China health care a hot investment sector

Chinese fund managers have an upbeat outlook for the rest of 2013 thanks to a recovering macroeconomic situation and the expectation of higher stock market yields. And one of the sectors that will be increasingly attractive to fund managers is health care and pharmaceuticals.

Although private equity investment in the Asia-Pacific region was down from 2011 onwards, healthcare was a bright spot with life science private equity investors showing increasing interest last year. In China, the bio-pharma sector drew most of the investments. Globally, three of the 10 largest bio-pharma private equity transactions in 2012 involved Chinese targets — Luye Pharma, SBio and Shaanxi BiCon — representing a mix of specialty pharma, traditional Chinese medicine and biotech drugs. Recently, American private equity firm, New Enterprise Associates, planned to invest up to 15 per cent of a $2.6 billion (Dh9.5 billion) fund in China on healthcare and information technology. One of their projects include a cancer hospital in Beijing.

In a break from the past, private hospitals have moved into the vision of foreign private equity investors as the government has now loosened its grip on the health infrastructure sector. Last year, China said foreigners could own 100 per cent of a hospital, up from 70 per cent ownership allowed in 2010. The government’s goal is to have 20 per cent of the country’s hospital beds run by the private sector by 2015.

Policy dose

Private equity industry experts say there are lots of opportunities on the health care sidelines in China waiting to be tapped. The reason why health care and pharmaceuticals will continue to be a hot ticket is due to the long-term reforms and investment that is going into the industry.

In 2009, China put a universal health care plan in action, promising to bring every citizen under a health insurance umbrella, while providing quality and affordable care. Since then, expenditure in healthcare has risen phenomenally, even as drastic reforms and legislation comes into place.

In 2012, the Chinese government’s spending on health care rose 27.1 per cent and this year too, the country expects to increase its medical spending by another 27 per cent. Foreign companies, however, are galvanised by an updated medical insurance system that came out last month, promising reimbursement of medicines for 20 serious illnesses, including lung and gastric cancers, chronic myelocytic leukemia, hemophilia, type-1 diabetes and cerebral infarction. Within just a few days of this announcement, more than 10 international health care companies launched new medicines and medical devices aimed at the Chinese market. French drug-maker Sanofi was quick to announce introduction of its new injectable diabetes treatment Lyxumia into the local market.

Growth drivers for M&A

In this boom-time, mergers & acquisitions in health care is also on the rise with increased competition from multinationals to buy Chinese assets. Late last year, American medical device giant Medtronic acquired China Kanghui Holdings for $816 million, while another heavyweight, Stryker, took stakes in a local company, Trauson Holdings, to change the dynamics of the Chinese medical device market.

Foreign companies have plenty of motivation to step up M&A activities in Chinese health care. According to estimates by various consultancies and industry bodies, Chinese drug spending will see 18 to 20 per cent annual growth through 2015. The health care sector will maintain its rapid pace, mainly due to demand generated by robust economic growth and a rising middle class. Additionally, government intervention, changing lifestyles, urbanisation and increasing awareness of quality health care is leading to an explosion of demand.

Most foreign companies are planning to harness the vast potential of smaller cities, towns and grassroots markets and penetrate the lower-end segment. To jumpstart this process, they are keen to collaborate with local companies who have strong market penetration and regional networks. This has already triggered a trend towards more joint ventures and mergers. Between 2011 and 2012, China registered 132 deals in the pharmaceuticals sector, with a total disclosed transaction size of USD5.2 billion for 94 deals.