China’s healthcare is moving from simply exporting cheap options and solutions to the world to exporting high quality and innovation. I wouldn’t have said the same five to 10 years ago, because if you imported a Chinese product or you used a Chinese vendor, it was because they were cheaper. Whereas now, companies in different sectors, such as devices or pharmaceutical, are making names for themselves globally.
Going back only 10 years, all Chinese healthcare companies were generic drug manufacturers. They copied and would sporadically spend on R&D, but that was pretty much it, with all the best and latest drugs imported. But in the last decade, there’s been a lot of progress. There are bigger pharmaceutical companies and a lot of the world’s biotech startups are Chinese. They can potentially bring best-in-class or first-in-class drugs to the world within a few years. We know this because they’re doing clinical trials in a global framework, which means they start talking to regulators very early on. They design clinical trials at multiple centres in Europe, the US and also China.
Even generic drug makers, who have accumulated significant cash in the last 20 years, have started to spend significantly on R&D, 15-20% of their revenue in some cases. I’m not arguing that the key growth driver for these Chinese drug companies over the next five years won’t be import substitution, but I think a larger growth story in the longer term is actually doing the same thing as companies like GSK or Pfizer, which is inventing drugs – and not just for China, but for the world.
The challenge, however, is that these companies are currently not very big and the major inventors remain well-established companies in the West, though I think they’re catching up quickly. Annual R&D expenditure in China’s pharmaceutical sector is already far greater than that in the US over the last few years. At the beginning, a lot of the money is just sum costs that you need to put into the system to learn, but once the companies get used to the system, the efficiency of this kind of spending will improve.
John Yung, managing director, head of Asia healthcare research, Citigroup
Healthcare is a theme straddling two Credit Suisse supertrends first launched in 2017. We put our supertrends, which are designed to transcend business cycles and offer investors multi-year equity investment opportunities, through an annual validity test. The silver economy is one of the preferred supertrends for 2022 that are better equipped to withstand the current period of elevated inflation and rising interest rates.
The silver economy supertrend projects increasing demand for innovative solutions to tackle rising costs in the healthcare sector against the backdrop of an ageing population. Areas of focus under the supertrend include therapeutics and devices, care and facilities, health and life insurance and senior consumer choices.
We believe that there are strong, long-term structural tailwinds for these areas, which can be made accessible via strategies that have a deep understanding of the growth themes within the healthcare sector. Diversification remains key in the healthcare sector in order to capture market opportunities across the entire healthcare spectrum, which includes pharmaceuticals, biotechnology, healthcare services, medical devices and supplies, and the contract research organisation space.
The technology supertrend captures the increasing potential of the healthtech space, which comprises fields such as remote patient monitoring solutions, health education and management portals, and automation and analysis solutions. Investors can benefit from strategies that access the entire ecosystem of digital healthcare technologies, including R&D, innovative treatments and efficiency improvements.
Despite strong growth rates of healthtech companies, we believe that the digitalisation of the healthcare sector remains at an early stage of the growth cycle. The recent volatility of healthtech stocks is driven by broad market uncertainties and does not cloud the positive outlook for digital healthcare technologies. It is critical that investors look beyond the short-term noise in the market and adopt a long-term view in this sector. We also highlight the importance of the life-sciences industry, as funds in this area have the potential to offer some resilience and portfolio diversification through exposure to long-term growth drivers.
Overall, private tech funds are favoured as they exhibit a better risk/return profile than their public and private counterparts, particularly in periods of elevated inflation and higher interest rates. The fast pace of innovation, rapid decision-making and readily available capital make venture capital funds well positioned to exploit the aforementioned long-term trends. We continue to stress the importance of sound due diligence and a diversified portfolio approach as the key to long-term success in private markets.
Tan Jun Lin, head of fund solutions Singapore, Credit Suisse Asia Pacific
China healthcare stocks have shown a sharp correction in the past few quarters, with the Hang Seng Healthcare index down more than 50% since its peak in mid-2021. A series of regulatory tightenings in China’s healthcare industry, especially in the pharmaceutical sector, has affected performance and weighed on investor sentiment.
We do not see a quick turnaround of China healthcare stocks, due to both domestic and external headwinds. Domestically, a structural shift in the healthcare sector is underway, with many Chinese pharmaceutical companies experiencing price cuts for their generics portfolios in line with the government’s common prosperity policy. And while there are government incentives to offset declining revenues in generics to encourage innovation in these pharmaceutical companies, it will take time.
On the external front, US-China geopolitical tensions are another risk, with the US potentially adding more Chinese healthcare companies to its unverified list. Beyond this, the near-term macro environment is also broadly unsupportive of Chinese equities, due to faster Federal Reserve rate hikes and weak economic activity in China amid the recent lockdowns.
Having said that, we remain constructive on China’s healthcare sector in the longer term. For investors with a longer investment horizon, there are opportunities to increase exposure in the sector amid the current weakness. We think the sector could continue to see structural longer-term supportive factors, including:
•Industry consolidation with bigger players gaining more market share through acquisition, with China’s healthcare sector being much more fragmented than developed markets.
•Increased healthcare spending on rising household income and China’s ageing population.
•Rising innovation capabilities driven by policy support and more partnerships with global counterparts, especially during the Covid-19 pandemic.
Jason Liu, head of CIO office Apac, Deutsche Bank International
Private Bank
Pictet has defined a global investment strategy around health in the private market and has recently launched a private equity (PE) strategy capitalising on strong macro drivers as governments, businesses and individuals prioritise the improvement of health across society. The strategy aims to invest in best-in-class biotech- and healthcare-focused venture capital, growth and PE funds globally and will dedicate a substantial allocation to co-investments within its covered segments of high conviction.
The strategy looks to target high conviction investments in five key segments (therapeutics, diagnostics, digital health, medical technology, and healthcare and services providers) to create a diversified portfolio of private healthcare companies.
From a private equity standpoint, the five areas provide opportunities across the full spectrum of company maturities. Deal flow in therapeutics, digital health and diagnostics is particularly strong in early and growth stages. Medtech and care providers, meanwhile, tend to be more attractive at the buyout stage.
The health sector has been growing in the last decades; we see investment volumes and M&A activity in the private markets with double-digit growth annually. Over the last few years the pandemic brought more generalist investor attention to the sector, but the growth trend is independent of the pandemic. There are both long-term trends as well as more recent ones that support the growth.
Therapeutic agents, i.e. innovative drugs to treat incurable diseases, are one of the core areas. Data shows that more than 50% of the drugs approved by the FDA every year were originally discovered by a small company, although marketed by a large pharmaceutical company. This transfer process, typically by M&A, is a strong value creator for health investors.
The intersection of technology and health in digital medicine is another area of focus. This is a high growth sector enabling a transformation in the way we operate and manage hospitals, the way we develop drugs or run clinical trials and even the way we deliver care.
Thirdly, there is the externalisation of R&D activities driven by the high degree of technical skills required. In the last decades, the pace of externalisation of R&D activities has grown; running a clinical trial, completing a specific pre-clinical experiment, requires deep tech expertise, technology and equipment. As such, biotech and pharmaceutical companies rely on specialised third parties to supply them with reagents and services, which has created a robust segment of innovative and high-margin service providers along the value chain.
An ageing global population is also a key growth driver. An older population requires specific solutions for health, from new drugs to treat chronic diseases to tech or digital solutions that allow a healthy and active lifestyle.
In addition, there is the transformation of the experience delivered to patients. This new focus on the patient as a customer, providing them with more than just effective care, requires new tools to optimise the delivery of care.
And lastly, the disproportionate growth of health expenditure, both by families and payers, requires new and more effective tools to deliver healthcare. At the same time, it also shows the willingness to pay and to buy innovation in the sectors.
Yann Mauron, principal, venture capital & healthcare, Pictet Alternative Advisors
