China Healthcare Industry White Paper 2021 by China Renaissance Capital

Although there are no particularly authoritative statistics with clear methodologies regarding the scale of China’s health industry, the market generally accepts the estimate that it reached RMB 8–9 trillion in 2019–2020. Of this, the pharmaceutical-related market accounted for approximately RMB 2.5 trillion, the medical device and diagnostics market for about RMB 1 trillion, and the medical services, digital health, and broader wellness market for roughly RMB 4.5–5.5 trillion. According to the “Healthy China 2030” Planning Outline released by the Chinese government in October 2016, the total size of China’s health industry is targeted to reach RMB 16 trillion by 2030.

The 2030 development goals were issued by the State Council in 2016. We tend to believe that these goals now appear overly conservative. According to the latest census results released by the National Bureau of Statistics, China’s population aged 60 and above has reached 260 million, accounting for 18.7% of the total population; those aged 65 and above have reached 190 million, representing 13.5% of the total population.

We project that if the scope of China’s health industry is expanded to include segments of the elderly care market closely tied to medical and health services, it will likely grow from under $2 trillion in 2021 to over $5 trillion by 2030, at a compound annual growth rate (CAGR) exceeding 10%, driven by the accelerating arrival of an aging society. This would make it very likely the only national market globally that combines such scale with such rapid growth in the multi-trillion-dollar range.

In our view, the most fundamental drivers propelling the vigorous growth of China’s health industry are the shifting age structure of the Chinese population, national strategic priorities and government policies, advancements in big data and artificial intelligence (AI), the COVID-19 pandemic, and heightened enthusiasm in the capital markets. Meanwhile, boundaries among various segments of the health industry are becoming increasingly blurred, with growing convergence between testing and diagnostics, pharmaceuticals, and health management. Underpinning this integration is ubiquitous, readily accessible, and self-reinforcing health-related big data.

1. An aging society is the most important catalyst and driving force for China’s health industry

According to the latest census results released by the National Bureau of Statistics, China’s population aged 60 and above has reached 260 million, accounting for 18.7% of the total population; the population aged 65 and above has reached 190 million, accounting for 13.5% of the total population. Based on certain market forecasts, by 2050, China’s population aged 60 and above is projected to more than double, exceeding 500 million, and its share of the total population is likely to surpass 40%; the population aged 65 and above is expected to reach 300 million, with its proportion of the total population likely to exceed 25%.

From our perspective, the aging of China’s demographic structure is the single most important catalyst and driver of China’s health industry.

The rapidly aging society presents a dual opportunity for China’s health industry. On one hand, the sharp increase in the elderly population will directly ignite demand on the healthcare services side, leading to exponential growth in the societal imperative for high-quality, affordable medical and healthcare services. On the other hand, the shifting age structure of Chinese society will compel more families to transition from children personally caring for their elders to entrusting professional institutions and personnel with elder care (either by the seniors themselves or their children), thereby structurally expanding the overall market share of elderly care services that possess certain healthcare attributes.

Furthermore, as disposable income rises, healthcare services focused on delaying aging, maintaining vitality, a youthful appearance, and overall health, as well as enhancing the quality of life for the “new elderly,” will create a substantial market. This will give rise to integrated models combining medical aesthetics with healthcare, medical care with health management, and medical treatment with eldercare, all of which are poised for significant growth.

2. Data-Driven Everything

Big health and medical data is not only the foundation of internet-based healthcare but also the cornerstone of the “Healthy China” initiative, serving as a vital strategic resource for the nation. It encompasses the entire human life cycle, involving the aggregation and processing of data across multiple domains, including personal health, pharmaceutical services, disease prevention and control, health security, food safety, and wellness and healthcare. This will bring about profound structural and disruptive changes to the entire health industry.The future health industry will inevitably be a data-driven, technology-enabled sector grounded in data. Therefore, it is first and foremost a technology industry, and only secondarily a service and manufacturing industry.

3. The boundaries of market segments are becoming increasingly blurred

The boundaries between various segments of the health industry are becoming increasingly blurred, with growing convergence among diagnostic testing, pharmaceuticals, and health management. Underpinning this trend is ubiquitous, readily accessible, and self-reinforcing big health data.

First, this is driven by humanity’s evolving understanding of the nature of things and technological advancement. Previously, human understanding of tumors was limited to the tissue level, so surgical resection was the only treatment option. Later, as understanding progressed to the molecular level, radiotherapy and chemotherapy became viable treatment approaches. In modern medicine, the understanding of tumors has advanced to the genetic level, leading to significant developments in targeted therapies and gene sequencing. Gene sequencing inherently involves massive amounts of genomic and clinical data; optimizing algorithms and computational power necessarily relies on artificial intelligence, big data, and internet technologies. This has ultimately led to the integration of multi-omics and cross-disciplinary development.

Secondly, this is a necessity for industrial upgrading. Enterprises are transitioning from an R&D and production model centered on process imitation of drugs and medical devices to an integrated R&D, production, and marketing model that leverages diverse product categories and technological approaches to address unmet clinical needs.

Third, any advanced technological product must ultimately confront the fundamental challenge of commercialization, which inherently involves the issue of rational cost control. In the future, insurance, as the most advanced payment mechanism in modern society, will inevitably permeate the entire healthcare consumption landscape. Identifying the most effective treatment protocols from multi-dimensional scenarios and massive datasets, achieving early screening and diagnosis at the initial stages of disease to ultimately realize the ideal of “preventive treatment,” and enabling limited resources and wealth to serve broader therapeutic objectives are also key drivers fostering the current integration of specialized industry sectors.

4. It will take considerable time for the “full-industry closed loop” of “digitalized healthcare + pharmaceuticals + insurance” to truly take shape

We maintain long-term confidence in the positive interaction and cyclical synergy between China’s health industry and its health insurance market. At present, the “digitalized healthcare–pharmaceuticals–insurance” closed loop is taking shape in certain specialty areas or among specific consumer segments; however, overall, it is far from reaching a stage where a truly comprehensive “industry-wide grand closed loop” can be realized. Even after such a grand closed loop is established, social health insurance will continue to play a pivotal role, with commercial health insurance serving merely as a supplement.In fact, the closed loop of healthcare, pharmaceuticals, and insurance has always existed within China’s social security system. Various algorithms for controlling medical insurance costs incorporate balancing and capping the proportions of medical services and pharmaceutical expenditures. With social insurance occupying an overwhelmingly dominant position, commercial insurance can only serve as a supplementary complement, addressing specific needs of particular population segments. It still has a long way to go before achieving a self-sustaining commercial closed loop.

We do not believe that China’s commercial health insurance will closely follow the development trajectory of its U.S. counterpart. While China’s commercial health insurance sector will undoubtedly experience rapid growth, its scale will remain significantly smaller than that of the United States for a considerable period.This is primarily because the scale of commercial health insurance in the United States stems from the mandate requiring all U.S. employers to provide commercial health insurance coverage for their employees, whereas Medicare and Medicaid are mainly designed to cover the elderly, the vulnerable, and individuals with disabilities or chronic illnesses. This stands in stark contrast to China’s healthcare system. Social health insurance and public hospitals constitute the fundamental foundation of China’s medical sector, a cornerstone that is unlikely to be shaken in either the short or medium-to-long term.

1. After years of development, China’s innovative drug industry has become highly mature in fast-follow strategies, capable of developing similar or even me-better molecules within a 2–3 year time lag. However, this has led to intense competition around the same targets; for instance, more than 20 companies are currently conducting R&D on claudin 18.2.Ultimately, drug development must return to its commercial essence. In the current context where China’s capital market has not yet fully opened its doors to First-in-Class (FIC) therapies, a pharmaceutical company’s ability to rationally design clinical trials for an optimal approval pathway, rapidly complete clinical studies both domestically and internationally, and possess commercialization experience and pipeline management capabilities is even more critical than innovation in targets or mechanisms.

2. As volume-based procurement policies compel established pharmaceutical companies to transform and the first wave of biotech firms enters the commercialization stage, collaborative transactions centered on specific products will become more frequent in the future, taking on diverse forms and pathways (such as licensing, M&A, joint ventures, CSO, etc.).Currently, the hot assets entering the radar for collaboration remain concentrated in late-stage clinical products nearing commercialization. However, Phase III assets are scarce, expensive, and limited in choice. We anticipate that future product-centric collaborations will gradually shift toward earlier stages, potentially extending to partnerships with universities. This trend is underpinned by two factors: the continuous increase in corporate R&D investment driven by industry development, which has raised pharmaceutical companies’ tolerance for failure rates; and the influx of talent returning from multinational pharmaceutical companies, which has enhanced the industry’s understanding of drug mechanisms and translational data.

3. Intensifying competition in the innovative drug market has led to a year-on-year decline in returns under traditional R&D pathways for pharmaceutical companies. Enhancing the efficiency of innovative drug R&D has become an urgent issue for the entire industry, providing an extremely broad stage for AI to penetrate and reshape the pharmaceutical sector.As AI technology matures and data on innovative drugs accumulates, numerous multinational pharmaceutical companies and internet giants have entered the field of AI-driven drug discovery. The initial public offerings of two AI-focused drug discovery companies, Schrödinger and Relay Therapeutics, along with several AI-discovered candidate drugs advancing to clinical trials or IND-enabling stages, have drawn unprecedented attention to this sector. Innovative drug development is a highly complex field with an extensive value chain. While AI-driven drug discovery companies employ diverse technologies and application scenarios, they share a common goal: leveraging AI to significantly enhance efficiency in the pharmaceutical industry. Although AI may not completely revolutionize the R&D process for innovative drugs in the short term, any innovation within this trillion-dollar industry, which is crucial to human well-being, will generate substantial economic benefits and social value.

4. Key sectors attracting capital focus in 2021 included:

Gene Therapy

Cellular Immunotherapy

RNA Therapeutics

Small-Molecule Targeted Drug Technology (PROTAC)

ADC

AI+ Drug Discovery

1. China is facing unprecedented demographic changes, with population aging and low fertility rates creating immense demand for and challenges to medical and healthcare resources as well as elderly care resources.“Age-Friendly” Transformation in China’s Healthcare Services Market: The Defining Theme and a Trillion-Yuan Incremental Opportunity in the Coming DecadeChina’s integrated medical and elderly care industry is still in its early stages, with business models gradually becoming clearer and more refined. In the future, numerous innovative service formats and models will emerge, giving rise to new incremental markets and multi-dimensional market segmentation. This evolution will inevitably create substantial investment opportunities suitable for capital market absorption and large-scale capital entry.

2. To address this demographic shift, state-backed purchasers underpinned by social insurance payments will inevitably deepen the implementation of volume-based procurement (VBP), Diagnosis-Related Groups (DRGs), and Big Data-based Disease Diagnosis-Related Group Payment (DIP). Meanwhile, commercial health insurance, as an effective social supplement to basic medical insurance, will be elevated to a prominent position, thereby alleviating the limitations in coverage capacity of the public medical insurance system.

3. The long-standing constraints on access to high-quality medical services stem from the excessive concentration of premium healthcare resources. The COVID-19 pandemic in 2020 accelerated the development of internet-based healthcare and the tiered diagnosis and treatment system. For the first time, internet healthcare, which had previously been limited to policy incentives and online registration and consultation, was included in the scope of medical insurance reimbursement. Recent regulations governing the operation of internet hospitals by physical hospitals, specifically the “Guiding Opinions on Actively Promoting Medical Insurance Payment for ‘Internet+’ Medical Services,” will undoubtedly further boost the adoption of internet and mobile healthcare, thereby expanding both the accessibility and utilization efficiency of high-quality medical resources.In the future, internet- and mobile-based medical services will become an indispensable component of the traditional offline healthcare market.

4.China’s healthcare services sector is undergoing profound transformation driven by the technological revolution.The past year has been hailed by the industry as Year One of AI in healthcare. With the increasing issuance of Class III medical device registrations,An increasing number of novel medical services, powered by artificial intelligence, big data, 5G transmission, robotics, wearable smart devices, and intelligent informatics, are not only enhancing the efficiency and accuracy of traditional healthcare through technological innovation but also expanding the conventional scope of medical services. These advancements have extended service coverage to include healthy and sub-healthy populations, while simultaneously accelerating the effective penetration of high-quality medical resources, expertise, and best practices into lower-tier markets.We anticipate that “digital healthcare,” which effectively integrates traditional practical experience with technological innovation, will inevitably become a standard feature of China’s healthcare services market in the future.

5. In 2021, key sectors attracting capital attention included:

Specialized Medical Chain Services Group (Neurology Services Group, Dental Chain Services and Digital Empowerment, Women’s and Children’s Health and IVF Services, New-Model Pediatrics, Ophthalmology, Medical Aesthetics, Elderly Care)

Independent Third-Party Medical Center

Commercial Insurance Technology

AI in Healthcare and Smart Hospitals

1.Nearly all global medical device giants have grown through mergers and acquisitions. M&A activities among Chinese medical device companies are also accelerating.The polarization in performance among healthcare companies caused by the COVID-19 pandemic in 2020 has accelerated this process. It is anticipated that a significant wave of mergers and acquisitions (M&A) will occur over the next three to five years, with pandemic-benefited companies acquiring those adversely affected by the pandemic. This trend will be particularly pronounced in the in vitro diagnostics (IVD) sector, where numerous technology-driven startups will become acquisition targets for established enterprises.

2.The government-driven volume-based procurement policy, while compressing costs in the intermediate links of medical products, has also become a significant driver inducing independent innovation among Chinese medical device enterprises.The era when a single product could sustain a company’s growth for a decade is gone; medical device companies with R&D capabilities limited to a single-product pipeline will find it difficult to grow and thrive independently in the future.

3. Product pipelines with substantial market demand and a significant impact on medical insurance expenditures will inevitably be included in volume-based procurement once import substitution reaches a certain level. Therefore, manufacturers of these products must expand their portfolios with new, high-margin, highly innovative product lines to prevent a rapid decline in corporate profits.

4. Key sectors attracting capital focus in 2021 included:

Medical Robots

Interventional Minimally Invasive Devices and Consumables

Electrophysiology-Related Surgical Equipment and Consumables

High-Value Consumables for Stomatology and Ophthalmology

Mass Spectrometry

Molecular Diagnostics

IVD Reagent Raw Materials

1. Intelligent healthcare is the ultimate goal, while digitalization is the inevitable path. The realization of intelligent healthcare is not an overnight achievement. The initial wave of hospital informatization first achieved structured data, laying a foundational infrastructure for digital medicine. This foundation enables further model training and applications based on data, starting with simple scenarios before expanding to more complex ones.Therefore, digital applications progress from simple to complex, evolving from data interpretation to data prediction and finally to data output. The market initially saw shallow data applications such as online appointment scheduling, teleconsultations, payment processing, and medication purchasing. It then transitioned to the analysis and synthesis of disease-specific data to develop auxiliary diagnostic capabilities. Furthermore, deep machine learning has enabled predictive capabilities in medicine and pharmacology. In the future, processed data will be externally output through devices such as surgical robots and brain-computer interface prosthetics. All these advancements are based on the continuous application, accumulation, and iteration of data and algorithms.

2. We maintain long-term confidence in the virtuous interaction and cycle between China’s health industry and the health insurance market. At present, the “digitalized medical care + pharmaceuticals + insurance” closed loop is taking shape in certain specialty fields or among specific consumer segments, but overall, it is far from reaching a stage where a truly comprehensive “industry-wide grand closed loop” can be realized. Even after such a grand closed loop is established, social insurance will continue to play a pivotal role, with commercial insurance serving merely as a supplement.Current Challenges in Commercial Health Insurance: Low Premium Volume, Passive Claims Management with Limited Bargaining Power over Services and Pharmaceuticals, and High Customer Acquisition Costs in a Market-Driven Environment. However, recent trends indicate continuous product innovation within the commercial insurance sector, bolstered by strong government support. The industry is steadily strengthening its foundation, evolving from purely market-driven products such as “Million Medical” insurance to government-led initiatives like “Hui Min Bao” (inclusive supplementary medical insurance). Large pharmaceutical companies and insurance institutions are proactively establishing integrated mechanisms linking healthcare, pharmaceuticals, and insurance. Meanwhile, originator drug manufacturers that have lost bids in national centralized procurement are exploring new payment models, and the inclusion of commercial insurance formularies under the guidance of basic medical insurance has been placed on the policy agenda. Once a virtuous cycle among healthcare providers, pharmaceutical companies, and insurers is established, it will foster self-reinforcing efficiency gains, cost reductions, sustainable circulation, and continuous enhancement, unlocking substantial commercial potential.

3. In the current digital health industry, the suitable model lies in the rational intersection of payers and customer acquisition scenarios, with the ultimate goal of the business model being scalable monetization.Currently, the singularity of payers in the healthcare industry and their clear demand for cost containment create a rather unfavorable environment for digital health. Therefore, during the development phase of digital health, it is essential to clearly identify the target users while simultaneously leveraging their willingness and ability to pay. Prioritizing hospitals and physicians as the primary user scenarios addresses challenges related to traffic acquisition and conversion; meanwhile, positioning pharmaceutical companies and medical insurance as the primary payment sources supports scalable expansion by ensuring efficiency and stability.

4. Cutting-edge technologies, especially AI, are reshaping the cognitive boundaries of the health industry at an unprecedented pace.We believe that in the coming years, emerging fields such as genomic big data, AI-driven drug discovery, surgical robotics, and brain-computer interfaces will experience rapid development, accelerating scenario implementation and commercialization. More importantly, we contend that it is precisely within these frontier domains that super players capable of reshaping the entire industry landscape are most likely to emerge.

5. Key sectors attracting capital focus in 2021 included:

(1) Recommended model for joint hospital-physician scenarios to drive user traffic and conversion:

✔ Leveraging upgrades in hospital informatization and aligning with new national policies, this model features substantive decision-making and monetization capabilities for pharmaceuticals and medical devices, encompassing approaches such as the spin-off of self-pay pharmacies in public hospitals and prescription circulation through the dual-channel pharmacy system.

✔ Upgrading information flow based on internet technology to empower under-resourced institutions with enhanced digital healthcare management and medical technical capabilities, including models such as co-construction and co-operation of departments, as well as in-hospital and out-of-hospital disease course management;

✔ Application of in-depth data based on specific disease categories, including digital assisted diagnosis and treatment applications based on standardized data (such as imaging), as well as models for precision medicine and personalized disease course management based on non-standardized data (such as genomics, metabolism, and clinical phenotypes);

✔Multidisciplinary medical data outputs, including surgical robots and brain-computer interface technologies;

(2) In the insurance sector, models with the capacity to drive incremental market growth are recommended:

✔ Standard Entity: Insurance (brokerage) platforms capable of covering differentiated traffic or enhancing conversion rates

✔Subheading: Insurtech leveraging big data-driven disease risk control for product pricing and distribution capabilities

(3) In the pharmaceutical company scenario, focusing on pre- and post-clinical settings

✔ AI Drug Discovery and Development

✔Digital marketing for drug and medical device market access and volume growth

1.Amid the emergence of new industry regulations and evolving policies—such as adjustments to China’s medical insurance payment structure and reimbursement list, the consistency evaluation of generic drugs, and the normalization of centralized procurement—the need for companies in China’s health industry (particularly in the pharmaceutical and medical device sectors) to further diversify their product portfolios and extend their industrial chains through mergers and acquisitions is becoming increasingly prominent. Companies with a single-product lineup will face greater risks and heightened uncertainty in the future, and may even struggle to sustain operations.Pharmaceutical and medical device companies can only mitigate the risk of a sudden drop in gross margins for single-product pipelines due to policy changes by maintaining a diverse product portfolio.

We see two important trend-driven opportunities related to this:

1. National reimbursement drug price negotiations and volume-based procurement have led to manyMultinational Corporationlowered expectations for the future revenue of certain products in the Chinese market, leading them to be willing to divest and sell off the businesses associated with these products as a whole. At the same time, they are also willing to strengthen their more profitable product lines for the future through acquisitions, so as to optimize and focus their business structure. (2) ManySingle-Product StartupsAt a distinct disadvantage in terms of pricing power and cost control, the company is compelled under pressure to opt for the sale of its entire business.

2.Influenced by the secondary market, valuations in China’s primary healthcare market have continued to rise over the past year or more. As a result, many innovative drug companies, despite having their flagship products still in Phase II or III clinical trials, already command high valuations and maintain relatively ample cash reserves. In this context, these companies are considering mergers and acquisitions to further enrich their product pipelines or to acquire and strengthen their R&D and sales capabilities.Given that capital markets assign significantly higher valuations to innovative pharmaceutical companies than to traditional ones, many innovative firms choose to acquire traditional pharmaceutical companies—with reasonable valuations, established products, distribution channels, and revenue streams—after securing substantial financing. This strategy enables them to transform from R&D-only entities into comprehensive pharmaceutical enterprises with robust sales networks and promotional capabilities.

In recent years, the trend of capital concentrating in top-tier institutions has become increasingly pronounced. Consequently, the fundraising scale of leading general partners (GPs) has grown significantly, creating both the conditions and near-imperative for them to participate in buyout investments. Traditionally, mergers and acquisitions (M&A) in China’s healthcare industry were driven by large corporate groups and listed companies; today, a new camp of financial buyers has suddenly emerged.The participation of financial buyers invigorates the M&A market. On one hand, compared with traditional strategic buyers, financial buyers are more adept at helping portfolio companies consolidate the market through subsequent mergers and acquisitions, rapidly scaling revenue, and enriching their product pipelines. On the other hand, unlike strategic buyers, the funds managed by financial buyers typically have a defined lifecycle. Therefore, if a portfolio company fails to go public after a certain holding period, the need to exit via “hot-potato” M&A transactions becomes both urgent and clear.

Although there are no particularly authoritative statistics on the size of China’s health industry, according to a Frost & Sullivan report, the market size of China’s broader health sector reached RMB 8.1 trillion in 2019. Of this, the pharmaceutical market accounted for approximately RMB 2.5 trillion, the medical device and diagnostics market for about RMB 1 trillion, and the healthcare services, digital health, and general wellness markets for roughly RMB 5 trillion.

In our view, although numerous factors will influence the future development of China’s health industry, the key underlying drivers that have shaped and continue to propel this market include:

In our view, this is the most fundamental underlying logic, bar none.

Let’s first look at several sets of data:

According to the latest census results released by the National Bureau of Statistics, China’s population aged 60 and above has reached 260 million, accounting for 18.7% of the total population; the population aged 65 and above has reached 190 million, accounting for 13.5% of the total population. Market forecasts predict that by 2050, China’s population aged 60 and above will more than double to exceed 500 million, likely accounting for over 40% of the total population at that time; the population aged 65 and above is projected to reach 300 million, likely representing more than 25% of the total population.

Chinese elderly people have high prevalence rates of chronic diseases and high rates of disability. Nearly 180 million elderly individuals suffer from chronic diseases, and the population of elderly people with disabilities or partial disabilities exceeds 40 million. The World Health Organization’s latest release, World Health Statistics 2020, shows that non-communicable diseases account for 71% of total deaths, primarily caused by four major conditions: cardiovascular and cerebrovascular diseases, cancer, chronic respiratory diseases, and diabetes. Currently, the prevalence of chronic diseases among the elderly in China is as high as 65%, and most of these conditions require prolonged treatment courses and incur substantial costs. According to research by the National School of Development at Peking University, the average annual medical expenditure for the population aged 65 and above is three times that of the young and middle-aged group aged 25–34.

Meanwhile, China’s annual number of newborns has plummeted from 17.58 million in 2017 to 10.03 million in 2020. If this trend continues, the number of newborns in China is likely to fall below 7 million by 2025. Some analyses predict that by 2050, the annual number of deaths in China could reach ten times the number of live births.

The rapidly aging society will bring dual opportunities to China’s health industry. On the one hand, the sharp increase in the elderly population will directly ignite demand for medical and healthcare services, leading to exponential growth in the societal imperative for high-quality, affordable medical and healthcare services. On the other hand, the future age structure of Chinese society will compel more families to shift from children personally caring for their elders to entrusting professional institutions and personnel with elder care (either by the elders themselves or their children), thereby structurally expanding the overall market share of elder-care services that possess certain medical and healthcare attributes.

In addition, as disposable per capita income rises, medical and health services focused on delaying aging, maintaining vitality, a youthful appearance, and overall well-being, as well as enhancing the quality of life for the “new elderly,” will create a vast market. This will spur the emergence and significant growth of integrated services combining medical aesthetics with healthcare, medical care with health management, and medical treatment with elder care.

The health industry is a highly policy-driven and heavily regulated sector. Therefore, changes at the policy level will inevitably have a profound impact on industrial development.

“Without health for all, there can be no comprehensive well-off society.” From the official promulgation of the Outline of the “Healthy China 2030” Plan in August 2016 to the implementation of the Law of the People’s Republic of China on Basic Healthcare and Health Promotion in June 2020, the Chinese government has elevated the “Healthy China” strategy to a height critical for achieving the great rejuvenation of the Chinese nation—an unprecedented move.

In the healthcare sector, the "Proposal of the Central Committee of the Communist Party of China on Formulating the Fourteenth Five-Year Plan for National Economic and Social Development and the Long-Range Objectives Through the Year 2035," released at the end of 2020, put forward key initiatives such as "improving a multi-tiered social security system," "comprehensively advancing the construction of a Healthy China," and "implementing a national strategy to actively respond to population aging." These initiatives represent the goals that China’s healthcare sector must achieve over the next five years. "Healthy China" is no longer merely a slogan; it has become a fundamental national policy, reflecting the country’s firm national will.

Against this backdrop, various national ministries and commissions successively introduced a series of supporting policies in 2020.

On March 2, 2020, the National Healthcare Security Administration and the National Health Commission jointly issued the “Guiding Opinions on Promoting ‘Internet+’ Medical Insurance Services During the Prevention and Control of the COVID-19 Pandemic,” which included online follow-up consultations for common and chronic diseases within the scope of medical insurance fund reimbursement and encouraged designated medical and pharmaceutical institutions to provide “contactless” medication purchase services.

In November 2020, the National Healthcare Security Administration issued the "Guiding Opinions on Actively Promoting Medical Insurance Payment for 'Internet+' Medical Services," clarifying that medical expenses incurred by patients with chronic and special diseases through online medical services would be reimbursable under medical insurance. In the future, efforts will be made to gradually expand the scope of reimbursement to cover more common diseases.

On February 25, 2020, to meet the needs of epidemic prevention and control, the National Medical Products Administration (NMPA) established a green channel for emergency approval of medical devices. According to statistics from Yiou, a total of 10 medical AI products received NMPA Class III certification in 2020.

On March 30, 2020, the newly revised Measures for the Administration of Drug Registration were officially promulgated and came into effect on July 1. In the review process, the National Medical Products Administration (NMPA), benchmarking against the U.S. FDA, established four special review pathways: Breakthrough Therapy Designation, Conditional Approval, Priority Review and Approval, and Special Approval Procedures. Meanwhile, it simplified the application processes for clinical drug trials and marketing authorization applications, thereby accelerating the approval workflow. For drugs granted Breakthrough Therapy Designation, the lengthy and costly development process will be shortened, allowing those showing promising results in early-stage research to reach the market sooner without having to complete the traditional Phase I–III clinical development plan. The introduction of the Breakthrough Therapy fast-track pathway will continuously encourage more domestic innovative pharmaceutical companies to intensify their efforts in developing drugs with significant clinical advantages, thus propelling the development of China’s innovative drugs onto a “fast track.”

We anticipate that new policies to be rolled out in the future will closely revolve around the following five directions:

1. Conducive to Universal Health Coverage

2. Facilitates cost control and reduction in medical insurance expenditures

3. Encourage original innovation and proprietary technologies

4. Encourage the restructuring of industrial chains with a focus on enhancing industrial efficiency

5. Encourage the active use of capital markets and new types of commercial insurance to develop the health industry

We believe that the future health industry is, first and foremost, a technology industry, and only secondarily a service and manufacturing industry. Its increasingly prominent technological attributes stem from the following three aspects.

(1) Internet Healthcare

In 2018, the State Council issued the "Guiding Opinions on Promoting the Development of 'Internet + Healthcare'," explicitly encouraging the development of "Internet + Healthcare" services, improving the supply guarantee services for "Internet + Pharmaceuticals," and advancing "Internet + Medical Insurance Settlement Services." The COVID-19 pandemic in 2020 propelled internet healthcare into a phase of rapid development. Currently, the internet healthcare industry is at a critical stage characterized by the deep integration of various business segments to form a closed loop. The "online + offline" integrated service model is becoming increasingly clear, and the industrial ecosystem of "health management + pharmaceuticals and insurance" is gradually being perfected. Driven by both policy guidance and market demand, the "new infrastructure" of healthcare, which links supply and demand through digital technologies, is rapidly taking shape. The ultimate goal is to achieve higher service quality, greater accessibility, and more transparent and controllable medical costs through internet and AI technologies.

(2) Health Big Data

The boundaries among various segments of the health industry—such as pharmaceuticals and biotechnology, medical and health services, medical devices, and digital and AI-driven health—are becoming increasingly blurred. Testing and diagnosis, pharmaceutical treatment, and health management are witnessing growing integration and overlap, underpinned by ubiquitous, readily accessible, and self-reinforcing big health data.

Big health and medical data is not only the foundation of internet-based healthcare, but also the cornerstone of the “Healthy China” initiative, serving as a critical strategic resource for the nation. It encompasses the entire human life cycle, involving the aggregation and processing of data across multiple domains, including personal health, pharmaceutical services, disease prevention and control, health security, food safety, and wellness and healthcare. This will bring about profound, structural, and disruptive changes to the entire health industry.

The big data industry in health and medical care can be divided into three levels, with enterprise competition at each level exhibiting distinct characteristics:

The first layer is the foundational layer, which includes the construction of data acquisition infrastructure and data acquisition interfaces. The market for data acquisition infrastructure construction is primarily served by enterprises engaged in traditional healthcare informatization (software/hardware, system integration, healthcare IT, and internet healthcare platforms). Data acquisition interfaces encompass hospitals, gene sequencing, and medical health examinations.

The second layer is the data layer, which is currently dominated by enterprises specializing in big data platforms for healthcare. Their business activities encompass data storage, processing, analysis, security, trading, standardization, and integrated data platforms. Cloud service providers such as Alibaba Cloud, Tencent Cloud, and Kingsoft Cloud empower the innovative development and promotion of healthcare industry solutions by building cloud service ecosystems and leveraging collaborative development strategies with partners.

The third layer is the application layer, which primarily comprises health and medical big data service enterprises catering to various application scenarios. These scenarios include clinical applications, refined operations, health management, assisted diagnosis and treatment, medical insurance, pharmaceutical R&D, and the Internet of Medical Things (IoMT).

(3) AI Applications

Artificial intelligence (AI) has immense development potential and a wide array of application scenarios in the healthcare sector. Although the overall market size for AI in healthcare is still relatively small today, its compound annual growth rate (CAGR) over the next five years is projected to exceed 50%, far outpacing the broader healthcare industry. In terms of specific applications, key areas where AI efforts are currently concentrated include intelligent diagnostics based on medical imaging, surgical robots, AI-driven drug discovery and development, and intelligent health management. Among these, AI-powered medical imaging and AI-enabled drug R&D are particularly noteworthy.

• AI + Medical Imaging

In 2020, a total of nine AI-powered medical imaging companies in China obtained Class III medical device certifications. In terms of application focus, the current layout of AI medical imaging products in China is primarily concentrated on major anatomical regions, including the chest, head, pelvis, and extremities/joints, with an emphasis on disease screening for oncology and chronic conditions. During the early stages of AI medical imaging development and adoption, pulmonary nodule detection and fundus screening were prominent areas. In recent years, as technology has continued to mature, major AI medical imaging companies have been expanding their business scope, with breast cancer, stroke, and bone age assessment related to skeletal joints becoming key areas of strategic focus for market participants.

During the screening, diagnosis, and treatment of COVID-19, AI-based medical imaging has played a key role in quantitative analysis of lesions and evaluation of therapeutic efficacy, thereby significantly improving diagnostic efficiency and quality.

Among the nine medical AI products approved in 2020, a variety of specialized clinical scenarios were covered, with functionalities including assisted diagnosis, assisted triage, assisted detection, computation, and analysis. This indicates that regulatory review continues to focus on how AI can better assist physicians. The “diagnosis” stage, being the core component of the clinical workflow, offers the greatest potential for enhancing the efficiency and quality of healthcare services. Consequently, this represents the most promising avenue for the commercialization of AI products in the healthcare sector.

• AI+ Drug Discovery

Traditional innovative drugs take up to 10 years from target identification to regulatory approval, cost billions of dollars, and have an overall success rate of less than 5%. By integrating AI, pharmaceutical companies can significantly shorten the drug discovery timeline, enhance R&D efficiency, and effectively improve prediction accuracy, efficacy, and safety.

A 2020 report published in The Lancet highlighted that the UK pharmaceutical company Exscientia successfully completed the preclinical studies for the world’s first AI-discovered novel drug for obsessive-compulsive disorder (OCD) within one year. Recently, Insilico Medicine announced the discovery of a novel target for pulmonary fibrosis using artificial intelligence. The company has completed both in vitro and in vivo preclinical studies of the candidate drug, which is expected to be developed into a once-daily oral medication. This marks the first time globally that an AI-discovered drug with a novel mechanism of action for idiopathic pulmonary fibrosis has been identified. The entire R&D process took less than 18 months and cost approximately $2 million, setting new records for both speed and lowest cost.

According to PitchBook statistics, there are currently about 200 AI + drug R&D companies worldwide, but the actual output of AI drug R&D is still relatively small, and AI drug R&D is still in a very early stage.

In contrast to the vibrant capital market for AI-driven drug discovery overseas, the sector in China has remained relatively subdued in recent years. However, it is encouraging to observe that, as this field garners increasing market attention, AI-focused companies represented by XtalPi have broken the previous stagnation in the domestic market last year. Public market information indicates that the company not only secured over $300 million in Series C financing in 2020 but has also continuously strengthened its business layout, team building, and external pipeline collaborations. As more AI-driven drug discovery companies complete financing rounds and advance their operations, the market will place greater emphasis on the tangible outcomes of AI-integrated drug development. It is anticipated that through increased investment in AI-driven drug discovery, China’s innovative pharmaceutical industry will further narrow the gap with international counterparts and achieve more First-in-Class breakthroughs.

The COVID-19 pandemic in 2020 placed significant pressure on China’s healthcare system, but it also brought substantial opportunities for development and momentum. This is mainly reflected in the following two aspects:

(1) The pandemic has accelerated the development of internet healthcare.

The pandemic disrupted the normal operations of many offline medical service providers, creating a prime opportunity for the growth of online healthcare services. Internet-based medicine has opened up a second front in the fight against the epidemic: surging traffic in online consultations and a significant increase in the penetration rate of digital health services.

According to Bain & Company data, in January 2020, Ping An Good Doctor’s new user additions and new-user consultation volumes increased by 900% and 800% month-over-month, respectively, while DXY’s online consultation volume and active user count rose by 135% and 215% month-over-month. In March 2020, during the early stages of the pandemic, internet-based diagnosis and treatment services at hospitals under the administration of the National Health Commission increased 17-fold year-over-year; certain third-party internet service platforms saw their diagnosis and consultation volumes grow more than 20-fold year-over-year, with prescription volumes increasing nearly 10-fold.

During the pandemic, the number of internet hospitals also grew rapidly. According to data released at a press conference by the State Council Information Office, China had only 100 internet diagnosis and treatment hospitals in 2018, but by the end of October 2020, this number had exceeded 900. The telemedicine collaboration network covered more than 24,000 medical institutions across all prefecture-level cities, and over 5,500 secondary-and-above hospitals were able to provide online services. According to iResearch data, the current penetration rate for online consultations remains below 10%, and the penetration rate for online medical inquiries is under 5%. However, the COVID-19 pandemic has significantly enhanced users’ awareness and acceptance of online diagnosis and treatment.

(2) The pandemic has propelled Chinese vaccines and ventilators onto the global stage

According to the Launch and Scale Speedometer for COVID-19 vaccines released by the Duke Global Health Innovation Center in the United States, an estimated 11 billion doses of COVID-19 vaccine are required globally—based on a two-dose regimen—to vaccinate 70% of the world’s population and reach the basic threshold for herd immunity. Consequently, global vaccine production “needs to be scaled up at an unprecedented level,” presenting China’s vaccine industry with unprecedented development opportunities.

To date, domestically produced COVID-19 vaccines in China have administered over 130 million doses within the country, with exports exceeding 100 million doses. Meanwhile, China has provided vaccine assistance to more than 50 countries and three international organizations, while also commercially exporting vaccines to dozens of other nations. Furthermore, Chinese enterprises are assisting multiple countries in jointly building vaccine production facilities and supplying biological active materials. Of the 18 COVID-19 vaccines currently applying for WHO Emergency Use Listing (EUL), seven are from China. As a global public good, Chinese COVID-19 vaccines are contributing to achieving universal access and affordability of vaccines in developing countries.

During the COVID-19 pandemic, thanks to China’s effective containment of the outbreak and the orderly resumption of work and production, Chinese-made ventilators entered the global market. According to estimates by Industrial Securities, the installed base of ventilators in regions outside China was approximately 430,000 units, while at least 1.33 million units were needed abroad to cope with the pandemic, resulting in a shortfall of up to 900,000 units. Ventilators are critical medical devices for treating severe cases of COVID-19 and are generally categorized into non-invasive and invasive types. The invasive ventilator market is dominated by foreign brands. There are 21 manufacturers of invasive ventilators in China, eight of which have obtained mandatory CE certification from the European Union for their main products, accounting for approximately one-fifth of global production capacity.

Currently, domestically produced invasive ventilators mainly occupy the mid-to-low-end market. Products from manufacturers such as Mindray and Aeonmed account for 30%-40% of the market share of invasive ventilators in developing countries. According to data released by the Ministry of Foreign Affairs on April 30, since the outbreak of the epidemic in India, China has exported more than 26,000 ventilators and oxygen concentrators to India cumulatively since April 2021.

It is worth noting that ventilator production capacity is primarily constrained by the supply of upstream raw materials, such as turbine blowers and chips. The pandemic will spur domestic brands to restructure their supply chains by sourcing alternative key component suppliers within the Chinese market. This shift is expected to drive a comprehensive upgrade of China’s ventilator industry chain, address shortages in the supply of core components, and enhance market competitiveness.

As China’s health industry rapidly develops and “Healthy China” becomes a national imperative and core government strategy, an increasing amount of domestic and foreign capital has turned its attention to the Chinese healthcare market, sparking a spectacular wave of investment. In this process, the Hong Kong securities market and the Shanghai STAR Market have played a pivotal role in driving this momentum.

According to statistics, a total of 146 companies successfully listed on the Hong Kong Stock Exchange in 2020, among which 23 were healthcare companies, accounting for as high as 16%; while this proportion was only 7% in 2018. The total amount raised by these 23 IPOs approached HK$100 billion, three times that of 2018. Chinese healthcare companies have gradually become the main players in going public in Hong Kong.

Launched in 2019, the STAR Market has become another key IPO destination for health industry companies, particularly innovative drug developers. Since its inception, healthcare and medical enterprises have accounted for nearly one-fifth of all companies listed on the STAR Market. In 2020, a total of 29 healthcare and medical companies successfully went public on the STAR Market, raising approximately RMB 50 billion in capital.

Meanwhile, the fervor in the secondary market and the heightened health awareness triggered by the pandemic rapidly spilled over into the primary market. In 2020, China’s healthcare industry saw a total of 470 financing deals in the primary market, with the total amount raised reaching RMB 162.7 billion, a year-on-year increase of 58%. The number of institutions investing in the healthcare sector grew rapidly, with many funds that previously focused primarily on TMT and consumer sectors establishing dedicated healthcare investment teams. We anticipate that as China accelerates its transition into an aging society, capital markets will demonstrate an even stronger willingness to invest in China’s healthcare industry.