China: Digitalisation hastens the healthtech boom

Changing demographics, rising affluence, lifestyle diseases and growing health consciousness are expected to fuel China’s healthcare sector’s growth. A shortage of medical professionals and high costs, however, are key challenges. Fortunately, the ongoing digitalisation is helping to alleviate some pressure, and this is resulting in many exciting investment opportunities.

June 2021 | 4.5 min read

China’s healthcare expenditure is expected to almost triple from RMB 6.5 trillion in 2019 to RMB 17.6 trillion by 20301, precipitating tandem growth in many other sub sectors such as drug sales, medical device sales, distributors etc. The landscape has also been evolving over the past decade with concurrent advances in technology. In fact, online healthcare expenditure has increased 2.5x since 2015.

China’s healthtech boom came only in the last 2 years following the implementation of a comprehensive framework to regulate online healthcare in 2018. The new regulations allowed 1) hospitals to use online platforms to collaborate amongst themselves 2) offline hospitals to provide online solutions, and 3) companies to set up an “internet hospital” if it works with an offline hospital. Internet hospitals can efficiently tap on services of doctors and nurses from various hospitals.

Meanwhile COVID-19 has further accelerated the digitalisation of the healthcare sector with many turning to telehealth for medical consultations. Given that almost 986 million people in China accessed the internet via a mobile device in 20202 facilitated by the world’s fastest 5G technology, connecting to online medical services is a non-issue. Two areas that we believe are poised to benefit greatly from telemedicine’s rise are online drug sales and artificial intelligence (AI) for medical diagnosis. See Fig 1.

Fig 1: Online consultation market is expanding

china-digitalisation-hastens-the-healthtech-boom-Fig 1

Thanks for subscribing!

Follow us :

A promising future for online drug sales

Online drug sales have not taken off in China for a few reasons. The traditional mindset of Chinese patients is one. Many believe that public hospitals have the best quality doctors and best available medicines, and hence avoided buying drugs online. As a result, 70% of drug sales take place in public hospitals across China and the remaining market share is taken up pharmacies; online drug sales constitute less than 1% of the RMB 1.8 trillion market. See Fig 2.

Fig 2: Online drug sales is a mere fraction of the total drug sales

china-digitalisation-hastens-the-healthtech-boom-Fig 1

But we believe the current model is changing and that online drug sales will see strong structural growth, backed by favourable regulations. In November 2000, the regulator issued draft regulations detailing the legal framework for online prescription drug sales and price harmonisation for drugs sold online and offline. In Apr 2021, the Ministry of Commerce issued documents to support Hainan province as a pilot for online prescription sales.

Patients that suffer from chronic illnesses will benefit greatly from this move. Chronic drug sales currently make up 55% of total drug sales in China. All in, we estimate that online drug sales will experience a compounded average growth rate of at least 30-40% over the next 3-5 years. See Fig 3. The expansion of the 5G infrastructure network is also expected to improve and facilitate the quality of online consultations.

Fig 3: Online retail pharmacy market set to grow strongly

china-digitalisation-hastens-the-healthtech-boom-Fig 1

The power of AI diagnostic systems to empower

Usually a doctor makes a diagnosis based on his or her experience and scientific evidence. However, in China’s remote areas, most of the doctors are not as experienced given their lack of exposure to a range of illnesses. This is where the AI diagnostic systems created by some Chinese technology companies fit in. By using AI diagnostic systems, doctors can enhance the accuracy of a patient’s disease diagnosis which results in better patient safety and survival rate. Moreover, AI tools also create value for the overall healthcare industry. Patients will have more confidence in lower tier hospitals in remote areas. In return, it will ease the traffic pressure of Grade A hospitals in high tier cities.

There are many AI healthcare companies in China; in 2020, there were 129 of them, excluding those in targeted genetic research. Among them, 55 firms are in medical imaging, representing 42.6% of the total AI healthcare players.3 Although AI technology has mostly been used in the medical imaging segment, it can eventually be more widely adopted in other healthcare areas. See Fig 4.

Fig 4: AI technologies’ immersion in healthcare segments

china-digitalisation-hastens-the-healthtech-boom-Fig 1

Investment considerations require solid understanding

While the above narrative portends exciting investment options, it is not without challenges. For a start, investors must understand that China’s healthcare industry is still a policy driven market. More than 60% of the public hospitals’ expenditure is met by government medical reimbursements. As such the government’s hold over the sector is strong and any policy change will impact the overall healthcare industry’s growth.

Next, given the number of sub sectors within the industry, expertise of the different sub sectors is a must to single out opportunities within them. Key areas to assess a company’s investment potential include the growth outlook, total addressable market size and product innovation capability. More importantly, investors must note that not all healthcare companies are high growth ones using cutting edge technology; there are many such as generic drug makers that have yet to embrace technology.

Meanwhile ESG is another area we need to address among healthcare investment opportunities. Here, healthtech companies face challenges related to data, namely how data is captured, stored and used. Patient records, personal information, and genetic data have different compliance requirements, making data processing a tricky business.

Big tech’s big future in healthtech

The role of big tech companies in healthcare is expected to grow. One key indicator that shows the growing momentum in China is the integration with telehealth platforms that are being formed by insurance companies, hospitals and government. Platforms with strong supply chain capabilities are better placed to consolidate the fragmented offline retail pharmacy market by enhancing partnerships with hospitals and quality doctors.

Separately the rapid advancement of digital technologies will promote the development of new infrastructure in digital healthcare, empowering sectors including medical services, public healthcare, drug supply, health protection and healthcare management. We are only at the start of this structural growth and as more capital is invested in these areas, higher growth will be seen.

But amidst all the euphoria, one needs to consider ethical issues. Big tech companies need to consciously show that patient care takes priority over using their data for monetisation. Data governance must keep abreast to ensure that ethical principles are adhered. Ultimately, AI technology should be an asset and not a liability for all.

1 Frost & Sullivan

This document is produced by Eastspring Investments (Singapore) Limited and issued in:

Singapore by Eastspring Investments (Singapore) Limited (UEN: 199407631H)

Australia (for wholesale clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore, is exempt from the requirement to hold an Australian financial services licence and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Australian laws

Hong Kong by Eastspring Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.

Indonesia by PT Eastspring Investments Indonesia, an investment manager that is licensed, registered and supervised by the Indonesia Financial Services Authority (OJK).

Malaysia by Eastspring Investments Berhad (200001028634/ 531241-U) and Eastspring Al-Wara’ Investments Berhad (200901017585 / 860682-K).

Thailand by Eastspring Asset Management (Thailand) Co., Ltd.

United States of America (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is registered with the U.S Securities and Exchange Commission as a registered investment adviser.

European Economic Area (for professional clients only) and Switzerland (for qualified investors only) by Eastspring Investments (Luxembourg) S.A., 26, Boulevard Royal, 2449 Luxembourg, Grand-Duchy of Luxembourg, registered with the Registre de Commerce et des Sociétés (Luxembourg), Register No B 173737.

United Kingdom (for professional clients only) by Eastspring Investments (Luxembourg) S.A. - UK Branch, 10 Lower Thames Street, London EC3R 6AF.

Chile (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Chilean laws.

The afore-mentioned entities are hereinafter collectively referred to as Eastspring Investments.

The views and opinions contained herein are those of the author, and may not necessarily represent views expressed or reflected in other Eastspring Investments’ communications. This document is solely for information purposes and does not have any regard to the specific investment objective, financial situation and/or particular needs of any specific persons who may receive this document. This document is not intended as an offer, a solicitation of offer or a recommendation, to deal in shares of securities or any financial instruments. It may not be published, circulated, reproduced or distributed without the prior written consent of Eastspring Investments. Reliance upon information in this document is at the sole discretion of the reader. Please carefully study the related information and/or consult your own professional adviser before investing.

Investment involves risks. Past performance of and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the funds managed by Eastspring Investments.

Information herein is believed to be reliable at time of publication. Data from third party sources may have been used in the preparation of this material and Eastspring Investments has not independently verified, validated or audited such data. Where lawfully permitted, Eastspring Investments does not warrant its completeness or accuracy and is not responsible for error of facts or opinion nor shall be liable for damages arising out of any person’s reliance upon this information. Any opinion or estimate contained in this document may subject to change without notice.

Eastspring Investments companies (excluding joint venture companies) are ultimately wholly owned/indirect subsidiaries of Prudential plc of the United Kingdom. Eastspring Investments companies (including joint venture companies) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or with the Prudential Assurance Company Limited, a subsidiary of M&G plc (a company incorporated in the United Kingdom).