2016 China Healthcare Investment Hotspots and Top Ten Trends

What Were the Key Highlights in Healthcare Investment During the First Half of 2016, and What Are the Future Trends for China’s Healthcare Industry Development and M&A Activity? At the recently concluded 2016 Taihu Forum on China’s Healthcare Investment and Development, Xu Xiaolin, Founding Partner of Huagai Capital, shared his insights on the investment hotspots in healthcare for 2016, summarizing them into three main points: “The next five years will be a golden period for healthcare investment; biopharmaceuticals, medical devices, and healthcare services are the three fastest-growing breakout sectors; and monoclonal antibodies, Category II vaccines, gene sequencing, mid-tier clinics, pediatric services, and oncology treatment represent future investment hotspots.” VCBeat (WeChat ID: vcbeat) has compiled and edited his views.

Overall Performance of the Healthcare Industry in the First Half of 2016

Data released by the National Bureau of Statistics in July showed that China’s GDP grew by 6.7% in the first half of the year, while the value added of the pharmaceutical industry increased by 10.3% year on year. This growth rate was 3.6 percentage points higher than the GDP growth and 4.3 percentage points higher than that of the entire industrial sector, ranking first among the 12 major industrial categories and making it the only industry to achieve double-digit growth. From January to May 2016, the main business revenue of the pharmaceutical industry reached RMB 1.1382 trillion, a year-on-year increase of 10.5%, which was 7.6 percentage points higher than the average for all industries and ranked among the top three in terms of growth rate across all sectors. During this period, the industry realized profits of RMB 117.3 billion, up 16.2% year on year, exceeding the overall industrial profit growth by 9.8 percentage points. The sales profit margin reached 10.3%, indicating an overall positive trend in the industry.

China's Pharmaceutical Industry: Large in Scale but Lacking in Strength

In China, 41 listed companies in the pharmaceutical manufacturing sector reported a combined revenue of RMB 110 billion in 2015. In comparison, Teva, the leading generic drug manufacturer, posted operating revenue of USD 19.7 billion (approximately RMB 130 billion) in 2015, while Johnson & Johnson, the leader in innovative drugs, recorded USD 70.1 billion (approximately RMB 460 billion).

Domestic large pharmaceutical companies allocate approximately 1% of their revenue to R&D, whereas international majors have reached 17.8%. Furthermore, the conversion rate of R&D outcomes in China’s large pharmaceutical enterprises is less than 2%, compared to 20% for international majors.

Subsector Growth Rates Reveal Healthcare Investment Trends

Trends vary across sub-sectors. An analysis of first-quarter revenues over the past three years for healthcare sub-sectors in the secondary market reveals that the four established industries—active pharmaceutical ingredients (APIs), formulated drugs, traditional Chinese medicine (TCM), and pharmaceutical commerce—have large market sizes but slowing revenue growth. In contrast, the three emerging sub-sectors—biopharmaceuticals, medical devices, and healthcare services—have smaller market capitalizations in the secondary market but exhibit rapid revenue growth, making them key areas for future investment. The biopharmaceutical sector achieved a compound annual growth rate (CAGR) of 22% from 2010 to 2015. The medical device sector saw the highest growth rate at 27%. For the healthcare services sector, the number of private hospitals serves as an indirect indicator, reflecting an average annual growth rate of 17%.

A comparison of healthcare in China and the United States reveals that, in terms of the biopharmaceutical market size, the U.S. market was valued at RMB 600 billion in 2015, while China’s stood at RMB 280 billion. The U.S. medical device market reached RMB 1.3 trillion, whereas China’s total healthcare market size was only RMB 300 billion. In terms of patient visits to private hospitals, 85% of Americans seek care at private institutions, while nearly 90% of Chinese patients visit public hospitals. This significant gap indicates that the industry is still in its early stages; although the overall market size is not yet large, the growth rate is high, making it a promising area for investment.

Hot Topics in the Biopharmaceutical Sector

The top ten best-selling drugs in China are predominantly traditional Chinese medicine injections, antibiotics, adjuvant therapies, and generic drugs. R&D capabilities within the Chinese pharmaceutical industry remain at a relatively low level. In terms of the number of new drug approvals in China, there were 600 in 2011, but this figure has shown a declining trend.

R&D advantages in the pharmaceutical sector: while large-molecule drugs are a hot spot, they will share equal prominence with small-molecule drugs in the short term. The development of oral formulations would constitute a major breakthrough. In the vaccine sector, investment focus is not solely on production; there are also investment opportunities in distribution and circulation.

In summary, first-to-market generic drugs, high-quality pharmaceutical excipients, and CRO companies continue to benefit from policy dividends. Meanwhile, antibody drugs remain a key investment focus, while vaccines present new opportunities.

Gene Diagnostics Takes the Lead; Third-Party Imaging Institutions Are Poised to Rise

In the field of genetics, simple gene sequencing is no longer a highly technical endeavor; in the future, core competitiveness will truly be reflected in gene interpretation and data accumulation.

In vitro diagnostics (IVD) is an undisputed investment hotspot, with upstream players seeking technological breakthroughs and downstream entities strengthening channel control. As third-generation gene sequencing technology remains immature, next-generation sequencing (NGS) combined with circulating tumor DNA (ctDNA) represents the most promising investment avenue, though its clinical application scenarios urgently need expansion. The rise of third-party independent imaging centers aligns with the trend of tiered diagnosis and treatment, holding promise for future expansion into the field of oncology therapy. There are significant opportunities in the localization of mid-to-high-end medical equipment as it extends coverage to primary care hospitals.

Top 10 Hot Trends in China's Healthcare, Pharmaceutical, and Life Sciences Industries in 2016

In July this year, PwC China’s Healthcare and Pharmaceuticals team released the report “Top 10 Hot Trends in China’s Healthcare, Pharmaceutical, and Life Sciences Industries in 2016.” The healthcare industry is expected to exhibit the following ten trends in 2016:

1. Community healthcare standards will be improved

For China, the rational allocation of medical resources and expanding the accessibility of healthcare services are two key objectives of the current healthcare reform, which were reiterated in the long-term 13th Five-Year Plan.A professional and efficient tiered diagnosis and treatment system will help improve healthcare accessibility in rural areas and communities, without excessively burdening large general hospitals and specialized hospitals. This means we need to provide appropriate diagnostic and therapeutic services at the right time and place.

2. High-Tech Databases Drive Healthcare Development

In China’s healthcare sector, an increasing number of large general hospitals with strong medical capabilities are committed to building medical quality control systems based on integrated electronic medical records (EMRs). Through years of practical application, clinical quality control management in domestic hospitals has been continuously summarized, optimized, and improved, becoming increasingly refined. While corresponding control measures have been established for terminal quality control, there remains room for improvement in process quality control, information technology architecture, and real-time process monitoring.

3. The M&A Boom Continues to Heat Up

In 2016, mergers and acquisitions (M&A) in the healthcare and pharmaceutical industries will continue to show an upward trend. In addition to the high-profile mergers of major insurance companies, a growing number of independent hospitals and clinics will find it increasingly difficult to sustain operations on their own. To acquire the existing customer bases of these organizations, large healthcare management companies are acquiring medical institutions that complement their own services.

4. More Rational Drug Pricing

The impact of medical insurance payment on drug pricing is mainly reflected in two aspects: First, the new reimbursement standards for drugs under medical insurance place significant pressure on healthcare institutions and insured individuals when selecting high-priced medications, thereby driving down market prices. Second, it is anticipated that medical insurance authorities will not only fulfill their payment functions but also actively participate in tender negotiations and price formation in the future.

5. The Dawn of the Mobile Health Era

Despite the failure rate of mobile health applications remaining above 40%, new apps continue to emerge. Patients and physicians will be able to use a growing number of apps to engage in cross-platform interactions through new channels. They anticipate greater innovation, investment, and collaborative models. Traditional market participants and disruptors have established cross-enterprise innovation platforms and incubators, thereby transforming their mindset regarding potential new modes of engagement, mutual influence, and collaboration among physicians, medical devices, pharmaceuticals, data, digitalization, distribution, and diagnostics.

6. Cybersecurity Draws Attention

A growing number of people are beginning to believe that medical device manufacturers must adopt a forward-looking approach to cybersecurity. In China, cybersecurity has often failed to keep pace with the rapid technological advancements in the manufacturing sector. In their pursuit of new product concepts, manufacturers and suppliers have frequently relegated security and privacy to secondary priorities. However, change is imperative: rather than focusing solely on reactive responses to cybersecurity incidents, it is essential to integrate cybersecurity as a core element of product strategy.

7. Rapid Development of Commercial Health Insurance

China’s commercial health insurance market exhibits the following major trends, which will create new opportunities for the healthcare market:

First, we will see more product innovation. As disease and medical data accumulate and risk control capabilities improve, insurance companies will be able to launch more health insurance products that are truly meaningful. Second, health insurance will further leverage digitalization. We will see the internet play a larger role as a channel in the health insurance market, with digital technologies widely applied in areas such as claims processing, payments, risk control, and service delivery. Third, insurance companies will explore innovative collaboration models with more partners to seek new opportunities. Finally, health insurance companies will build comprehensive health platforms to integrate fragmented health and medical services, covering consumers’ entire life cycles, including diagnosis, treatment, health education, disease management, elderly care, and other services.

8. Growing Challenges in Controlling Healthcare Service Costs

Medical services generally use service types as the objects for cost accounting, primarily encompassing two major categories: outpatient care and inpatient care. The finance department typically establishes subsidiary cost ledgers based on service types to account for the costs of different business activities. Furthermore, building upon outpatient and inpatient costs, clinical service departments should be designated as cost objects, with all outpatient and inpatient service costs allocated to respective clinical service departments according to established rules. In China, big data-driven precision medicine has become a prevailing trend for enhancing the quality of medical services and controlling healthcare costs. This relies heavily on the accurate data collection and real-time analysis capabilities of healthcare information systems. Guided by the 13th Five-Year Plan, an increasing number of hospitals have strengthened their informatization initiatives, aiming to achieve refined hospital cost management through modern technological means. Additionally, hospitals must identify methods to optimize processes, eliminate non-value-added activities, and implement efficient, rigorous, patient-centered closed-loop management. Meanwhile, hospitals must enhance staff training across all positions to ensure that personnel competencies align with job responsibilities, thereby facilitating the transition towards modern enterprise-style management.

9. Mental Health Is No Longer Neglected

Compared with global standards, China’s psychiatric medical resources are significantly insufficient. Policy-wise, there is currently encouragement for social capital to enter sectors with inadequate healthcare resource supply, such as psychiatry; however, the actual increase in new supply remains low. Tele-mental health services may serve as a novel complementary approach to diagnosis and treatment. On one hand, they provide remote mental health counseling and crisis intervention support to regions with scarce psychiatric resources. On the other hand, they offer a highly private channel for consultation and treatment to individuals who are reluctant to seek diagnosis and care at psychiatric departments or hospitals due to stigma. Meanwhile, it is crucial to ensure that professionals providing remote mental health counseling and treatment possess appropriate qualifications, and that effective supervision of service quality is maintained.

10. Promising Prospects for Biosimilars

According to IMS data, biosimilars are poised to capture 20% of the global pharmaceutical market over the next five years as patents on originator biologics expire. Meanwhile, Thomson Reuters data indicates that China has taken the lead globally in the number of biosimilar drugs under development, with its core patent count trailing only behind the United States and the European Union. In terms of therapeutic areas, oncology, diabetes, and immunological disorders represent the primary focuses. However, despite the seemingly boundless opportunities presented by China’s vast biosimilar market, numerous challenges remain to be overcome. Under current clinical trial regulations, research and development costs are also substantial. The complexity and uncertainty inherent in the biosimilar development process are significantly higher than those for small-molecule generics, imposing stricter technical requirements on manufacturing capabilities. Consequently, pharmaceutical companies must proactively adopt innovative solutions to address these current challenges and difficulties.