Junlian Capital's Wang Jianfei Identifies Two Key Company Types Poised for Growth in China's Primary Healthcare Investment Landscape

On May 17, VCBeat’s “2017 China Primary Care Innovation Practice Forum” was held as scheduled. Wang Jianfei, Executive Director at Legend Capital, was invited to deliver a keynote speech titled “Reshaping the Healthcare System and Seizing Entry-Point Opportunities: New Investment Opportunities in Primary Care.” The following is the content of his speech:

Legend Capital was established in 2001. It began investing in healthcare-related companies in 2008, with its early investments primarily focused on pharmaceutical R&D outsourcing (CRO) and third-party clinical laboratory services. The first company it invested in was Pharmaron, followed by KingMed Diagnostics. It was not until 2015 that Legend Capital established a dedicated healthcare investment fund to focus its investments on the healthcare sector.

Wang Jianfei candidly stated that investing in the healthcare sector is by no means easy. However, over the years, Legend Capital has accumulated extensive experience in specialized fields such as pharmaceuticals and diagnostic devices, establishing verifiable business models and capabilities for profitability.

Regarding healthcare investment, Wang Jianfei first shared the core logic of investing in the entire medical and health services sector.In summary, it is essential to identify the primary contradictions within an industry and seek out investment opportunities by focusing on resolving key issues.。

Wang Jianfei believes that within the entire healthcare system,The primary issues that China’s healthcare system needs to address are: diversifying payment mechanisms, improving the efficiency of public medical service systems, and meeting the demands driven by consumption upgrading. Among these, the most core and prominent driver initiating the new healthcare reform is the payment segment, which constitutes the first key point.。

From 2013 to 2014, national medical insurance funding reached a peak. The rapid growth previously seen in pharmaceutical and medical device companies was directly linked to the continuous increase in medical insurance coverage. However, it was during these two years (2013–2014) that a turning point emerged. As is well known, medical insurance gradually entered a state of insufficient supply, leading to strict controls on expenditure. Many medical institutions were unable to settle medical insurance payments in a timely manner, which in turn posed significant challenges for upstream industries related to pharmaceuticals and medical devices. Therefore, this period serves as an excellent entry point for analyzing changes within the industry.

The second core point is that the national healthcare service system relies heavily on the public sector. Data from the National Health and Family Planning Commission shows that 88% of services are provided by public hospitals. When examining an industry through the lens of social development and change to identify business opportunities, it is essential to analyze your relationship with the existing healthcare supply system—specifically, whether your offering serves as a competitor, substitute, or complement.

Furthermore, from the perspective of evolving social demand, the consumption upgrade in investment banking’s health sector is driven by the public’s rising demand for health-related products and services. This trend is clearly visible, as evidenced by the continuous growth of many health supplement and fitness-related consumer sectors.

Therefore, Wang Jianfei concluded that the entry point for investment in the entire healthcare services industry lies in: improving payment methods to address healthcare financing issues; enhancing the operational efficiency of the public healthcare system and ensuring rational resource allocation; and meeting the public’s health and medical needs against the backdrop of consumption upgrading.

Returning to the theme of primary healthcare, Wang Jianfei believes that village clinics and urban clinics constitute the main terminal service network of the primary healthcare market. In terms of quantity, statistics from the National Health and Family Planning Commission in 2014 show that village clinics and urban clinics accounted for 70% and 21%, respectively.

However, based on service capacity (represented by floor area), according to 2013 data from the National Health and Family Planning Commission, the average floor areas (in square meters) for urban clinics and village health rooms—two types of healthcare facilities—were 84 and 79, respectively, less than 1/30 of that of community health service centers, which reached 2,505 square meters. The largest average floor area was observed in township health centers, at 2,552 square meters.

One trend is that the number of patient visits at primary healthcare institutions in urban areas, mainly community health service centers and clinics, has been steadily increasing. Currently, the services provided by community health service centers are primarily focused on internal medicine, surgery, obstetrics and pediatrics, general practice, preventive healthcare, and other departments, with traditional Chinese medicine also accounting for a significant proportion. The core focus of attention is on the number of patient visits. In 2014, the total number of patient visits to community health service centers and clinics reached 1.349 billion.

From a cross-sectional perspective, Wang Jianfei stated that in 2014, China recorded 7.6 billion outpatient visits (excluding hospitalizations), with an average of 5.6 visits per resident annually. However, the distribution was uneven: hospitals and urban primary care institutions together accounted for 4.32 billion visits, representing 60% of the total. The average revenue per outpatient visit at hospitals was RMB 221, significantly higher than that at primary care institutions; specifically, it reached RMB 269 at tertiary hospitals. The proportion of pharmaceutical costs in urban primary care visits reached 68%, far exceeding other categories. The overall market size for urban outpatient services amounted to RMB 801.5 billion, accounting for 30% of the RMB 2.64 trillion total market for medical institutions.

The purpose of conducting this statistical analysis is,If current trends continue, it may take less than a decade for the majority of outpatient services to shift to primary care settings, implying that the outpatient revenue currently generated by tertiary hospitals will correspondingly decline and be redirected to primary healthcare institutions.

Of course, from the perspective of changes in market dynamics, Wang Jianfei believes that despite visible policy-driven momentum, tertiary hospitals have in fact continued to exert a “siphon” effect over the past few years in terms of physician resources, revenue, and patient visits. The overall proportion of patient visits handled by primary care institutions has remained stable, while secondary and primary-level hospitals have experienced significant contraction.

The latest change was actually Beijing’s new policy implemented on April 8, which adjusted the reimbursement standards for medical service fees. One data point shows that one week after the new policy took effect, outpatient visits and specialist consultations at tertiary hospitals decreased by approximately 13%, while outpatient visits at primary healthcare institutions increased by only 3%.

Another point is that, in terms of revenue composition, substantial fiscal funds have been invested in the development of primary healthcare institutions. In 2014, the average annual revenue of community health service centers was RMB 11.95 million, with average annual subsidy income reaching RMB 4.307 million, accounting for over 36% of their total revenue. This has placed considerable financial pressure on local governments, particularly in the central and western regions of China.

Wang Jianfei also highlighted the significant gap between China’s primary healthcare services and those abroad. In the United Kingdom, 90% of outpatient and emergency visits are initially managed by general practitioners (GPs), with over 90% of these cases treated entirely by GPs without referral. Furthermore, 98% of outpatient prescription medications are prescribed by GPs. In the United States, out of 1.2 billion annual medical visits, 81% take place in physicians’ offices outside of hospitals.

In comparison, countries such as the United Kingdom and the United States have a significantly higher proportion of outpatient visits at the primary care level. While 80% of diagnosis and treatment occurs at the primary care level abroad, the share of primary care medical institutions in China stands at only 44%, even after excluding the impact of village clinics. This room for growth depends on adjustments to national policies. Wang Jianfei believes that this trend will continue, presenting opportunities to identify new prospects.

Based on the aforementioned data and analysis, from a national financing perspective, the three major healthcare systems have achieved a financing coverage rate of 97%–98%, approaching universal population coverage. In the future, the growth rate of total financing is expected to align roughly with the growth rate of average social wages, at approximately 10%–15%. Consequently, it is unlikely that development in the medical services sector will rely on enhanced social insurance financing capacity. Therefore, improving the utilization efficiency of social insurance funds and the operational efficiency of public hospitals is an inevitable choice.

From the perspective of national policy, the series of policies introduced over the past three years to control drug prices and insurance costs aim primarily to divest the government of responsibilities that should not fall under its purview, transferring these functions to other institutions supported by social capital.

Based on the above analysis,Wang Jianfei concluded that implementing tiered diagnosis and treatment at the primary care level is an inevitable path to improving the efficiency of the public healthcare system, which will undoubtedly drive the development of related industrial chains.

Nevertheless, it cannot be overlooked that the government has its own agenda, and the market is stratified. Demand varies across different wealth brackets, regions, stages of disease diagnosis and treatment, households and enterprises, and age groups. Therefore, a “standardized” public healthcare system primarily focused on public health services cannot address all issues; a diversified market requires multi-tiered supply.

Regarding primary healthcare, Wang Jianfei has also given thought to its broader implications. He stated that, currently, the narrow definition of primary care centers refers only to county-level people’s hospitals, community health service centers, township health centers, and village clinics within the public healthcare system.

New types of chain clinics with social capital participation, serving middle- and high-end populations or areas not covered by government programs—including existing traditional Chinese medicine, Western medicine, and dental clinics, as well as private hospitals—should also be included within the scope of basic medical services. In recent years, new business models have gradually emerged, such as specialized medical service centers (e.g., rehabilitation, dialysis, and day surgery) and third-party service centers (e.g., laboratory testing, pathology, and medical imaging).

From the perspective of the health security system, he believes that with further deepening of healthcare reform and the continued implementation of policies such as the separation of prescribing and dispensing, pharmacies will usher in new development spaces and opportunities. These include non-medical health services, chain physical examination centers, chain pharmacies, and health services, which together constitute an extended service system for primary healthcare.

Therefore,Wang Jianfei stated that primary healthcare services serve as the entry point within the industry chain, delivering significant value. However, enhancing the capabilities of community health service centers is a critical prerequisite for this role, encompassing improvements in physician expertise, IT infrastructure, and pharmaceuticals/diagnostic technologies.

Finally, Wang Jianfei summarized that companies in the primary care sector can be broadly categorized into two types. The first type includes companies that provide medical services directly to households and enterprises, such as chain medical service providers and internet hospitals. The second type comprises companies that enhance the service capabilities of primary healthcare institutions, including third-party service providers offering laboratory testing, remote ECG, medical imaging, and health insurance payment solutions; chronic disease management (pharmaceutical distribution); as well as tools, informatization solutions, pharmaceuticals, and medical devices.