HM Capital: Impact of the Pandemic on the Healthcare Industry and Investment Opportunities

This article is reposted from the official account of Jupai Asset, with authorization granted to VCBeat.

Today, Mr. Song Longtao, Partner at HM CAPITAL, a partner of Jupai, will provide an in-depth analysis of the short-term impact and long-term opportunities that the pandemic has brought to the healthcare industry.

HM Capital is a vertical fund within the Hillhouse Capital Group ecosystem, specializing in early- to mid-stage healthcare investments. Leveraging the ecosystem advantages of Hillhouse Capital Group, a leading Asian private equity firm, and the Mayo Clinic, a renowned U.S. healthcare institution, HM Capital adopts a multi-dimensional and comprehensive approach to investing in the healthcare ecosystem. Committed to building an industry investment platform with a global perspective, HM Capital aims to help more early-stage and growth-stage healthcare companies achieve rapid growth.

In the short term, the COVID-19 pandemic did lead to a reallocation of medical resources toward relevant departments such as respiratory and critical care. However, isolation measures suppressed other medical services, preventing most patients from seeking timely hospital care, which temporarily adversely affected companies across the entire healthcare industry chain.

However, in the post-pandemic era, patients will continue to seek medical care at hospitals. As pent-up healthcare demand is gradually released, more companies across the industry chain will experience a recovery. Mr. Song Longtao believes that the pandemic merely delayed, rather than eliminated, healthcare demand.

This sudden outbreak has tested China’s healthcare system and disease control and prevention (CDC) system, revealing many shortcomings. According to reports, the state is providing top-level macro-policy support from a strategic perspective to foster the future growth and development of China’s biopharmaceutical and broader health industries.

From a microeconomic perspective, the outbreak of the COVID-19 pandemic has derailed China’s economic development from its intended trajectory, fostering a deeper, top-down realization that “there can be no comprehensive well-off society without universal health.” Under this consensus, stakeholders ranging from government agencies at all levels to individual residents will increase investment in the healthcare sector, jointly driving growth in demand within this field.

So, what impacts has the pandemic had on healthcare institutions? How will development trends in the healthcare industry change in the post-pandemic era? And which specific sectors deserve attention?

Upstream, midstream, and downstream enterprises have all been impacted, either positively or negatively; however, Mr. Song Longtao believes that certain sectors will see favorable developments in the long run:

Upstream medical suppliers, including active pharmaceutical ingredients (APIs), chemical drugs, and vaccines, will benefit from long-term positive trends. In particular, traditional Chinese medicine (TCM) has garnered further attention and recognition in the wake of the pandemic. Meanwhile, the government has introduced a series of supportive policies to encourage the research and development of innovative drugs.

Midstream players, such as Contract Sales Organizations (CSOs) and medical product distributors/logistics providers, will face short-term impacts from the epidemic, with distribution channels experiencing certain disruptions; however, the long-term positive trend remains unchanged, and demand has not disappeared.

Downstream service providers, such as private medical institutions and commercial health insurance companies, stand to benefit from long-term tailwinds.

Mr. Song Longtao specifically cautioned that, due to the impact of the pandemic, basic medical insurance has significantly exceeded its budget. Consequently, cost-containment measures will be intensified, and policies will encourage commercial health insurance, which is bound to bring long-term benefits to the commercial medical insurance sector.

China’s healthcare system urgently needs to shift its focus from “treatment” toward “disease control and prevention.” Emergency response mechanisms must be continuously improved, an emergency medical supply system established, and policies related to biosafety accelerated to safeguard public safety.

Short-term Opportunities:

In Vitro Diagnostics—Currently, suspected patients are primarily confirmed through nucleic acid testing (PCR), so PCR companies will benefit significantly. However, as this method requires operation by professionals, is time-consuming and labor-intensive, and has room for improvement in accuracy, other methodologies are needed to supplement it.

Imaging Equipment—CT is a widely available imaging modality in hospitals at all levels; however, it can only reveal pulmonary opacities and cannot differentiate between COVID-19 and other types of pneumonia, making it more suitable for screening rather than definitive diagnosis.

Long-term Bullish Outlook:

Digital PCR—More intuitive, effectively avoids human error, and enhances the reliability of patient discharge eligibility assessments.

Automated Molecular POCT (Point-of-Care Testing) Devices—Eliminating Dependence on PCR Laboratories and Specialized Technicians for Rapid Test Results.

Short-Term Opportunities:

Protective Supplies and Equipment—Masks, Gloves, Disinfectants, etc.: Government Procurement Policies to Drive Favorable Conditions Within Six Months.

Life Monitoring and Support Medical Devices—Due to the large number of patients, this sector will see short-term gains. However, as the pandemic ends, demand for these devices will decline.

Long-Term Bullish Outlook:

Infectious Disease Prevention and Control Products—Revealing severe deficiencies in prior preparedness and stockpiles, the government will gradually address this shortfall.

Intelligent, Wearable, and Portable Home Diagnostic and Monitoring Medical Devices—Patients can use them at home to monitor their physical condition. In the wake of the recent pandemic, patients have recognized the advantages of intelligent devices, and demand for such products is expected to rise among patients with other diseases as well.

Opportunities Arising from the Enhancement of Public Health Systems, Infectious Disease Prevention and Control Systems, and ICU Critical Care Isolation Management Systems—It is Expected That the State Will Invest in Upgrading Related Hardware and Software Infrastructure Within the Next 5 to 10 Years.

Short-Term Opportunities:

Telemedicine—China Telecom’s Wuhan branch completed 4G and 5G wireless network coverage at Huoshenshan Hospital within three days, enabling the hospital to provide telemedicine services supported by its 5G network.

Online Consultations—During the pandemic, platforms such as Ping An Good Doctor and Alibaba Health witnessed a sharp surge in traffic, indicating significant opportunities within this sector. Policy support is also expected to drive the development of lightweight consultations, internet hospitals, and remote diagnosis and treatment. However, it is important to note that healthcare is, at its core, a face-to-face service industry. In-person interactions allow for thorough communication between doctors and patients, thereby enhancing patients’ sense of security and trust. Therefore, in the long run, whether online consultations can continue to thrive remains to be seen, given their inherent limitations.

In the long run, the pandemic will inevitably drive the development and upgrading of healthcare informatization. The original Healthcare Informatization 1.0 primarily served hospitals to improve efficiency. The upcoming 2.0 version will focus on assisting physicians to enhance the quality of medical services.

Long-Term Bullish Outlook:

Internet Hospitals—In the policy-driven healthcare industry, national policies play a crucial role. Further policy breakthroughs and support from the state are needed to sustain emphasis on the role of internet hospitals and fully leverage limited resources to address the challenges of inadequate medical insurance coverage and heightened doctor-patient tensions.

Pharmaceutical E-commerce — During the pandemic, there was a surge in services for online ordering and delivery via the internet.

AI-Powered Intelligent Assistance Software System — If it can provide robust support to physicians, clinical quality, diagnostic and treatment efficiency, and medical safety will be significantly enhanced.

Healthcare Insurance Cost Containment—The current pandemic will inevitably lead to a significant deficit in the healthcare insurance fund. It is expected that over the next three to five years, the government will continue to intensify cost-containment measures to balance the revenue and expenditure of the healthcare insurance system.

Digital Marketing in Pharmaceutical Companies—Driven by the advancement of the “4+7 Volume-Based Procurement” policy (“4+7” refers to the 11 pilot cities involved in this procurement initiative, including four municipalities directly under the central government and seven provincial capitals: Beijing, Tianjin, Shanghai, Chongqing, Shenyang, Dalian, Xiamen, Guangzhou, Shenzhen, Chengdu, and Xi’an), pharmaceutical companies are facing heightened demands for regulatory compliance and cost pressures. This may prompt them to enhance efficiency and reduce costs through digitalization in their marketing strategies.

Short-term Opportunities:

Pharmacies, online pharmaceutical retailers, psychological counseling services, and rehabilitation institutions—however, as the pandemic eases, demand for these services will decline to varying degrees.

Long-Term Bullish Outlook:

Third-Party Diagnostics—Higher Efficiency, Lower Costs, and Policy Support Post-Pandemic to Drive Significant Market Growth. However, how to balance the interests of hospitals and third-party providers? How to adjust resource allocation? These issues still require coordinated policies from the state.

Opportunities in Commercial Health Insurance and Related Industrial Chains—In the wake of the pandemic, the public has come to realize that financial resources alone are insufficient; safety and health are equally essential, leading to greater emphasis on health insurance awareness.

Pharmaceutical CROs (contract research organizations) and CDMOs (contract development and manufacturing organizations)—as the pharmaceutical industry develops, drug companies are increasing their R&D and manufacturing investments, and the volume of outsourced R&D and manufacturing will continue to rise.

Short-Term Opportunities:

New Drugs: Post-pandemic, the budget for R&D of COVID-19-related drugs will decrease.

Long-Term Bullish Outlook:

Drugs for Infectious Diseases—The Center for Drug Evaluation (CDE) of China has established a green channel for COVID-19 drugs, and the approval process for other infectious disease-related drugs is also expected to be accelerated.

AI-based drug screening platforms and high-throughput drug screening platforms—capable of saving R&D time, improving efficiency, and reducing costs—present a rare opportunity for proof-of-concept validation.

Blood Products—The current epidemic has heightened clinical awareness of blood products. Given the significant supply gap and scarcity of resources in China, there is substantial room for development.

Short-term Opportunities:

Relevant vaccine R&D enterprises will receive support at the policy and capital levels, and demand for influenza and pneumococcal vaccines will rise. One point to note is whether the virus causing this outbreak will coexist with humans in the long term. If so, everyone will need to be vaccinated against it.

Long-term Bullish Outlook:

Platform-based vaccine R&D enterprises, as well as novel vaccine technologies such as mRNA vaccines, DNA vaccines, and viral vector vaccines, will have more opportunities.

Mr. Song Longtao summarized as follows:

The pandemic has exerted short-term adverse effects on the healthcare industry, particularly the healthcare services sector, while also generating numerous short-term opportunities. Nevertheless, the healthcare industry possesses attributes conducive to long-term structural value investment. The pandemic will not alter the prevailing trend in which market leaders continue to strengthen their positions (“the strong get stronger”) nor the trajectory of innovative transformation within the sector.

“The strong get stronger” and innovation-driven transformation remain the long-term logic for development and investment in the healthcare industry.

From a demographic perspective, population aging and rising national income will create long-term structural investment opportunities in China’s healthcare sector.

By 2030, China will have the world’s largest elderly population, exceeding 300 million people. From the perspective of economic development patterns, once per capita GDP surpasses $8,000, the primary factors influencing gains in human life expectancy will shift from infectious diseases to chronic diseases.

Since 2010, China’s disease spectrum has increasingly resembled that of developed nations. In a comparison of the corporate landscapes in China and the United States, the healthcare sector in China boasts only a few large enterprises with market capitalizations exceeding RMB 100 billion, whereas the U.S. is home to multiple companies valued at over USD 1 trillion. Therefore, we predict that China will also see the emergence of several healthcare giants with valuations reaching the trillion-yuan level in the future.