18 February 2019

Are private hospitals the elixir for drug makers?

Encouraging private capital into industries that are mostly owned by the state has been one of the main policies of the Chinese government in recent years. But now the spotlight has turned to the pharmaceutical sector.

Reports have it that Guangzhou Pharmaceuticals Corp (600032.CN) plans to invest 5 billion yuan (US$ 821 million) in the healthcare sector, including acquiring as well as setting up private hospitals. This comes as the pharmaceutical sector has been suffering from low profit due to the government’s drug procurement policies that typically award orders to the lowest bidder. Consolidating with the industry downstream — private hospitals — seems to be a way to shore up the profitability.

The State Council released a set of guidelines earlier this month to further open up the market. New measures will include relaxing entry requirements for investment from non-governmental sources, and giving equal treatment to private medical institutions and public medical establishments.

The government will also simplify approval procedures for rehabilitation centers, hospitals for children and elderly patients, and nursing homes, according to the guideline.

China has set a target of increasing the gross value of its health service sector to over 8 trillion yuan by 2020, according to the State Council. Given that the total value of the industry is about 2 trillion yuan this year, there is room for a three-fold growth within the next six years from now on.

Actually, Guangzhou Pharmaceuticals is not the first mover. Fosun Pharma (02196.HK), another big player in drug manufacturing, has acquired equity interest in Changcheng Hospital and teamed up with Nanyang Tumour Hospital, both located in Guangdong province,  in the last two months. Its head Guo Guangchang{郭廣昌} has even said that he aims to open 500 private hospitals across the nation.

Other listed pharmaceuticals players like Guizhou Braun (002424.CN) and Mayinglong Pharmaceutical Group (600993.CN) are also exploring ways to build up their hospital chains.

Data from private hospitals give the impression of high profitability. Take Aier Eye Hospital Group (300015.CN), for example. The group recorded 1 billion yuan revenue for the first half of this year, and its profit margin reached 45 percent, which is quite high.

But the situation is not always the same, and there are many exceptions. Jinling Pharmaceutical (000919.CN), which has strong ties with the army, was the first drug maker to enter the private hospital business back in 2003. Medical services are now the group’s second largest business. But unlike Aier Eye Hospital, its profit margin has been shrinking for three straight years, and was about 17 percent in the first half this year.

An industry insider from Wuhan explained why this happened, in comments reported by the Securities Times. “It is not appropriate for hospitals to emphasize too much on making profits, given the sector’s historical nature as a public service. It is really hard to find the right balance.”

Another problem is that some private hospitals provide medical services that are too general and are hardly different from that offered by public hospitals. So why would patients choose private hospitals, which are usually more expensive, over the hospitals provided by the government?

In conclusion, positioning is the key. Private hospitals specializing in certain fields tend to do better while those offering general medical advances and treatments usually struggle as they compete with the government-backed institutions.

– Contact the writer at [email protected]


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