China Healthcare: Separating from the Pack

June 28, 2021

In our 2017 report “Healthcare and Life Sciences: The Evolution of China’s Next Big Market,” we laid out the case for healthcare becoming the next sector in China to attract significant amounts of investment from private equity. Our thesis was straightforward: China’s healthcare sector was ripe for investors to help address the demand for more, and better, drugs and services. We believed  then, as we do now, that private markets would provide the optimal venue to capitalize on the growth in this sector.

Since then, our thesis has been borne out. Private equity investment in China’s healthcare sector has continued to increase at a significant pace, and overall the sector has outperformed, although the number of investments in the sector started from a low base prior to 2015. Moreover, the number of GPs specializing in healthcare has grown significantly. SPI, our private markets research library, tracked just five such managers in 2010; today that number is closer to 50.

Our intention with this report is threefold:

1. To provide an update on the themes behind the continued growth in investment activity;
2. To discuss how private equity managers have been fine-tuning their strategies to adapt to this rapidly evolving market; and
3. To explain how investors might shape their exposure to this opportunity set.

Regulations Propelling Innovation

To encourage the creation of homegrown innovative drug companies, the NMPA (formerly known as the China Food and Drug Administration) has made good on its promise to make it easier for drug companies to bring new products to market.

• The State Council’s “The Opinions on Reforming the Review and Approval System for Drugs and Medical Devices” requires the NMPA to approve or reject every investigational new drug and new drug application within a certain time frame. The review process for drugs targeting AIDS, tuberculosis, viral hepatitis, malignant tumors, rare diseases, and common diseases among children and the elderly may be completed in as little as six months. Over the past several years, this scope has broadened to include drugs for life-threatening diseases and diseases affecting public health (including Covid-19 vaccines), among others. In addition, the “Conditional Approval Guidance” provides rules on the early use of new drugs where there is a pressing need to treat patients in a critical clinical condition.
• Joining the International Council for Harmonization made it possible for the NMPA to accept data from clinical trials conducted outside of China.
• The 2019 amendments to the Drug Administration Law (DAL) require the NMPA to approve or deny clinical trial applications within 60 working days. If the NMPA does not respond in time, the application is approved by default.
• The trend toward specialization and outsourcing is democratizing and propelling drug development. The DAL codified the concept of a marketing authorization holder (MAH), which allows biotech companies to outsource manufacturing to contract manufacturing organizations (CMOs). Previously, innovators had to invest in costly manufacturing facilities to commercialize their assets and gain access to the Chinese market. Chinese regulators have also encouraged the development of contract research organizations (CROs). WuXi Apptec and WuXi Biologics are well-known examples, but many more have grown into leading international organizations.

Owing to these reforms, new drug approvals have significantly increased in China, from 22 total in the four years between 2013 and 2016 to 53 in 2019 alone. Over this same period, the launch gap narrowed significantly, from more than eight years on average to less than five.