The Chinese Healthcare, on the back of strong structural fundamentals and well established reform infrastructure, is entering into a new rapid development era with numerous investment opportunities for global investors.
China Healthcare sector is poised for sustainable yet rapid growth
China is the world's second-largest healthcare market with market total size totaling RMB4.6trn in 2016, representing a 13.5% average growth rate over the past three years. Yet, China's healthcare expenditure accounted only for 6.2% of GDP, vs. 11% in France and close to 19% in US. According to the "Outline of the Healthy China 2030 Plan" issued by the Central Government and State Council, China healthcare industry is expected to reach RMB8trn by 2020 and RMB16trn by 2030, implying an annual growth rate of 15% until 2020 and 7% thereafter.
Aging population is an important structural factor to support sustainable growth. The elderly population (aged 65+) represented c.11.5% of the total population in 2017 and is expected to reach c. 26% by 2050. 65% of this group is suffering from at least one chronic disease. A market research also shows that half of the healthcare demand is generated by people aged 65 and above.
Urbanization, rising disposal income and increasing conscientiousness towards health are also contributing to increasing healthcare consumption.
New regulatory reform well underway, paving the way for quality development and innovation
The healthcare reform started in 2009 with particular focus on drug prices control and universal coverage. Today, almost all of the population is covered by the healthcare reimbursement scheme with out-of-pocket expenditure representing slightly below 30% of the total expenses . Therefore, the key issue that the regulatory reform tends to address today is not the "quantity", but the "quality", i.e. the quality supply with affordable prices to satisfy ever-growing demand while keeping the total expenditure under control.
In that context, the Central Government has initiated a comprehensive set of policies to reshape the healthcare system, called the "Three Medical Linkage" reform ("三医联动"), covering medical reimbursement, medication and medical services. This reform is well underway and is being executed gradually at provincial level. Key measures for illustrative purpose are summarized as follows:
Payment system reform: using a global budgeting based on disease/treatment types, eventually eliminating excess in drug prescription and centralizing purchase.
Negotiation reimbursement list: adding new innovative drugs with a particular focus on clinical value but at significantly discounted prices, potentially leading to pharma companies trading prices for volume.
Fast track of drug approvals by CFDA: shortening time to market for new drugs and clinically urgent drugs.
Quality consistency test: enhancing cost performance of generic drugs, eliminating costly original drugs and poor quality generics.
Zero mark-up: eliminating the 15% mark-up on drugs earned by hospitals, who can now only charge for medical services performed.
Medical treatment classification: redirecting patient flow according to severity and urgency of diseases, enhancing roles of lower-tier institutions, therefore, more balanced distribution of medical resources.
Although the execution is yet to be completed and the full impact needs to be evaluated, this new reform is expected to upgrade quality and elevate standards of the healthcare sector in general, paving the way for innovation.
New market environment creating new winners
Market consolidation and innovation will remain key themes in this sector for a while, driving out unqualified players and benefiting large and innovative groups.
Manufacturers: more focus on profitability and innovation/pipeline; domestic pharma with quality generic supply and cost advantage will be increasingly favored; MNCs continue their strategic review and layout, adapting to new market environment;
Distributors: unclear perspective with continued market consolidation and significant pressure ahead;
Healthcare service providers: significant development opportunity at lower-tier cities
What are cross-border investment opportunities for global and domestic players?
Despite pressure on drug prices and increasing competition from domestic pharmas, global healthcare companies still need to execute a sounding strategy in China given the tremendous opportunities ahead: large population base with increasing disposal income, aging population with chronic diseases, unmet and curbed diversified healthcare demand etc. Direct investment remained stable with c.$2.5bn in 2016 and M&A still at a relatively low level $1.0-1.5bn. Areas attracting most of the foreign investment include drugs and biotech. But healthcare service sector is catching up, attracting clearly more flows than in the past, both in terms of direct investment and acquisitions. With further open-up of the healthcare service sector, we expect to see increasing inbound investment in this field.
China outbound M&A in healthcare experienced explosive volume in 2016 (c. $6bn) with focus in developed regions in particular US and Australia. Areas attractive to Chinese investment include: healthcare services, cutting-edge therapies / quality generics / branded OTC, such as oncology drugs, cardiovascular drugs, blood products, IVD, health supplements etc.
The current context continues to support Chinese outbound investment for the following reasons: 1), enhance R&D and innovation and enrich product portfolio / pipeline become imperative, 2) lack of domestic clinically valuable targets, 3) significantly higher valuation expectations of domestic targets.
We expect to see innovative treatments / quality generics corresponding to China's drugs consumption continue to be interesting targets. IVD, labs, health check, elderly care etc. are also very demanding areas in China.
How we can help
Specialized in cross-border projects involving China and Europe with double business culture, we are happy to put into your service our expertise in business cooperation and M&A, as well as our knowledge about the healthcare sector both in China and in Europe, to help you identify attractive targets / business opportunities and execute them.