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China’s healthcare industry is booming. What investment opportunities does it bring?

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The health sector in China is experiencing unprecedented growth.

A variety of factors, including extended life expectancy, an aging population and greater expectations about quality of life have driven China’s healthcare market to become the second-largest in the world.[1] There has been significant investment in local healthcare infrastructure, market reforms and support for innovation through the ‘Healthy China 2030’ initiative announced in 2016.[2]

There are concrete metrics associated with China’s ambition to improve the healthcare outcomes for its 1.4 billion people – these include achieving an average life expectancy of 79+, eliminating major diseases, improving drug safety, the provision of world-leading health technology and establishing an innovative health industry that is a pillar of the economy.  An expanding universal health insurance scheme that covers an ageing population across rural and urban areas underlies this ambition.

Health is a prerequisite for people's all-round development and a precondition for economic and social development.”[3] President Xi Jinping

Here, we explore the changes that are unfolding in China’s health sector, in particular:

  • the post-Covid-19 shift towards pharmaceutical innovation
  • widespread digitisation including online care, the almost RMB200 billion online pharma market and the use of AI
  • the vast R&D spend on, and broader policy support for, biotechnology
  • opportunities for foreign entities to participate in pilot drug marketing programs
  • the expanding list of publicly funded medicines.

We look at options for foreign companies to capitalise on opportunities in China, including by engaging local partners.

Infrastructure, new technology & preventative care in the world’s second-largest healthcare market

The Healthy China 2030 initiative is driving efficiency and cost effectiveness in the delivery of healthcare services. This has precipitated an increase in demand for new technology to optimise healthcare delivery systems, including fast diagnostic systems, AI-augmented solutions and digitalisation.[4] Expenditure on preventative care has also increased as the government seeks to improve standards of living and relieve pressure on hospitals.[5]   

On top of these significant drivers, the COVID-19 pandemic and related movement restrictions have accelerated the development and adoption of online medical and pharmaceutical services in China.[6] Compound annual growth of the sector is expected to reach 39% from 2019 to 2024.[7]

Biotech innovation and the fast-growing pharmaceutical industry

China has one of the largest and fastest growing pharmaceutical markets in the world.[8] The manufacture of generic medicines and the supply of active ingredients have historically dominated, but the COVID-19 pandemic and the Healthy China 2030 initiative are driving a substantial shift towards investment in pharmaceutical innovation.[9]

The Healthy China 2030 initiative lists innovation as one of its four core principles.[10] As part of the initiative, the government is seeking to promote investment in innovation by significantly reducing the price (and therefore profitability) of generic medicines and introducing tax incentives for innovative companies to invest in research and development.[11]

Biotechnology has emerged as a key area for innovation: government R&D spending on biotech was over USD291 billion in 2019 and Chinese companies accounted for over a third of global biotech IPOs in 2020.[12] The government is also supporting biotech companies by providing land incentives and interest-free finance.[13]

Publicly insured drugs

Inclusion of pharmaceutical products on the National Reimbursement Drug List (NRDL) is widely regarded as the most effective way to achieve rapid and broad market access in China.[14] Medicines on the NRDL are publicly insured so that 70% to 80% of their cost is publicly funded by the China wide insurance scheme.[15]

Inclusion on the NRDL requires price negotiation with the National Healthcare Security Administration (NHSA). The average price of drugs on the NRDL was reduced by 51% in 2020 and 62% in 2021.[16] Despite inclusion on the NRDL often resulting in significant and rapid price reductions, inclusion on the list overcomes many of the market access barriers that new drugs commonly face in China (such as provincial tendering and drug cost ratio control) and has a positive impact on market share and revenue growth.[17]   

New drugs are added to the list annually, with the most recent additions released in December 2021. Out of the 117 drugs negotiated, 74 were added to the 2021 NRDL.[18] The 2021 NRDL now includes 2,860 drugs – 1,486 of which are ‘Western’-made medicines.[19]

Most of the drugs that have been recently included in the NRDL are supplied by Chinese companies, however foreign companies are becoming increasingly successful in negotiating the inclusion of drugs on the NRDL.  In China, “orphan drugs” are referred to as “drugs for rare diseases” and are eligible for fast-track regulatory approval (the ‘Priority Review pathway’). Under the Priority Review pathway, the expedited timeline for review and approval is 70 working days for a drug that has already been approved overseas to treat a rare disease, as opposed to the standard 200 workdays for a drug that has not already received approval overseas. In 2021, 7 orphan drugs were added to the NRDL, including foreign imported Vyndamax (Pfizer), Replagal (Takeda), Firazyr (Takeda), Fampyra (Biogen) and Spinraza (Biogen).[20]

However, western companies are continuing to find it difficult to achieve NRDL listing and penetrate the China market for products for which there is a domestic alternative. For example, imported PD-1 inhibitors (oncology products) were excluded for the third year in a row while three domestically developed PD-1 inhibitors were added to the list.[21]

A revised regulatory landscape

A number of legal and regulatory changes have been implemented as part of Healthy China 2030. While these changes have presented new opportunities for foreign companies and foreign applications for marketing approvals are expected to increase, foreign applicants for registration of medical products are continuing to face a system that is ambiguous and increasingly difficult to navigate. 

Two key reforms are the implementation of the Revised Drug Administration Law (rDAL) in 2019 and the associated revised Drug Registration Regulation (rDRR) in 2020.

rDAL opens marketing pilot to foreign entities and accelerates approval of urgently needed drugs

One of the key features of the rDAL is the Pilot Marketing Authorisation Holder Program (PMP). Originally introduced in 2015, the PMP is a licencing program that allows research institutions and drug manufacturers to hold licences to market drug products without holding a manufacturing licence.[22] While previously foreign entities could import drugs into China with an Imported Drug License, they were ineligible to participate in the PMP. Under the new rDAL, the rules have been harmonised so that both domestically manufactured drugs and imported drugs are subject to the same requirements. The rDAL allows a foreign entity to be a marketing authorisation holder (MAH), provided that it designates a local Chinese entity to be responsible for complying with MAH obligations.[23] While there is some ambiguity around whether a domestic MAH can use foreign manufacturing sites and vice versa, the change presents a significant opportunity for western companies.[24]

The rDAL also promotes innovation by introducing programs to accelerate the review and approval of applications for marketing approval for drugs that treat severe, rare or clinically urgent illnesses. For example, urgently needed drugs with positive early clinical trial data can be approved on the condition that post-marketing studies are conducted.[25]

The rDAL also permits drug developers, manufacturers and sellers, as well as e-commerce platforms, to sell prescription medicines online.[26] However, foreign entities face difficulties entering this sector due to market entrance restrictions. For example, companies must obtain an Internet Content Provider license to host a website in China, and these are rarely issued to foreign businesses.[27]

Reduced registration categories and increased IP ambiguity

In China, the requirements for registration and development of medicinal products depend on whether the product is a small molecule drug, a biological product or a Chinese medicine.  Following the introduction of the rDRR, there are now three, rather than fifteen, categories for each.  For example, biological products may be registered as an innovative biological product, an improved new biological product or a marketed biological product.[28]

However, there is no category for “imported drugs” or “drugs marketed overseas but not marketed in China” under the rDRR and no clarity has been provided in relation to how drugs made and approved abroad can be approved for local supply. It is also unclear whether a foreign manufacturing site can be used for a domestic MAH (and whether a local manufacturing site can be used for a foreign MAH). You can read more about this here.

Further tightening of regulations relating to drug safety

On 10 May 2021, the General Office of the State Council (GOSC) outlined proposed measures to enhance drug supervision and management capabilities, including the introduction of a more scientifically robust and efficient system to monitor drug safety[29] for both traditional Chinese medicines and biological products, such as vaccines.[30]

Dramatic COVID-19-driven boost to digital healthcare

Increasing demand for cost effective and accessible healthcare services in China has led to highly significant growth in digital healthcare. Accessibility has long been a major issue in the Chinese healthcare sector as resources are disproportionally concentrated in the large hospitals of major cities which struggle to keep up with demand.[31] While investment in digitalisation was already increasing, the COVID-19 pandemic dramatically accelerated the uptake of digital technology.

In early 2020, the Chinese government announced that online services to diagnose and treat common and chronic diseases by qualified online healthcare organisations would be publicly insured.[32]  As a result, between late 2019 and mid-2020, the number of telemedicine providers in China grew from less than 150 to around 600.[33] The uptake of these services has been significant, with internet consultations quadrupling in 2 years.[34] While the surge in teleconferencing was initially driven by the need to avoid hospitals at the height of the pandemic, many patients now prefer using teleconference facilities.[35] Healthcare infrastructure is also being upgraded and updated to support the increasing use of digital health technologies.

The online pharmaceutical market is also growing as online pharmacies begin to provide a greater range of drugs and improve supply chain capacity. China’s pharmaceutical e-commerce sales exceeded RMB190 billion (approx. AUD40 billion) in 2020 and it is estimated that the market will expand to nearly RMB380 billion (approx. AUD80 billion) in 2025.[36] The online market was also given a substantial boost by the rDAL which permits drug developers, manufacturers and sellers, as well as e-commerce platforms, to sell prescription medicines online.[37]

Artificial intelligence (AI) is also being increasingly deployed. The ‘Healthy China 2030’ initiative seeks to make AI a cornerstone of the “smart health” industry.[38] China has traditionally imposed weaker restrictions on the collection, storage and use of health data than western countries, which has given Chinese companies important access to the health data of hundreds of millions of residents to train algorithms for new applications.[39] In recent years, however, there has been significant reform that has provided individuals with greater rights to limit use and disclosure of their health data, and to better understand who will have access to their health data and for what purpose.[40] You can ready more about these reforms here

How to take advantage of the opportunity?

Given the cultural and regulatory challenges faced by western healthcare providers, it is often desirable to work with a local partner, either as a domestic advisor or joint venture partner.  However, the choice of partner is critical.  A local partner should have experience in the sector and the regulatory processes associated with obtaining certification and registration of health products.

References

[1] See https://insights.omnia-health.com/market-updates/omdia-chinas-healthcare-equipment-market-hit-600bn-2025

[2] https://healthcareglobal.com/digital-healthcare/chinas-healthcare-market-set-undergo-rapid-growth

[3] https://www.weforum.org/agenda/2019/06/china-is-picking-up-the-fight-against-rare-diseases/

[4] https://www.austrade.gov.au/news/publications/china-healthcare-market-an-introduction p 28

[5] Ibid.

[6] See https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/china-s-big-tech-to-continue-disruption-of-healthcare-sector-despite-crackdown-61610882

[7] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/china-s-big-tech-to-continue-disruption-of-healthcare-sector-despite-crackdown-61610882

[8] https://invivo.pharmaintelligence.informa.com/IV124904/Is-Now-The-Time-To-Build-In-China

[9] Invesco, Could Healthy China 2030 also be a blueprint for investment opportunity? (2021)

[10] Tan et al. Healthy China 2030: A Vision for Health Care (2017) https://doi.org/10.1016/j.vhri.2017.04.001

[11] Melanie Senior. China at the threshold. Nat Biotechnol 39, 789–795 (2021). https://doi.org/10.1038/s41587-021-00973-w

[12] Invesco, Could Healthy China 2030 also be a blueprint for investment opportunity? (2021); Melanie Senior. China at the threshold. Nat Biotechnol 39, 789–795 (2021). https://doi.org/10.1038/s41587-021-00973-w

[13] Melanie Senior. China at the threshold. Nat Biotechnol 39, 789–795 (2021). https://doi.org/10.1038/s41587-021-00973-w

[14] https://invivo.pharmaintelligence.informa.com/IV124904/Is-Now-The-Time-To-Build-In-China

[15] https://www.pharmexec.com/view/china-2021-national-reimbursement-drug-list-outlook

[16] https://www.pharmaceutical-technology.com/pricing-and-market-access/china-nrdl-foreign-pd1-inhibitors/ .

[17] https://www.pharmexec.com/view/china-2021-national-reimbursement-drug-list-outlook

[20] Ibid.

[21] Ibid.

[22] https://www.cov.com/-/media/files/corporate/publications/2019/09/china-adopts-revised-drug-administration-law.pdf

[23] Ibid.

[24] Ibid.

[25] Ibid.

[26] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/china-s-big-tech-to-continue-disruption-of-healthcare-sector-despite-crackdown-61610882

[27] https://www.china-briefing.com/news/it-compliance-in-china-how-to-manage-requirements/

[28] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/china-s-big-tech-to-continue-disruption-of-healthcare-sector-despite-crackdown-61610882

[29] http://subsites.chinadaily.com.cn/nmpa/2021-05/11/c_619905.htm.

[30] Ibid.

[31] https://www2.deloitte.com/content/dam/insights/us/articles/r722480_new-view-on-chinas-digital-health-care/DI_A-new-view-on-Chinas-digital-health-care.pdf

[32] https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/life-sciences-health-care/deloitte-cn-lshc-internet-hospitals-in-china-the-new-step-into-digital-healthcare-en-210315.pdf

[33] Deloitte, 2021 China Life Sciences and Health Care M&A Market Whitepaper

[34] Melanie Senior. China at the threshold. Nat Biotechnol 39, 789–795 (2021). https://doi.org/10.1038/s41587-021-00973-w

[35] Deloitte, 2021 China Life Sciences and Health Care M&A Market Whitepaper

[36] https://daxueconsulting.com/digital-healthcare-china/

[37] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/china-s-big-tech-to-continue-disruption-of-healthcare-sector-despite-crackdown-61610882

[38] Invesco, Could Healthy China 2030 also be a blueprint for investment opportunity? (2021) https://www.invesco.com/invest-china/en/institutional/insights/could-healthy-china-2030-also-be-a-blueprint-for-investment-opportunity.html

[39] Melanie Senior. China at the threshold. Nat Biotechnol 39, 789–795 (2021). https://doi.org/10.1038/s41587-021-00973-w

[40] See for example, PRC Data Security Law (2021), PRC Personal Information Protection Law (2021) and PRC Provisions on Management of Automotive Data Security (2021)

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