2016 Healthcare Industry Investment Report (Part II): Internet Healthcare and Precision Medicine Market Analysis

Recently, iCapital released a research report on healthcare industry investments in 2016. The report provides a detailed analysis of the current development status and trends in China’s health insurance, medical devices, pharmaceuticals, and internet healthcare sectors. VCBeat has excerpted the most essential insights from the report, which offer valuable reference for companies planning to enter these industries.

As China gradually enters an aging society, its healthcare industry has grown into a market worth nearly RMB 4 trillion. This market has maintained a compound annual growth rate (CAGR) of over 20% in the past five years and is projected to double in size over the next five years, reaching RMB 8 trillion—accounting for nearly 10% of China’s GDP at that time. Today, China’s healthcare industry is undergoing the most profound transformation in its history. Against this backdrop, the country’s health sector will usher in historic opportunities for rapid development. It is inevitable that industry giants on the scale of BAT (Baidu, Alibaba, and Tencent) will emerge, capable of influencing society and delivering broad public benefits. The report predicts that in 2016, capital will be heavily invested in the following areas of China’s healthcare industry:

• Medical Services Market

  
  

• Medical Technology and Medical Device Market

• Pharmaceutical and Biotechnology Market

• Internet Healthcare Market

• Precision Medicine Market

“2016 Healthcare Industry Investment” Part IThis report primarily analyzes industry trends and investment opportunities in three sectors: the healthcare services market, the medical technology and medical device market, and the pharmaceutical and biotechnology market. The second part of the “2016 Healthcare Industry Investment Report” focuses on the internet healthcare market and the precision medicine market. By integrating both parts, VCBeat provides a clear overview of the market development across the entire healthcare industry, offering guidance and strategic planning for corporate investment directions, transformation and upgrading, and startup ventures.

IV. Industry Trends in the Internet Healthcare Market

In 2015, the market size of China’s internet healthcare industry exceeded RMB 17 billion, representing a year-on-year growth of over 70% compared to 2014. Currently, transaction-based revenue accounts for the largest share of the total market size, followed by online marketing, while value-added services for users constitute the smallest portion. As the online sale of prescription drugs has not yet been deregulated, the opening of this channel is expected to trigger explosive growth in the internet healthcare market. By 2020, the market size of China’s internet healthcare industry is projected to surpass RMB 100 billion. Similar to the biopharmaceutical sector, we believe that the internet healthcare field will also give rise to carrier-grade enterprises with market capitalizations in the hundreds of billions, comparable to BAT (Baidu, Alibaba, and Tencent).

1. The policies on tiered diagnosis and treatment and multi-site practice are becoming important catalysts for internet healthcare.

The root cause of the problems in China’s healthcare system lies in the unreleased productivity on the supply side. The undifferentiated patient care pathways and physicians’ fixed-site practice are considered the biggest obstacles to unlocking this productivity. In a market where supply is severely constrained and new capacity cannot be created in the short term, the internet model—adept at generating and meeting massive demand—appears somewhat ill-suited to the healthcare sector. This is also the fundamental reason why internet healthcare has faced numerous challenges in recent years.

Immense pressure from payers and the public has made the mandatory implementation of tiered diagnosis and treatment one of the most critical measures in China’s new healthcare reform. Meanwhile, regulations governing physicians’ multi-site practice are being progressively relaxed, which will significantly unlock productivity and improve healthcare supply. This trend will undoubtedly create substantial development opportunities for internet healthcare.

Changes in patients’ healthcare-seeking pathways will improve patient–physician matching. Coupled with physicians’ multi-site practice, this will gradually free up scarce resources of renowned specialists from managing a high volume of minor ailments. Division of labor and collaboration between senior and junior physicians, as well as between tertiary hospitals and primary care institutions, will become more clearly defined, thereby enabling services to reach more patients with genuine need. In this context, the screening and matching capabilities of the Internet can play a meaningful role. A series of business model innovations centered on the tiered diagnosis and treatment system and the physician–patient relationship under multi-site practice will become feasible; both large-scale platforms and vertically specialized models are likely to identify their respective market demands.

2. Big data will play a significant role in the field of internet healthcare.

The value of big data in healthcare is widely recognized. Although the commercial application of big data as a whole is still in its early stages, this is primarily because the prevailing consumer-facing (2C) traffic models fail to generate structured medical data, while business-facing (2B) models yield higher-quality data but accumulate it at a slower pace. We believe that although the value of chronic disease data has not yet been fully unlocked, the further implementation of the national “Internet Plus” strategy and the overarching trend of healthcare reform will gradually break down data silos within hospitals. Consequently, medical data will undergo a process of accumulation and mining characterized by a quantitative buildup leading to qualitative transformation.

Particularly in the field of chronic disease management, data represents a veritable gold mine for internet healthcare due to characteristics such as a large patient population, high data quality, and long-term follow-up periods. Imagine if structured, high-quality data accumulated via internet platforms reaches a critical mass; this would generate substantial commercial value, whether applied to precision medicine, academic research, or product development. Furthermore, we anticipate that medical big data, especially in the chronic disease sector, will present significant opportunities for monetization and practical implementation in areas such as precise referral and triage on internet healthcare platforms, health insurance cost containment, and internet-based health insurance products.

3. Drug price reductions are imperative, and the pharmaceutical e-commerce sector holds immense growth potential.

Pharmaceutical e-commerce is widely recognized within the industry as the segment of internet healthcare closest to monetization, while also being closely tied to the core interests of hospitals in the existing medical system. In China’s pharmaceutical market, valued at nearly RMB 1.4 trillion, hospital sales account for over 80%. Under the current e-commerce landscape, neither B2B, B2C, nor O2O models have successfully penetrated the hospital sector or truly accessed the core of China’s pharmaceutical distribution channels. The fundamental challenge lies in the unique characteristics of the supply side within the healthcare industry: physicians hold prescription authority, while patients face significant information asymmetry on the demand side and lack decision-making power. Consequently, regardless of the platform’s demand volume, it remains difficult to exert pricing power over the hospital supply side or disrupt the hospitals’ established economic structures. However, with the continued deregulation of online prescription drug sales and the strict implementation of controls on the proportion of pharmaceutical revenue in hospitals, we believe the next two years will be a critical period for the development of prescription drug e-commerce.

Amid the frequent rollout of new policies in the pharmaceutical industry, B2B pharmaceutical e-commerce platforms have become the new favorites of capital.

Traditional pharmaceutical distribution groups, such as Sinopharm, Jointown Pharmaceutical Group, and Conba, have been actively laying out B2B e-commerce platforms and expanding their online channels. The primary advantage of these traditional distributors in entering the e-commerce space lies in their extensive resources accumulated among upstream pharmaceutical manufacturers and downstream retail pharmacies, coupled with their well-established offline drug distribution networks. Furthermore, several emerging platforms, such as Wen Yao and Drug Terminal Network, rose to prominence in 2015 and successfully secured financing. As is well known, the cancellation of drug markups in hospitals has eliminated the price advantage previously held by retail pharmacies. In addition, pharmacies lack bargaining power when dealing directly with upstream manufacturers. Therefore, collaborating with B2B pharmaceutical e-commerce platforms—which aim to reduce multi-tiered intermediaries and lower drug prices—and expanding online procurement channels serve as effective strategies to address these challenges.

In the realm of pure B2C and O2O pharmaceutical e-commerce, the overall market size is currently limited.

The primary value propositions offered to consumers include delivery services, competitive pricing, purchasing convenience, and a comprehensive product assortment. However, current consumer concerns revolve around drug authenticity, delivery timeliness, the lack of professional guidance during the purchasing process, and the inability to use medical insurance. Consequently, there is a mismatch between the value provided by this e-commerce model and consumer needs when purchasing medications. Furthermore, prior to the full liberalization of prescription drug sales, independent B2C pharmaceutical e-commerce platforms have limited appeal to sellers due to their restricted product categories, making it difficult for them to compete with comprehensive e-commerce platforms, such as Tmall Health, in terms of traffic.

4. With the increasing digitalization of healthcare scenarios, internet-based healthcare is driving innovation in the product design, marketing, and underwriting processes of health insurance.

Internet insurance primarily reshapes the sales segment of traditional insurance by eliminating redundant offline intermediaries, thereby improving profit margins and operational efficiency. As internet healthcare scenarios continue to deepen across hospitals, physicians, patients, and enterprises, health insurance products will see increasingly enriched personalized customization, user experience, and marketing through integrated online and offline channels, sustaining rapid growth in the health insurance sector.

In mature healthcare markets, internet-based healthcare innovation models centered on commercial medical insurance have been heavily favored by foreign capital markets. Oscar Health, a startup specializing in next-generation internet-based health insurance, reached a total valuation of $2.7 billion within just two years of its establishment. Venture capital firms are bullish on this service model, which enters the market from the consumer end and leverages internet technologies to disrupt traditional health insurance. In China, since early 2015, traditional insurance giants such as Taikang, Ping An, and Pacific Insurance have successively established e-commerce companies or third-party platforms, significantly increasing their online investments.

Major Players in the Internet Healthcare Market on the A-Share Market:

• Positioning in Pharmaceutical E-commerce: Shanghai Pharma (Yaoyaohao), Jointown Pharmaceutical (Haoyaoshi), Kangmei Pharmaceutical, By-Health, Yiling Pharmaceutical




• Strategic Focus on Smart Healthcare, Doctor-Patient Consultation, and Health Insurance Cost Control: Winning Health, Wonders Information, Neusoft Corporation, AVCON Holdings, and DHC Software




• Strategic Layout in Integrated Hardware-Software Solutions and Chronic Disease Management: Andon Health (APP + Devices), Lepu Medical (Cardiovascular and Cerebrovascular Fields), Furuishare (Liver Disease Field), Sinocare (Diabetes Field), Biolight




• Non-Medical Listed Companies’ Strategic Transformation and Layout: Vanke, Evergrande, Yihua Real Estate (Youde Medical Technology), Greentown Real Estate, Yunsheng Industrial (Rongda Information Technology), China Mobile, China Unicom, China Telecom

VCBeat Summary:

• Tiered Diagnosis and Treatment Liberates Physician Productivity




• Big data will demonstrate its advantages in chronic disease management, triage and referral, health insurance cost containment, and internet-based health insurance.




• B2B Pharmaceutical E-Commerce Wins Favor from Capital, While B2C and O2O Markets Face Overall Limited Growth Potential




• Rising Profits and Efficiency Drive Rapid Growth in Internet Health Insurance

V. Industry Trends in the Precision Medicine Market

Precision medicine represents a transformative direction with the potential to alter average human lifespan, marking a revolutionary innovation in existing healthcare models. Predicated on the rapid advancement of gene sequencing technologies, the precision and diversity of diagnostic methods, the clear targeting of clinical pharmaceuticals, the increasing maturity of biomedical analysis, and the continuous evolution of big data and cloud computing in biology, it is guiding the transition from current generalized healthcare models toward highly individualized medical care. By leveraging personalized diagnostic techniques to predict an individual’s future disease risks, it enables more effective disease prevention. In the event of disease onset, it facilitates early diagnostic screening and employs precise targeted therapies to eliminate pathological lesions. From diagnosis to treatment, patients receive the most appropriate therapies and medications, achieving optimal dosing, minimal side effects, and the highest precision in diagnostic and therapeutic timelines. These advantages will significantly reduce diagnostic and treatment costs while improving healthcare efficiency, thereby garnering substantial attention from governments worldwide.

1. Precision Medicine, Riding the Wind.

The concept of personalized medicine, similar to precision medicine, was first proposed in the 1970s but failed to develop rapidly due to technological limitations and high costs (limited commercialization pathways). Accompanied by technological advancements and pressure to control healthcare costs, precision medicine has received widespread attention from governments worldwide in the past two years and is experiencing unprecedented rapid development.

• United States – In January 2015, President Obama announced the Precision Medicine Initiative in his State of the Union address. In October, he designated precision medicine as the future direction for the U.S. healthcare sector.




• China – In March 2015, the Ministry of Science and Technology of China convened the nation’s first expert meeting on precision medicine strategy and decided that the government would invest RMB 60 billion in the field of precision medicine by 2030. In December of the same year, the National Health and Family Planning Commission disclosed that China was formulating a strategic plan for precision medicine.




• UK – The “100,000 Genomes Project” was proposed by UK Prime Minister David Cameron in December 2012 and officially launched in spring 2014, with the aim of completing whole-genome sequencing for 100,000 participants by 2017.




• Other - Australia's "100,000 Genomes Project" and South Korea's version of the "10,000 Genomes Project" were also launched at the end of 2015.

2. Precision is not unidimensional; rather, it is multidimensional, three-dimensional, and integrated.

Medical Services

• Precision and personalized health checkup services provide early warnings of individual disease risks, enabling proactive intervention and prevention. Health checkup data will no longer be merely a static report, but will become a continuous, dynamic system for health monitoring and feedback.




• The accumulation and analysis of big medical data will help improve the efficiency of medical services and reduce healthcare costs. In clinical trials, physicians can conduct precise patient recruitment and targeted education. During diagnosis and treatment, doctors can select highly effective medications based on patients’ genetic profiles to minimize adverse drug reactions, or implement early intervention and treatment for diseases based on patients’ family genetic history and genomic profiles.




• Leading medical big data service companies will gain a competitive edge through optimized data structures and proprietary data mining technologies, thereby earning the trust of physicians and patients.




• Amid the broader context of healthcare cost containment under medical insurance programs, providing patients with more precise diagnostic and therapeutic services will be an inevitable choice to improve the efficiency of medical insurance fund utilization and reduce costs. This, undoubtedly, will rely on the development of precision medicine.

Medical Devices

• By leveraging the latest molecular diagnostic technologies, personalized diagnosis and treatment plans are tailored to individual genetic mutations, achieving outcomes unattainable through conventional medical approaches (as exemplified by Angelina Jolie’s genetic testing for breast and ovarian cancer).




• Precision medicine facilitates accurate diagnostic subtyping of diseases (such as the various subtypes of cancer) and elucidates disease pathogenesis, particularly in cancer, at the molecular level.

Biopharmaceuticals

• Leverage immunotherapy technologies, including monoclonal antibodies, stem cell therapy, and CAR-T, to deliver targeted, personalized treatments for diseases such as cancer and autoimmune disorders.




• Reverse-Engineering Drug Development Based on Large-Scale Patient Genomic Data to Reduce the Risks of New Drug R&D.




• Pharmaceutical companies can develop high-value orphan drug products by collecting and accumulating physicians' research on cases of rare diseases.

Internet Healthcare

• Redistributing the value chain of healthcare services through internet-based medical care, precisely matching the supply and demand of medical consultations between doctors and patients, improving diagnostic and treatment efficiency, and reducing healthcare costs.




• Break down data silos between hospitals to effectively leverage the immense value of medical big data in the previously fragmented existing market, thereby supporting pharmaceutical companies in new drug development and personalized diagnosis and treatment.

3. Capital is accelerating its deployment, requiring a long-term perspective and catalyst events

Precision medicine is a major wave capable of transforming average human life expectancy. Consequently, it is bound to attract the attention of global capital. In the short term, precision medicine remains in its nascent stage, contributing relatively limited revenue (let alone profit) for many companies. Therefore, investing in this sector requires a sufficiently long-term perspective and considerable patience. As new technologies are gradually validated, we believe the market will experience a steep upward trajectory following a key catalyst event.

Key Players in Precision Medicine on China’s A-Share Market:

• Molecular Diagnostics Layout: Galaxy Biotech, Daan Gene, Dian Diagnostics, Qianshan Pharmaceutical Machinery, New Open Source, Zixin Pharmaceutical




• Gene Therapy Layout: Anke Biotechnology, Beilu Pharmaceutical

VCBeat Summary:

• Precision Medicine Becomes a Global Development Trend




• Precision medicine encompasses multiple dimensions, including medical services, medical devices, biopharmaceuticals, and internet-based healthcare.




• Precision Medicine: A Long-Term Investment Yet to See a Capital Boom