, Italy

2012 Designated hospitals within five provinces, municipalities and autonomous regions in China

The market for cardiac muscle protecting drugs was Rmb250m with a CAGR of 14.5% in 2010-12

The ninth best-selling product with market share of 2.7%

Budesonide Easyhaler (budesonide powder for inhalation)

沐而畅茜乐（布地奈德吸入粉剂）

Treatment of asthma Respiratory Orion, Finland

2011 China nationwide Mild competition

Salbutamol Easyhaler (salbutamol sulphate powder for inhalation)

顺而忻茜乐（硫酸沙丁胺醇吸入粉剂）

Treatment of bronchospasm Respiratory Orion, Finland

2011 China nationwide

The market for budesonide and salbutamol was Rmb1,509m with a CAGR of 44.3% in 2010-12 Mild competition

Polimod solution (pidotimod)

普利莫 (匹多莫德）

Immunostimulant in respiratory tract and other urinary tract infections

Immunology Polichem, Switzerland

2011 Guangdong, Hainan, Shaanxi, Zhejiang, Hunan, Hubei, Liaoning and Fujian provinces; over 50 hospitals and 19 cities

The market for pidotimod was Rmb739m with a CAGR of 12.1% in 2010-12

The 4th best-selling pidotimod product with a 13% of market share

Macmiror Complex (nifuratel and nystatin vaginal suppositories)

麦咪康帕（硝呋太尔制微素阴道栓剂）

Vaginal infections Gynaecology Polichem, Switzerland

2011

Macmiror (nifurateltablet)

麦咪诺（硝呋太尔片）

Vaginal infections Gynaecology Polichem, Switzerland

2011

China nationwide; over 60 hospitals in 11 provinces and 31 cities

The market for oral nifuratel was Rmb160m with a CAGR of 11.5% in 2010-12

The 4th best-selling oral nifuratel with a market share of 19%

Vinpocetin API 长春西汀原料药 Treatment of diseases such as dementia

Pharmaceutical raw materials

Covex, Spain 2009 China nationwide; sold to 18 pharmaceutical manufacturers

The market for antidementia drugs was Rmb220m with a CAGR of 23.8% in 2010-12

The 6th best-selling antidementia drug with a market share of 5.7%

Zenotec CAD/CAM series

Zenotec牙科系统 Digital cutting equipment and digital scanners

Dental equipment

Wieland, Germany

2012 China nationwide n.a N.A.

20 ophthalmic pharmaceutical products

20 种眼科药品 Ophthalmology Ophthalmology Alcon, United States

1996 China nationwide; over 60,000 hospitals and pharmacies in 31 provinces and 407 cities

N.A.

Tobradex ophthalmic suspension

典必殊液 Used to prevent and treat eye infection and inflammation

Ophthalmology Alcon, United States

1996 Over 13,000 hospitals According to Alcon, Tobradex is one of the most commonly used in clinical practices worldwide and in China

N.A.

Tobrex ophthalmic solution

托百士液 Topical antibiotic for the treatment of external bacterial infections of the eye caused by susceptible organisms

Ophthalmology Alcon, United States

1996 over 15,000 hospitals Can be used for children; the 2nd highest market share of 11.2%



UBS 25

Product pipeline Table 9: Summary of key pipeline products

Product Product (CN) Component Indication Supplier Term of Supply Agreement Status Market potential Competition

Neutrophase 纽储妃伤口护理液

0.01% pure hypochlorous acid in physiological saline solution

Wound cleaning

NovaBay, US 5.5 years after approval in China and other south-eastern Asian countries on exclusive basis

• Received 501(K) from US FDA in 2012 • Expect to launch by end of 2013 in China

• Rmb5bn in 2012 • Expect to grow at 20% CAGR in next 5 years

N.A.

CollaGuard 防手术粘黏薄膜

A sterile, translucent bioabosorbalbe collagen membrane

Prevention of post-surgical adhesions

Innocoll, Ireland 10 years after approval in China and other south-eastern Asian countries on exclusive basis

• Received 501(K) from US FDA in 2006 • Approved in Europe since October 2011 • Submitted registration application in July of 2013 in China

• Rmb2.1bn in 2012 • Expect to grow at 15% CAGR in next 5 years

N.A.

Mirtazapine orally disintegrating tablets

米氮平口崩片 New formulation which can dissolve in the mouth and be absorbed quickly without drinking water

Treatment of depressive episodes

Ethypham, France 10 years after approval in China on an exclusive basis

• Submitted the registration application in January 2011 • Expect to launch in China by 2016

• Rmb200m in 2012 • Expect to grow at 10% CAGR in next 5 years

New formulation; more suitable for patients suffering psychosis, dementia or epilepsy or the elderly or children

Ketipinor Tablets quetipine

喹硫平片 Generic Treatment of schizophrenia and manic episodes of bipolar disorder

Orion, Finland 10 years since 2009 in China on an exclusive basis

• Submitted the registration application in August 2011 • Expect to launch in China by 2016


Originally developed by AstraZeneca

Magma rapamycin biodegradable coated DES

雷帕霉素生物降解药物释放冠脉支架

Drug eluting coronary stent Treatment of narrowed, diseased coronary arteries

QualiMed, Germany

10 years since 2013 in China and other south-eastern Asian countries on an exclusive basis

• Expect to submit the registration application by the end of 2013

• Rmb4.5bn in 2012 • Expect to grow at 20% CAGR in next 5 years

Fierce competition with domestic controls 70%+ market in DES

Archimedes Biodegradable Biliary Stent

阿基米德生物降解胆道支架

Biliary stent inserted into the pancreas

Treatment of blocked biliary duct

QualiMed, Germany

10 years since February 2013 in China and other South-eastern Asian countries on an exclusive basis

• Expect to submit the registration application by June 2014


Proprietary and patent protected

Topiramate 托吡酯片 A new antiepileptic drug whereby monosaccharide is substituted by sulfamate

Treatment of epilepsy

PharmaceuticalInc, Canada

10 years since September 2011 in China on an exclusive basis

• Submitted the registration application in October 2012 • Expect to launch in China by 2017


Generics

STARflo gaucoma implant

青光眼引流器 A non-degradable, precision-pore implant made from Healionics’ proprietary silicone STAR Biomaterial technology

Implant for glaucoma

iSTAR, Belgium 7 years since December 2012 in China on an exclusive basis

• Expect to submit the registration application by the end of 2013

• 8million plus glaucoma patients in China with a 90% undiagnosed rate • Rmb800m in 2012 • Expect to grow at 30% CAGR in next 5 years

Proprietary



UBS 26

Financials Pioneer recorded robust profitability growth in 2010-12 due to: 1) the faster growth of its high-margin promotions business versus the low-margin business; and 2) operational leverage as distribution and selling expenses as a percentage of revenue steadily decreases. As of H113, 65.1% of Pioneer’s gross profit was derived from promotions, up from 54.8% in 2010. Pioneer has rapidly transformed its business focus to a marketing, sales and promotions service from low-margin channel management, and we expect earnings from marketing, sales and promotions service to record high growth in the next two years.

Stable growth during 2010-12: Pioneer recorded a revenue CAGR of 29.6% and a net profit CAGR of 57.3%, with an average net margin of 15.4%.

Robust growth to continue; 2013-15 growth forecasts:

— Revenue: Rmb1,247m/1,571m/1,959m in 2013/2014/2015 (up 30.0%/26.0%/24.7% YoY), mainly driven by higher market penetration of existing products and new product additions.

— Net profit: Rmb247m/348m/431m in 2013/2014/2015 (up 32.3%/41.3%/23.8% YoY) based on solid top-line growth.

— Net margin: 19.8%/22.2%/22.0% 2013/2014/2015 based on an increase in operational leverage.

Profit and loss We forecast Pioneer’s revenue to grow 30.0%/26.0%/24.7% YoY in 2013/2014/2015 and reported net profit to grow 32.3%/41.3%/23.8% YoY, respectively.

Chart 26: Revenue contribution of Pioneer’s business segments in 2012

Chart 27: Gross profit contribution of Pioneer’s business segments in 2012

324 , 33.8%

635 , 66.2%

Promotion Channel management

(Rmb, m)

199 , 65.0%

108, 35.0%


(Rmb, m)

Source: Company data Source: Company data

Robust profitability growth in 2010-12


UBS 27

Chart 28: Revenue contribution of Pioneer’s business segments in 2010-15E

Chart 29: Gross profit contribution of Pioneer’s business segments in 2010-15E

171 194 324 478 637 829 400 523 635

768 934

1,130

0

500

1000

1500

2000

2500

2010 2011 2012 2013E 2014E 2015E


(Rmb, m)

94 105 203 254

335 431

72 91

104124

151

182

0

100

200

300

400

500

600

700

2010 2011 2012 2013E 2014E 2015E


(Rmb, m)

Source: Company data, UBS estimates Source: Company data, UBS estimates

Revenue

Promotions and channel management revenue grew 66.5% and 21.3% YoY in 2012. We forecast 2012/2014/2015 revenue growth for each of Pioneer’s two business segments as follows: promotions service: 47.8%/33.3%/30.0%; and co-promotion and channel management: 21.0%/21.5%/21.0%, respectively.

Revenue forecasts for 2014-15

Promotions service: we expect revenue growth to accelerate in 2014-15 due to new product additions.

Co-promotion and channel management: we forecast stable growth of 20-25% for Alcon’s products due to market penetration and solid end market demand for Alcon’s products.

Margins Gross margin

We forecast Pioneer’s gross margin (GPM) at 30.3%/30.9%/31.3% in 2013/2014/2015. The stable GPM reflects Pioneer’s efforts to shift towards the higher-margin business—pharmaceutical and medical device promotions—which should offset the price cut pressure on the company’s blended GPM.

We forecast Pioneer’s gross margin (GPM) to be 30.3%/30.9%/31.3% in 2013/2014/2015


UBS 28

Chart 30: Pioneer’s GPM trend by business segment Chart 31: Pioneer’s EBIT margin and expenses rate trend

55.0% 53.8%62.6%

53.0% 52.5% 52.0%

18.0% 17.4% 16.4% 16.2% 16.2% 16.1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2010 2011 2012 2013E 2014E 2015E


16.8% 16.9%

21.1% 21.3%23.2% 23.3%

11.2%9.6% 9.6% 8.4% 8.8% 8.7%

2.7% 2.6% 3.0% 2.6% 2.7% 2.8%0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2010 2011 2012 2013E 2014E 2015E

EBIT margin Distribution expense rate Admin expense rate

Source: Company data, UBS estimates Source: Company data, UBS estimates

Promotions service: 1) Pioneer’s pharmaceutical promotion’s GPM improved from 53.4% in 2010 to 62.6% in 2012 due to the fast growth of high-margin products; and 2) we expect GPM to contract to 52.0% in 2015 based on default government price cut expectations.

Channel management and co-promotion services: we expect an average flat channel management and co-promotion service gross margin of 16.0% in 2013-15. Pioneer recorded a decrease in GPM in 2010 to H113 due to government price cuts for several of Alcon’s products (a 1.8% price cut for Tobrex in March 2011 and a 6.5% cut for Tobradex in February 2013).

EBIT margin

EBIT margin improved to 21.1% in 2012 and we forecast 21.3%/23.2%/23.3% in 2013/2014/2015 compared with 16.8%/16.9%/21.1% in 2010/2011/2012, respectively.

Distribution and selling costs: we forecast distribution and selling costs at 8.4%/8.8%/8.7% of revenue in 2013/2014/2015, down from 9.6% in 2012. This is because we expect Pioneer to further leverage three-party promotions partners rather than increase in-house marketing and the sales force.

Administrative expenses: Pioneer incurred administrative expenses of 3.0% in 2012, including some non-recurring costs (professional expenses: auditor and lawyers). We forecast administrative expenses at 2.6%/2.7%/2.8% of revenue in 2013/2014/2015 compared with 3.0% in 2012, assuming a non-recurring cost (professional expenses, etc) in 2013 and a proportional increase in personnel costs versus revenue growth.

Tax

We expect the effective tax rate to increase from 10.2% in 2012 to 10.5%/10.5%/10.5% in 2013/2014/2015, as the company has transferred most of its business from Hainan to Tibet, which enjoys tax breaks: no income tax and a 50% reduction in VAT.

We expect the effective tax rate to increase from 10.2% in 2012 to 10.5%/10.5%/10.5% in 2013/2014/2015


UBS 29

Balance sheet Working capital Table 10: Working capital

(Rmb m) 2010 2011 2012 2013E 2014E 2015E

Inventory 110 243 296 428 494 663 AR Balance 124 167 200 274 329 434 AP Balance 170 242 291 421 445 606 Total Working Capital 64 168 205 281 378 491 Inventory Days 98 123 151 152 155 157 AR Days 55 45 42 45 47 49 AP Days 141 122 126 130 130 130 Cash Conversion Days 12 46 66 67 72 76

Source: Company data, UBS estimates

Inventory

Pioneer’s inventory turnover days increased from 98 in 2010 to 123 days in 2011 and 151 days in 2012 due to: 1) the intentional accumulation of inventory whose registration certificates were due for renewal; 2) along with revenue growth and market coverage expansion, Pioneer has increased its safe inventory level to avoid out-of-stock situations; and 3) the change in Alcon’s shipping method in 2011 from airborne to seaborne to reduce costs.

We expect inventory turnover days to increase modestly to 152/155/157 days in 2013/2014/2015, as Pioneer needs to increase inventory after new product additions.

Receivables

Pioneer recorded decreasing accounts receivable (AR) of 55/45/42 days in 2010/2011/2012, respectively. The decrease was mainly due to: 1) operational efficiency; 2) leveraging of the Alcon business; distributors must pay Pioneer within 30 days as Alcon’s products are high demand and large volume; and 3) given the popularity of Pioneer’s products, some customers select to pay cash upfront in order to secure orders. We expect AR to be flat in 2013-15, as Pioneer needs to balance its top-line growth target.

Payables

Pioneer reported accounts payable of 141/122/126 days in 2010/2011/2012, respectively. The decrease was due to new product additions and new suppliers requiring cash in advance. However, after a business relationship is established, we expect payable terms to change to credit terms.

Alcon gives Pioneer 150-180 day credit terms (180 days for small volume products that are delivered every six months).

Debt

Pioneer has not had long-term debt in the past and we expect this to continue. Most of its short-term bank loans have been used to support working capital requirements. Pioneer increased short-term borrowing from Rmb159m in 2010 to Rmb416m in 2012, reflecting its higher working capital requirement. We expect the company to continue to receive short-term loans from banks to support working capital needs.

We expect inventory turnover days to increase modestly

We expect AR to be flat in 2013-15

Pioneer has not had long-term debt in the past and we expect this to continue


UBS 30

Table 11: ROE analysis

2010 2011 2012 2013E 2014E 2015E

Net income / Sales 13.3% 19.4% 19.8% 22.2% 22.0%

Sales / Total assets 1.10x 1.12x 0.76x 0.63x 0.68x

Total assets / Equity 3.58x 4.25x 2.01x 1.62x 1.59x

ROE 52.3% 92.2% 30.2% 22.6% 23.8%


Cash flow Free cash flow in 2013-15E. We forecast free cash flow to improve from

Rmb132m in 2012 to Rmb204m in 2015, due to revenue growth increasing faster than working capital.

Capital expenditure. We expect capex to increase from Rmb12m in 2012 to Rmb24m/115m/103m in 2013/2014/2015, primarily due to additional investment in sales channel expansion and facility upgrades.

Table 12: Income statement

(Rmb m) 2010 2011 2012 2013E 2014E 2015E

Revenue 571 718 959 1,247 1,571 1,959 % chg YoY 25.8% 33.6% 30.0% 26.0% 24.7% CoGS (405) (522) (652) (869) (1,086) (1,346)

Gross profit 166 196 307 378 485 613 Distribution and selling expense (64) (69) (92) (105) (138) (169) G&A expense (16) (18) (29) (52) (42) (54)

Other gain and loss 9 12 16 45 59 67

Operating income 96 121 202 266 364 457 % chg YoY 26.1% 66.6% 31.7% 36.9% 25.5%

Financial income (expense), net 1 2 5 5 21 22

Share from Associates & JVs - - - (1) - - Pre-tax income 97 123 207 270 385 479

% chg YoY 27.1% 68.0% 30.6% 42.6% 24.4%

Tax (22) (26) (21) (28) (40) (50) Minority interests (5) (1) 1 5 3 2

Net income to shareholders 70 96 186 247 348 431 % chg YoY 35.8% 94.8% 32.3% 41.2% 23.8% Number of shares outstanding - - 1,000 1,051 1,333 1,333

EPS (Rmb)

-Basic (Rmb) - - 0.19 0.23 0.26 0.32 -Diluted (Rmb) - - 0.19 0.23 0.26 0.32

Ratios (%)

Gross margin 29.1% 27.3% 32.0% 30.3% 30.9% 31.3% SG&A / revenue 13.9% 12.1% 12.6% 12.6% 11.5% 11.4%

Operating profit margin 16.8% 16.9% 21.1% 21.3% 23.2% 23.3%

Pre-tax income / revenue 17.0% 17.1% 21.6% 21.7% 24.5% 24.5% Tax rates 22.5% 21.2% 10.2% 10.5% 10.5% 10.5%

Net margin 12.3% 13.3% 19.4% 19.8% 22.2% 22.0%



UBS 31

Table 13: Revenue breakdown

(Rmb m) 2010 2011 2012 2013E 2014E 2015E

Difene 68 66 94 120 149 178

Fluxum 26 37 62 86 112 139

Polimod - 18 39 56 73 92

Macmiror complex - 11 22 30 40 49 Vinpocetine API 6 5 12 42 54 68

Bestcall 48 25 24 1 - -

FLEET Phospho-Soda 10 15 27 1 - - Neoton - - 5 19 39 58

Budesonide Easyhaler and Salbutamol Easyhaler - - 1 6 14 26

Salbutamol Easyhaler - - - - - - Zenotec CAD/CAM series - - 6 9 11 14

Neutrophase - - - - 5 30

Others 12 18 32 107 140 175 Promotion revenue 171 194 324 478 637 829 YoY 0.0% 14.0% 66.5% 47.8% 33.3% 30.0%

% of total revenue 29.9% 27.1% 33.8% 38.4% 40.6% 42.3%

Alcon 400 523 635 768 934 1,130 YoY 0.0% 30.8% 21.3% 21.0% 21.5% 21.0%

% of total revenue 70.1% 72.9% 66.2% 61.6% 59.4% 57.7%

Total revenue 571 718 959 1,247 1,571 1,959 YoY 0.0% 25.8% 33.6% 30.0% 26.0% 24.7%



UBS 32

Table 14: Balance sheet

(Rmb m) 2010 2011 2012 2013E 2014E 2015E

Current Assets 495 758 867 2,244 2,422 2,816

Cash & Cash Equivalents 114 51 60 1,213 1,269 1,390

Trade and other receivables 124 167 200 274 329 434

Inventory 110 243 296 428 494 663 Other Current Assets 147 297 311 329 329 329

Non-current Assets 26 29 62 100 211 304

Tangible Fixed Asset 20 20 18 35 142 230 Investment in Associates & JVs - - - 17 17 17

Intangibles - 3 16 20 24 28

Others 6 7 28 28 28 28 Total Assets 521 788 929 2,344 2,634 3,120

Current Liabilities 336 594 716 930 979 1,166 Current Interest Bearing Debt 159 338 416 500 525 551

Trade and other payable 170 242 291 421 445 606

Other Current Liabilities 8 15 9 9 9 9 Non-current Liabilities - - - - - -

LT bank loan - - - - - -

Other Non-current Liabilities - - - - - - Minority Interest 11 1 1 (4) (8) (10)

Shareholders’ Equity 173 192 212 1,418 1,662 1,964

Share Capital - - - 1,034 1,034 1,034 Reserves 173 192 212 385 628 930

Liabilities and Equity 521 788 929 2,344 2,634 3,120 Working Capital 64 168 205 281 378 491

Invested Capital 237 494 578 693 902 1,107

Interest Bearing Debt 159 338 416 500 525 551 Net Debts/(Cash) (45) (287) (357) 713 744 839

Ratios : Current Ratio (%) 147.3% 127.5% 121.1% 241.4% 247.4% 241.5%

Equity/ Assets (%) 33.3% 24.4% 22.8% 60.5% 63.1% 62.9%

Interest-bearing debt / Equity (%) 91.6% 176.0% 196.3% 35.3% 31.6% 28.1%



UBS 33

Table 15: Cash flow

(Rmb m) 2010 2011 2012 2013E 2014E 2015E

EBIT 96 121 202 265 364 457

Change of Net Working Capital (1) (123) (48) (76) (97) (113)

Tax paid (26) (20) (29) (28) (40) (50)

Interest paid 1 2 5 5 21 22 Others 1 (2) (9) (14) (28) (23)

Cash Flow from Operating Activities 71 (22) 120 152 220 294 Purchase of Tangible Fixed Assets (1) (2) (1) (19) (110) (98) Purchase of Intangible Assets - (3) (12) (5) (5) (5)

Proceeds from Associates - - - (17) - -

Acquisition - - - - - - Interest received 6 5 12 17 31 33

Dividend received - - - - - -

Others 41 (148) (27) (18) 0 0 Cash Flow from Investing Activities 46 (147) (27) (42) (84) (70) Net proceeds from borrowing (49) 195 78 84 25 26

Net proceeds from equity issue - - - 1,034 - - Net proceeds from Subsidiaries - 1 0 - - -

Dividend paid (36) (90) (148) (74) (104) (129)

Others - - (16) - - - Cash Flow from Financing Activities (85) 106 (85) 1,044 (79) (103) Net Cash Flow 32 (63) 8 1,153 57 121

FX impact - (0) 0 - - - Ending Cash & Equivalents 114 51 60 1,213 1,269 1,390



UBS 34

Appendix Corporate structure Chart 32: Shareholding and corporate structure

Xiantao Pioneer(PRC)

Publicshareholders

PioneerMedical (HK)(Hong Kong)

NewCo 1(PRC)

Naqu Pioneer(PRC)

Pioneer Ruici(PRC)

Pioneer Medident(Singapore)

NovaBay(U.S.)

Q3(Ireland)

60% 60% [5.4]% [21.2]%

Pioneer Singapore(Singapore)

Xiantao Medical(PRC)

NewCo 2(Taiwan)

60%100%

100%

100% 70%60%

Shanghai Saierling

60%

Mr. Li Mrs. Li

48.5%48.5%

3%

Pioneer Pharma(BVI)(BVI)

Our Company(Cayman Islands)

Pioneer HK(Hong Kong)

75%

100%

100%

25%

Mr. Wang



UBS 35

Company history

Chart 33:Company development and history

• Acquired a minority interest in

NOVABay• Obtained

exclusive rights to sell its

NeutroPhaseproducts in China

and in other Southeast Asia

1996 1997 2004 2008 2009 2010 2011 2012 2013

• BudesonideEasyhaler

• SalbutamolEasyhaler

(Suppler: Orion corporation)

• Polimod Solution• Macmiror &

MacmirorComplex(Supplier:

Polichem SA)

Ophthalmic pharmaceutical

products ( Supplier:

Alcon)

Difene(Supplier:

Temmler Werke)

Fluxumproducts

(Supplier:AlfaWassermann

S.p.A.)

Vinpocetine(Supplier: Covex)

• Zenotecdental devices

(Supplier: Wieland)• Neoton

(Supplier: Alfa Wassermann

S.p.A.)

Recognized as the Top Five Enterprises

for Importing Medicines and

Health Products from 2008 to 2012 consecutively

Pioneer Pharma

established in Hainan

Recognized as the Top 100

Enterprises in Hainan

Province by Hainan Province

Enterprise Directors

Association from 2009 to 2012 consecutively

Acquired a minority interest

in Q3, the holding

company of QualiMed and

AMG

Presented by Alcon a prize in

appreciation of the contribution to the partnership with

Alcon

Pioneer Ruiciestablished in Shanghai and commenced sale of dental

devices business

• Acquired a minority interest in

NOVABay• Obtained

exclusive rights to sell its

NeutroPhaseproducts in China

and in other Southeast Asia

1996 1997 2004 2008 2009 2010 2011 2012 2013






Polichem SA)



Alcon)

Difene(Supplier:

Temmler Werke)

Fluxumproducts


S.p.A.)





S.p.A.)




Pioneer Pharma








in Q3, the holding


AMG



Alcon


devices business

1996 1997 2004 2008 2009 2010 2011 2012 2013






Polichem SA)



Alcon)

Difene(Supplier:

Temmler Werke)

Fluxumproducts


S.p.A.)





S.p.A.)

1996 1997 2004 2008 2009 2010 2011 2012 2013






Polichem SA)



Alcon)

Difene(Supplier:

Temmler Werke)

Fluxumproducts


S.p.A.)





S.p.A.)




Pioneer Pharma








in Q3, the holding


AMG



Alcon


devices business



UBS 36

UBS 37


Income statement (Rmbm) - - 12/10 12/11 12/12 12/13E % ch 12/14E % ch 12/15E % chRevenues - - 571 718 959 1,247 30.0 1,571 26.0 1,959 24.7 Operating expenses (ex depn) - - (482) (607) (770) (1,024) 32.9 (1,263) 23.4 (1,559) 23.4 EBITDA (UBS) - - 98 124 205 268 31.0 368 37.1 467 27.0 Depreciation - - (2) (3) (3) (2) -17.5 (4) 52.7 (10) 188.5 Operating income (EBIT, UBS) - - 96 121 202 266 31.7 364 36.9 457 25.5 Other income & associates - - 0 0 0 (1) - 0 - 0 - Net interest - - 1 2 5 5 7.9 21 291.0 22 6.0 Abnormal items (pre-tax) - - 0 0 0 0 - 0 - 0 - Profit before tax - - 97 123 207 270 30.6 385 42.6 479 24.4 Tax - - (22) (26) (21) (28) 34.3 (40) 42.6 (50) 24.4 Profit after tax - - 75 97 186 242 30.2 345 42.6 429 24.4 Abnormal items (post-tax) - - 0 0 0 0 - 0 - 0 - Minorities / pref dividends - - (5) (1) 1 5 641.5 3 -28.7 2 -37.8 Net income (local GAAP) - - 70 96 186 247 32.3 348 41.2 431 23.8 Net Income (UBS) - - 70 96 186 247 32.3 348 41.2 431 23.8 Tax rate (%) - - 23 21 10 11 2.8 11 0.0 11 0.0 Pre-abnormal tax rate (%) - - 23 21 10 10 2.4 11 0.4 11 0.0 Per share (Rmb) - - 12/10 12/11 12/12 12/13E % ch 12/14E % ch 12/15E % chEPS (local GAAP) - - - - 0.19 0.23 25.9 0.26 11.3 0.32 23.8 EPS (UBS) - - - - 0.19 0.23 25.9 0.26 11.3 0.32 23.8 Net DPS - - - - 0.00 0.07 - 0.08 11.3 0.10 23.8 Cash EPS - - - - 0.19 0.24 25.1 0.26 11.4 0.33 25.5 BVPS - - 0.15 0.16 0.16 1.34 737.5 1.24 -7.9 1.46 18.1 Balance sheet (Rmbm) - - 12/10 12/11 12/12 12/13E % ch 12/14E % ch 12/15E % chNet tangible fixed assets - - 20 20 18 35 94.1 142 307.6 230 62.3 Net intangible fixed assets - - 2 18 18 23 23.9 27 18.6 31 15.1 Net working capital (incl. other assets) - - 207 455 519 613 18.1 710 15.9 823 15.8 Other liabilities - - 0 0 0 0 - 0 - 0 - Operating invested capital - - 229 493 555 670 20.7 879 31.1 1,084 23.3 Investments - - 0 0 14 32 121.6 32 0.0 32 0.0 Total capital employed - - 229 493 569 702 23.2 910 29.7 1,115 22.5 Shareholders' equity - - 196 207 214 1,410 560.3 1,647 16.8 1,944 18.1 Minority interests - - (11) (1) (1) 4 - 8 84.8 10 28.5 Total equity - - 185 206 213 1,414 564.6 1,655 17.0 1,954 18.1 Net debt / (cash) - - 45 287 357 (713) - (744) 4.4 (839) 12.7 Other debt-deemed items - - 0 0 0 0 - 0 - 0 - Total capital employed - - 229 493 569 702 23.2 910 29.7 1,115 22.5 Cash flow (Rmbm) - - 12/10 12/11 12/12 12/13E % ch 12/14E % ch 12/15E % chOperating income (EBIT, UBS) - - 96 121 202 266 31.7 364 36.9 457 25.5 Depreciation - - 2 3 3 2 -17.5 4 52.7 10 188.5 Net change in working capital - - (1) (123) (48) (76) 58.9 (97) 28.3 (113) 15.6 Other (operating) - - 5 3 2 (1) - 0 - 0 20.0 Operating cash flow (pre tax/interest) - - 102 3 159 191 20.3 270 41.4 355 31.1 Net interest received / (paid) - - 1 2 5 5 7.9 21 291.0 22 6.0 Dividends paid - - (36) (90) (148) (74) -49.89 (104) 41.20 (129) 23.79 Tax paid - - (26) (20) (29) (28) -3.5 (40) 42.6 (50) 24.4 Capital expenditure - - (1) (5) (12) (24) 92.8 (115) 385.1 (103) -10.5 Net (acquisitions) / disposals - - 0 0 0 0 - 0 - 0 - Other - - - (148) (43) 999 - 0 - 0 - Share issues - - 0 1 0 0 - 0 - 0 - Cash flow (inc)/dec in net debt - - 81 (256) (68) 1,069 - 32 -97.0 95 198.3 FX / non cash items - - - 14 (2) 0 - 0 - 0 - Balance sheet (inc)/dec in net debt - - - (242) (70) 1,069 - 32 -97.0 95 198.3 Core EBITDA - - 98 124 205 268 31.0 368 37.1 467 27.0 Maintenance capital expenditure - - 0 0 0 0 3107.6 (1) 488.1 (1) -10.9 Maintenance net working capital - - 0 0 0 0 - 0 - 0 - Operating free cash flow, pre-tax - - 98 124 205 268 30.9 367 36.8 466 27.2

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Note: For some companies, the data represents an extract of the full company accounts.

UBS 38

Global Equity Research China

Pharmaceuticals

12-month rating Buy

12m price target HK$5.32

Company profile China Pioneer Pharmaceutical Holdings (Pioneer) is a leading third-party marketing, promotions and channel management serviceprovider in China for international pharmaceutical and medical devicesuppliers. Pioneer provides two main services: 1) a comprehensive marketing, promotions and channel management service; and 2)channel management and co-promotion services . According to Frost& Sullivan, Pioneer was the second-largest, third-party pharmaceutical promotions service provider in China with a market share of 9.4%, based on revenue, in China in 2012.

Value (EV/OpFCF & P/E)

12/11 12/12 12/13 12/14E 12/15E0.0x2.0x

4.0x6.0x

8.0x

10.0x12.0x

14.0x

0.0x2.0x

4.0x6.0x

8.0x

10.0x12.0x

14.0x

EV/OpFCF (LHS) P/E (RHS)

Profitability

12/11 12/12 12/13(E) 12/14(E) 12/15(E)15.00%

16.29%

17.57%

18.86%20.14%

21.43%

22.71%

24.00%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

EBIT margin (LHS) ROIC (RHS)

ROE v Price to book value

12/11 12/12 12/13(E) 12/14(E) 12/15(E)10.0%

21.4%

32.9%

44.3%55.7%

67.1%

78.6%

1.8x

1.9x

2.0x

2.1x

2.2x

2.3x

2.4x

ROE (LHS) Price to book v alue (RHS)

Growth (UBS EPS)

12/11 12/12 12/13(E) 12/14(E) 12/15(E)0

500

1000

1500

2000

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Rev enue (LHS) UBS EPS Grow th (RHS)


Valuation (x) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15EP/E (local GAAP) - - - 12.2 11.0 8.9 P/E (UBS) - - - 12.2 11.0 8.9 P/CEPS - - - 12.1 10.9 8.7 Net dividend yield (%) - - - 2.5 2.7 3.4 P/BV - - - 2.1 2.3 2.0 EV/revenue (core) - - - 2.9 2.0 1.5 EV/EBITDA (core) - - - 13.5 8.3 6.4 EV/EBIT (core) - - - 13.6 8.4 6.6 EV/OpFCF (core) - - - 13.5 8.4 6.5 EV/op. invested capital - - - 5.9 4.0 3.1

Enterprise value (Rmbm) 12/11 12/12 12/13E 12/14E 12/15EAverage market cap - - 3,823 3,823 3,823 + minority interests 6 1 2 6 9 + average net debt (cash) 166 322 (178) (728) (792) + pension obligations and other 0 0 0 0 0 - non-core asset value 0 (14) (32) (32) (32) Core enterprise value - - 3,615 3,069 3,009 Growth (%) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15ERevenue - 25.8 33.6 30.0 26.0 24.7 EBITDA (UBS) - 26.2 65.5 31.0 37.1 27.0 EBIT (UBS) - 26.1 66.6 31.7 36.9 25.5 EPS (UBS) - - - 25.9 11.3 23.8 Cash EPS - - - 25.1 11.4 25.5 Net DPS - - - - 11.3 23.8 BVPS - 5.6 3.1 NM -7.9 18.1

Margins (%) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15EEBITDA / revenue - 17.2 21.3 21.5 23.4 23.8 EBIT / revenue - 16.9 21.1 21.3 23.2 23.3 Net profit (UBS) / revenue - 13.3 19.4 19.8 22.2 22.0

Return on capital (%) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15E EBIT ROIC (UBS) - 33.5 38.5 43.4 47.0 46.6 ROIC post tax - 26.4 34.6 38.8 42.1 41.7 Net ROE - 47.4 88.6 30.4 22.8 24.0

Coverage ratios (x) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15E EBIT / net interest - - - - - - Dividend cover (UBS EPS) - - - 3.3 3.3 3.3 Div. payout ratio (%, UBS EPS) - - - 30.0 30.0 30.0 Net debt / EBITDA - 2.3 1.7 NM NM NM

Efficiency ratios (x) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15E Revenue / op. invested capital - 2.0 1.8 2.0 2.0 2.0 Revenue / fixed assets - 23.9 25.9 26.7 13.9 9.1 Revenue / net working capital - 2.2 2.0 2.2 2.4 2.6

Investment ratios (x) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15E OpFCF / EBIT - 1.0 1.0 1.0 1.0 1.0 Capex / revenue (%) - 0.7 1.3 1.9 7.3 5.3 Capex / depreciation - 1.8 4.4 NM NM NM

Capital structure (%) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15E Net debt / total equity - NM NM (50.5) (45.2) (43.1) Net debt / (net debt + equity) - 58.0 62.5 NM (82.4) (75.9) Net debt (core) / EV - - - (4.9) (23.7) (26.3)

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of HK$3.65 on 06 Dec 2013 16:56 HKT Market cap(E) may include forecast share issues/buybacks. Shaojing Tong Analyst [email protected] +852-2971 7217


UBS 39


China Pioneer Pharmaceutical Holdings (Pioneer) is a leading third-party marketing, promotions and channel management service provider in China for international pharmaceutical and medical device suppliers. Pioneer provides two main services: 1) a comprehensive marketing, promotions and channel management service; and 2) channel management and co-promotion services . According to Frost & Sullivan, Pioneer was the second-largest, third-party pharmaceutical promotions service provider in China with a market share of 9.4%, based on revenue, in China in 2012.

Statement of Risk

China’s pharmaceutical industry is subject to government regulations such as price intervention and quality controls. These macro factors can result in sales volume volatility and profit margin pressure. We believe key risks for Pioneer are a dependency on top suppliers’ products, new product additions, and a dependency on promotions partners.

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.


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Required Disclosures This report has been prepared by UBS Securities Asia Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission.

UBS Investment Research: Global Equity Rating Allocations

UBS 12-Month Rating Rating Category Coverage1 IB Services2

Buy Buy 44% 32%Neutral Hold/Neutral 46% 32%Sell Sell 10% 19%UBS Short-Term Rating Rating Category Coverage3 IB Services4

Buy Buy less than 1% less than 1%Sell Sell less than 1% less than 1%

1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 30 September 2013. UBS Investment Research: Global Equity Rating Definitions

UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition

Buy Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event.

Sell Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event.


UBS 41

KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS AG Hong Kong Branch: Shaojing Tong. Company Disclosures

Company Name Reuters 12-mo rating Short-term rating Price Price date China Pioneer Pharma Holdings2, 4, 5 1345.HK Not Rated N/A HK$3.68 05 Dec 2013

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of

this company/entity or one of its affiliates within the past 12 months. 4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking

services from this company/entity. 5. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services

from this company/entity within the next three months. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.


UBS 42

China Pioneer Pharma Holdings (HK$)

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0.000.501.001.502.002.503.003.504.00

Price Target (HK$) Stock Price (HK$)

No Rating

Source: UBS; as of 05 Dec 2013


UBS 43

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UBS 44

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