CEC Capital Releases '2023 China Healthcare Industry White Paper'

On April 19, at the iCapital China Health Industry Summit 2023, iCapital—a new-economy investment bank with extensive influence in China’s health industry—released its flagship annual industry research report, the “iCapital China Health Industry White Paper 2023” (hereinafter referred to as the “White Paper”). This marks the fifth official release of the series since iCapital first launched it in 2019.

The white paper predicts that over the eight-year period from 2022 to 2030, China will transition from having one in five people aged 60 or older to one in four. The overall scale of China’s health industry will grow from RMB 10 trillion to nearly RMB 20 trillion, with a compound annual growth rate (CAGR) of 9.5–10%.

The white paper compared the RMB 10 trillion market size of China’s health industry in 2022 with that of other sectors, revealing that few industries in China are larger than the health industry, apart from consumer retail, traditional manufacturing, real estate, and logistics.

It is understood that the 2023 China Health Industry White Paper by iCapital is divided into a Core Insights section and six thematic chapters, covering sub-sectors such as pharmaceuticals and biotechnology, healthcare and health services, medical technology and devices, digital and AI health, synthetic biology, and mergers and acquisitions in the health industry. The Core Insights section has been released first, with the six thematic chapters to be published in the near future.

The white paper posits that in the just-concluded year of 2022, China’s health industry experienced an exceptionally unusual year.

In that year, the COVID-19 pandemic, which had ravaged the nation for three years, was finally consigned to memory as the majority of Chinese people recovered from infection and life gradually returned to normal. China’s birth rate experienced a precipitous decline, with fewer than 10 million newborns registered throughout the year. For the first time in 61 years, China’s population recorded negative growth. The aging trend in Chinese society is accelerating, and the various social issues stemming from this demographic shift are becoming increasingly severe.

It was also in this year that the official launch of ChatGPT marked humanity’s entry into a new phase of technological advancement. The new generation of generative artificial intelligence and foundational large language models, exemplified by ChatGPT, will profoundly influence and transform how people access health consultations and services, making medical resources more accessible and inclusive. Beyond artificial intelligence, fields such as synthetic biology, life sciences, materials science, medical and surgical robotics, and brain-computer interfaces are undergoing rapid changes, advancements, and iterations. These developments are swiftly transitioning healthcare from its current focus on diagnostic and therapeutic outcomes to a new era of full-cycle health management, encompassing health monitoring, early prevention, sub-health intervention, precision treatment, and scientifically guided postoperative recovery.

In the same year, the centralized procurement policy launched by the Chinese government advanced significantly toward normalization and institutionalization, profoundly influencing the growth trajectories of the innovative pharmaceuticals and innovative medical devices sectors, and leaving a deep and lasting impact on the industry. Overall, the current centralized procurement policy is driving the healthcare industry to achieve “good money driving out bad,” facilitating batch iteration and upgrading among industry players. Innovative enterprises with genuine R&D capabilities and the agility to embrace change can find their own development paths in the era of centralized procurement, thereby establishing new growth curves under this policy framework.

Meanwhile, Chinese innovative pharmaceutical and medical device companies are accelerating their expansion into overseas markets. Against the backdrop of centralized volume-based procurement, a growing number of Chinese firms specializing in innovative drugs and devices are going global to seek broader markets, more diversified revenue streams, and higher profit margins. They are establishing a presence in international markets through mergers and acquisitions, licensing agreements, and setting up local operations.

Against this backdrop, the white paper posits that the underlying logic shaping the future development of China’s health industry is constituted by four key factors: an aging society, technological advancements, uneven distribution of medical resources, and new policies surrounding medical insurance and centralized procurement. Among these, the most significant driver—bar none—will be the rapidly approaching aging society. With the advent of this demographic shift, the integrated sector of healthcare and elderly care is poised to become China’s largest industry.

The white paper predicts that, influenced by the secondary market, China’s primary healthcare investment market is expected to see a partial recovery beginning in the third and fourth quarters of this year, although the valuation environment will remain predominantly conservative. Meanwhile, RMB-denominated funds—particularly those backed by national and local governments—are rising strongly across multiple industries, including healthcare. This trend is bound to exert a profound impact on investment preferences and valuation frameworks in the primary market. Although the direction and magnitude of this influence may vary across different subsectors, overall, the focus of RMB funds is shifting from incremental growth to existing assets, from top-line growth to profitability, from business models to hard-core innovation, from everyday consumer scenarios to domestic substitution and addressing “chokepoint” technologies, and from mid-stage growth companies to the two extremes of early-stage ventures and those nearing an IPO.

From the perspective of China’s pharmaceutical and biotechnology industry, stricter regulatory oversight of innovative drug R&D, more robust medical insurance reimbursement for innovative drugs, and the normalization and institutionalization of volume-based procurement (VBP) policies are driving high-quality innovation. Embracing VBP and pursuing international expansion have become the core pathways for Chinese pharmaceutical companies.

In the realm of healthcare and health services, historic population decline has reignited debates on elderly care and birth promotion. A flurry of policies across various sectors have been introduced to adjust industry trends. While consumables in fields such as dentistry and ophthalmology are being included in centralized procurement, social capital investment in private healthcare, elderly care, rehabilitation, traditional Chinese medicine (TCM), and "Internet + Healthcare" is steadily advancing, driven by policy support. DRGs/DIP reforms are promoting high-quality development in public hospitals, urging private hospitals to adapt proactively to these changing circumstances.

In the realm of medical technology and devices, a “carrot-and-stick” policy synergy is driving the innovation, upgrading, and localization of medical equipment. Amid the pandemic, the overall medical device market has continued to experience significant growth, with medical equipment (such as ventilators, ultrasound systems, and CT scanners) and the in vitro diagnostics (IVD) sector receiving the strongest positive impetus, thereby accelerating industry upgrading and consolidation.

In the realm of digital and AI-driven health, the development of digital infrastructure spanning the entire drug lifecycle has entered a golden age. Meanwhile, artificial intelligence technologies, exemplified by the phenomenal application ChatGPT, are poised to drive an epochal transformation in digital healthcare. After the exuberance of previous years, the digital health sector returned to rationality in 2022. While the technological foundation has been laid, the greatest value that digital health must demonstrate to capital markets is how to establish sustainable commercialization pathways grounded in sound business logic.

In the field of synthetic biology, a cohort of companies is entering the “harvest” phase characterized by industrialization, commercial deployment, and initial public offerings (IPOs). Against the backdrop of carbon peaking and carbon neutrality goals, synthetic biology has empowered iterative advancements and transformative changes across multiple sectors and value chain segments, including pharmaceuticals and biotechnology, bulk commodities, functional foods, and medical aesthetics and daily chemical products.

In terms of M&A in the health industry, both the transaction volume and value in the healthcare M&A market showed a downward trend in 2022. The participation of financial investors decreased significantly, while strategic corporate buyers became the main drivers of M&A transactions. Widespread valuation inversion in the secondary market has increased the demand for exit through M&A. Amidst domestic centralized procurement and the wave of import substitution, multinational corporations have either strengthened their domestic presence through M&A or divested their domestic assets, leading to continued polarization in strategic layouts.

From the perspective of various sub-sectors, the investment hotspots in 2023 were mainly reflected in the following tracks: in the pharmaceutical and biotechnology sector, cell therapy, specialized drugs, nucleic acid drugs, antibody-drug conjugates (ADCs), the CXO industry, radiopharmaceuticals, and CNS drugs; in the healthcare services sector, elderly care, obstetrics, gynecology and pediatrics, consumer healthcare, smart healthcare, diversified payment models, independent third-party medical centers, brain science, and internet and digital healthcare; in the medical devices sector, upstream life sciences, scientific research instruments, ophthalmology, heart failure and electrophysiology, regenerative medicine, IVD industry consolidation, and home healthcare; in the digital healthcare sector, AIGC-driven transformation of the healthcare industry supported by large language models, digital infrastructure construction around the full lifecycle of drugs, and brain science; and in the synthetic biology sector, upstream industries applying foundational technologies, vaccine R&D, microbiome therapy, peptide and recombinant protein drugs, bio-based biodegradable plastics, bulk bio-based alcohols and acids, alternative proteins, and novel food additives.

In the field of mergers and acquisitions (M&A) within the health industry, changes in the policy environment are expected to further increase the supply side of M&A activities, thereby stimulating market vitality. The full implementation of the registration-based IPO system has accelerated the divergence in valuations of companies listed on the secondary market. In an ecosystem characterized by intensified competition and survival of the fittest, M&A strategies cannot be overlooked. Furthermore, the dual forces of deepening centralized procurement and the substitution of imported products with domestically produced ones will create opportunities for joint ventures, M&A, restructuring, asset divestitures, and spin-off financing between Chinese enterprises (including state-owned enterprises) and multinational corporations.