2017 China Digital Health Investment White Paper: Monetization as the Key Challenge, Opportunity Lies in Cost-Control Capability Enhancement
Background and Outlook: The Past Decade and the Eve of Qualitative Change
In October 2016, the State Council issued the Outline of the “Healthy China 2030” Plan (hereinafter referred to as the “Outline”), elevating the concept of “Healthy China” to a strategic priority for development. The Outline explicitly sets targets for the total scale of the health service industry to exceed RMB 8 trillion by 2020 and RMB 16 trillion by 2030. The “Healthy China” strategy is poised to become a key driver for the development of China’s medical and health industry.
Before discussing the next decade, let us briefly review the past ten years.
During the previous five-year period from 2007 to 2011, the Chinese government continuously increased healthcare expenditures. In particular, the new round of healthcare reform launched in 2009 injected nearly RMB 1 trillion into initiatives such as expanding health insurance coverage and establishing the National Essential Medicines System, significantly boosting industry prosperity. Meanwhile, the expansion of basic medical insurance for urban employees and urban residents drove rapid industry growth.
During the latter five-year period from 2011 to 2015, following the significant nationwide expansion of medical insurance coverage, some regions began to experience payment pressures on their medical insurance funds. As healthcare reform entered a more profound and complex phase, various localities started exploring diverse measures for controlling medical insurance costs. With strong policy intervention, tighter terminal payment controls slowed the release of “rigid” medical demand.
Since 2015, cost-containment measures within the basic medical insurance system have begun to yield initial results. In both 2015 and 2016, the urban basic medical insurance funds recorded revenues exceeding expenditures, with revenue growth outpacing expenditure growth. Meanwhile, commercial health insurance is emerging as a new payer in the pharmaceutical and healthcare sectors. Although many regions across China continue to face increasing pressure on the sustainability of their medical insurance funds, the substantial expansion of the overall healthcare market capacity and the general improvement in multi-tiered payment capabilities have established a solid foundation for the effective implementation of various new healthcare policies. Over the next 5–10 years, China’s healthcare industry will undergo a genuine qualitative transformation driven by reform.
These qualitative changes include:
“Created in China” will rise powerfully on the global stage of new drugs.According to Pharmaprojects statistics, by the end of 2015, a total of 147 companies in China were engaged in original drug development. In terms of the number of R&D enterprises alone, China has surpassed Japan to become Asia’s largest country for new drug research and development. With the introduction of the priority review policy by the China Food and Drug Administration (CFDA) and the significant expansion of staff at the Center for Drug Evaluation (CDE), China’s concepts and operational practices in new drug review are increasingly aligning with international standards. Meanwhile, as a large number of talents with years of experience at multinational pharmaceutical giants return to China, the Chinese pharmaceutical industry has seen comprehensive improvements in basic scientific research, laboratory R&D, process and manufacturing, and quality control. It is understood that currently, more than 10 Chinese new drug R&D companies have achieved global leadership and have entered or completed Phase III clinical trials, while over 50 companies have advanced to Phase I and Phase II clinical stages. It can be anticipated that as these companies grow and mature, China will produce a cohort of innovative and original drug companies equipped with globally leading technologies, bringing their blockbuster new products to the global market.
China Has the Opportunity to Lead the World in Precision Medicine.In the upstream sector of sequencing instruments, U.S. companies hold an absolute advantage. However, the core of precision medicine research requires extensive data collection and analysis, an area in which China enjoys a distinct edge. Among the hundreds of Chinese companies providing gene sequencing services, BGI Genomics has emerged as the global leader in non-invasive prenatal testing (NIPT). In the CAR-T cell therapy sector, which holds the greatest promise for treating hematologic malignancies, China ranks second only to the United States in the number of clinical trials, placing it in the first tier globally. As precision medicine represents the future direction of human healthcare, China is well-positioned to assume a leading role on the global stage in this field.
Wearable Devices + Telemedicine + Artificial Intelligence Will Completely Disrupt Traditional Diagnostic and Treatment Services.Not long ago, IBM’s supercomputer Watson, having processed 25,000 medical cases and concluded its two-year “intensive training,” traveled to China to unveil the application of artificial intelligence in the Chinese healthcare sector at the Zhejiang Provincial Hospital of Traditional Chinese Medicine. The most significant pain point in China’s healthcare service system is the supply–demand mismatch surrounding scarce medical resources. However, with the widespread adoption of internet hospitals, medical wearable devices, and third-party imaging centers, artificial intelligence is poised to play an increasingly vital role in disease prevention, diagnosis, and treatment. Technological breakthroughs and the rapid advancement of AI are making it increasingly clear that traditional healthcare service models may be disrupted.
Against this backdrop, we believe that on the eve of a qualitative transformation, investors in the primary healthcare market should pay close attention to the following sectors in 2017–2018:
· The generic drug industry reshuffling brought about by the consistency evaluation
· The Impact of Changes in Review Efficiency and Philosophy on the Development of Chinese New Drug R&D Enterprises
· Development of Domestic Biopharmaceuticals, Innovative Drugs, and Precision Medicine in China
· Consolidation in the Commercial Sector Under the Two-Invoice System
· Import Substitution for High-End Medical Devices
· Cross-Border Acquisitions of High-End Medical Devices
· Applications of AI and Robotics in Healthcare
· Accelerated Development of Tiered Diagnosis and Treatment Systems and Specialized Chain Medical Service Platforms
Digital Healthcare Sector
Industry TrendsMajor shifts occurred in investment and financing trends within the digital health sector in 2016. Facing core challenges in monetization models, mobile health—once centered on connecting patients and physicians—cooled down significantly after Ping An Good Doctor secured substantial funding in the first half of the year. Meanwhile, the market identified AI and big data as new focal points, with three oncology big data companies—Xinyu Technology, LinkCare Technology, and SiMai Network—completing financing rounds in quick succession mid-year. By the second half of the year, many industry players had adopted “big data” labels, and the niche segment’s name quietly shifted from “mobile health” to “digital health.” We anticipate that in 2017, as traditional mobile health companies exhaust the substantial capital raised during the previous boom, the industry will undergo a decisive reshuffling that will determine survivors. Nevertheless, we remain confident that the entire digital health industry will continue to experience rapid growth, driven by a market size worth hundreds of billions of yuan.
1. A Core Challenge: Monetization is an unavoidable hurdle; the B2B model is more stable than the B2C model in the short term
The two major payers that mobile healthcare had high hopes for in the past two years—insurance companies and pharmaceutical firms—have struggled to gain investor recognition during fundraising due to obstacles encountered in practice. Although we firmly believe that, in the long term, health insurance’s involvement in proactive health management is logically sound as a payer model, it fails to resolve the near-term monetization challenges faced by industry participants, nor can it sustainably support the valuations of companies entering the mid-to-late stages of financing.
Faced with the challenge of monetization, industry participants have been compelled to pursue distinct strategic directions for breakthroughs. Representative and already implemented initiatives include:
(1) Leverage platform advantages to absorb capital flows: This can effectively generate book revenue and address monetization concerns, but attention must be paid to the quality of conversion from revenue to profit;
(2) Convert C-end users and transition to online e-commerce: Leverage the platform’s highly sticky, targeted user base to drive e-commerce conversions, with a focus on product categories and conversion rates;
(3) Persist in providing informatization services to the B-side and follow the traditional To B model.
From a practical standpoint, although the B2B model lacks potential for explosive growth and imaginative appeal, it capitalizes on the new round of technological upgrades in intra-hospital and inter-hospital informatization. With objective willingness from payers, this model is more likely to deliver financial performance acceptable to investors, demonstrating its robust advantages. In contrast, other monetization attempts targeting consumers (C-end) have generally found it “easy to make small profits but difficult to achieve scalable revenue,” a proposition that remained to be proven in 2017.
2. A Shift in Trend: The Transition from Mobile Health to Digital Health Is Essentially a Transformation from Business Model Innovation to Technological Innovation
As we mentioned last year, mobile healthcare will undergo two phases: the first phase involves improving efficiency through restructuring of the industry chain and reallocation of resources; the second phase focuses on enhancing diagnostic and therapeutic outcomes by leveraging the Internet and other related technologies. These two phases do not follow a strict logical sequence; rather, their order is determined by the difficulty of implementation.
Currently, the first phase of development has hit a bottleneck, and the market is undergoing consolidation, with more capital flowing into the second phase. The focus is shifting from business model innovation driven by “mobile” to technology innovation centered on “digital.” This trend aligns with the industry development path in the United States, still reflecting the follower characteristic of China’s related industries in relation to the U.S.
3. A Recent Hot Topic: Big Data and Artificial Intelligence Are Gaining Momentum in Precision Medicine and Computer-Aided Diagnosis, but Their Future in the Capital Markets Is Bound to Face Challenges
Big data and artificial intelligence are representative of technological innovation, with a sequential relationship within the industry chain. As the foundation of AI, specialized domestic big data startups are relatively more advanced, having already reached Series B to C funding rounds, whereas AI companies are largely at Series A or earlier stages. This pattern aligns with international trends: as the bedrock of AI, big data companies such as Flatiron Health secured a substantial $175 million in financing led by Roche in early 2016, while Merge Healthcare, a medical imaging systems provider, was acquired by IBM for $1 billion in 2015 for image analysis purposes. In terms of AI applications, ranked from highest to lowest maturity, they are as follows:
(1) Imaging-Assisted Diagnosis: Arterys’ deep learning-based cardiovascular MRI analysis software was approved by the FDA in early 2017, marking the first such approval worldwide;
(2) Clinical Decision Support: IBM Watson has been piloted in practical applications to provide diagnostic assistance to physicians by learning from medical literature.
(3) Precision Medicine Applications: Grail, which just completed a $900 million Series B financing round in March, aims to establish the link between ctDNA and early-stage cancer through bioinformatics analysis for early cancer screening. The high-quality integrated analysis of clinical data and genomic data is of paramount importance.
(4) R&D Support for Pharmaceutical Companies: For instance, the U.S. company Atomwise leverages deep learning to conduct early-stage evaluation of new drug candidates, thereby reducing development costs; this application is still in its relatively early stages.
This also foreshadows the development trajectory of the AI industry in China, where current substantive progress is primarily concentrated in data accumulation and imaging diagnosis, indicating immense potential for future growth.
We anticipate that China’s AI sector will remain in a relatively early stage over the next few years, but health big data is poised to mature first. The ultimate winners in the big data arena may not necessarily be the companies with the largest current data volumes, but rather those competitors capable of setting industry standards, ensuring data quality, and navigating policy risks.
We must also point out that progress in this hot field will by no means be smooth. Big data and artificial intelligence in the healthcare sector are industries that require sustained, high-level investment over the long term. During their development, domestic RMB-denominated funds, which typically have shorter investment horizons, inevitably push the industry toward premature monetization, even though it is clearly too early for such commercialization. Meanwhile, long-cycle USD-denominated funds, when dealing with Chinese health data, often introduce policy-related uncertainties for companies due to the sensitivity of regulatory considerations. Therefore, what this industry needs most is support from leading domestic industrial players, just as Watson relied on IBM’s financial strength and capabilities to complete numerous acquisitions and research and development efforts.
4. A Long-Term Opportunity: Enhancing Cost-Control Capabilities Through Technological Upgrades Remains a Core Theme, with Significant Opportunities Still Present
We believe that, in the long term, the core theme in China’s healthcare sector will remain cost containment. Enterprises capable of effectively reducing costs across the entire industry chain will undoubtedly demonstrate their value. The primary approaches to lowering costs throughout the full industry chain include:
(1) Reducing the incidence of critical illnesses—early disease screening and prevention: technology-driven, with a positive outlook on the development of molecular pathology testing technologies and bioinformatics analysis;
(2) Enhancing diagnostic and treatment efficiency—hospital informatization upgrades and AI-assisted diagnosis: driven by both policy and technology, we are optimistic about technology providers targeting hospitals;
(3) Optimizing Therapeutic Efficacy—R&D of New Drugs and Treatment Modalities: Technology-driven; bullish on the implementation of AI-assisted R&D and precision medicine.
(4) Rational Allocation of Resources—Tiered Diagnosis and Treatment and Telemedicine: Policy-driven; bullish on relevant health IT solution providers;
(5) Reducing distribution channels—two-invoice system and separation of prescribing from dispensing: policy-driven, with a focus on the online development of pharmacies.
In 2017, the following sectors will receive significant attention from capital investors.· Medical Big Data and Artificial Intelligence
· Third-party service providers, including third-party imaging centers, third-party surgical centers, and third-party laboratories.
·Technical and Platform-Based Services for Telemedicine
· A New Round of Technological Upgrades in Intra- and Inter-Hospital Informatics
Major A-Share Players in the Pharmaceutical Sector· Internet Giants Deploy New Technologies:Baidu, Alibaba, Tencent, Xiaomi
· Mobile and remote deployment by traditional healthcare IT companies:Winning Health, Wonders Information, Neusoft Group, B-Soft, etc.
· Strategic Expansion by Traditional Pharmaceutical Companies:Tasly, Hainan Haiyao, Kangmei Pharmaceutical, Fosun Group, Joincare, etc.
· Traditional medical device companies expand into the terminal market:Andon Health, Sinocare, Lepu Medical, etc.
· Industry consolidation by major industrial platforms, such as real estate developers and telecommunications operators:Longfor Properties, Longxi Real Estate, Yihua Real Estate, China Telecom, etc.
Source: China Renaissance
Authors: Li Gang, Cai Hua, Zhu Yunpeng, Hu Minjie, Xu Dingliang, Zhang Xiao, Liu Zeyuan, Xu Lichen, Wei Wei