How to Profit From Health Care Reform… in China

by Tony Daltorio, Investment U Research
Friday, March 5, 2010

It’s safe to say that the financial media is obsessed with four subjects these days: Economic stimulus, healthcare reform, Greece and China.

And let’s face it: After the eighth, seventeenth or twenty-fifth article on the same topics, it starts to get a bit boring.

Combine three out of those four subjects together though, and it becomes much more interesting… especially considering that unlike what the United States implemented, China’s $586 billion stimulus package focused on repairing the weak links in its economy, including its healthcare system.

Over the next three years, the Chinese government pledged $123 billion towards a variety of medical programs, including ones that target waste and distortions in prescriptions and treatment.

China also plans to use 2010 to build some 29,000 medical centers and 2,000 hospitals, while upgrading existing ones. And Health Minister Chen Zhu recently pledged a clinic for every village by the end of 2011 and universal health insurance by 2020.

The Treatment Needed For An Unhealthy System

China has known for 30 years now that it needs a social security network to replace its former communist command economy.

When Beijing began market reforms in 1978, the regime’s universal health coverage disappeared, leaving only about 20% insured by the mid-1990s versus the 90% that had it before.

The government ran regional tests and pilot projects for years before settling on a social insurance program for urban workers in 1998. But by 2005, patients still paid 52% of expenditures out of pocket due to strict coverage caps, while public insurance policies covered 40% and private ones handled 8%.

That especially affected China’s countryside, where many areas still lack even the most basic medical infrastructure since the government only started rebuilding rural health insurance in 2003.

Although the majority of rural residents do technically have insurance again, it doesn’t cover much and patients have to pay up front before they receive any financial help whatsoever.

As a result, the country’s poor can’t afford to treat many serious illnesses, and a full 30% of that group point to healthcare costs as the main cause of their poverty… with good cause, since a single doctor’s visit costs them 83% of their monthly income in 2003, with only minimal improvements since.

Adding to the problem, China has a rapidly aging population in increasing need of medical attention.

The country’s median age is fast approaching 35, compared with 20 in 1970. And within the next five years, analysts expect the 60+ crowd to comprise nearly 20% of the population, while in 1990, it only accounted for 10%.

A Good Kind Of Growth

Beijing also wants to bring about structural changes in its healthcare system, particularly when it comes to pharmaceuticals, which Chinese clinics and doctors have always relied on for most of their income.

But that has led to distorted treatment patterns, corruption and waste. In 2003 alone, pharmaceutical expenses amounted to 40% of total healthcare costs, nearly three times that of other global powers.

Now that the government is stepping in, that should hopefully change. And if all goes well, sales should actually increase from the paltry $20 billion generated last year to something much more significant.

Health consultant IMS Health predicts that China will have the fastest growing pharmaceuticals market in the world, expanding at 20% per year. And by 2013, it could rise from the ninth largest in value terms… to the third.

Within just a few decades, China could easily become the largest. Bar none.

Healthcare Opportunities To Die For

Many of the foreign pharmaceutical companies involved in these changes come from Europe, including Novartis ADR (NYSE: NVS), which plans to invest $1 billion into expanding its Shanghai laboratories in order to turn China into its third pillar of global research and development capabilities.

French drug firm Sanofi-Aventis ADR (NYSE: SNY) and British drug companies GlaxoSmithKline ADR (NYSE: GSK) and AstraZeneca ADR (NYSE: AZN) have also expressed solid interest in the country.

And China’s medical device industry is easily set to profit from any changes. Pharmaceutical market researcher Episcom predicts that it should hit $28 billion by 2014, double the figure it stood at two years ago.

That puts both Mindray Medical International ADR (NYSE: MR) and China Medical Tecnologies ADR (Nasdaq: CMED) in enviable positions of growth and revenue as the new decade dawns.

As the country sets forward to improve healthcare availability to its 1.3 billion people, its domestic healthcare industry can only expand, reaping serious profits for any investors who get in early.

Good investing,

Tony Daltorio