After a stormy anti-corruption campaign and regulatory personnel
reshuffles last year, China's healthcare industry seems to have
emerged from the dark clouds to become a hot focus of investors
from both home and abroad.
"China's healthcare spending will grow dramatically with
continued GDP growth," says Norman Chen, partner from venture
capital firm FAV.
"By 2010, China will be the world's sixth-largest healthcare
market with industry turnover surpassing US$27 billion. Obviously,
it is not about whether we should put our money in this area but
time to think of which part of the sector we should invest in."
China's rapid economic growth, which has averaged 8 to 9 percent
annually since 1978, is enabling ordinary Chinese to spend more on
healthcare.
As well, the unprecedented demographic transition brought by
decreasing birth rates and an increasingly elderly population has
also resulted in a boom in the number of hospitals, pharmaceutical
companies and medical equipment manufacturers in the country.
According to domestic research firm ChinaVenture, venture
capital investment in China's healthcare market reached US$31
million in the third quarter of this year, an increase of nearly
200 percent over US$11 million in the second quarter.
The flow of capital into Chinese healthcare companies has also
resulted in an unprecedented number of initial public offerings
(IPOs) by healthcare companies.
In the first 10 months of this year, seven Chinese healthcare
companies were listed in overseas stock markets, a significant jump
from four listings a year earlier, according to Zero2IPO, a local
researcher on the venture capital market.
Li Ying, secretary of the China Association for Medical Devices
Industry, says "Chinese pharmaceutical companies and medical
equipment companies are striving for expansion, but often face
bottlenecks in investment, research and development abilities and
management experience."
She notes that the involvement of venture capitalists, which
often bring with them expertise in management, financing and
marketing, can help Chinese healthcare companies to grow in line
with the country's booming market.
Although optimistic about China's healthcare companies,
investors say that risk certainly exists, especially in
pharmaceutical companies.
"We are especially wary when evaluating investment in new drug
research," says Zhang Suyang, partner from IDG VC.
"Drug research, unlike healthcare services and medical devices,
is a highly professional area that only a limited number of experts
fully understand. It is a challenge for fund managers like us."
Zhang's remark was echoed by a researcher from Merrill
Lynch.
"According to our observations, there are six Chinese
pharmaceutical companies listed in the United States, but their
price-to-earnings (P/E) ratios are much lower than companies
providing medical equipment and services in China," says the
researcher who declined to be named.
He says it is partly due to the perception by investors in the
US that the patent power of the Chinese pharmaceutical companies is
not strong enough to sustain growth of new drugs in the
international market, which means they are more likely to be
involved in legal issues in countries like the United States or in
Europe, where patent laws are strict.
A P/E ratio is the relationship of a company's share price to
its earnings used to evaluate its value for money.
Norman from FAV contents investment in Chinese pharmaceutical
companies should be "extremely careful", but adds Chinese companies
have its some advantages in new drug research.
"China has a more efficient new drug approval system and is more
cost-effective in undertaking experiments and recruiting
volunteers, which is a huge plus," he says.
In the US, it often takes 10 to 15 years and US$600 million
before a new drug is approved. But in China, it needs an average of
five years and 50 million yuan, according to industry
estimates.
"Whatever challenges or opportunities, China's healthcare market
is just in its inception," says Zhang from IDG VC.
"It's like the time of gold rush - many people who panned for
gold failed, but people who sold them drinking water made the
wealth," he says.
"I think in China we may first need to fund those who sell the
water."
(China Daily November 12, 2007)
