Standing out in China’s medical services boom

China’s next big growth story comes with a new twist – its rapidly graying population. Today one in every four people in the world over 64 is from China. In twenty years this is forecast to reach one in three.

PE investment has poured into the health sector as demand for everything from hospital beds to new hips and drugs is expected to rocket.

But if there is a silver-haired lining to China’s rapidly aging population, it’s proving elusive for early PE investors.   The moribund IPO market means few exits are available. 

Instead, what we have seen is a pick-up in medical M&A deals, suggesting the underlying fundamentals remain attractive. This year Hong Kong-listed orthopedic manufacturer Trauson Holdings was bought by Stryker Corp of the US in a $764 million deal.  In another notable transaction, last month Shanghai- based Microport Medical agreed to buy the knee and hip division of Wright Medical of the US for $290 million.

Still, for earlier stage PE invested companies to convince investors they are a part of the China medical growth story, they face a rigorous health check.  Product reliability aside, what they also must not overlook in the highly sensitive area of human health, is the need to get their message right.

The big picture investment case appears persuasive: a richer and older Chinese population will demand and spend more on health care.  A spike in the number of  “empty nester” households will also free up disposable income. 

The government is also doing its part.  Healthcare spending is being increased from a relatively low base. China currently spends just 5.1% of GDP, well below Western Europe at 10.7% or North America at 17%.  

In 2009 authorities introduced a new reform plan that has extended basic medical care to 96 per cent of the population.  Last year the Health Ministry published plans to invest 400 billion yuan in the healthcare sector in the next eight years. Restrictions have also been lifted on investing in healthcare infrastructure.  From last year, foreign investors are able to own 100% of hospitals, up from 70% previously. 

These initiatives help explain why healthcare has bucked the trend where Chinese PE investment in general has slowed in line with the decelerating economy.  In 2012, healthcare related deals reached $1.78 billion, more than treble the amount in 2009 according to AVCJ data.  

But despite this surge in investment, the sector faces a number of challenges from industry fragmentation and regulatory hurdles, to being able to adequately protect intellectual property.   

On the regulatory side, companies are being forced to focus on quality and safety.  Historically, in many areas low cost, low margin products have swamped the medical device industry.  

Industry fragmentation can also be a challenge to scale businesses. Companies may need to negotiate contracts or distribution agreements at provincial and local levels.

While IP concerns exist for all players in China, investors take comfort from a commitment to R&D, branding, product innovation and industry leadership.

Ultimately the stock-listing hurdle is this:  can PE invested companies translate a positive industry outlook to a scalable business with clear earnings visibility?  

The subdued IPO market and bearish equity sentiment will also raise the bar.

In Hong Kong, new listings have slowed to a trickle this year. In China, the new issues market has been in moratorium since last October and has a hefty backlog of listing hopefuls.   

The pick-up in M&As offers another potential exit option.  Year to date medical device service M&A transactions at $1.37 billion, are already well ahead of 2012.  

Still, whatever exit a PE invested healthcare company is seeking, its communications needs to be at the core of strategy.

Invariably, reputation and trust is heightened when your business involves the sensitive issue of human life.  Bad news has the potential to be extremely toxic, hence the industry standard of repeated tests to authorize new drugs or equipment.  

In China, with a highly competitive market for both funding and customers, companies need to adopt a pro-active public relations strategy.  This means developing a narrative that places their product or service in China’s health story and also resonates with multiple audiences.    

It is also important to recognize the goals of communications activity, be it brand awareness, securing alliances, funding, an IPO or all of these.  These objectives need to be mapped so they reinforce one another. 

If one part of the chain falls down, it can trip up the next.  A funding round that goes poorly can damage reputations with customers and medical practitioners, fairly or not.  

Alternatively, strong market engagement with a brand can be critical to generating funding buy-in. 

This means a presence should be built across both industry and consumer media. It must also be digital, as this is by far the most important platform for accessing medical information. Companies must also prepare for uncertainty, and prepare for judgment by social media.  

Keeping China’s rapidly aging population healthy promises to be not just a huge business, but also an increasingly competitive and crowded one.  To reap that silver-haired lining, PE invested medical companies must make sure they have the right messages to stand out. 

 

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