INTRODUCTION

China has a population of about 1.3 billion people, a fast-growing economy, and an emerging middle class population that is already as large as the entire population of the United States — and is growing fast. As China continues to develop into a global economic power, many areas of the country’s infrastructure and services will have to grow as well. One key area where China is well behind its large global peers (at least for now...) is healthcare.

As a rapidly growing number of people in China have the financial means and the ability to seek/demand healthcare, the healthcare industry in China has been on a strong growth trajectory, and this growth is likely to continue across multiple segments of the industry.

HEALTHCARE SPENDING GROWING FAST
As the chart below indicates, total Chinese healthcare spending was about RMB 900 billion (roughly $135 billion) in 2006 (per World Health Organization (WHO) and Morgan Stanley’s estimates below).

This total healthcare market size has been growing in the low-to-mid teens for several years, and is expected to continue along this strong pace, even with the much larger market. Total expenditures are expected to reach RMB 1.7 trillion in 2010, equating to about $250 billion.

GOVERNMENT HEALTHCARE REFORM— NOT JUST A U.S. IDEA
As the Chinese market and middle class grows, the government is doing its part to support the healthcare industry. The Chinese government has stated that it will spend RMB 850 bilLion ($125 billion) from 2009-2011 on healthcare, increasing its contribution to the industry’s growth at roughly a 12% CAGR.

Government support and reform of the industry will be key factors in the modernization and expansion of the Chinese healthcare system in the coming years. [This support will likely be financial as well as through initiatives such as the Essential Drug List (EDL) and National Drug Reimbursement List (NDRL), which defines which drugs are reimbursable through healthcare insurance, and improving the health insurance industry overall.] Today. due to a large government/public insurance plan, and only a small private insurance industry, the vast majority of the Chinese population has some sort of coverage, yet due to varying and limited coverage levels, nearly 50% of healthcare spending is out-of-pocket. This will likely improve in the years to come.

CHINA WELL BELOW PEERS ON HEALTH CARE SPEND
As the chart on the next page shows, the per capita disposable income in China has been on a rapid ramp, surpassing RMB 15,000 just recently. As this disposable income ramps — due to the growth of the emerging middle class in China — the ability and willingness to spend on healthcare rises quickly.

While incomes are rising fast and China’s GDP growth remains on a strong trajectory — even through the current/recent recession, spending on healthcare has not kept up. The table below shows how China compares with its global peers in terms of healthcare spending as a percentage of GDP. China comes in at a very low 4.5% of GDP in 2006, actually trending down for several years as GDP growth outstripped healthcare growth. When comparing this percentage to the U.S. at an astounding 15.3% of GDP, and a number of other leading countries in the 8%-i 1% range, China appears to be vastly underspending on healthcare. This is likely one of the drivers for the government’s efforts to expand healthcare in China. While the U.S. is trying to move that 15.3% lower, other emerging market economies such as Brazil (7.5%), Mexico (6.2%), and Poland (6.2%) continue to outspend China on a relative basis.

Another way to look at this notion of underspending on healihcare is spending per capita. Not surprisingly, the U.S. leads the pack, with healthcare expenditures of about $6,700 per capita in 2006. China’s per capita healthcare expenditures are an astonishingly low $92. With a range of other developed nations in the $2,400 to $4,300 range, China has a long way to go.

One facet in Chinese hcalthcare growth is very similar to the United States. Demographically, the elderly population is growing as a percentage of the total population. The population of Chinese aged 65 years or older has grown from 5.6% in 1990, to 7.0% in 2000, and 8.1% in 2007. As we will see or are seeing in the United States, an older population requires higher healthcare spending. This will likely play a role in the Chinese industry’s growth going forward.

CONCLUSION: WHERE ARE THE OPPORTUNITIES?
There is little doubt that the Chinese healthcare market has grown rapidly and still has a way to go before it matures to the levels of China’s global peers. From an investment perspective, where are the opportunities? As discussed above, spending on healthcare is forecast to continue along a strong double-digit growth path. Two large segments of the market are pharmaceuticals/drugs and medical devices.

Chinese pharmaceutical revenue is growing at a mid-to-high teens rate (17% CAGR through 2011 per chart below) and is slated to surpass RMB 600 billion ($88 billion) in 2011. Looking to the medical devices industry, Morgan Stanley forecasts an even faster 25% CAGR through 2013. Medical devices are estimated to grow into a RMB 450 billion ($66 billion) market in 2011.

While pharmaceuticals and medical devices are two large segments, there are a number of areas that represent potential investment opportunities:

Pharmaceuticals —As noted above, a large, fast-growing industry.

Medical Devices (broadly) —Fast-growing market, and with more access to healthcare services and financial means to pay for them, medical device needs are ramping.

Consumables —As more people utilize the growing heahhcare system, consumable products such as needles and syringes (and thousands of other products) will be needed.

Advanced Treatments and Therapies —As ability to pay for such services increases, Chinese people increasingly want access to advanced technologies and treatments. With cancer the leading cause of death in China, areas such as diagnostics imaging, radiation therapy, chemotherapy, and a wide range of other procedures and therapies — and the delivery of these therapies, should represent growth opportunities.

Hospitals —China has about 20,000 hospitals, although they range in scale and capabilities. Modernization and growth of advanced facilities may offer opportunity.

Healthcare Insurance —The broad insurance industry in China is still in its very early stages. With government-based healthcare insurance the largest factor today — although with a range of coverage and high out-of-pocket expenses — the private medical insurance industry could be an area of growth.

There are clearly multiple areas of the Chinese healthcare industry that should benefit from continued industry growth and government support going forward. We expect this large emerging-market industry will continue to present a wide range of interesting investment opportunities in the coming years.

(source:http://www.ecabot.com/white-papers/China-Healthcare_A_Growing-Market.htm