The healthcare segment in China, which encompasses multiple areas, from biotech to traditional medicine, is an increasingly important economic driver.
Fidelity International’s Head of Equities Asia Pacific, Marty Dropkin, met with Portfolio Managers Hyomi Jie and Tina Tian to assess growth opportunities across the sector. With additional contributions from healthcare analysts Duanting Zhai and Lizheng Zhu.
A study commissioned by the World Bank claims that China could spend over US$2 trillion annually on healthcare by 2035. That number was only around US$500 billion in 2014.1 “It’s unsurprising, therefore, that China’s healthcare segment is increasingly diverse,” says Jie.
At a high level, there are the pharmaceutical companies who develop generic and innovative drugs. This is done with the help of well-developed clinical research organisations. In tandem, traditional Chinese medicine (TCM) plays a big part in the country’s healthcare landscape.
“Medical equipment is a fast-growing segment, too,” she adds. The Chinese government focused on improving its healthcare infrastructure in the wake of the pandemic. This includes the development of infrastructure upgrades. For example, in May 2024, the authorities announced a significant RMB100 billion plan to increase intensive care capacity. Furthermore, medical equipment has traditionally been dominated by multinational players, but an increasing number of domestic companies are making their mark in China and overseas.
From an investment perspective, the healthcare sector may only represent around four per cent of the MSCI China Index, but given China is one of the world's fastest ageing societies, demand growth is evident. “However, supply is not always clear,” adds Jie. This could be affected by innovation as well as public policy, given the government is the most significant contributor to the National Health Insurance Fund. It’s also worth noting that local Chinese brands are gaining market share in overseas territories, with a few subsectors and companies well positioned to harness demand, particularly in emerging economies.
On-the-ground insights
Fidelity’s analysts recently visited pharmaceutical and biotech companies in Shanghai and Hangzhou to discuss their research and development (R&D) pipelines, product innovation, and views on potential policies targeting China’s healthcare industry.
The pharmaceutical companies we spoke to explained that previously, their focus had been on profitable generic drugs. However, when the government introduced volume-based procurement to control the price of generic products, many of these firms increased their research investment, leading to more robust innovation. “Already we see a rising number of best-in-class firms given their R&D pipelines,” says Zhai. “Upgrades to China’s regulatory system in 2015 also encouraged a shift from generic to newly developed drugs,” continues Tian.
Market fundamentals across the biotech industry have improved significantly in terms of innovation. “Sentiment is also better, with a series of government policy moves to support new developments in the drug supply chain,” says Zhu. Two innovative drugs stand out, she explains. The first is a therapy for multiple myeloma, a type of blood cancer, and the other is a blood cancer treatment. Both are expected to reach peak sales of US$4 billion annually. In terms of the drug pipeline, Zhu is particularly excited about new therapies for cancer and obesity.
Unmet hospital demand and growth in traditional therapies
Regarding the hospital system, Zhai points out that public hospitals account for around 85 per cent of the total market, with private facilities representing the remainder. “Public hospitals will never be able to satisfy all the medical needs of patients, so there are multiple areas with huge unmet medical demand, which means there is room for private hospitals to survive.”
TCM, representing around 15 per cent of China’s healthcare market, is a broad concept covering many sub-segments, such as herbs and acupuncture. “From our conversations, we believe that TCM’s position will be maintained since the government is providing support to encourage its development,” notes Zhai.
Traditional Chinese Medicine is an interesting segment because some of its efficacy is not confirmed or verified by science. “We view it more as a consumer-focused service, given many of its products have strong brand names and are marketed accordingly,” adds Jie.
Innovation and growth underpinned by a deep pool of talent
Returning to the theme of innovation and how China stacks up against other markets, Tian observes that the Chinese single-payer healthcare structure shares some similarities with Japan. In a similar vein to China, local businesses in Japan also started as ‘fast followers’ (companies that mirror a competitor’s innovation with similar offerings). “In 2024, Japanese businesses deliver real innovation, licensing assets to global pharmaceutical groups. And I think that is exactly what's happening in China,” she observes.
Chinese healthcare companies also have human-resource strengths. “Given local opportunities, many people working overseas for global pharmaceutical businesses are returning home,” says Tian. And with them, they bring experience. China can also boast a deep pool of domestically educated talent.
Source: 1. Bayer, 2024
