China’s top leaders have declared a “decisive victory” over COVID-19, with health officials reporting that the coronavirus epidemic has “basically ended”.

Nevertheless, the last three years of COVID lockdowns have helped to refocus the government’s attention on its healthcare system. At a recent meeting, the Politburo Standing Committee (PSC), emphasised the need for local departments to strengthen their medical facilities, enhance their medical supplies, and plan for the next phase of vaccinations.

Healthcare as an economic driver

President Xi Jinping had previously highlighted the importance of healthcare as a precondition for economic and social development. His Healthy China 2030 vision was aimed at making the Chinese health industry a mainstay of the national economy¹.

Going forward, the healthcare stresses of recent years look set to bring China’s healthcare industry to a new level, spurred by:

• China’s economic shift from manufacturing to innovation and services-led growth. Healthcare is seen as part of this burgeoning “new economy” sector
• China’s aging population and rising middle class continue to drive strong demand for healthcare and wellness services
• Strong policy support for domestic healthcare companies underpinned by China’s drive for self-sufficiency in healthcare
• Prioritisation of core pipeline growth projects by healthcare firms as the focus on COVID-19 fades

Opportunities within the healthcare space

China’s healthcare sector encompasses a wide range of sub-sectors including biotech, medical equipment, life sciences, genomics, facilities, etc. Looking ahead, UOBAM maintains a positive view on these sub-sectors.

1. Biotech and pharmaceuticals

China’s pharmaceutical sector is the world’s second largest after the US and is forecasted to achieve a compounded annual growth rate (CAGR) of 12.2 percent by 2025². This growth will be supported by China’s growing demand for new therapies and drugs; the country’s population of citizens over the age of 60 is expected to reach 360 million by 2030, from 210 million in 2020.³

Furthermore, COVID-related headwinds are expected to fade in 2023. The lifting of zero-COVID policies has allowed research and development (R&D) activities such as clinical trials to resume. Chinese biotech and pharmaceutical companies are increasingly shifting their focus and resources back onto core pipeline growth projects.

We also expect the price pressures weighing on China’s pharmaceutical industry in recent years to stabilise soon. Since 2018, China’s centralised drug procurement initiative has resulted in drug prices being reduced by over 50 percent⁴. Looking ahead, we think there is not much room for further price cuts especially as drug procurement rules improve. This is broadly positive for the pharmaceutical sector.

Notable Chinese biotech and pharmaceutical companies include BeiGene, which specialises in the development of drugs for cancer treatment, and Walvax Biotechnology, a leading vaccine producer.

2. Pharmaceutical Outsourcing

As pharmaceutical demand recovers after China’s exit from zero-COVID, the pharmaceutical outsourcing industry is poised for a rebound. Depending on the service provided, the industry is comprised of various subsectors:

• Contract Research Organisations (CROs) provide R&D and clinical trial services
• Contract Development and Manufacturing Organisations (CDMOs) provide drug development and manufacturing services
• Contract Sales Organisations (CSOs) provide marketing and sales support for pharmaceutical companies

Collectively, these are commonly referred to as CXO services, and their growth is driven by demand from emerging biotech companies. Small and medium-sized biotech companies occupy an increasing proportion of new global drug pipelines, but they often have limited in-house resources and capabilities. As such, many rely on outsourced service providers for drug R&D and production.

In addition, China’s 14^th Five-Year-Plan calls for an average annual increase of more than 10 percent in R&D investment across the healthcare industry. Innovative products are expected to represent a larger proportion of Chinese healthcare companies’ operating revenues by 2025. This provides more opportunities for CXOs specialising in innovative drug development.

WuXi Biologics, Asymchem and Porton Pharma Solutions are some of the leading CXO companies in China.

3. Medical services

With the resumption of in-person medical services in 2023, demand for consumption medical services in China is expected to bounce back.

As it stands, China’s healthcare expenditure as a proportion of gross domestic product (GDP) is about 6.5 percent. This is still low compared to other countries like the US where healthcare spending makes up more than 15 percent of GDP.

As China’s per capita disposable income rises, there is room for the country’s healthcare spending to expand over the longer term. We also see further growth potential for this sub-sector given the relatively low cataract surgery, refractive surgery, and dental treatment penetration rate in China⁵.

Medical service providers that come to mind include China Resources Medical, the largest hospital group listed in Hong Kong and mainland China, and Aier Eye, the leading ophthalmology hospital operator in China.

Overall, we are constructive on the longer-term outlook for China’s healthcare sector, though we note that it is not without risks. Headwinds for the sector include regulatory scrutiny, which can affect the development, approval, or pricing of a product. Additionally, some products may turn out to be ineffective or unsafe. Such announcements can lead to volatility, especially in biotech stocks.

Amid these considerations, we favour staying diversified in the healthcare sector and investing across a range of different healthcare sub-sectors and companies.

¹World Health Organisation, Healthy China 2030 (from vision to action)

²Source: GlobalData

³Source: GlobalData

⁴Source: National Healthcare Security Administration

⁵Source: Research Institute of Economics and Finance, Industrial Securities