Insights from a Nearly 1,000-Participant Online Forum: Clarifying the Impact of the Pandemic on the Healthcare Industry | VB Group Interview

At the end of the Ji Hai year and the beginning of the Geng Zi year, a severe epidemic struck Jingchu. People stayed indoors, and the entire nation mobilized for prevention and control. This classical Chinese monologue from Douyin touched many hearts; I borrow it here as the opening of this article.

Confined at home for over half a month due to the novel coronavirus, people have been subjected to a relentless barrage of massive amounts of information. During this period, VCBeat has curated multiple thematic series focused on nationwide epidemic prevention efforts, aiming to provide readers with essential and objective information. As the date for resuming work approaches, a growing number of individuals are beginning to contemplate how the widespread standstill of the business world during the outbreak will impact their respective industries. News of a chain restaurant securing loans to pay salaries and mass layoffs of employees in the entertainment sector has infused these reflections with varying degrees of anxiety about bankruptcy and unemployment.

Guided by our commitment to the healthcare sector and our aim to provide readers with as objective an industry forecast as possible, we have decided to relaunch the VB Group Interview series after a two-year hiatus, inviting industry leaders to engage in real-time online discussions with our audience. For the inaugural session, we are honored to feature Yu Wenxin, Chief Healthcare Analyst at Haitong Securities, as our guest speaker.

Yu Wenxin believes that the shock brought by the epidemic to the macroeconomy is a one-time event and will not affect the original trend. The pharmaceutical industry may be the sector least affected by the epidemic in the economic structure. The occurrence and development of the epidemic have made people re-experience the high importance of health, putting forward higher requirements for the disease control system of the whole society. This may lead to continued increases in national investment in the big health industry.

Below is a summary of the views shared by Yu Wenxin, as compiled by VCBeat:

It is most evident that medical device companies providing daily protective supplies gained short-term benefits spurred by the pandemic. Many listed companies in the industry suspended their Spring Festival holidays and ramped up production lines for ventilators, disinfectants, face masks, oxygen cylinders, patient monitors, and other products that faced significant market shortages during the medical resource crunch in Wuhan. Upon completion of production, these items were directly supplied to the market, driving performance growth.

In the short term, the impact is self-evident. First and foremost, among all sub-sectors, the healthcare services industry has been hit the hardest. Yu Wenxin learned from recent strategy conferences held by listed companies that certain operations within the healthcare services sector were suspended due to the epidemic, with some companies experiencing over 20 days without revenue, inevitably affecting their first-quarter performance. However, given the inelastic nature of medical demand, the impact on the healthcare services industry is one-off; the epidemic has merely deferred a portion of demand. Relevant companies should prepare to cope with a significant surge in patient volume in the subsequent period.

Secondly, labor-intensive industries such as medical device manufacturers and CROs/CDMOs will be somewhat affected; if work resumption is anticipated in February, it implies a continuous adjustment period of 2–3 weeks. On the other hand, for healthcare IT companies, although hospital suspension of outpatient services may pose short-term headwinds, the long-term bullish trend driven by rigid demand remains unchanged.

Finally, the pandemic had a relatively smaller impact on biotechnology companies. There were external concerns that oncology drug development companies would face challenges in patient enrollment; however, this impact was very short-lived, and enrollment resumed promptly after the pandemic ended.

If the current epidemic has brought entrepreneurial opportunities, they mainly stem from online channels, for both the medical and non-medical industries. Among these, internet healthcare and O2O pharmaceutical e-commerce have favorable long-term prospects. Recently, companies such as Ping An Good Doctor and Ali Health have performed well on the Hong Kong Stock Exchange, as society as a whole has increasingly turned to online solutions to meet daily needs during the epidemic.

Yu Wenxin observed that certain industries have recently undergone a reallocation of online and offline resources. For instance, some of the labor force remaining after the suspension of offline catering services has been redirected to the delivery of products generated by online transactions. Furthermore, in the sales of certain new oncology drugs, disruptions in courier services created gaps in meeting medication demands. Pharmaceutical companies identified opportunities in patient-led group purchasing initiatives and managed these efforts, providing user support through online channels during times of crisis. This approach enhanced patient brand loyalty, and such spontaneous, direct communication via WeChat groups for medication purchases may give rise to new business models. Additionally, Yu Wenxin emphasized that although some companies face partial business suspensions, they should appropriately consider increasing online appointment scheduling, examinations, and consultations.

As the pandemic gradually subsides, the state will increase its investment in primary healthcare and progressively improve medical conditions in certain regions based on lessons learned. Examples include strengthening the public health service system, increasing funding for county-level people’s hospitals, and advancing informatization in primary healthcare.

In the offline sector, Yu Wenxin believes that tiered diagnosis and treatment systems and chain pharmacies may benefit from this epidemic. Prior to the outbreak, the government had made substantial investments in tiered diagnosis and treatment; the epidemic precisely exposed deficiencies in primary healthcare and clarified the need for improvement. Under the new healthcare reforms, offline pharmacies have faced certain impacts, particularly as the latest round of volume-based procurement has drastically compressed drug prices, leading some market investors to even question the necessity of pharmacies’ existence. However, practices during the epidemic have demonstrated that pharmacies, as a pharmaceutical retail format highly needed by the public, serve as the primary channel for delivering a wide range of daily medical products to patients, demonstrating strong resilience and vitality.

Furthermore, Yu Wenxin engaged in an interactive discussion with Li Datao, founder of VCBeat and special industry observer for the inaugural VB Group interview series, as well as with the live audience, addressing issues that have recently garnered widespread attention in the industry. This article excerpts and presents the following highlights from the Q&A session:

Li Datao:When is the shortage of masks expected to ease? A number of large enterprises have temporarily shifted production to manufacture masks and protective suits. How will this newly added production capacity be phased out after the epidemic ends?

Yu Wenxin:The government has implemented measures to address the mask shortage. On the first day of the Lunar New Year, a fund company attempted to donate supplies to epidemic-affected areas but encountered significant difficulties, as all domestic mask manufacturers had been taken over by the government. Some cities adopted designated distribution points, reflecting the national need for such short-term resource allocation. It is widely believed that the primary challenge in resuming work lies in the availability of masks. Several listed companies and foundations have donated mask production lines to boost capacity while alleviating manufacturers’ concerns about post-pandemic capacity exit. The public is advised against purchasing masks through unofficial channels.

Li Datao:The development of specific drugs for COVID-19, including Gilead’s remdesivir in its Phase III clinical trials in China, has sparked considerable discussion. We are keen to understand the current state of Chinese CROs and whether a cohort of world-class enterprises will emerge in the future.

Yu Wenxin:In the clinical trials of remdesivir for the treatment of COVID-19, Dian Diagnostics served as the third-party laboratory, and Tigermed acted as the CRO for the remdesivir clinical trials, announcing a highly rigorous study design. Clinical trial data will not be released until mid-to-late April, making it premature to discuss drug efficacy at this stage. The clinical protocol consists of two randomized, controlled, double-blind trials: one enrolling 308 patients with mild-to-moderate disease and the other enrolling 452 patients with severe disease. The planned start date was February 5, with the endpoint date for mild-to-moderate cases set for April 10 and for severe cases for April 3. Regarding endpoints, for patients with mild-to-moderate disease, assessments include body temperature, respiratory rate, blood oxygen saturation, and cough symptoms, sustained for at least 72 hours after clinical medication. Reports emerging today (February 10) claiming that more than 300 patients have already been cured are definitely inaccurate. The state attaches great importance to this matter; any positive developments will be promptly announced by the National Health Commission.

However, the global expansion of CRO companies is certainly not driven solely by remdesivir; rather, it reflects the broader alignment of China’s drug regulatory system with international standards, including joining the ICH and the listing of more innovative pharmaceutical companies in both China and the United States.

Li Datao:How responsive are domestic IVD companies? Although IVD companies have undertaken numerous initiatives, such as the rapid development of test kits, these kits have been associated with the most negative issues. For instance, there have been frequent false-negative results, and sales to end consumers without obtaining proper certification.

Yu Wenxin:Diagnostic test kits inevitably require time for development and validation. Currently, the sensitivity of colloidal gold immunoassays and PCR-based methods varies under different standards, with some companies employing both types of reagents for testing. All products sold to hospitals must obtain regulatory approval, and their sensitivity is generally relatively high. For instance, the Haitong Charity Foundation purchased BGI Genomics’ test kits and donated them to Wuhan Tongji Hospital; BGI was among the first six companies to receive regulatory clearance. At present, a small number of unapproved products are being sold directly to consumers, but this does not represent the mainstream of the industry.

In fact, obtaining qualifications for IVD-related products requires conducting large-scale clinical trials, which involve substantial financial and other resource investments. We believe that after companies have accumulated a certain amount of capital through early-stage technical service outputs, they can invest more in standardized product development.

Audience:Could this outbreak potentially alter certain aspects of China’s drug approval process?

Yu Wenxin:Feedback from the industry indicates that the current drug approval process is relatively open, fair, impartial, and efficient. Consequently, products such as remdesivir have been able to utilize expedited pathways, with rapid submission of ethical approvals. While the current epidemic may catalyze reforms in the drug approval system, it remains to be seen whether this will have a profound impact on the overall regulatory framework.

Audience:China exports a variety of active pharmaceutical ingredients (APIs). Will the pandemic affect its pharmaceutical exports to foreign countries in the short to medium term? What impact will it have on the global pharmaceutical industry chain?

Yu Wenxin:Regarding the export of domestically produced active pharmaceutical ingredients (APIs), no listed companies have reported any impact on their API export orders to date. The World Health Organization (WHO) has not imposed any embargo on Chinese goods or products. The sector currently facing more significant disruptions is likely the automotive supply chain, as upstream raw materials and components sourced from Wuhan, China, have caused considerable concern among Japanese and American automakers. However, since no major API manufacturers are based in Wuhan, the API industry has not been substantially affected by delays in resuming production.

At the end of the classical Chinese monologue excerpted at the beginning of this article, the author wrote: “With unity across the land, within a little over a month, the epidemic was completely eradicated, and the country enjoyed prosperity and peace.” We believe that this sudden outbreak merely stole a few months from the Year of the Rat (Gengzi), and that everything will eventually return to normal. VCBeat is committed to fostering rational thinking and action within the industry, as we jointly welcome a future where our nation remains unharmed and our people live in peace.

VBInsight Interview Series, Episode 2: We have invited Yao Feng’e, Partner and Head of Healthcare at KPMG China, to discuss the current global healthcare workforce crisis and outline six key measures to address the healthcare gap. Tune in tonight at 8 PM.http://suo.im/5GmKic