Investment Outlook for China's Healthcare Sector in H2 2016: Pediatric and Assisted Reproductive Medicine

The infant and young child population is substantial, with the two-child policy contributing an annual increase of 3 million newborns. According to the latest data released by the National Bureau of Statistics, China’s infant and young child population reached 227 million in 2015, laying a solid foundation for the development of the infant and child industry. Since the 1970s, family planning has been implemented as a basic national policy in China, which has gradually slowed down the country’s population growth rate.

Among the affected groups, the number of children saw a continuous decline from 2003 to 2011, with their proportion of the total population also steadily decreasing. However, starting in 2012, as the post-80s generation born during the previous baby boom (1983–1990) reached marriageable age, and given the phased implementation of the “selective two-child” policy across various provinces beginning in 2014, the growth rate of China’s child population turned positive from negative in 2012, registering a slight increase.

It is projected that the universal two-child policy will lead to an annual increase of 3 million newborns. Given that China’s annual number of newborns has stabilized at approximately 16 million in recent years, the figure is expected to rise by about 20% over the next five years, reaching around 19 million per year.

China’s Maternal and Child Healthcare Industry: Significant Progress Made, but Challenges Remain. The maternal and child healthcare industry can be broadly categorized into two major segments based on business type: medical products and technologies, and healthcare services. Additionally, it can be divided into four stages according to the developmental timeline of mothers and children: pre-conception, prenatal, postpartum/infancy, and childhood.

As per capita GDP and income levels continue to rise, the country has progressively increased its investment in the public health service system, medical service system, medical security system, and pharmaceutical supply guarantee system. Among these, maternal and child healthcare has consistently remained a top priority in China’s health initiatives and medical reforms.

The Maternal and Child Healthcare Industry Faces Consumption Upgrading. With advancements in medical technology, growing demand for personalized medical services among high-net-worth individuals, and policy support for non-invasive prenatal screening, pediatric drugs, maternal and infant medical devices, as well as obstetrics and private children’s hospitals, China’s maternal and child healthcare industry is poised for significant growth opportunities. Driven by the comprehensive two-child policy, consumption patterns will continue to upgrade.

Infertility is becoming the third major disease of the 21st century. According to the WHO, infertility is clinically defined as the failure of a couple to achieve pregnancy after one year of regular, unprotected sexual intercourse. The WHO predicts that infertility will become the third most prevalent disease in the 21st century, surpassed only by cancer and cardiovascular and cerebrovascular diseases.

The incidence of infertility in China has been rising year by year. In 2009, according to the "Report on the Current Status of Infertility in China" released by the China Women and Children's Development Center and the China Population Association, the prevalence of infertility was 15%-20%.

The rapid rise in the incidence of infertility in China is mainly attributed to two factors: environmental and stress-related factors reducing male reproductive capacity, and delayed childbearing age among women lowering the probability of successful pregnancy.

Furthermore, the eligible population for assisted reproductive technology (ART) continues to expand, cure rates have increased significantly, and strong industry demand has driven the potential market size to RMB 400 billion. According to survey results from the Population Association, the number of individuals with infertility in China has exceeded 40 million.

Assuming a future penetration rate of 22% (with 6% opting for artificial insemination [AI] technology and 16% using IVF-ET/ICSI techniques), and referencing treatment costs reported in relevant literature, the potential size of China’s assisted reproductive technology market is estimated to exceed RMB 400 billion, indicating substantial growth potential.

The calculation formula is: Potential Market Size = China's Infertile Population × (Total AI Medical Costs × AI Penetration Rate + Total IVF-EF/ICSI Medical Costs × IVF-EF/ICSI Penetration Rate)

With the increasing number of women of childbearing age, the rising incidence of infertility, the stimulus from the two-child policy, and shifting social attitudes, societal demand for assisted reproductive technologies will continue to rise, and the potential market space is expected to expand further.

Currently, the assisted reproductive technology (ART) industry is under strict government regulation, with supply falling far short of actual demand. Driven by factors such as a rising number of women of childbearing age, increasing infertility rates, and the two-child policy, industry demand is expected to continue growing over the long term.

Therefore, the supply-demand imbalance in the industry is expected to persist in the short term. Against this backdrop, technical licenses and brand equity will constitute the core competitive advantages in the assisted reproductive technology (ART) sector.

Based on the technical methods employed, prenatal screening can be categorized into two approaches: serological screening and non-invasive prenatal testing (NIPT).

NIPT requires only a 3–5 mL venous blood sample from the pregnant woman, and it can achieve a detection rate of up to 100% for trisomy 21 and trisomy 18, with a specificity of 97.9%–99.7%. The enhanced safety and precision of NIPT have made it a revolutionary innovation in prenatal diagnostic technology.

Technological advancements have also exhibited two trends: reduced testing costs and expanded screening coverage. Moreover, the industry holds immense potential, with the market far from saturated. According to the 2012 China Report on Birth Defects Prevention and Control, there are 16 million newborns annually in China, with a birth defect rate as high as 5.6%. Meanwhile, among the additional 90 million women of childbearing age following the implementation of the universal two-child policy, 50% are aged 40 or older.

With advancing maternal age, the reproductive capacity of older pregnant women declines significantly, leading to an increased probability of fetal chromosomal abnormalities, as well as higher rates of stillbirth and neonatal morbidity. Consequently, their demand for prenatal screening correspondingly increases.

Currently, the market penetration rate of non-invasive prenatal screening (NIPS) is only about 3%, indicating substantial room for future growth. Roughly estimated, with approximately 16 million newborns annually and a per-test cost of around RMB 2,500, the current market size amounts to approximately RMB 5.6 billion.

Following the comprehensive relaxation of the two-child policy, the annual number of newborns is projected to reach 19 million, expanding the market size to RMB 10.2 billion, with a compound annual growth rate (CAGR) of approximately 38% from 2015 to 2020.

As the industry is still in its early growth stage, the market landscape has yet to be firmly established. Current market participants include BGI Genomics, Berry Genomics, and Annoroad Gene Technology. The predominant business model involves collaboration with medical institutions: hospitals collect blood samples from pregnant women and send them to third-party testing laboratories such as BGI Genomics for genetic analysis. These laboratories then issue test reports, which are returned to the hospitals for clinical diagnosis.

In this model, the key to whether third-party medical testing laboratories offering NIPT services can grow and expand lies in how they establish business relationships with healthcare institutions. We are optimistic about leading enterprises that have entered this field early and possess advantages in channels, brand recognition, and cost efficiency.

In 2014, the market size of pediatric drugs in China (limited to those with pediatric dosage and administration instructions specified in the drug package insert) reached RMB 59 billion, maintaining an annual growth rate of approximately 10% over the past decade. If considering the portion where adult medications are prescribed at half-dose for children by physicians, the actual market size of pediatric drugs is projected to exceed RMB 100 billion.

For a long time, the pediatric drug industry has been plagued by issues such as limited product varieties, insufficient dosage specifications, unclear package inserts, and irrational drug use. The supply side has failed to meet the substantial market demand for pediatric medications. Inadequate research and development, coupled with flawed pricing mechanisms, have further constricted an already insufficient supply.

With the arrival of the baby boom, demand for pediatric medications is set to rise significantly. On the policy front, state support for pediatric drugs is steadily increasing, and favorable policies are expected to continue in the future.

Currently, many regions have adopted direct online procurement for pediatric drug pricing in their tendering processes, thereby sparing these drugs from the rigors of competitive bidding. It is anticipated that, with continued strengthening of policy support, the supply-side shortage will be alleviated.

Industry Status: Products are homogeneous and low-end, with weak competitiveness. China’s infant and toddler medical device industry started late, has a small scale, features single-product production lines, and suffers from insufficient R&D investment and weak innovation capabilities.

Domestic products are primarily concentrated in the low-end segment. For instance, in the field of infant care equipment, David Medical holds a market share of approximately 40%, while foreign brands such as GE and Atom hold around 30%. In addition, the trace element testing sector is also largely dominated by domestic manufacturers, with Bohui Innovation accounting for about 59% of the market share.

Due to the late start and weak competitiveness of China's infant and child medical device industry, the domestic mid-to-high-end market is currently dominated by foreign manufacturers.

In recent years, national policies have vigorously supported the development of the domestic medical device industry. In the “Guiding Opinions of the General Office of the State Council on Promoting the Healthy Development of the Pharmaceutical Industry,” issued by the State Council on March 11, 2016, the state explicitly pointed out the need to strengthen innovation capabilities for original drugs, first-to-market generic drugs, traditional Chinese medicines, novel formulations, and high-end medical devices, and to accelerate the transformation and upgrading of the medical device industry.

Driven by strong policy support, continuous advancements in the technology and performance of domestically produced infant and child medical devices, and catalyzed by the universal two-child policy, these domestic products are poised to gradually replace imported alternatives. This substitution is expected to begin in grassroots and private hospitals, whose markets are continuously expanding, leveraging the high cost-effectiveness of domestic devices. In this process, industry leaders with brand advantages and robust R&D capabilities are likely to be the primary beneficiaries of import substitution.

China’s pediatric healthcare sector faces challenges such as insufficient supply of medical resources and severe operational overload. As of 2014, there were only 99 children’s hospitals in China, accounting for merely 0.038% of the country’s 25,900 hospitals of all types. The number of licensed physicians and assistant physicians per 1,000 children was only 0.5.

In contrast, the United States has only 1.6 licensed physicians per 1,000 children, representing a significant disparity. The insufficient supply of pediatric medical resources has also led to operational overload; in terms of bed utilization rates, children’s hospitals ranked second, second, and first among all specialized hospitals in 2014 for bed occupancy rate, bed-days, and bed turnover rate, respectively.

After decades of development, China’s obstetrics and gynecology medical standards have made significant progress, with the maternal mortality rate declining from 1,500 per 100,000 in the early years of the People's Republic of China to 23.2 per 100,000 in 2013. However, compared with developed countries, there remains substantial room for further reduction in China’s maternal mortality rate.

Meanwhile, with the rise in national income and the emergence of high-net-worth individuals in China, women with sufficient financial means often seek to make their one or two childbirth experiences throughout their lives more comfortable and safe, while enjoying high-quality medical services. However, traditional public hospitals lack the resources and capacity to meet the demand for premium, patient-centered medical care.

With the continuous advancement of healthcare reform, the introduction of policies encouraging social capital to invest in medical institutions, rising per capita income levels, and growing demand for high-end medical services, traditional public hospitals can no longer fully meet societal healthcare needs, ushering private hospitals into a golden age of development.

In recent years, private hospitals have experienced rapid development. In terms of the number of hospitals, outpatient visits, and inpatient admissions, the growth rate of private hospitals has far outpaced that of public hospitals. After several years of development, the number of private hospitals in China reached 12,546 in 2014, nearly matching the 13,314 public hospitals.

As the market gradually reaches saturation, competition will intensify further. Private obstetrics and gynecology hospitals will face risks such as declining service prices, rising labor costs, and reduced tax incentives. Therefore, cost control has become a core element in the development of private medical institutions.

In this context, given the high degree of similarity in target patient populations, service offerings, and care delivery models among specialized obstetrics and gynecology hospitals, adopting a chain operation model can effectively reduce operational, managerial, and financial costs. Once a standardized model is established, it can be rapidly replicated, thereby providing strong support for market development and penetration.

In 2013, the market share of China’s top five private obstetrics and gynecology specialty hospitals was only 29.6%, with the industry leader, Hemei Medical, holding a 13% market share. We believe that there remains significant room for consolidation in the private obstetrics hospital sector, and the chain affiliation rate is expected to increase further.

Pediatric diseases often have an acute onset and vague symptoms, compounded by the inability of young patients to articulate their conditions accurately. Consequently, pediatric diagnosis and treatment demand advanced infrastructure and technical expertise, while the substantial initial investment in human and material resources raises barriers to entry for private capital.

This issue can be addressed by adopting the Public-Private Partnership (PPP) model to facilitate collaboration between private hospitals and large local public hospitals. The PPP cooperation between New Century Children’s Hospital and Beijing Children’s Hospital serves as an excellent example. Through well-designed PPP structures, social capital can maximize the utilization of the abundant resources available in public hospitals, thereby unlocking the blue-ocean market for private pediatric hospitals.