China’s economy is like a large ship still sailing steadily forward, while rebalancing its growth driver on a more even keel after a period of faster sailing. During the last 10 years the economy has shifted away from investment and exports, towards a more sustainable consumption-driven growth model. The healthcare sector, in particular, has benefited from these changes and now presents many opportunities. China intends to spend more domestically on healthcare and the industry is also consolidating, trends which present plenty of openings for quality growth investors if they know where to look. 
In fact, China has made significant progress in many aspects of public health over the past 20 years; life expectancy has risen significantly and childhood mortality rates have plummeted by more than half. Healthcare expenditure has experienced significant growth as a result, increasing from RMB1,330bn in 2008 to RMB5,870bn in 2018, representing a compound growth rate of 16 per cent. And yet, healthcare spending per capita in 2017 still stood at only 6.4 per cent of GDP, far behind 9.8 per cent in the UK and 17.8 per cent in the US. Further growth is therefore to be expected and China’s total healthcare expenditure is forecast to continue to increase progressively as a result of growing disposable income and health awareness, an ageing population, as well as strong government support and healthcare reform plans.
China has adopted a series of laws, regulations and reform measures to upgrade the healthcare system to satisfy patients’ needs and control costs while still encouraging cutting-edge research. Ongoing healthcare reform and increased competition have led to industry consolidation, with the number of Chinese pharmaceutical manufacturers decreasing from 4,875 in 2013 to 4,376 in 2017 while the market grew notably, a trend which is expected to continue. Consolidation allows for more innovative drugs and research & development (R&D) investment, which benefits both leading domestic healthcare companies and foreign companies. As a result, both camps have been gaining market share at the expense of small players.
There is now a range of Chinese healthcare companies, from R&D focused pharmaceutical companies to medical consumable manufacturers that look set for long-term sustainable growth by leveraging growing domestic demand, industry consolidation and the percolation of international business and academic expertise back into the Chinese market.
One such example is 3SBio, a leading Chinese biopharmaceutical company founded by a Chinese scientist who had previously spent significant time in the US. Biosimilars are biologic medical products highly similar to an already-approved biological medicine. Biosimilars can potentially treat major diseases at lower costs than innovative biologics (medicines made from living organisms) and are emerging globally. 3SBio has been investing consistently in developing a biosimilar pipeline and licensing other successful biosimilars which haven’t yet entered the Chinese market.
A strong leader in R&D is JiangSu Hengrui, one of the few R&D driven Chinese pharmaceutical companies with an established leadership position in some of the largest and fast-growing therapeutic areas in China where there are significant unmet clinical needs. The company has established a leading franchise in central nervous system, oncology, anti-infectives and diabetes research. JiangSu Hengrui has always been the first to develop generic drugs in China, benchmarking their quality to that of their Western originators. After consistently investing 10% of revenue in R&D, the company has established 11 R&D centres in China, Japan and the US in recent years. It has shown the ability to shift towards a more differentiated best-in-class or potentially first-in-class products.
Healthcare isn’t solely about innovative R&D. A more health-conscious population and outcome-driven medical community drives strong demand for high-quality consumables. At the other end of the scale Shangdong Weigao is the largest single-use medical consumables manufacturer, and the largest domestic orthopaedic implants device company in China. The company benefits from its scale and strong distribution, but more importantly it is the leader in upgrading products across categories in filter infusion sets, intravenous catheter needles and orthopaedic devices.
In addition to these established healthcare companies, the field of future candidates grows. We see about 10-15 companies in China performing global standard R&D that are making big strides in producing global drugs. For example, BeiGene and Innovent Biologics only filed IPOs in recent years, but are stacked with R&D staff with decades of experience in multinational companies. They have designed their strategies to couple international expertise in biotech R&D with the lower costs, scale and capital available only in China.
It’s early days for these young companies but some of the best might surprise the world in the future.
Jasmine Kang is portfolio manager of the Comgest Growth China fund. The views expressed above are her own and should not be taken as investment advice.