2016 China Healthcare Industry Investment Outlook (Part I): Market Trends and Opportunities in Medical Services, MedTech, and Biopharma

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 transitions into an aging society, its healthcare industry has grown into a market worth nearly RMB 4 trillion. Over the past five years, this market has maintained a compound annual growth rate (CAGR) of over 20%, 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 nation’s health sector will usher in historic opportunities for rapid development. This environment will inevitably give rise to industry giants on the scale of BAT (Baidu, Alibaba, and Tencent), capable of exerting significant social impact and delivering broad public benefit.

The report projects that in 2016, capital will be heavily invested in China’s healthcare industry, focusing on the following areas:

• Medical Services Market




• Medical Technology and Medical Device Market




• Pharmaceutical and Biotechnology Market




• Internet Healthcare Market




• Precision Medicine Market

The first part 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.

I. Industry Trends in the Healthcare Services Market

Medical services, in a general sense, encompass prevention, diagnosis, treatment, and rehabilitation services provided by various healthcare institutions to patients. China’s nearly 8 billion annual outpatient visits have given rise to a RMB 3 trillion medical services market; driven by accelerating population aging, shifts in disease patterns, expanded social insurance coverage, and rising per capita disposable income, this market is projected to grow to RMB 6 trillion within the next five years.

Over the past decade, resolving issues related to healthcare payment has become a direct driver of growth in China’s healthcare services industry, while also prompting transformation among healthcare providers. In the coming years, China’s healthcare services sector is poised to undergo numerous new, structural changes:

1. Measures to address the issue of medical expense payment will increasingly focus on improving the efficiency of fund utilization, in addition to further expanding social security coverage and increasing funding levels. Cost containment within medical insurance will become the norm, significantly impacting business models that are heavily reliant on medical insurance reimbursements.

Although commercial insurance will continue to expand, social security will remain the primary payer. Over the past fifteen years, China’s health insurance coverage has increased significantly, rising from 20% in 2000 to 95% in 2015, thereby achieving near-universal health insurance coverage. Notably, the most rapid growth in insurance coverage occurred over the past five years, which has also driven the rapid expansion of the entire healthcare industry.

At the same time, however, the disconnect between healthcare providers and payers has led all industry participants—including pharmaceutical manufacturers, medical device suppliers, and patients—to align with providers in collectively opposing payers, pushing the latter to the brink of “insolvency.” Statistics show that employee basic medical insurance funds in over 200 pooling regions across China are running deficits, accounting for one-third of all urban employee pooling regions nationwide; among these, more than 20 pooling regions have exhausted their cumulative historical surpluses. In terms of resident basic medical insurance, over 100 pooling regions nationwide are experiencing deficits, including economically developed areas such as Beijing, Wuhan, Guangzhou, and Tianjin.

In the future, China will continue to strengthen healthcare insurance funding and expand coverage, particularly for critical illness insurance; however, the overall pace will be significantly slower than in previous years, with a shift in focus toward improving the efficiency of healthcare insurance utilization. Given the current level of state control over healthcare insurance expenditures, the mandatory implementation of tiered diagnosis and treatment systems and the allocation of quotas for healthcare insurance usage will constitute the primary measures. Payment model reforms, such as Diagnosis-Related Groups (DRGs), are unlikely to be implemented on a large scale in the short term.

Although commercial health insurance has long been hailed as a promising force to address healthcare payment challenges, there is little sign of significant progress in the short term. Social health insurance, functioning as China’s largest “insurer,” covers the broadest population base and secures a steady flow of premium contributions through state administrative mechanisms. In China, social health insurance contributions are not merely a means of covering medical expenses but are legally mandated, serving as a prerequisite for citizens’ participation in various economic activities. Consequently, within a social insurance system that offers citizens no freedom of choice, commercial insurers can only compete by differentiating their product offerings. However, the lack of access to medical data poses a substantial barrier, resulting in sluggish development for products such as critical illness insurance, health insurance, and long-term care insurance. Integrating commercial elements into the social health insurance framework may represent a potential breakthrough.

2. Pressure from payers will lead to a redefinition of various medical institutions as healthcare providers, with more clearly delineated functional divisions across different levels of care. This structural shift in the healthcare provider landscape will fundamentally influence patients’ healthcare-seeking behaviors, resulting in significant changes in patient flow. Business models that adapt to these changes will gain market favor, while those that fail to do so will be eliminated.

Over the past decade, the Chinese government has invested heavily in building a vast medical infrastructure system, establishing nearly one million medical institutions at all levels and training approximately 10 million healthcare professionals. In terms of aggregate volume, there is no severe imbalance between supply and demand for medical resources in China. However, this infrastructure operates in silos, with fragmented governance and misaligned functions, leading to significant structural imbalances between supply and demand.

Under dual pressure from fiscal constraints and public livelihood needs, the service structure of healthcare providers will undergo significant changes. The tiered diagnosis and treatment system, which has been proposed for over a decade, will see more substantive promotion and implementation. Tertiary hospitals and primary care institutions will return to their respective intended functions. The vast medical assets built with substantial government investment will be reactivated, enhancing the service efficiency of the public healthcare system and shifting its focus back toward basic medical services.

During this adjustment process, all parties involved in healthcare service delivery will be significantly impacted:

• Primary healthcare institutions: Positioned to provide preventive care, initial diagnosis, and post-diagnosis rehabilitation services, serving as the starting point for connecting patients and physicians;




• Tertiary Healthcare Institutions: Serving as an extension of primary healthcare institutions, they are positioned to provide medical services that leverage their superior medical resources, such as the diagnosis and treatment of major diseases and complex or intractable conditions;




• Pharmacies: Their role will be redefined once again, evolving from traditional outlets merely serving as retail endpoints for medications into the “last mile” connecting healthcare resources with patients, and gradually transforming into comprehensive health management institutions.




• Doctors: will re-examine their own positioning and make a choice, either to remain within this system or to leave it and enter the socialized medical service system;




• Patient: Healthcare-seeking perceptions will be impacted, and healthcare-seeking habits will gradually change.

3. Private medical institutions will face a new wave of opportunities and challenges. On the one hand, the persistent talent shortage that has hindered the development of private medical institutions will be alleviated by the influx of physicians from public hospitals. On the other hand, the transformation of functions in public medical institutions will release a portion of the healthcare service market space, including measures such as caps on the scale expansion of public medical institutions and the diversification of patient acquisition channels for private medical institutions.

The enhanced efficiency of public healthcare institutions will pose significant challenges to private medical providers. Private healthcare, which has traditionally relied on superior clinical environments and patient service experiences as a differentiated competitive strategy, will struggle to survive in this new landscape. Advancements in medical technology and rigorous control over medical safety will become the key determinants of development for private medical institutions. How to forge close collaboration with the public healthcare system, rather than being marginalized once again, presents a new challenge facing the private healthcare sector.

4. Changes on the supply side are also driving transformations on the demand side. The medical philosophy regarding disease management will shift from prioritizing treatment over prevention and rehabilitation to placing equal emphasis on all three; patients’ health awareness and willingness to actively participate in their care will gradually strengthen, and the frequency and modes of communication between doctors and patients will undergo new changes; these developments will inject new vitality and dynamism into the traditional healthcare services market.

Although China has established a disease prevention and health management system, it lacks effective operation, with over 90% of medical resources allocated to treatment. Meanwhile, the absence of continuous medical data and health records has led to significant waste of medical resources and exorbitant costs. In countries with mature healthcare systems, treatment, prevention, and rehabilitation each account for roughly half of the efforts. Continuous medical data and health records greatly facilitate diagnosis and treatment, reduce unnecessary duplicate testing, avoid repeated adjustments to treatment plans, and thereby save substantial costs.

As the functions of healthcare institutions are redefined, the traditional concept that focuses solely on disease treatment will gradually change. Disease prevention and rehabilitation will play an increasingly important role, with the primary care market serving as the core setting for these two aspects. Correspondingly, the payment model will shift from primarily covering diagnosis and treatment to increasing the proportion of payments for prevention and rehabilitation while reducing the proportion for treatment, thereby establishing a virtuous cycle.

Changes in healthcare delivery processes and reforms in medical insurance policies will significantly influence patients’ healthcare perspectives. Appointment-based consultations will become the mainstream approach. Awareness of disease prevention and health maintenance will gradually increase. Patients are increasingly dissatisfied with passively accepting physicians’ recommendations; instead, they are proactively engaging in healthcare decisions through digital technologies such as the internet. Consequently, communication between patients and physicians will extend far beyond the traditional three-minute consultation in the examination room.

5. Big data-driven precision medicine services will provide clinical decision-makers with more precise support and assistance, while enabling patients to receive precise treatment plans, optimal pharmacotherapy, and information on ineffective medications and side effects.

Precision medicine is a new medical model based on systems biology approaches that leverages big data analytics to develop tailored healthcare plans according to each patient’s individual characteristics, encompassing personalized clinical decision-making, services, and medications. Advances in technology have provided the necessary conditions for the large-scale adoption of precision medicine in healthcare delivery. Common technological applications include biobanks, bioinformatics, electronic health records (EHRs), and big data analytics.

Major Players in the A-Share Medical Services Market

• Traditional Medical Service Providers: Aier Eye Hospital, Topchoice Medical, Meinian Onehealth




• Traditional Pharmaceutical Companies: Hengkang Medical, Kangmei Pharmaceutical, Tasly




• Traditional Medical Device Companies: Lepu Medical, Yuwell Medical, Andon Health

  
  

• Non-Medical Industry Company: Yihua Health

VCBeat Summary:

• Under the fundamental policy framework where social insurance remains dominant, commercial insurance is not yet mainstream; it is necessary to identify breakthrough points in niche segments.




• The continuous implementation of tiered diagnosis and treatment has altered the role definitions of medical institutions, pharmacies, physicians, and patients;




• The liberalization of physician practice has created opportunities for private hospitals;




• The shift in medical functions has led to a reallocation of patient payment ratios among prevention, treatment, and rehabilitation.




• Medical big data enables patients to receive optimal treatment plans.

  
  

II. Industry Trends in Medical Technology and the Medical Device Market

From 2004 to 2014, the compound annual growth rate (CAGR) of revenue in China’s medical technology and medical device industry reached 25%, significantly higher than the global growth rate of 7%–8%. In 2014, the market size of China’s medical device industry was RMB 255.6 billion, and it was projected to exceed RMB 300 billion in 2015. Compared with the pharmaceutical manufacturing sector, China’s medical device market accounts for only 10% of the total pharmaceutical market. In contrast, medical devices represent 42% of the global pharmaceutical market, indicating substantial room for future growth in China.

Driven by population aging, the expanding middle class, and rising government healthcare expenditure, China’s medical device industry is poised to sustain robust growth, exhibiting the following key development trends:

1. Upgrade of the Import Substitution Theme: Import substitution has been largely achieved for certain traditional consumables and patient monitoring products. The next phase will shift toward high-value-added areas, such as advanced surgical equipment and imaging diagnostic devices. “U.S. technology + Chinese manufacturing + global markets” will emerge as a key theme.

The development of China’s medical device industry has undergone a long transition from reliance on imports to domestic production, from basic material processing to integrated electromechanical manufacturing, and from serving the domestic market to expanding into the global arena. Compared with developed countries, China’s medical device sector started relatively late, with early demand met almost entirely through imports. Due to a lack of core technologies, many Chinese medical device companies initially focused on relatively simple material processes and equipment, gradually displacing foreign competitors by leveraging cost advantages and policy incentives, and capturing significant shares of the domestic market in certain niche segments. With consumption and technological upgrades, along with national strategic initiatives, Chinese medical device companies are poised to achieve import substitution for high-value-added advanced surgical and imaging diagnostic equipment.

We believe that import substitution and globalization of domestically produced medical devices will remain a major trend for the foreseeable future, with innovation serving as the most effective strategy. A large number of overseas entrepreneurs possessing core technologies have recognized the opportunities in the Chinese market; they are localizing their technologies and products, establishing production bases in China to leverage its relatively low labor costs, and then distributing their products globally through distributors to achieve globalization. The model of “U.S. Technology + Chinese Manufacturing + Global Market” will continue to be a highly favored theme in the market for a considerable period.

2. Gradual Penetration of Disruptive Technologies: The emergence of disruptive technologies such as liquid biopsy, surgical robots, and 3D printing has the potential to fundamentally transform existing diagnostic and therapeutic approaches as well as the overall healthcare landscape.

Liquid biopsy is revolutionary for cancer detection. The method of diagnosing and monitoring patients’ tumors by detecting circulating tumor cells (CTCs) and circulating tumor DNA (ctDNA) in the blood is known as liquid biopsy. The emergence of liquid biopsy addresses the limitations associated with tissue biopsy. This technology overcomes the challenges of clinical sampling, meets the need for high-frequency patient monitoring, and offers the advantage of lower cost compared to needle biopsy. It holds promise for future applications in early cancer screening, dynamic monitoring of cancer patients, and guidance for personalized medication, indicating broad market prospects. MIT Technology Review named liquid biopsy one of the “10 Breakthrough Technologies of 2015.”

In the field of surgery, the advent of surgical medical robots has revolutionized existing surgical methods, maximizing the liberation of surgeons’ hands. Compared with traditional surgery, surgical robots offer significant advantages: reduced patient blood loss, faster recovery, and shorter training periods for surgeons. Surgical procedures are transitioning from an era of “resection” to an era of “repair.” As the most sought-after surgical robot currently, the da Vinci system has been widely used in various surgeries, including general surgery, thoracic surgery, urology, obstetrics and gynecology, head and neck surgery, and cardiac surgery, for both adults and children. The penetration rate of the da Vinci system in the U.S. hospital market has approached 50%. By the end of 2015, a total of 3,597 da Vinci systems had been installed worldwide, with annual revenue reaching $2.37 billion in 2015. As of the third quarter of 2015, China had 46 da Vinci robots, with a penetration rate of 4.3% among Tier-3 Grade-A hospitals. Compared with the United States, the Chinese market still holds substantial room for growth.

3D printing is a representative disruptive technology in the manufacturing industry, with encouraging progress in its penetration and application within the medical field. It is considered disruptive because it resolves problems that were previously difficult to address. For instance, in the field of orthopedics, Peking University Third Hospital has used 3D-printed artificial axis vertebrae to treat patients with cervical spine tumors, achieving excellent outcomes in tumor resection. There have already been four successful cases, which was unimaginable in the past. Additionally, the successful launch of the 3D-printed artificial liver unit independently developed by Hangzhou Dianzi University has provided a brand-new solution for new drug screening. Leading companies in China’s 3D printing sector, such as Medprin Regenerative Medical Technologies, have pioneered the commercialization of 3D-printed dura mater, injecting a shot of adrenaline into the market.

3. Platform-based companies are poised to emerge: An increasing number of A-share listed medical device companies are seeking overseas M&A opportunities, with significant cross-border arbitrage potential. Meanwhile, some large pharmaceutical companies are also considering integrating medical device firms to build comprehensive healthcare product and service platforms.

Chinese medical device companies not only seek to achieve new profit growth points and explore new markets through overseas mergers and acquisitions (M&A), but also aim to facilitate technological upgrades and enhance management standards. Furthermore, compared with foreign capital markets, China’s A-share market offers unparalleled valuation advantages, creating significant arbitrage opportunities for cross-border acquisitions.

Some large pharmaceutical companies listed on China’s A-share market are also actively seeking M&A opportunities in fields related to, but distinct from, pharmaceuticals, extending their reach into the medical device sector. Their aim is to build comprehensive healthcare product and service platforms, thereby strengthening their resilience against risks. An increasing number of M&A transactions in the market have evolved from mere channel- or product-focused deals to “M&A 3.0,” which centers on strategic layout and integration across the entire ecosystem.



Major Players in the A-Share Market for Medical Technology and Medical Devices:

• Platform-Based Medical Device Companies: Yuwell Medical, Shinva Medical, and Kaili Tai




• Specialized Medical Device Companies: Lepu Medical, Daan Gene




• Traditional Pharmaceutical Companies: Salubris, Haisco Pharmaceutical, Hainan Haiyao




• Non-medical companies: Hongda High-Tech, Jingwei Textile Machinery

VCBeat Summary:

• Import substitution and globalization of domestically produced medical devices will both become major trends.




• Disruptive technologies are poised to transform existing diagnostic and therapeutic approaches as well as the overall healthcare landscape.




• Ecosystem Layout and Integration Become the M&A Trend for Listed Medical Device Companies

  
  

III. Industry Trends in the Pharmaceutical and Biotechnology Markets

Today, China has become the world’s second-largest pharmaceutical market, primarily driven by factors such as its large population base, expanded health insurance coverage, increased government investment, and rising per capita income. According to statistics, China’s terminal pharmaceutical market was approximately RMB 1.38 trillion in 2015. However, with strengthened regulation, cost containment within health insurance programs, and industry restructuring, the compound annual growth rate (CAGR) of China’s pharmaceutical market is expected to slow from 16.1% over the past five years to 10.6% in the next five years.

1. Stricter approvals, tighter policies, slower growth, and industry consolidation.

Looking ahead to the next five years, we anticipate several trend-driven shifts in China’s pharmaceutical and biotechnology markets.

At the end of 2015, the China Food and Drug Administration (CFDA) issued the strictest drug review and approval regulations in its history, establishing clear provisions on raising approval standards for generic drugs, optimizing the review and approval process for clinical trial applications, accelerating the approval of drugs urgently needed for clinical use, and severely penalizing fabrication of clinical trial data. Many new drugs under development or review at pharmaceutical companies will be affected. Meanwhile, bidding reforms, stringent crackdowns on commercial bribery, and medical insurance cost containment measures will substantially impact the sales and operations of certain pharmaceutical enterprises. Amidst tightening regulatory approvals and policies, coupled with a continued slowdown in the growth rate of the pharmaceutical market, homogeneous generic drug manufacturers will seek consolidation for mutual support, while pharmaceutical companies with strong R&D foundations, robust sales networks, and powerful integration capabilities will have the opportunity to gradually evolve into platform-based pharmaceutical groups.

2. The acceleration of China’s aging process and the full relaxation of the two-child policy have created opportunities in niche markets such as chronic disease medications and pediatric drugs.

From 2015 to 2035, China will enter a phase of rapid aging, with the elderly population increasing from 212 million to 418 million, accounting for 29% of the total population. Due to lower immunity among the elderly, disease prevalence is higher; furthermore, older adults are prone to chronic diseases requiring continuous medication, which incurs substantial costs. Consequently, the aging population will place higher demands on healthcare services and bring unprecedented development opportunities to the pharmaceutical industry.

From 2010 to 2014, China saw approximately 16 million newborns annually. Following the full implementation of the two-child policy, the number of newborns was projected to increase by around 5 million per year during the first five years. Although there are approximately 6,000 pharmaceutical manufacturers in China, only about 10 specialize in pediatric medicines. With the population of children under 12 exceeding 200 million and their immune systems still developing, this demographic is particularly susceptible to diseases. Consequently, the market demand for pediatric medications is substantial, offering significant opportunities for development and innovation.

3. Biotechnology remains highly active, with precision medicine nurturing a trillion-dollar market.

In March 2015, the Ministry of Science and Technology convened China’s first expert conference on the national precision medicine strategy, deciding that the government would invest RMB 60 billion in the field of precision medicine by 2030. Globally, biotechnologies such as CAR-T, CRISPR, ctDNA, and monoclonal antibodies have been gradually validated and applied to early disease detection and precision treatment. Although these technologies are still in the exploratory stage, their research and development, clinical trials, and subsequent diagnostic and therapeutic applications will create enormous market opportunities, preliminarily estimated to reach a scale of trillions of yuan.

4. Traditional Chinese Medicine is on the verge of a renaissance, poised for explosive growth.

Recently, the State Council has issued a series of policies aimed at increasing investment and policy support for Traditional Chinese Medicine (TCM), relaxing market access for TCM services, and deregulating the approval of TCM preparations. These favorable policy developments have laid a solid foundation for the imminent explosive growth of the TCM industry. In 2015 alone, there were over 80 mergers and acquisitions in the TCM sector within China’s A-share market, with total transaction values exceeding RMB 50 billion. Notably, China Traditional Chinese Medicine Holdings Co., Ltd. acquired Tianjiang Pharmaceutical at a valuation of RMB 10 billion, highlighting the growing recognition of the value of TCM enterprises.

Major Players in the A-Share Pharmaceutical and Biotechnology Market

• R&D Layout: Fosun Pharma, Hengrui Medicine, Livzon Pharmaceutical, Tasly




• Channel and Sales Layout: Shanghai Pharmaceuticals, Kanion Pharmaceutical, Jianmin Group




• Strategic Layout of Non-Medical Industry Companies: Nanjing Xinbai, Nanjing Gaoke

  
  

VCBeat Summary:

• The Stringent CFDA Approval System Slows the Growth of the Pharmaceutical Market




• Introduction to the Two-Child Policy Drives Increased Opportunities for Pediatric Pharmaceutical Companies




• # Huge Market Opportunities in Biotechnology and Precision Medicine




• State Council Eases Market Entry Barriers for Traditional Chinese Medicine, Driving Surge in Market Enthusiasm