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China's Healthcare Industry Continues to Offer Investment Opportunities

Posted on Apr 26, 2013 by Sergio Ulloa ()

Hedge fund managers in China are feeling positive about the rest of 2013 as the nation's stock market recovers, resulting in high expectations for potential yields. One of the fastest growing and most attractive segments for fund managers in China is that of healthcare and pharmaceuticals.

Although investment in the Asia Pacific region, particularly in private equity, has been sluggish since 2011, the healthcare industry has seen surprising and promising growth. Many articles, opinion pieces and exposes have highlighted the new frontier that is Asia healthcare.

Worldwide, one of the fastest growing healthcare industries is in China, with the bio-pharma sector recently attracting substantial investment. On an international level, 3 of the 10 biggest bio-pharma private equity transactions in 2012 were with Chinese targets -- Luye Pharma, SBio and Shaanxi BiCon. This wide variety of companies demonstrates how the country is uniquely seeing a mixture of specialty pharma, traditional Chinese medicine and biotech drugs. In addition, New Enterprise Associates, a large American private equity firm, recently announced their plans to contribute about 15% of a $2.6-billion fund for healthcare and information technology in China. Included in the fund is a project for a hospital specializing in cancer treatment.

Another bright spot for China's healthcare industry is the government's looser grip on the industry and their move to privatize more of the industry. In 2012, the government shifted its stance on private hospital ownership from previously only allowing foreign investment to own up to 70% of a hospital, to now allowing 100% foreign ownership. This loosening of the reigns is evident as private hospitals move toward visions and look for investments from foreign private equity investors. In addition, the government hopes that by 2015, the private sector will run 20% of the nation's hospital beds.

All of this is good news, according to industry experts, and more opportunities will undoubtedly continue to emerge in such a rapidly developing country such as China. As the country continues to see long-term reforms and investment, the healthcare and pharmaceutical industries will both be industries to watch in the coming years.

China has already seen large improvements and reforms, as the country put in place a universal healthcare plan in 2009. This plan promised that every citizen would have access to health insurance and would be provided with affordable and high-quality healthcare. In the few years after this reform, healthcare expenditures have dramatically increased. The results from this reform can be seen as the government's healthcare expenditures increased by more than 27% in 2012.

The latest shock to the industry came last month when an updated health insurance system announced the new reimbursement for medicines and treatments of 20 serious illnesses. Some of those on the list include lung and gastric cancers, chronic myelocytic leukemia, hemophilia, type-1 diabetes and cerebral infarction. After only a few days of this new reimbursement scheme, some 10 international healthcare manufacturing and pharmaceutical companies released new medicines and devices specifically targeting the Chinese market. Included in the influx of new products to the market was Sanofi's introduction of Lyxumia, the French pharmaceutical's injectable diabetes treatment product.

Another way that the healthcare and pharmaceutical landscape continues to change in China is in regard to the increased number of mergers and acquisitions. This has been a result of increased competition among foreign multinational companies to purchase and invest in Chinese assets. One such example is last years' acquisition by Medtronic, the American medical device company, of China's Kanghui Holdings for $816 million. Another merger that made headlines in the industry involved Stryker gaining large stakes in Trauson Holdings, a local company. These mergers and acquisitions did, and are expected to, shake up China's medical device market.

There is plenty of motivation for foreign companies to continue investing and seeking merge and acquisition opportunities in the China healthcare market. Analysts from a number of leading consultancies anticipate that drug spending will grow by 18 to 20% annually for the next few years. These figures are attributed to the promising economic growth and the increasing size of China's middle class. Other factors for the nation's rapid healthcare industry growth also include government intervention, urbanization, changing lifestyles and an overall interest and awareness in healthcare quality.

For the foreseeable future, many foreign companies are looking to China's smaller cities and towns to initially enter and expand in the lower-tier areas. In order to do this, foreign companies are looking to start partnerships or collaborate with local companies that are already familiar with the market.

There continues to be a growing number of joint ventures popping upl across the country. From 2011 to 2012, there were more than 132 deals worth about $5.2 billion that were registered in China in the pharmaceutical sector alone. These figures only further demonstrate the number of opportunities for healthcare in Asia, and more specifically, in China.

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