Industry Overview

7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT SMITH ZANDER INTERNATIONAL SDN BHD (1058128-V)’ Level 23, Premier Suite, One Mont’ Kiara, SMITH ZANDER 1 Jalan Kiara, Monti Kiara, 50480 Kuala Lumpur, Malaysia. T +60327856822 F +603 27856922 1 B’ MAR 2015 The Board of Directors BIOALPHA HOLDINGS BERHAD Suite 10.03, Level 10 The Gardens South Tower Mid Valley City Lingkaran Syed Putra 59200 Kuala Lumpur
Dear Sirs, Executive Summary of the Independent Market Research Report on the Health Supplement Market, Health Supplement Manufacturing Industry and the Retail Market in relation to: Public issue of 100,000,000 new ordinary shares of RMO.05 each in Bioalpha Holdings Berhad in conjunction with its listing on the ACE Market of Bursa Malaysia Securities Berhad This Executive Summary of the Independent Market Research Report on the Health Supplement Market, Health Supplement Manufacturing Industry and Retail Market is prepared by SMITH ZANDER INTERNATIONAL SON BHD (“SMITH ZANDER”) for inclusion in the Prospectus of BIOALPHA HOLDINGS BERHAD. For and on behalf of SMITH ZANDER: DENN~-‘–­MANAGING PARTNER 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
1 DEFINITION AND SEGMENTATION The Pharmaceutical Industry The pharmaceutical industry refers to the research, development, manufacturing and commercialisation of drugs and health supplement products. The pharmaceutical industry can be broadly segmented into four (4) categories, based on its product classification: • Health supplements Health supplements consist of two (2) broad categories of products, Le. herbal and non-herbal supplements, as well as functional foods. Herbal and non-herbal supplements refer to dietary and nutritional supplements which are used to boost an individual’s nutritional intake and/or offer the potential of improved health and/or reduced risk of disease. Herbal and non-herbal supplements are typically found in tablet and capsule dosage forms and examples of these products include vitamins and mineral dietary supplements, as well as traditional herbs found in capsule forms. Meanwhile, functional foods can be broadly defined as food which is intended to be consumed as part of a normal diet and contains biologically active components which offer the potential of improved health and/or reduced risk of disease1. Some examples of functional foods are soy­based food, honey, oats, herbal and non-herbal concentrates such as chicken essence and fish collagen concentrate, beverages fortified with traditional herbs such as ‘ginseng’, ‘spirulina’, ‘Kacip Fatimah’ and ‘Misai Kucing’, as well as other food-based products such as chocolates and oats which are fortified with traditional herbs such as ‘Tongkat Ali’, ‘Acai berry’ and ‘wolfberry’. • Botanical drugs Botanical drugs refer to drugs derived from herbal materials which are used to treat diseases. Typically, botanical drugs can both be dispensed over-the-counter in retail pharmacy stores and food and health retail stores, when they have been approved by the relevant authorities for self­diagnosis and self-medication, as well as through a registered medical practitioner’s prescription. Botanical drugs would have undergone extensive research and development, as well as pre­clinical and clinical trials prior to being approved with a country’s Food and Drug Administration (“FDA”) agency, or equivalent organisation. The pre-clinical and clinical studies will also substantiate its claims for treatment of a particular disease as well as establish a standard dosage requirement for the product. These types of drugs may be administered through solution, powder, tablet, capsule, or injection dosage forms. Botanical drugs are a new alternative to conventional chemically-synthesized drugs and hence, there are not many of such products in the market. In the United States of America (“United States”), there are two (2) botanical drugs which have been approved by the United States FDA for commercialisation, Le. “Veregen®” which is a botanical drug for treatment of genital warts, as well as “Fulyzaq” which is an anti­diarrhea drug for HIV patients2. 1 Extracted from the Independent Market Research Report by SMITH ZANDER 2 Extracted from the Independent Market Research Report by SMITH ZANDER 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
• Chemically-synthesized prescription drugs Chemically-synthesized prescription drugs are drugs which have undergone pre-clinical and clinical trials prior to being approved and are regulated by the respective country’s regulators, and are to be obtained only with a prescription from a registered medical practitioner or a registered pharmacist. Chemically-synthesized prescription drugs comprise both original and generic drugs. Original prescription drugs are a result of extensive research and development by a pharmaceutical company, as well as pre-clinical and clinical trials on animals and humans prior to being approved for us. On the other hand, generic prescription drugs are duplicate copies of original prescription drugs manufactured by a company other than the original manufacturer when the patent for the drug owned by the original manufacturer has expired. A generic prescription drug thus contains the same active ingredients as its original prescription drug, and is identical in its function and efficacy. Chemically-synthesized prescription drugs include drugs that typically treat common but serious illnesses such as diabetes and hypertension, as well as drugs that are used in the treatment of chronic diseases such as cardiovascular diseases and cancers. • Over-the-counter (“OTC”) products OTC products are drugs or medicines which are sold directly over the counter to consumers and can be sold without a prescription by a healthcare professional. OTC products are drugs which have also undergone pre-clinical and clinical trials prior to being approved and are regulated by the respective country’s regulators but these products are considered to be safe for self­diagnosis and self-medication. At times, OTC products are a result-of extensive market use of a chemically-synthesized prescription drug, which enables regulators to determine that the product is safe to be dispensed without prescription. Thus, these products may be sold in places such as retail pharmacy outlets, as well as food and health retail stores. Examples of these products include paracetamol, probiotics, medicated plasters with medicines and cough syrups. Segmentation of pharmaceutical industry r–“..”······ , i r———-_..-_.-_.-.—_.1._.-•••-.——–_.-•.:I : ” .””….””1..,,. . …._””,: …” .. ! ,,,,,,,,,,,, ~ -~ ————~ -~—–~~ ——-~~ ——————~
Notes: C~~~:! Industry segment where Bioalpha Holdings Berhad competes in.
Source: Extracted from the Independent Market Research Report by SMITH ZANDER The segment within the pharmaceutical industry that are of interest in this report is the health supplement industry as it is the segment in which Bioalpha Holdings Berhad is principally involved in.
2 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
The Health Supplement Industry Health supplement intakes are viewed as a way to maintain general wellness without having to make drastic lifestyle changes. Health supplements consist of two (2) broad categories of products, Le. herbal and non-herbal supplements, as well as functional foods. These products are generally manufactured using herbal and non-herbal materials, and are generally consumed for the purpose of maintaining and improving health conditions. Herbal materials refer to plant-based or botanical active ingredients. Herbal active ingredients basically contain biologically active compounds or phytochemicals, such as polyphenols in fruits, isoflavones in the legume soy and beta-carotene in vegetables, which offer the potential of improved health or reduced risk of disease. Meanwhile, non-herbal materials are active compounds found in non-plant based sources including animals and other sources such as pearls and corals. In general, health supplements are sold in two (2) forms, Le. semi-finished health products and finished health supplement products. Semi-finished health products refer to herbal and non-herbal products either in its dried form or extract form. Dried semi-finished health products have undergone primary processing which include cleaning, drying, cutting and I or grinding. Semi-finished products in an extract form are typically formulated ingredients which have undergone a process to extract its active compounds. These semi-finished products are used as raw materials in the manufacturing of finished health supplement products. On the other hand, finished health supplement products refer to packed and processed health supplements, and these products have taken a dosage form (Le. tablet and capsule) or a functional food form. Health benefits of herbal and non-herbal materials Evidence is beginning to emerge showing that the consumption of certain food and their constituents can have certain physiological effects, as well as general health maintenance. Below are examples of herbal and non-herbal materials, as well as their health functions: Selected types of herbal materials Product  Examples of Claimed Health Functions  Cordyceps sinensis  Traditionally used for the restoration of energy, respiratory benefits and anti­oxidant properties Traditionally used to improve stamina and vitality, and for its anti-oxidant properties Traditionally used to improve immune system Traditionally used to improve immune system and may potentially assist with blood cholesterol regulation Traditionally used to improve male reproductive health and for its respiratory system benefits and anti-oxidant properties Traditionally used to improve immune system Traditionally used as an aphrodisiac, and for the treatment of fever, boils, ulcer, syphilis, bleeding gums, dysentery, glandular swelling, aches and edema “., ~ ….—..,…~~…._.., ,_.”,_ .”·__ v· • .-••<·y_.•__,_,~ __·,, ……  Lignosus rhinocerus  Grifola frondosa  Lentinula edodes Cordyceps militaris Ganoderma lucidum  Tongkat Ali c•••.•••••• __ ‘_”,V” __ ,..””.,.<~,,–,”~-_.> .,~,~”.
7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d) SMITH ZANDER Traditionally consumed for induction and facilitation of labour, as well as the
‘–‘–~—r——l
treatment of flatulence, dysentery, dysmenorrhea, gonorrhea and prevention ofKacip Fatimah I bone-related concerns which are caused by the lack of estrogen such as1 osteoporosis. –~-~–~~~._~ Misai Kucing 1—–.–……… Hempedu Bum;  ~–~­Roselle  ..  Ginger
._,,-~~,~”——-_ .._­Traditionally used to treat tonsillitis, fever, influenza, menstrual disorders, gonorrhoea, syphilis, renal calculus, gallstones, lithiasis, rheumatism, diabetes, I 1~ hypertension. epilepsy. edema. hepatitis and jaundk:e. It;s also used as an adjuvant in minor urinary tract illnesses. ··_–;ov~~~~ blood pr~ssure regulation, treatment of diabetes, cancer and comm~;’­flu, anti-inflammatory properties Contains anti-oxidant properties and is used as an antibacterial and antifungal. is traditionally used for the treatment of kidney stones. It is also used for its hypocholeterolemic, diuretic, uricosuric and laxative effects. Traditionally used as a carminative to prevent formation or facilitate expulsion of gas in the gastrointestinal tract, as well as relieve indigestion and stomach Source: Extracted from the Independent Market Research Report by SMITH lANDER Selected types of non-herbal materials … …  Examples of Claimed realth Functions  I Regulates inflammation and blood pressure (facilitates blood thinning), encourages  Fish Oil  hormone production and increasing immune and central nervous system activities.  Calcium  Development and maintenance of bones and teeth  r——­ Supports vision and prevents drying of cornea, and maintains epithelial tissues. It is also  Vitamin A  required for the growth of bones, teeth and soft tissues.  ‘~’  C  antioxidant properties, and is involved in the production of collagen and elastin.
Source: Extracted from the Independent Market Research Report by SMITH ZANDER [The rest of this page is intentionally left blank] 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Health supplement health claims in Malaysia In order for consumers to make informed choices in purchasing health supplements, and ensure health supplement manufacturers produce health supplements that are consistent with their claims, health supplement products must be registered with the National Pharmaceutical Control Bureau (“NPCB”), Ministry of Health (liMOH'”) Malaysia prior to its commercialisation in the market, with the appropriate health claims. Health claims refer to the representation or message which states the health benefit of consuming a particular product. The following depicts the type of health claims for health supplements and the evidences required to substantiate the claims: Evidence to substantiate disease risk raductionlbotanicaldrug or high claims Disease risk reduction (i.e. Compulsory evidence: botanical drug) or high claim i) Scientific evidence from human intervention study on ingredient andlor product ii) Toxicological study (chronic) • Significantly altering or reducing iii) Pharmacological study a risk factor of a disease or At least 1 additional evidence:health related condition i) Standard reference texts· iil Recommendations on usage from reference regulatory authorities or reference
t organisations” iii) EVidence from published scientific reviews or mela-analysis iv) Report prepared by expert committeesl expert opinion (subject to the Authority”· approval) Evidence to substantiate functional or medium claims Functional or medium claim 1 or more Of the following evidences:• Maintains or enhances the i) Standard reference texts’ structure or function of the ii) Recommendations on usage from reference regulatory authorities or human body, excluding disease­reference organisations” related claims t iii) Good quality scientificevidence from human observational studies (refer to ASEAN Guidelines on efficacy dala requirement) (on/y in the event that human experimental study is not ethical, animal studies will be accepted together with epidemiologica/studies or other scientific literature and documented traditional use) iv) Peer-reviewed scientificdala or meta-analysis Evidence to substgntiate generol claims General claim 1 or more of the following evidences: • General health maintenance i) Standard reference texts’ Benefits derived from ii) Recommendations on usage from reference regulatory authorities or supplementation beyond normal
reference organisations” dietary intake
Notes: * Examples ofreference texts are “The ABC Clinical Guide to Herbs. American Botanical Council’: “World Health Organisation Monographs on Selected Medicinal Plants”, “British Pharmacopoeia”, and “United States Pharmacopoeia”. ** Reference regUlatory authorities refer to “Australia Therapeutic Goods Administration’: “Chinese Health Authority on Chinese Medicinal Herbs’: “European Commission”, “Health Canada” and “United states Food and Drug Administration’: while reference organisations include, but are not limited to, “American Botanical Council’: “American Nutraceutical Association’: and “Global Information Hub for Integrated Medicine” (“GlobinMed’). *** Authority refers to Drug Control Authority (“DCA’?, NPCB. Source: Extracted from the Independent Market Research Report by SMITH ZANDER Value chain of the health supplement industry There are generally five (5) segments in the health supplement industry value chain -namely raw material supply, research and development, manufacturing, distribution and retail. As these health supplements are sourced from herbal and non-herbal materials, the first segment of the health supplement industry consist of the raw material suppliers. Suppliers of herbal materials either cultivate their own herbal plants or source these herbal plants from nature (e.g. wild herbs). Suppliers that cultivate their own herbal plants are typically required by their customers to ensure that the plants are safe from harmful pesticides and fertilisers. 5 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
The research and development segment consists of companies and organisations which focus on the research of raw material extracts, product formulations and other related areas. These research and development companies and organisations have the technical expertise and equipment required to perform research and development studies such as plant genetics, phytochemistry and process improvement studies. In the manufacturing stage, there are two (2) types of manufacturing processes involved. i.e. semi­finished product manufacturing and finished product manufacturing. Semi-finished products are usually sold to other manufacturers and used as raw materials for further manufacturing into finished products. Health supplement products are manufactured based on product formulations which are either developed in-house by the manufacturers, or outsourced to a research and development organisation typically also known as a contract research organisation or a clinical research organisation. Distributors comprise the fourth segment within the health supplement industry, and are intermediaries between manufacturers and retailers, and are responsible for distributing the finished products to retailers for onward sales to retail customers. Distributors typically purchase wholesale from manufacturers in bulk and distribute to retail outlets and retail pharmacy outlets who sell the products into the consumer market. The retail segment of the health supplement industry consist of enterprises or companies involved in the marketing and sale of products to consumers and end-user customers. These enterprises or companies consist of retail pharmacy outlets. food and health stores, as well as consumer product retailers. Industry value chain of the health supplement industry • Raw material supply of herbal and non-herbat materials
• Cultivate own raw materials or source through natural resources (e.g. wild herbs)

Notes • Research and development activities, including product formulation, plant genetics studies, phytochemistry studies and process Improvement.
• Have technical experts in related fields and specialised equipment required for the study.

I I COnsist Of seml·fin/shed product I manufacturers and finished product I • Distribution companies  are  I Organisations or parties I responsIble for marl<eting,  manufacturers  I  intermediaries  and  selling  products  to I  May  perform  manufacturing 1  between  end-user customers.  I  processes on behalf of other I manufacturers and/or brand owners , May have in-house research and development capabilities to develop I manufacturers retailers  and  Comprises retail pharmacy I outlets, food and health I retail stores and consumer: p/oduct retailers. I  product formulations  I  May perform own packaging processes (e.g,: tableting, j encapsulating, ate) or outsource I packaging processes to external I  I I I I I  parties.  I
…-.;,;-. denotes Bioalpha Holdings Berhad’s principal activities L=-=-; denotes other business activities which Bioalpha Holdings Berhad is involved in Source: Extracted from the Independent Market Research Report by SMITH ZANDER Bioalpha Holdings Berhad is principally involved in the manufacturing of both semi-finished and finished health supplements in Malaysia, while it also has its own herb farm for internal supply of certain herbal raw materials and research and development functions to support its operations. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
2 OVERVIEW OF THE HEALTH SUPPLEMENT MARKET The Global Health Supplement Market In the context of this report, healthcare expenditure is defined as the provision of both preventive and curative healthcare products and services, including nutrition activities, family planning activities, and emergency aid. Healthcare Total healthcare expenditure (North America, Asiaexpenditure has been growing across Pacific, Middle East and North Africa), 2008·12 global regions, illustrating that there is growing accessibility to healthcare­related product and services, coupled with an increase in health awareness within the global society. The higher awareness worldwide has consequently led to increases in acceptance and adoption of products with health benefits, and this has led to a growing increase in demand for health supplement products. Between 2008 and 2012, healthcare expenditure in the North America increased  from  USD2.52  trillion  (RM8.40 trillion 3) to  USD3.21  trillion  (RM9.92  trillion 4),  growing  at  a  Compound  Annual  Growth  Rate
(“CAGR”) of 6.24% overthe same time 3.50 3.21 ?953.00 2.85
1.46
1.43 II1.16 (1.92 0.50 ~O.14~~.0.00 ~­

2008 2008 2010 2011 2012 • North Arnerka ~ A!,ia Pacffic • MiddlE: East and Nortt’l Atnca Note: Latest pUblicly available information is 2012
Source: Extracted from the Independent Market Research Report by SMITH ZANDER period. Meanwhile, Asia Pacific illustrated a CAGR of 12.24% in terms of total healthcare expenditure, growing from USDO.92 trillion (RM3.07 trillion3) in 2008 to USD1.46 trillion (RM4.51 trillion4) in 2012. Total healthcare expenditure in the Middle East also grew, as it increased from USDO.10 trillion (RM333.19 billion3) in 2008 to USDO.15 trillion (RM463.50 billion4) in 2012, at a CAGR of about 10.67%. [The rest of this page is intentionally left blank] 3 Converted based Bank Negara Malaysia’s annual average exchange rate in 2008 of USD1=RM3.3319 4 Converted based Bank Negara Malaysia’s annual average exchange rate in 2012 of USD1=RM3.090 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Health supplement market size (Global, United States and Middle East),  The  global  health  2008-12  supplement  market  denotes  the
250.00 i consumption of health 2) ·1.66′}{. .’ ” .” .. supplementsI 2008.201 . . ‘.., 207.60
GR GlobElI (..

worldwide, and is200.00 ! cA -…….. 191.55
….. 180.83I
measured by the 167.73 volume of sales of154.70 150.00 i health supplement products. The globalI health supplement market grew from USD154.70 billion 100.00 I 50.00 (RM515.44 billion3) in 2008 to USD207.80I II000 ~ i!..~ -~-._~ ·1 billion (RM642.10 billion4) in 2012, ….. United States -Middle East -Other countries . .1 registering a CAGR of Note: 7.66% during theLatest publicly available information is 2012 period. In 2012, sales Source: Extracted from the Independent Market Research Report by SMITH ZANDER of functional foods comprised approximately 53% of the total health supplement market, while sales of herbal and non-herbal supplements contributed approximately 47% to the health supplement market. The global health supplement market is still in its growth stage, and much of its growth is attributed to a number of key factors including the rise of the affluent population, urbanisation and increasing awareness of chronic illness. The rise of the affluent population globally is in line with increasing disposable incomes and urbanisation in most countries, prompting purchases on health supplement products. Concurrently, due to a more educated population, consumers are increasingly gaining awareness of the overall importance of health, and the benefits of health supplement products to promote healthier living. The health supplement market in the United States is one of the largest markets globally for health supplement products, and it comprised approximately 40% of the global health supplement market in 2012, where it stood at approximately USD82.05 billion (RM253.53 billion4). Meanwhile, the health supplement market in the Middle East region was estimated to be USD1.29 billion (RM3.99 billion4) in 2012. [The rest of this page is intentionally left blank] 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
The Health Supplement Market in Indonesia The health supplement market in Indonesia grew from USD794.96 million (RM2.65 billion3) in 2008 to USD1.17 billion (RM3.62 billion4) in 2012, registering a CAGR of 10.19% between the same period. Much of this growth is attributed to the same factors driving the global demand for health supplements. Indonesians, particularly middle to high income earners, are increasingly gaining awareness on preventive health measures, and are becoming more receptive towards health supplement products. This is also in line with the Health supplement market size (Indonesia), 2008·12 rising urbanisation within 1,400.00 the country. Indonesia’s 190/ 0 population in 2013 was
12) : 10.201,200.00 . 2008.
249.90 million persons 5dooeSI3 t .’ …… CAG~ln . and the percentage of 1,000.00 urban population within the country was 800.00 approximately 50% during the same time600.00 period, translating to about 124.95 million400.00 persons in urban areas. Indonesia’s large200.00 population and strong internal consumption0.00 2010 2011 2012 indicates rising market Note: potential for health Latest publicly available information is 2012 supplement products. Source: Extracted from the Independent Market Research Report by SMITH The health supplementZANDER industry in Indonesia is at a relatively young development stage and as a result, a large proportion of consumption of health supplements in Indonesia remains largely dependent on imports. Furthermore, there are yet to be proper guidelines, regulations and standards in place to regulate the industry in Indonesia. Nevertheless, in May 2013, Indonesia’s Food and Drug ,Agency announced its intentions to adopt the terminology in the Association for Southeast Asian Nations (“ASEAN’) harmonization regulation for ”traditional medicine health supplements”, and this regulation is expected to be implemented by 2015. With these guidelines, regulations and standards governing the health supplement industry in Indonesia, the standard and quality of health supplement products available in Indonesia is expected to improve, consequently leading to an increase in acceptance of health supplements amongst the local population.
5 Extracted from the Independent Market Research Report by SMITH ZANDER 5 Extracted from the Independent Market Research Report by SMITH ZANDER 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Conl’d)
The Health Supplement Market in Malaysia Malaysia is a newly industrialised country with a growing economy and increasing wealth. The country is supported by a large productive population (aged 15-64 years) and a high employed segment, which contributes to the increasing wealth of the population and a growing middle income group. Its Gross Socioeconomic indicators (Malaysia), 2009 and 2013 Indicators I 2009 I 2013 II GOP (RM billion)
712.86 986.73(8)(current prices)GOP perCaplta(RMf·——·—-·——-·–..—.—.–.——-­I .) 25,385.00 32,984.00(8) I current pncesPopulation(nifiiTonj”·—-··,,”——-…..—-“.__.”.. 28~OEf–‘ …_—‘-“”–~-2’9:95″-­?~:~~~~==~=~I~f··~~~~
65 years and above (%) 4.85 5.50 _~~~~~~:~~~~~~~~:~~~~~~:~~I:=~=~~~~~:~~~~[=:~~:_~~::=~~~~1_
Household Income Distributionlb): RM2,999-and be(Ow——–·iT———T8.500j~——-­-R~~.O~~ RM~99~=~~=~~~-~=~_~~~:=~=:~~:~~2~~:_-:-=-_:-:===_ RM8000 and above 15.40% J —-~._——-._._.,,—_.-_._–_._~_. __._—~_._-_. ._._–~—­Note: (a) 2013 data is a projection
(b) Latest publicly available data is 2012.

Source: Extracted from the Independent Market Research Report by SMITH ZANDER Healthcare expenditure (Malaysia), 2008·12 40.00 37.13 35.00 i 33.94 31.52 29.332! 30.00 27.94″ 2e.6026.25′” 24.58c c._ ‘” 25.00′” 21.59 ~g ~~ 20.00 ~::E I~~ 15.00 ::r: ‘” 10.00S {2. 500

 

………..~ ….. ~ J~

0.00 ‘ 2008 2009 2010 2011 2012 “Oul-of·pochet expendifure • Tota! expenditure Note: Latest publicly available information is 2012
Source: Extracted from the Independent Market Research Report by SMITH ZANDER domestic production (“GOP”) per capita is higher than in most Southeast Asian countries with the exception of Singapore and Brunei. Malaysia has a low population base as compared to other Southeast Asian countries but is nonetheless growing. However, its ageing population (65 years and above) is around 5.50% of the total population in 2013, which is an increase from 4.85% in 2009. Meanwhile, the percentage of younger population in the country has decreased from 28.01 % in 2009 to 26.04% in 2013. With an increasing ageing population and decreasing younger population segment, there is a greater risk of illnesses and diseases such as cardiovascular diseases, cancers and other age-related diseases. The increased cases of illnesses and diseases within the country is expected to lead to a greater awareness of the importance of staying healthy and thus, benefitting the health supplement industry. Furthermore. as the country develops further, its disposable income will further increase, and this would ineVitably increase the purchasing power of Malaysians, including for healthcare-related products such as health supplements. As defined earlier in this report, healthcare expenditure refers to the provision of both preventive and curative health products and services, including nutrition activities, family planning activities, and emergency aid. Malaysia’s total healthcare expenditure illustrated a CAGR of 9.09% between 2008 and 2012, from RM26.25 billion in 2008 to RM37.13 billion in 2012. Out of this total expenditure, about 80% are generated 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
from private Health supplement market size (Malaysia), 2009·13 expenditure. The strong growth in healthcare 3.50 expenditure, specifically private expenditure, is 3.00 ll>reflective of the ~ country’s demand for 2.50 ~healthcare products, ‘”~’2including health …. 0 200 1:­til;;:supplements as these E.o ~:E 1.50products form a part of 8:~ ::stotal healthcare l/I J: 100expenditure. As such, ~ tilthis illustrates that J: 0.50Malaysians are becoming increasingly ._-­0.00health conscious as well
2009 as aware and receptive of products with health Note: Latest publicly available data is 2013 as at 9 February 2015 benefits. This in turn is expected to contribute Source: Extracted from the Independent Market Research Report by SMITH to the future growth in ZANDER market demand for health supplement products. The health supplement market size in Malaysia is defined as the sum of domestic manufacturing by local industry players and imports, net of any exports by local industry players, and denotes consumption of health supplement products in the country. This is to be differentiated from the health supplement manufacturing industry to be discussed in Chapter 3, where it represents the revenues earned· from the manufacturing of health supplements by local industry players. The consumption of health supplements in Malaysia has demonstrated positive growth over the last five (5) years, from RM2.60 billion in 2009 to RM3.15 billion in 2013, representing a CAGR of 4.91% or an overall growth of 21.15% in five (5) years.
[The rest of this page is intentionally left blank] 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
3 ANALYSIS OF THE HEALTH SUPPLEMENT MANUFACTURING INDUSTRY IN MALAYSIA Introduction The health supplement manufacturing industry in Malaysia is in its growth stage. In 2012, there were about 170 licensed health supplement manufacturers registered with the NPCB, MOH Malaysia. 7 Many of these manufacturers are able to fully undertake the manufacturing process from processing of raw materials to the packaging of finished products. Over the years, the health supplement manufacturing industry in Malaysia has developed in terms of its manufacturing and product formulation processes. For example, today, herbal products are not just sold as dried semi-finished herbal products, but is also further processed into herbal extracts which are more potent and has better absorption rates. In addition, through extensive research and studies on herbal and non-herbal active ingredients, health supplement manufacturers are also able to combine these active ingredients to provide end-user customers or consumers with various health benefits. This has resulted in the increase in efficacy of these herbal and non-herbal active ingredients. With the continuous effort on the industry players’ part to develop their technologies and products, coupled with the support provided by the Government of Malaysia in terms of funding and growing health supplement consumption, the health supplement manufacturing industry in Malaysia is expected to continue to demonstrate further potential for growth. Demand Conditions: Key Demand Drivers Increasing income ofthe population signifies growth potential for health supplements Malaysia is an upper-middle income developing economy with aspirations to achieve developed status by the year 2020. GDP per capita increased by 30.93% from approximately RM25,385 in 2009 to RM33,236 in 2013 while purchasing power parity (“PPPII) per capita income increased by 26.20% from approximately USD14,063 (RM49,5526) to USD17,748 (RM55,9269) during the same period. The Economic Transformation Programme (“ETplI ) (2011-2020) was launched in an effort to promote Malaysia into an inclusive and sustainable high-income country by the year 2020. The ETP is a comprehensive initiative comprising 131 high impact projects under 12 economic focus areas that have the potential to stimulate economic growth. The implementation of the ETP will allow Malaysia to be closer to achieving its goal of raising the per capita disposable income of the population to approximately RM48,OOO by 2020.1oThe Government expects Malaysia to achieve GDP growth of between 5% and 5.50% in 2014 despite the uncertainty in global economic outlook. Private investments are also targeted to rise by 12.70% to reach RM153.0 billion in 2014. In order to achieve a per capita income of RM48,OOO, the Government intends to attract RM1.4 trillion in investments, which is expected to create 3.3 million jobs, of which 60% are expected to be in high value sectors under the 12 economic focus areas under ETP. This increase in income is leading to a rise in a more affluent population that has greater spending power. As a result, consumer purchases are diversitying from staple food products to more expensive and quality purchases, which include products with health benefits such as herbal and non-herbal supplement products, as well as functional foods. An increase in demand for these health supplement products will contribute to the overall growth of the domestic health supplement manufacturing industry. 7 Latest publicly available information is 2012 as at 3 March 2015 B Converted based Bank Negara Malaysia’s annual average exchange rate in 2009 of USD1 =RM3. 5236 9 Converted based Bank Negara Malaysias annual average exchange rate in 2013 of USD1=RM3.1511 10 Extracted from the Independent Market Research Report by SMITH ZANDER. 12 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Growth in disposable income -GOP per capita and PPP per capita (Malaysia), 2004-13p
~ 25,000 14,000 0′ (f) ~ 2­20,530 12,000 Ql .~ 20,000 E 18,2!}.a~~ 11,840 (Jrl 0 lil 10,718 10,000 .5 c.. .s ‘0.0. 15,000 «lCJ 8,000 (J <9 lil c.. 6,000 0.10,000 0. 0. 4,000 5,000 2,000 00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013p ……GOP per capita -+-PPP per capita Source: Extracted from the Independent Market Research Report by SMITH ZANDER Increasing rates of chronic diseases and infections raising health awareness and thus, driving demand for health supplement products There is also increasing incidences of chronic lifestyle diseases mainly attributable to the leading of a more stressful lifestyles, consumption of processed foods which generally have higher saturated fat content and lower nutritional values, and a more sedentary lifestyle with lack of regular exercise. As a result, there has been an increase in chronic diseases such as hypertensive diseases and cancer. In addition, there is also an increased threat from viral influenza infections and other acute respiratory infections. The MOH recorded increases in mortality rate where hypertensive diseases (particularly heart and renal and renal cases) and cancer (malignant neoplasm) amongst patients in Government hospitals increased from 0.05% and 16.14% in 2006 to 0.13% and 19.30% in 2012, respectively. Mortality rates due to influenza, pneumonia and other acute lower respiratory infections likewise increased from 8.92% in 2006 to 10.22% in 2012. [The rest of this page is intentionally left blank] 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Chronic diseases number of deaths or mortality rate in Government hospitals (Malaysia), 2006 and 2012 Types of chronic ~rt~ 2012ality rate ~ityratediseases and infections (%) %)
Hypertensive disease 13 390.05 0.13(heart and renaV renal) Influenza, pneumonia and other acute lower 2,376 2,997 10.228.92 respiratory infections Cancer (Malignant 4,299 16.14 5,590 19.30neoplasm) Note: Latest publicly available data is 2012
Source: Extracted from the Independent Market Research Report by SMITH ZANDER The National Health and Morbidity Survey in 2011 also showed that about 27.20% of adults above 18 years old are obese. This is an alarming situation where the number of obese adults had grown from 4% in 1996 to 14.00% in 2006 and to 27.20% in 2011, and is thus becoming a concern as an increase in obesity is an indicator of future increases in incidence of chronic diseases such as diabetes, high blood pressure, heart disease and cancer. This growing trend of chronic lifestyle diseases and obesity concerns, as well as increasing rate of viral and other acute respiratory infections, could heighten Malaysia’s awareness in preventive healthcare, and with the increase in demand for health supplement products, the health supplement manufacturing industry is expected to benefit as well. The growing access, through the Internet, of scientific evidence linking dietary habits to health is also a major contributor to the increased health awareness, and thus creating demand for health supplements and consequently driving the health supplement manufacturing industry. Rapid urbanisation and an ageing society is expected to continue to drive the increase in health awareness and subsequently the market acceptance of health supplements The average age of the population in Malaysia has increased over the years. Malaysia’s percentage of young population (0 to 14 years) in the country has decreased from 28.01 % in 2009 to 26.04% in 2013 while its ageing population (65 years and above) has increased from 4.85% of the total population in 2009 to 5.50% of the total population in 2013. This is expected to drive the health supplement manufacturing industry as the older generation are generally more health conscious with greater awareness of their mortality, creating higher demand for healthcare-related products including herbal and non-herbal supplements, as well as functional foods. Rapid urbanisation has also led to a change in lifestyle of the population in Malaysia, to becoming increasingly busy as more women join the labour workforce and people work longer hours. As such, convenience has become essential,leading to an increase in the intake of processed and fast foods, and a sedentary lifestyle. This growing change in lifestyle is a concern in all developing countries as the population finds it increasingly difficult to balance their health with their stressful lifestyles. In this aspect, health supplements, particularly herbal and non-herbal supplements, is a time-saving avenue for individuals to supplement their nutritional requirements which they lack due to their hectic schedules. 14 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Coni’d)
As the population in Malaysia become increasingly aware of the benefits of health supplements, it is expected that they will become more receptive to the consumption of health supplement products. Furthermore, it should also be noted that the working population in Malaysia (15 to 65 years) comprise the largest proportion in the country, Le. 68.46% in 201311, and thus an increase in the adoption rate of health supplements in this segment of the population will increase the sales of health supplements significantly. Health-oriented campaigns and events which promote health awareness leading to an increase in health supplement consumption The Government of Malaysia, through MOH, plays a pivotal role in increasing the health awareness amongst its population in the country. The MOH has been diligently organising various health-oriented campaigns and events, with the main aim of promoting preventive health measures. Among some of the . campaigns and events MOH has organised in the past include campaigns on increasing awareness on cancer, oral health, heart health, mental health, sexual health, as well as anti-smoking campaigns. free medical check-ups and health talks. In addition, non-governmental organisations (“NGO”) such as the National Cancer Society Malaysia and the National Heart Association of Malaysia, have also contributed in raising health awareness through their initiatives to organise health-oriented campaigns. These campaigns and events generally aim to raise overall health awareness of the popUlation, and the health supplement manufacturing industry indirectly benefits from such programmes. Government incentives in light of promoting the health supplement manufacturing industry The Government of Malaysia has identified the health supplement manufacturing industry as a new source of wealth for Malaysia.12 In light of this, the Government of Malaysia has launched national initiatives to promote the development of health supplement products and support the growth of the health supplement manufacturing industry as a whole. The national initiatives set out by the Government of Malaysia supports all industry segments of the health supplement manufacturing industry, including raw materials cultivation and farming, research and development, and manufacturing of health supplement products. There are several Government initiatives to support and promote herbal cultivation and farming, as listed below: a) East Coast Economic Region Development Council (“ECERDC”) The ECERDC herbal industry project is expected to generate a Gross National Income of RM3.25 billion by 2020, assisting the country to create over 2,500 new jobs and 530 contract farmers.13 The herbal industry will thus supply the cultivated raw materials to the health supplement manufacturing industry players to manufacture herbal-based supplements and functional food products. Other incentives enjoyed by companies who participate in this initiative include tax exemptions for 10 years. Appointed industry players in this project will also provide training in farming techniques to contract farmers and satellite farmers with the aim of achieving higher productivity. 11 Extracted from the Independent Market Research Report by SMITH ZANDER 12 Extracted from the Independent Market Research Report by SMITH ZANDER 13 Extracted from the Independent Market Research Report by SMITH ZANDER
15 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
b) Bio Desaru Besides federal initiatives. there are also state initiatives such as the Johor State government embarking on a fully integrated agro-based development project based in South-Eastern Johor called Bio Desaru in order to fulfil state and national objectives under the National Biotechnology Policy. 14 Johor Biotechnology and Biodiversity Corporation have been given the task of developing about 10.000 acres of land designated for Bio Desaru. Bio Desaru is intended to be a regional Green Food Hub and an Agro-Tourism Centre which integrates modern biotechnology and agro-culture. This will be especially beneficial to the health supplement manufacturing industry as herbs that are used as raw materials are cultivated in herb farms in Bio Desaru. These initiatives in herbal cultivation and farming are expected to benefit health supplement manufacturing industry players in ensuring consistent quality supply of herbal active ingredients. In addition. the Government of Malaysia has also appointed organisations as welf as created programmes to spearhead the growth of research and development within the health supplement manufacturing industry. Among some of these programmes and organisations include: a) Entry Point Project (UEPP”) 1 The EPP 1 under the ETP, driven by the Perfonnance Management Delivery Unit (“PEMANDU”). aims to improve product quality and marketing efforts of dietary and herbal supplements to tap into the global demand for “high-value herbal products” (which are herbal-based nutraceuticals or health supplement products and botanical drugs with scientifically backed claims). This initiative involves the appointment of health supplement manufacturers as Anchor companies to spearhead the development. including marketing and branding of “high-value herbal products”. Under this initiative, a grant is given to each Anchor company to carry out pre-clinical and clinical trials on their herbal supplement products. Once the pre-clinical trials are completed, these manufacturers can then launch their health supplements as premium products as they are considered health supplements with functional claims (Le. medium claims). At the end of the clinical trial stage, the product would have sufficient scientific claims to be registered as a botanical drug. b) Malaysian Technology Development Corporation (UMTDC”) The Government set up MTDC in 1992 to promote the adoption of technologies by local companies through the commercialisation of local research and inventions, and investment in new technologies from abroad. Under the 10th Malaysia Plan, the role of MTDC has been expanded to create an effective ecosystem for commercialisation of home-grown technologies in order to groom a new generation of “Technopreneurs” (Le. technology entrepreneurs) through comprehensive nurturing services that support them across the value chain, from laboratory ideas to commercialisation. Furthermore, MTDC has now evolved to become an Integrated Venture Capital Solutions Provider, of which it manages grants, venture capital funds, technology centres and nurtures technology companies. 14 Extracted from the Independent Market Research Report by SMITH ZANDER 16 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Some of the funding schemes and grants provided by MTDC are as follows: Equity Funding and Grants provided by MTDC Fund name I Technology I Acquisition Fund l~­Commercialisation of R&D Fund (“CRDF”) I .. … .. Maximum amount per company Acquisition of foreign technology I RM2.0 million or 50% of the eligiblethrough licensing of technology or ht h f t h I II expenses (whichever is lower)outng· purc ase 0 ec no ogy ——————.————l~;~~;~~~;–~-;Dby a Sma~~ Me~ium I Enterprise (“SME”): RM4 million or I 70% of the eligible expenses Commercialisation of local R&D I(whichever is lower) II For any public non-SME: RM4.0 , million or 50% of the eligible expensesI (whichever is lower) ~ess Start-~p . Support and encourage n~w ~;.;~~~~~-~~–t-~M5 millio~~;~~ximum of 900/: of t~ Fund (“BSF”) ~I technology-based companies I total project cost (whichever is lower). —–+———–+-~—————–­Provide follow-on funding to previously I I successful grant recipient companies in I I order to accelerate development of local !
Business Growth high-tech companies for R&D and ! Ja) Fund (“BGF”) commercialisation and help companies ,I bridge from grant to venture capital II
[EBumiPu~eraF ::~:~BwniPutera bUSi=~ti:-:+U-t–RM1-5–:I·-I.————–1
d I xpanslon un dh .b’ –II I P 0 mlIon II (“BEFU) I expan t elr uSlnesses Internatlona y I L ——L. __. –..L . . ._~J Note: (a) Information not publicly available Source: Extracted from the Independent Market Research Report by SMITH ZANDER c) Malaysian Biotechnology Corporation Sdn Bhd (“MBC”) MBC is an agency under the purview of the Ministry of Science, Technology and Innovation (“MOSTI’) to execute the objectives of the National Biotechnology Policy. The objective of the establishment of MBC, amongst others, is to nurture and support the growth of biotechnology companies, and to actively promote foreign direct investments in the biotechnology sector. The BioNexus status is a recognition awarded by the Government of Malaysia, through the MBC, to qualified companies that participate in and undertake value-added biotechnology activities in focus areas specified by MBC. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
BioNexus status companies enjoy a set of privileges and incentives contained within the BioNexus Bill of Guarantees such as the freedom to source funds globally, to bring in knowledge workers, receive assistance for international accreditation and standards, access to shared laboratories and other related services, strong intellectual property regime, as well as eligibility for competitive incentives and other assistance. Part of the competitive incentives enjoyed by BioNexus status companies include the following, amongst others: • An exemption from tax on 100% statutory income; ~ For a period of ten (10) consecutive years of assessment from the first year the company derived statutory income from the new business; or ~ For a period of five (5) consecutive years of assessment from the first year the company derived statutory income from the existing business and expansion project. • An exemption of 100% statutory income derived from a new business or an expansion project that is equivalent to an allowance of 100% of qualifying capital expenditure incurred for a period of five (5) years.
• A BioNexus status company is entitled to a concessionary tax rate of 20% on statutory income from qualifying activities for ten (10) years upon the expiry of the tax exemption period.
• Tax exemption on dividends distributed by a BioNexus status company.
• Exemption of import duty and sales tax on raw materials/components and machinery and equipment.
• Double deduction on expenditure incurred for R&D.
• Double deduction on expenditure incurred for the promotion of exports.
• Buildings used solely for the purpose of biotechnology qualifying activities will be eligible for Industrial Building Allowance to be claimed over a period of 10 years.
• A company or an individual (that carry on business) investing in a Biol\lexus status company is eligible for a tax deduction equivalent to the total investment made in seed capital or early stage financing.

[The rest of this page is intentionally left blank] 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
d) MOSTI MOSTI provides funds in various areas of biotechnology to support the development of the biotechnology industry: Grants provided by MOSTI Fund name Purpose of funding Maximum amount per company iRM1.5 million to RM3.0 million I i Funding for technology development, up (depending on the merit of theTechnoFund I to pre-commercialisation stage proposal) ————-~———–­, To support research that can lead to innovation of products or processes for . F d further development or
RM500,OOOI Sclence un -‘I’ t’ d/ t t l ~ I commercia Isa lon, an or 0 genera e I new scientific knowledge and strengthen I national research capacity and capability -_.._-.._———-j-~———–.. +—-­I ITo increase participation from micro
Individual/ sole proprietor: I businesses/individuals, and encourage1­RM50,OOOI InnoFund technological participation of new or! I existing products, process or services for I Micro/ small businesses: I commercialisation RM300,OOOI__._. __. I ~_.. -=-_–:—-=~=_ __-JI Source: Extracted from the Independent Market Research Report by SMITH ZANDER The grants and incentives awarded by the above governing bodies encourages health supplement manufacturing industry players to spearhead R&D projects and initiatives to develop new product formulations and enhance manufacturing technologies. This provides the industry players with the opportunity to playa key role in further developing the health supplement manufacturing industry in Malaysia, while benefiting from the incentives provided by the governing bodies, with opportunities for increased revenue as a result of the R&D projects and initiatives undertaken. [The rest of this page is intentionally left blank] 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Industry Size, Outlook and Prospects The health supplement industry has been identified by the Government of Malaysia to be a new emerging sector for development, as it is classified as EPP 1 under the ETP. The health supplement manufacturing industry is in its growth stage, and thus has potential for further growth to cater for increasing local and international demand. The industry size for the health supplement manufacturing industry in Malaysia can be measured based on revenues of identified industry players. SMITH ZANDER has identified 131 industry players comprising: (i) industry players registered with NPCB (as at 2012, which was the latest available list provided by the NPCB as of August 2014)’5; and
(ii) industry players identified based on the list of health supplement companies awarded with BioNexus status as well as through SMITH ZANDER’s independent primary and secondary research.,e

Based on the revenues of these 131 identified industry players, the health supplement manufacturing industry size increased from approximately RM501.23 million in 2009 to approximately RM676.59 million in 2013, at a CAGR of 7.79%. The industry size in 2013 is the latest available as the financiC!1 year ended (“FYE”) 2013 is the latest year where financial information of the identified industry players are available. Health Supplement Manufacturing Industry Size (Malaysia), 2009-18(f)
2009 2010 2011 2012 2013 2014(e) 2015(f) 2016(f) 2017(f) 2018(f) Note: Latest available data is 2013 as at 9 February 2015.
Source: Extracted from the Independent Market Research Report by SMITH ZANDER 15 While there were 170 companies registered with the NPCB (as at 2012), 113 players were verified to be in active operations and were revenue generating companies. The remaining 57 companies were either non-revenue generating based on their audited accounts filed with SSM, or there was no publicly available information on them to verify their scope of operations and/or their financial results, and thus they were excluded from the computation of industry size. ,. There are 18 identified industry players based on the list of health supplement companies awarded with BioNexus status as well as through SMITH ZANDER’s independent primary and secondary research. As the latest available list of health supplement companies registered with the NPCB is as at 2012, SMITH ZANDER was unable to verify if these 18 players are presently registered with the NPCB. However, on the basis that they were either BioNexus status companies and/or their operations in the manufacturing of health supplements were verified, these companies were included in the computation of industry size. 20 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
As with all consumer goods, the historical growth trend of health supplements is reflective of Malaysia’s economic growth, where there was a slower growth in 2011 due to the European sovereign debt crisis during the period which affected the global economy. Nevertheless, the health supplement manufacturing industry in Malaysia demonstrated resilience during this period, posting growth of 3.71% between 2010 and 2011. Overall, the industry grew by 34.99% during this period. In 2014, the health supplement manufacturing industry in Malaysia was estimated to have risen to RM717.14 million. SMITH ZANDER forecasts the health supplement manufacturing industry to grow to RM914.59 million by 2018, representing a CAGR of 6.27% between 2014 and 2018. This is driven by the increasing income of the population, rapid urbanization in the country, an ageing society as well as overall increased health awareness in Malaysia. In addition, the health supplement manufacturing industry is also expected to continue to benefit from Government initiatives, incentives and grants for the development and commercialisation of health supplement products. Key Supply Conditions and Dependencies Availability of raw materials and supplies The raw materials used in the manufacturing of health supplement products in Malaysia are primarily herbal and non-herbal extracts or active ingredients, and these include herbal active ingredients such as medicinal mushrooms (e.g. C. sinensis and L. rhinoceros), Tongkat Ali, Misai Kucing, Hempedu Bumi and Kacip Fatimah, as well as non-herbal active ingredients such as fish oil, collagen and pearl powder. Most of these active ingredients and supplies are generally readily available, and health supplement manufacturers typically source these raw materials and supplies from local suppliers and importers. However, health supplement manufacturers must ensure the quality of these active ingredients and supplies as the product manufactured must be compliant with the safety requirements set out by the authorities. In order to ensure the quality of their raw materials, there are also certain health supplement manufacturers who cultivate their own raw materials, particularly herbal ingredients which can be easily cultivated in Malaysia’s tropical climate. Availability of labour and equipment for the manufacturing of health supplement products Health supplement manufacturing is typically a semi-automated process, as it requires both human labour and equipment. Equipment utilised in the manufacturing of health supplement products include, amongst others, mixers, encapsulation equipment, tableting equipment and tablet counting equipment. As most industry players typically manufacture products based on various product formulations and their products may be manufactured in different product dosage forms (e.g. capsule, tablet, sachet and teabag dosage forms), human labour is required to transfer mixtures or compounds from one equipment to another. Both equipment and labour required in the manufacturing of health supplement products are readily available, with equipment available for purchase from local suppliers and importers, and domestic and foreign workers hired as labour for the manufacturing process. Product I Service Substitution Health supplement products are products which are consumed to maintain general wellness and are typically consumed to “supplement” the intake of certain active compounds or phytochemicals. Examples of some of these active compounds include polyphenols in fruits, isoflavones in the legume soy and beta­carotene in vegetables. These active compounds are typically found in certain food products, or are extracted from herbal and non-herbal materials to manufacture health supplement products. As such, other than the food products, there is no direct substitute for health supplement products. 21 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Reliance and Vulnerability to Imports The health supplement market in Malaysia has historically witnessed substantial imports. In 2013, total imports of health supplement products in Malaysia was valued at RM4.83 billion. This is largely due to two (2) main factors, namely that the domestic market in Malaysia is receptive to foreign brands of health supplement products, and that the domestic health supplement manufacturing industry is still a relatively young and growing industry. Among Malaysia’s largest importers are the US and China, collectively comprising approximately 20% of imports into Malaysia in 2013. Relevant Laws and Regulations Some of the key regulations, acts, standards and guidelines which health supplement manufacturers have to adhere to are as follows: Food Act 1983 The Food Act 1983 protects the public against health hazards and fraud in the preparation, sale and use of food and for other related products. While herbal and non-herbal supplement products are governed by the NPCB, functional food products are considered as food products and are thus governed by this Act. The Act grants any medical officer or health inspector from the MOH or any other local authority, or any suitably qualified person appointed by the authorised officer, to enter any premises which he believes to be food premises in order to examine any food found or take samples of the food; stop, search and detain any aircraft, ship, vehicle as well as open and examine any package which he believes to contain food; as well as seize and detain for such time food which he believes to have contravened this Act. This Act sets out the requirements for food premise conditions as well as the offences for sale and marketing of food products. In any proceedings under the Food Act in relation to the food product, the Certificate of Analysis is sufficient for the disclosure of product information, unless the information can be rebutted from other reliable evidences. Control of Drugs and Cosmetics Regulations 1984 According to the Control of Drugs and Cosmetics Regulations 1984, the DCA is the authority established for the purpose of this Regulation. The Control of Drugs and Cosmetics Regulations 1984 states that no person shall manufacture, sell, supply, import or possess or administrate any pharmaceutical product unless the product is a registered product and the person holds the appropriate licenses issued under this Regulation. This Regulation encompasses all pharmaceutical products, including traditional medicine and homeopathic medicine. This Regulation also highlights that the Director of Pharmaceutical Services, which is a member of the DCA, has the right to issue written directives or guidelines to any persons or group of persons which he deems necessary for the better carrying out of the provisions under the Regulation. In light of this, the Director of Pharmaceutical Services has issued the Drug Registration Guidance Document which states the evaluation standards required for a product to be registered. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Drug Registration Guidance Document The Drug Registration Guidance Document is issued by the Director of Pharmaceutical Services under Regulation 29, Control of Drug and Cosmetics Regulation 1984, and NPCB reserves the right to amend any part of the document wherever it deems fit. Products have to meet the evaluation standards listed in the Drug Registration Guidance Document in order to be registered. For traditional and health supplement products, some of the key standards which manufacturers must comply with are as follows: • Good Manufacturing Practice a The compliance to the GMP is a pre-requisite for the application of a product registration. GMP is a standard that should be followed by manufacturers of a registered pharmaceutical or traditional product to ensure that the product manufactured is safe, efficacious and of quality. The Centre for Compliance and Licencing (“CCl”) is responsible for GMP inspections of manufacturers of registered products to ensure manufacturers’ compliance towards the GMP requirements. GMP certificates are issued for the purpose of exportation of locally manufactured registered products. It endorses that local manufacturers complies with the current GMP requirements and these certificates are required by overseas regulatory agencies for product registrations in their countries. • Product indications a There must be indications that the product is either to be used as a health supplement or is a vitamin or mineral for pregnant and lactating women. • Active ingredients used in the products: a Recommended dosages must not exceed maximum daily levels of vitamins and minerals stated in the Drug Registration Guidance Document by NPCB. • Product claims a There are three (3) types of health supplement product claims, Le. general or nutritional claims, functional claims (medium claims), disease risk reduction claims (high-claims). a Disease risk reduction claims or high-claims can only be made if there are evidences to substantiate these claims. a For general or nutritional claims and functional claims, a minimum of 15% of the Codex Nutrient Reference Value per daily dose of vitamins and/or minerals. a All claims must be consistent with the definition of health supplement, enable consumers to make informed choices, not be misleading or false, support the safe, beneficial and appropriate use of the product, maintain the level of scientific evidence which is proportionate to the health claims, be for maintenance and promotion purposes only and must not be medicinal or therapeutic in nature such as implied for treatment, cure or prevention of illness. a For natural products, NPCB has implemented drug registration guidelines listing all products that are prohibited under the traditional medicine section, as well as labelling guidelines of specific warnings and statements with regards to functional claims on health supplements. In Malaysia, health claims on nutraceutical products are monitored, and the marketing and sale of these products are regulated to protect the interest of consumers. The indications acceptable for traditional products are limited to categories such as: 23 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
• General health maintenance
• Blood and body fluid
• Bone, muscle and joint
• Pain and fever
• Cough and cold
• Digestive system
• Women’s health
• Men’s health
• Skin and external usage

• Product labelling and packaging inserts o Product labelling must follow the standard labelling requirements stated.
o All information must be truthful and not misleading to consumers
o Packaging inserts is required to include the list stated. Examples of some of these requirements are brand or product name, name and strength of active substance(s), dose or usage instructions, warnings and precautions and interaction with other medication(s).

Certificate of Free Sale A Certificate of Free Sale is issued by the Malaysia External Trade Development Corporation (UMATRADE”) to facilitate exporters from Malaysia in exporting local household products to countries which require such certificates. It assures the importing countries that the respective product has been sold freely in the country of origin. This certificate is only for finished household products which are manufactured locally. Amongst some of the pre-requisites for obtaining a Certificate of Free Sale include a letter of application containing the product information and the importing country, manufacturing license or standards or business license (which includes the GMP) or Certificate of Free Industrial Zone, brochures and pamphlets of the products, as well as past invoices of the products. Medicines (Advertisement and Sale) Act 1956 (revised 1983) Advertising for pharmaceuticals in Malaysia are governed by the Medicines (Advertisement and Sale) Act (revised 1983). It is a requirement that all advertisements on pharmaceuticals, which includes health supplement products, are approved by the Medicine Advertisements Board. According to this Act, any article(s) must not lead to the description of the product as a medicine, or as an appliance or remedy for the purpose of treatment or prevention of diseases or conditions, unless it has been approved by the Medicine Advertisements Board. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Competitive Landscape In 2012, there were approximately 170 health supplement manufacturers registered with the NPCSY However, for the purpose of this report, 131 industry players were identified as health supplement manufacturers, based on the explanation provided in Chapter 3 -Industry Size, Outlook and Prospects of this report. The health supplement manufacturing industry includes industry players which are involved in contract manufacturing and industry players which manufacture their own house brand of products, as well as industry players which are involved in both of these activities. Out of the 131 identified health supplement manufacturing industry players, only one (1) is a foreign industry player and its parent company is headquartered in Singapore. The remaining industry players are local companies, and some have ventured overseas. The health supplement manufacturing industry is moderately fragmented, with a majority of industry players consisting of SMEs. The industry is in its growth stage, and as such the industry size is expected to grow in line with the growing demand for health supplement products locally as well as internationally. Key Industry Players There are generally three (3) types of industry players in the health supplement manufacturing industry in Malaysia, Le. (i) industry players which are involved in contract manufacturing of finished health supplement products and manufacturing of semi-finished products which are sold to other manufacturers for further processing; (ii) industry players which are involved in the manufacturing of their own house brand products, or are manufacturing arms of large health supplement retailers; (iii) industry players which are involved in both contract manufacturing as well as the manufacturing and sale of their own house brand products. Some of these health supplement manufacturing industry players also have the capability to perform their own research and development activities on product formulations, while others outsource their research and development activities to third party research and development organisations. Many of the larger health supplement manufacturing industry players are typically manufacturing arms of larger establishments with retail businesses in health supplement products and/or who own their own retail outlets which extends their reach to end-user customers or consumers. [The rest of this page is intentionally left blank] 17 Extracted from the Independent Market Research Report by SMITH ZANDER 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
A list of major selected health supplement manufacturing industry players in Malaysia is shown as follows: • Bioalpha Holdings Berhad
• CS Progyms Pharmaceutical Sdn Bhd
• DXN Pharmaceutical Sdn Bhd
• Ecolite Biotech Manufacturing Sdn Bhd
• Exclusive Mark Sdn Bhd
• Gano Excel Industries Sdn Bhd
• Herbal Science Sdn Bhd
• J.B. Pharmacy Group Sdn Bhd
• Len Fa Medical Supplies (M) Sdn Bhd
• Syarikat Wen Ken Drug Sdn Bhd
• The Origin Foods Sdn Bhd
• Thoyyib Pharma Industries (M) Sdn Bhd
• Weng Li Sdn Bhd
• Yanling Natural Hygiene Sdn Bhd

Note: Includes selected key industry players registered with the NPCB and with revenue of RM10 million and above in the latest financial year end available Source: Extracted from the Independent Market Research Report by SMITH ZANDER [The rest of this page is intentionally left blank] 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Market Share In 2013, which is the latest available as the FYE 2013 is the latest year where financial information of the identified industry players are available, the health supplement manufacturing industry size in Malaysia was approximately RM676.59 million. Bioalpha Holdings Berhad had a market share of 3.63% in 2013, based on its revenue of RM24.57 million in FYE 31 December 2013. This is an increase from the previous year, where Bioalpha Holdings Berhad garnered a market share of 3.01 % based on its revenue of RM19.12 million in FYE 31 December 2012 and an industry size of RM634.96 million in the year. Health supplement manufacturing industry -Market share (Malaysia), 2012 and 2013 Amongst health supplement manufacturers, 2013Amongst health supplement manufacturers, 2012

Source: Extracted from the Independent Market Research Report by SMITH ZANDER [The rest of this page is intentionally left blank] 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
4 OVERVIEW OF THE RETAIL MARKET IN MALAYSIA Definition and Segmentation The retail sector in Malaysia is an integral component of the nation’s economy and the fourth largest contributor to GDP after oil and gas, agriculture and manufacturing. The retail landscape in Malaysia has transformed in the last decade with modern retail formats increasing in dominance over small family­owned and operated shops. The launching of large shopping malls has increased the lifestyle elements of shopping in Malaysia, with retail concepts carefully chosen to target specific consumer groups. Globalisation has also brought foreign players, franchises and new retail concepts into the retail market in Malaysia. In the Asia Pacific region, Malaysia has the largest share of foreign grocery retailers on its shores, with retailers such as Tesco and Aeon Big (formerly known as Carrefour), being the mainstays of the sector following the positive effects of liberalised business policies implemented in 1995. The retail sector in Malaysia is led by large chains of hypermarkets and supermarkets, who are typically grocery retailers, which collectively contribute to approximately 15% of total retail earnings. The grocery retail segment also include traditional retailers such as independent small grocers, and food, beverage and tobacco specialists. Major non-grocery retailers include mixed retailers and specialists providing apparel, health and beauty, home and garden, electronics and appliances, and leisure and personal goods. Technology has also been a key factor affecting retail sales and has broadened distribution channels, with internet-savvy youths and young adults contributing to growth in online retail transactions through various electronic commerce (“e-commerce”) platforms. Internet retailing is appearing as a significant retail channel for non-grocery products and there are a large number of internet retailers that carry out business transactions via social media channels such as Facebook. Several large and established retailers are also responding to the growth of e-commerce by adding internet retailing as a channel for online purchases. By 2020, approximately 54% of Malaysia’s population will be below the age 30 18 alluding to the fact that a large percentage of the population would have been raised in an environment where online transactions is the norm. [The rest of this page is intentionally left blank] 18 Extracted from the Independent Market Research Report by SMITH ZANDER 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Retail market in Malaysia -market segmentation
Note: ~::_-_-_-! Market segment where Bioalpha Holdings Berhad currently competes in.
Source: Extracted from the Independent Market Research Report by SMITH ZANDER With its house brand products, Bioalpha Holdings Berhad operates within the health and beauty specialist category in the retail market in Malaysia. Market Size and Growth Prospects The retail market in Malaysia, measured by the value of retail sales, grew from RM108.0 billion in 2004 to RM168.7 billion in 2013 at a CAGR of 5.08%. Store-based retailers comprised 94.69% of total retail sales in 2013, having recorded a growth from RM102.7 billion to RM159.7 billion between 2004 and 2013 at a CAGR of 5.03%. Non-store retailing comprised a smaller 5.31 % of total retail sales and grew at a rate of 5.90% between the same period of 2004 and 2013. The largest segment of non-store retailing in 2013 was direct selling which formed 82.80%, this channel witnessed the highest growth rate of 19.17% between 2004 and 2013. Retail sales in Malaysia is expected to grow from RM168.7 billion in 2013 to RM190.5 billion in 2016 at a CAGR of 4.13% with store-based retailing continuing to remain a key component of retail sales. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Retail market in Malaysia -growth in retail sales 240,000 o 200,000

.5 .9 i 160,000 ‘E ::2: ~ 120,000 rn ..!!1 rn ‘” ‘roQ) 80,000 a: 40,000 o 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 _Store-based -Non-store –Total Source: Extracted from the Independent Market Research Report by SMITH ZANDER Key Demand Drivers Increasing disposable income of the population signifies growth potential for retail sales Malaysia is an upper-middle income developing economy with aspirations to achieve developed status by the year 2020. GOP per capita increased by 30.93% from approximately RM25,385 in 2009 to RM33,236 in 2013 while purchasing power parity (“PPP”) per capita income increased by 26,20% from approximately US014,063 (RM49,55219 ) to US017,748 (RM55,92620 ) during the same period. This increase in disposable income is leading to a rise in a more affluent population that has greater spending power, creating demand for basic necessities and non-essential products. The ETP (2011-2020) was launched in an effort to promote Malaysia into an inclusive and sustainable high-income country by the year 2020. The ETP is a comprehensive initiative comprising 131 high impact projects under 12 economic focus areas that have the potential to stimulate economic growth. The implementation of the ETP will allow Malaysia to be closer to achieving its goal of raising the per capita disposable income of the population to approximately RM48.000 by 2020.21 The Government expects Malaysia to achieve GOP growth of between 4.50% and 5.50% in 2015. Private investments are also targeted to rise by 12.70% to hit RM153.0 billion in 2014. In order to achieve a per capital income of RM48,000, the Government intends to attract RM1.4 trillion in investments which is expected to create 3.3 million jobs, of which 60% are expected to be in high value sectors under the 12 economic focus areas under ETP. The Government is keenly aware of the challenges faced especially by the middle income population, and has set forth initiatives and policies in favour of this group. Apart from tax cuts announced under Budget 2014, concrete efforts have been taken through the implementation and increases in RPGT to curb speculation in the property sector which has historically pushed prices to unaffordable prices, and the launching of affordable housing schemes. These concrete efforts are significant in the move to 19 Converted based Bank Negara Malaysia’s annual average exchange rate in 2009 of USD1 =RM3. 5236 20 Converted based Bank Negara Malaysia’s annual average exchange rate in 2013 of USD1=RM3. 1511 21 Extracted from the Independent Market Research Report by SMITH ZANDER 30 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
increase incomes and reduce living costs, both of which are goals of the Government and the ETP. The increasing disposable income of the population has the potential to contribute to higher retail sales in the country. Greater Government-driven initiatives to propel the retail market in Malaysia and boost retail expenditure The retail and wholesale sector is a major contributor to Malaysia’s GNI and thus has been identified as one (1) of the 12 key economic focus areas under the ETP. The ETP (2011-2020) was launched in 2010 with the goal of promoting Malaysia into an inclusive and sustainable high-income country by the year 2020. The ETP is a comprehensive initiative comprising 131 high impact projects under 12 economic focus areas that have the potential to stimulate economic growth. The retail sector is a key driver of domestic consumption and plays a significant role in promoting economic growth. Despite recent developments in the retail market, retail expenditure in Malaysia (RM3,154 or USD905.8322 ) is substantially lower compared to that in countries such as South Korea (USD2,995 or RM9,254.5523), Taiwan (USD3,115 or RM9,625.3523) and Singapore (USD3,423 or RM10,577.0723). While this disparity can be partially attributed to differing income levels, the Government of Malaysia intends to drive retail spending in achieVing the targets under ETP. In achieving the GNI targets for the retail sector, the Government intends to improve access to finance, Iiberalise the retail sector and streamline set-up and expansion requirements. upgrade transportation infrastructure and grow human capital. [The rest of this page is intentionally left blank] 22 Converted based Bank Negara Malaysia’S annual average exchange rate in 2012 of USD1=RM3.090 23Converted based Bank Negara Malaysia’s annual average exchange rate in 2012 of RMO.2872=USD1 31 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
5 PROSPECTS AND OUTLOOK FOR BIOALPHA HOLDINGS BERHAD The health supplement manufacturing industry in Malaysia had an industry size of approximately RM501.23 million in 2009, and this grew to approximately RM676.59 million in 2013, at a CAGR of 7.79%. The industry is estimated to grow from RM717.14 million in 2014 to RM914.59 million in 2018, at a CAGR of 6.27%. The growth of the health supplement manufacturing industry directly correlates with the health supplement market, which denotes the consumption of health supplements in Malaysia. The health supplement market in Malaysia has demonstrated strong positive growth over the last five (5) years, from RM2.60 billion in 2009 to RM3.15 billion in 2013, representing a CAGR of 4.91 % or an overall growth of 21.15% in five (5) years. Meanwhile, the global health supplement market is also growing, from USD154.70 billion (RM515.44 billion24) in 2008 to USD207.80 billion (RM642.10 billion25) in 2012, registering a CAGR of 7.66% during the same period. In 2012, sales of functional foods comprised approximately 53% of the total global health supplement market, while sales of herbal and non-herbal supplements contributed approximately 47% to the global market. The prospects for growth in the health supplement manufacturing industry in Malaysia are positive as the industry is expected to continue being driven by the increase in income where purchases are increasingly diversifying from staple food products to more expensive and quality purchases, which include products with health benefits such as herbal and non-herbal supplement products, as well as functional foods; the growing chronic lifestyle diseases, infections and obesity concerns which has heightened Malaysia’s awareness in preventive healthcare, and thus driving demand for health supplement products; rapid urbanisation and an ageing society driving the increase in health awareness and market acceptance of health supplements; health-oriented campaigns and events which promote health awareness; and the Government’s initiatives and incentives in promoting and encouraging herbal cultivation and farming as well as health supplement manufacturing. Bioalpha Holdings Berhad, as one of the industry players in the health supplement manufacturing industry in Malaysia, shows potential to gain from the growing industry. In 2012, Bioalpha Holdings Berhad’s market share in Malaysia was 3.03% based on its revenue of RM19.12 million in the FYE 31 December 2012. The Company’s market share increased to 3.63% in 2013, based on its revenue of RM24.57 million in FYE 31 December 2013. The company’s future growth is expected to be supported by opportunities arising from the growing health supplement market in Malaysia as well as globally, as it is well-positioned in the market with its wide range of health supplement products, as well as being one of the selected health supplement manufacturing industry players in Malaysia to be appointed as an Anchor company to undertake pre-clinical and clinical research studies for health supplements with functional or medium claims and botanical drugs under EPP1. These factors are expected to drive the future growth of the company. 24 Converted based Bank Negara Malaysia’s annual average exchange rate in 2008 of USD1=RM3.3319 25 Converted based Bank Negara Malaysia’s annual average exchange rate in 2012 of USD1=RM3.090 31

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