Market Insights of China Healthcare Industry 2021

- Trends, Opportunities and Strategies for Investment & Development

2021医疗健康行业市场发展、投资趋势：机遇与策略篇

Overview on Background and Status quo

In the era of Great Shuffle under the catalysis of the COVID-19, the healthcare industry has buckedthe trend and undoubtedly became the market highlights. The Outlineof "Healthy China 2030" (Hereinafter referred to as “Healthy China”)initiative has clearly set out the strategic goal of making the development ofthe Healthcare a pillar industry of the national economy, and at the Two Sessionsheld in March 2021, President Xi jinping reiterated the strategic priority andcontinued to promote the implementation of “Healthy China”.

Data analysis showsthat the overall revenue of China's healthcare industry keeps growing in recentyears, and it is expected to exceed RMB 9 trillion yuan in 2020. The marketsize of the industry brought by "Healthy China" is expected to exceedRMB16 trillion yuan by 2030. The development trend of China's healthcareindustry is consistent with that of the world, and the demand will keepsustainable growth due to the change of social structure.

Overall Revenue of China's HealthcareIndustry (trillion yuan)

Data source from: iimediadata center

On the economic front, China's domestic per capita income and consumption has increased, butthe proportion of GDP on healthcare expenditure is low at 6.44%, well below theproportion of more than 10% in developed countries such as the United Statesand Japan. In terms of social structure, the aging population as a socialproblem is worsening, the number of patients with chronic diseases isincreasing, the patients tend to be younger, and the unmet medical needs arehuge. In terms of technology, information technologies such as big data and AIhave been widely used in the R&D of new drugs, and new methods such asbiotechnology including gene editing and cell immunotherapy have been widely adoptedin diagnosis and treatment. As an important driver of the industry, continuousprogress of science and technology has made it possible to cure major diseasessuch as cancer and depression. In terms of policy support, China’s 14thFive-Year Plan related to healthcare industry covers comprehensive areas such asmedical insurance coordination and reimbursement, graded diagnosis andtreatment, social medical, telemedicine, biomedicine, traditional Chinesemedicine (TCM), and chronic disease management. The healthcare industry hold abright and promising future.

Industry Segmentations

Datafrom "2019-2025 China's Healthcare Industry Market Analysis and InvestmentProspect Forecast Report" shows that at the present stage, among the five major segmentations of healthcare industry in China, pharmaceutical and elderlycare accounted for 50.05% and 33.04% of the market respectively. Medical treatment and health care products accounted for less than 10% and 5% respectively, and the proportion of health management service industry was the smallest, at only 2.71%。

MarketSegmentation of China's Healthcare Industry

Data from: zhiyan research insititute and zgzyyky.org.cn

Industry Investment Trends Analysis

In his best-selling book The Wellness Revolution, Paul Zane Pilzer, a famous American economist, called the healthcare industry “The Global Fifth Wave of Wealth"after The IT industry. Under the context of Healthy China 2030 Strategy, thehealthcare investment field is becoming the focus of capital. Hillhouse CapitalGroup, one of Asia's largest investment funds from China, is making a flurry ofinvestments in China's healthcare sector in the first week of the 2021 ChineseNew Year. Looking into their 7 invested projects in Healthcare out of the 13projects invested within 7 days, Hillhouse increased its investments on earlystage projects with 5 Series B round projects. Further analysis shows that these projects are focusedon cutting-edge technologies such as innovative therapy, vitro diagnostic andsynthetic biology technology.

From the perspective of changes in the composition of listed companies in the healthcare industry, pharmaceutical andmedical device companies represented by innovation have gained extremely rapiddevelopment and capital favor. From the perspective of industrial and capitalpolicy, "Healthy China” clearly encourages the R&D of innovative medicine and centralized procurement. The development of high-end medical equipment, asproposed in the 14th Five-Year Plan, will be an important part of the "New Infrastructure". Influenced by the overall capital environment, the amountof investment and financing in China's healthcare industry generally presents afluctuating rising trend, and the Sci-Tech innovation board (STAR Market) became friendlier to innovative companies. Favorable polices have led to the largestconcentration of capital in recent years for companies focused on innovationand the future. The COVID-19 has exposed the shortcomings in the field of key technologies and core components of domestic medical devices, which also puts forward higher requirements for the development of the industry.

The Impact of the Pandemic on theHealthcare Industry Development Trends

Impactedby the pandemic, favorable policies and trends will show that, first, thedemand for protective equipment and medical consumables, and high-end medicaldevice in the short term. Second, in pharmaceutical manufacturing: COVID-19 prevention related products demands in the short term and innovative medicine, high-end biotech,life science R&D investment, and TCM in long run. Third, in Medical service: In particular, the pandemic promoted the application of science andtechnology in the medical industry, such as online medical service related Internet medical industry. We will further elaborate the impact on the key segmentations to help identify the opportunities and development strategies.

Key Segmentations: China's PharmaceuticalManufacturing Market Potential, Trends and Investment Opportunities

Datafrom the “Analysis Report on Market Competition and Competition Strategy ofChina's Pharmaceutical Industry (2020-2026)”shows that under the trend of population aging, the global pharmaceutical market size is expected to grow to US$ 1.6 trillion dollars (RMB 11 trillion) by 2023, and the China pharmaceuticalmarket will grow to US $ 322.1 billion (RMB 2.1 trillion). It is estimated thatthe global and China pharmaceutical market size will grow at an average annualrate of 4.7% and 6.8% respectively from 2018 to 2023, with the Chinesepharmaceutical market growing faster than the global market.

Global and Chinese PharmaceuticalMarket Size

Data source from: YanzhiInsititute and CINIC,

Orange line: China market;Red line: Global market

Among all the products, biological medicine are the best-selling pharmaceutical productsin the world at present. Although China's biopharma market is still in theearly stage of development, it has shown strong growth potential. In recentyears, with the improvement of health awareness and affordability, as well asthe expansion of medical insurance coverage, the sales of biological medicine have increased rapidly. It is expected that the size of China's biopharma marketwill further expand to 641.2 billion yuan (about US $100 billion) by 2023 witha CAGR of 19.6% in the same period. The market is expected to reach 1319.8billion yuan (US $200 billion) by 2030 with increasing investment in pharmaceutical R&D.

China's Biopharma Market Size (billion RMB)

Data source from：Frostchina

The Innovation Wave of China's Pharmaceutical R&D driven by Pandemic

The spread of the COVID-19 and the progress of vaccination have led to a greater awareness of the importance of biopharma R&D such as vaccines and neutralizing antibodies(NT) globally. At current stage, the medical productions in China are mainly developed based on international original innovative drugs, and domestic innovative drugs account for only 3% of China's pharmaceutical market share. The pandemicwill further promote the clinical research and customized productions in thepharmaceutical sector, however due to China's biopharma market is at its initial stage, and the technical barrier is very high, many small and medium-sized companies highly depend on outsourcing R&D production services.The industry demand for Contract Research Organization (CRO) and ContractDevelopment and Manufacturing Organization (CDMO) is therefore very large.Since the rise of Biotech worldwide, the CDMO market has been concentrated indeveloped markets such as Europe and the United States, but the above-mentioned markets have greatly limited capacity expansion due to the high costs andcompliance requirements. Large multinational pharmaceutical enterprises thereforegradually divest non-core assets and outsource R&D production services basedon the consideration of cost-effectiveness. As pharma market demand increasingand the pharmaceutical patent protection system gradually improved, the globalCDMO market has begun to shift from mature western markets to Asia-Pacificemerging markets. Compared with most other Asian countries, China is clearlyfavored for its strengths in new technology development, scientific research, manufacturing capabilities, infrastructure construction, supply chains, quality management systems, and intellectual property protection.

On May1, 2020, Lonza Group, a leading CDMO company, announced its cooperation withModerna, a leading US biopharma company to produce mRNA-1273, a vaccine for COVID-19 and Lonza will supply Moderna with 1 billion doses of the vaccine peryear. As one of the leading CDMO companies in China, WuXi Biologics recentlyacquired the bulk drug manufacturing plant of German pharmaceutical giant Bayer Wuppertal after acquiring three factories in the US in 2020. The stock price ofWuXi Biologics has risen more than 600% over the past three years with a PE ratio of 345 times since it’s accelerating the process of R&D, innovation and globalization. This month it futher announced a plan to set up a private equity fund to focus on mergers and acquisitions (M&A) in the pharmaceutical industry.

Strengtheningdomestic and international cooperation in this field will play a strategicsignificance in terms of avoiding risks and integrating advantages for win-winresults. Multinational corporations can better meet the diversified needs ofcustomers more quickly and take over more market shares through the globalal location of production bases, the localization of R&D strategies, and leveragelocal preferential policies.

The TCM Industry is in High Demand during the Outbreak

Since 2015, China has introduced aseries of relevant policies to support the development of the TCM industry. "Vigorously development of TCM” was included in the 14th Five-Year Plan to further improve the value and status of TCM in the healthcare system. In the past few years,the market size of the TCM industry has continued to rise. The White Paper on Traditional Chinese Medicine in China expected that the TCM industry marketsize to exceed 3 trillion yuan by 2020 with a CAGR of 20%. In the process of fightingCOVID-19, a batch of TCM, represented by Jinhua Qinggan Granules and LianhuaQingwen Capsules, proved to have obvious curative effect, and frequently soldout in China. At present, there is still no specific remedy for COVID-19 in theworld, while good news about TCM's effective against COVID-19 keeps coming. As of February this year, the confirmed cases treated by TCM accounted for 85.20% of the total cases in China. As the pandemic continues to spread globally, TCM were exported overseas and gained popularity.

According to customs statistics, in2019, the export volume of Chinese patent medicine was 12,600 tons, with ayear-on-year (YoY) growth of 12.21%. In 2020, the export volume of Chineseherbal medicinal materials and Chinese patent medicine increased compared with the same period in 2019, showing a steady development trend. The TCM industryhas attracted a lot of attention in capital market with soaring stock prices. TheTCM decoction pieces and proprietary Chinese medicine are the core of TCMindustry. The growing production of both will drive the development of upstream Chinese herbal medicine industry. There is still a long way to go to promotethe awareness of TCM in China and overseas, but TCM industry as China'sadvantages and characteristics, has a strong potential for development in the long term.

Other Key Segments with Long-term Optimistic Development Significance

An important prerequisite for the development of the healthcare industry is to change from the traditional single treatment mode to the integrated mode of "prevention, treatment and care". To this end, China will not only continue to develop the medical devices and pharmaceutical manufacturing segments, but also accelerate the development of the health products industry, which focuses on health food, cosmeceuticals and functional daily necessities, as well as the health management service industry, which focuses on personalized health testing & evaluation, consultation services &disease rehabilitation. At present, the medical treatment, health products andhealth management services take insufficient market shares as illustratedearlier in the second chart and there is still a huge space for development.

Online Medical Market Catalyzed bythe Outbreak

Withthe introducing of digital technologies such as artificial intelligence (AI) into the healthcare field, it has fundamentally changed the way health productsand services provided. Digital healthcare market mainly includes online retail pharmacy, online consultation, online consumer health and digital healthinfrastructure, etc. The 14th Five-Year Plan require continuous promotion oftelemedicine by integrating the application of Internet and medical services.The introduction of a number of favorable policies will have a significant impact on the medicine distributions and healthcare services. Research shows that in 2020, the scale of China's Internet medical market is expected to reach 40.89 billion yuan, with a YoY growth of 50.5%, among which the online health insurance market takes up the largest proportion with 28.8%, followed by the medical e-commerce market.

China's OnlineMedical Market Size and Growth Rate (100 million yuan, %)

Data Source from: iresearch

The pandemic has catalyzed consumers' habits of using online medical services. Take three Internet medical giants, Ali Health, Jingdong Health and PingAn Good Doctors asexamples, online medical services have received an unexpected wave of traffic and revenue driven by the pandemic control. Reflected in the capital market is their soaring stock prices. During the Outbreak, new regulatory policies were issued for the industry, which significantly relaxed the restrictions on online medical treatment and opened up for online medical insurance and payment. Under the new situation, online medical industry is facing a new opportunity for high-quality development.

The Peak of MedicalCosmetology Market is forthcoming

In the past few years, China's medical cosmetology market has maintained rapid growth. In 2019, the market size reached 176.9 billion yuan, with a YoY growth rate of 22.2%. Overall, the CAGR of China's medical cosmetology industry is expected to exceed 15% from 2020 to 2023, much higher than the growth rate ofthe global market at 10%. According to the estimate of Sealand Securities Research Institute, the scale of China's medical cosmetology industry is expected to exceed 360 billion yuan in 2022. The peak of the entire industry will come along with the increasing awareness and demand for women,technological progress and gradual improvement of medical cosmetology policies.As for the investment and development strategy, three major directions are suggested: upstream manufacturers with absolute technical barriers, online medical cosmetology platform empowered by capital market and downstream medical cosmetology brand chain companies.

Development Strategies Outlook -Seize the Opportunists and Stand Out

As the pandemic has brought unprecedented difficulties and challenges to many industries, it also brought great vitality to the healthcare industry. Under the catalysis ofthe pandemic, the recognition of Chinese medical products has been greatly improved in the global market. Emerging markets have an increasingly strong demand for Chinese medical products, in particular, countries covered by the"One Belt And One Road" policy.

With the effort of continuously building a great business environment from both national and regional level, China has issued a series of preferential policies and received optimistic comments from domestic and foreign companies in healthcare industry as they achieved accelerated development in this market. For instance at the national level, with the Foreign Investment Law and the Basic Health Care &Promotion Law of China taken effect in 2020, China have abolished the prohibition on foreign investment in TCM decoction pieces and encouraged more private capital (including foreign capital) to participate in the investment and M&A in China's healthcare sector.

At the regional level, taking Beijing as an example, as the science and technology center, the biopharma and healthcare industry is accelerating into a new pillar industry of RMB 100 billion level at the Economic and Technological Development Zone. Thanks to the comprehensive promotion of online service by the Municipal Food and Drug Administration last year, the examination and approval processingtime of all the applications have been reduced by 24% and 30%. In March of thisyear, the Beijing government began to offer subsidies 10% of the actual amountof R&D expenses in 2020 to companies that produce drugs and diagnostic devices for the COVID-19 prevention, with a maximum reward of 10 million yuan.

Excellent companies incline to taking advantages of the favorable polices and resourceful ecological network such as the upgraded globalization and expansion strategy adoptedby Lonza and WuXi Biologics during the Pandemic. For startup and innovative companiesin the industry, in addition to plan on key factors such as the company positioning, business model, shareholders background, production and logistics,having outstanding abilities on identifying leading technology with greater market potential, building operation team in line with global standards and implementing cooperation with mainstream CRO & CDMO have become importantconsiderations for investors.

The ability of international cooperation is not only that the creation of new products, but also the integration ability of authorization, joint development, M&A, more cutting-edge strategic planning on globalized sales team and post-investment management value adding services, etc. Investors will be more interested in excellent teams that have strong ability to execute innovation strategy and R&D. Inthe context of global industrial chain reform and economic growth adjustment,the healthcare industry has ushered in a new round of structural changes catalyzed by Pandemic. Identify the opportunities and further develop their own differentiation advantages will become the key for companies to stand out inthe future.