SHANGHAI – China continues to entice and confound those looking for the right opportunity to invest in its rapidly changing health care sector. At the 5th China Healthcare Investment Conference held in Shanghai, biotech stood out as the key opportunity among numerous strategies discussed.

“We are in year five of a 13-year journey,” said Claudia Suessmuth-Dyckerhoff, director at McKinsey & Co.’s Shanghai office, during her keynote, when describing the objective of the government’s health care reform plan to establish basic universal health care that provides safe, effective, convenient and low-cost services by 2020.

“The central government has committed to increase funding to the bio industry by 6.5 times from 2011 to 2015” which makes biologics “an attractive investment area which will see tremendous growth,” she said.

The room was packed with 350 attendees, just under half of whom were investors from banks and venture capitalists looking for insights to guide their China health care investment strategies.

In the background, news about hospital privatization from the Chinese government’s “two sessions” meeting of parliament and party officials was in the air. The government plans to double the number of private hospital beds in China, going from 10 percent to 20 percent in the space of one or two years.

Many questions were circulating about how that will come about: what were the pitfalls for investors in this heavily regulated space, and what impact it would have, if any on drug sales?

While the general consensus was that much still needs to be figured out, Suessmuth-Dyckerhoff identified biologics as the key area for investment.

In a pharmaceutical market that reached approximately $79 billion in revenues in 2012 and is growing at a rapid clip of 18 percent to 20 percent annually, her data showed biologics as the fastest growing segment of the Chinese pharma market maintaining 25 percent growth per annum.

She called out the low market penetration of biologics and the high growth and margins of many specialty therapeutic areas such as in oncology, as key success factors.

In comparison, the medical devices market had revenues of almost half of pharma’s, at $24 billion in 2012 with an annual growth at 18 percent 20 percent. The much smaller market for wearable devices was valued at $70 million in 2012, but is growing at an astonishing 54 percent per year while big data companies, at $25 million in sales, is growing at 114 percent.

None of this compares to the medical services market, which has $150 billion in revenue. However, much of this investors can’t touch; the sector is dominated by government-run hospitals. Given the recent government push, private hospitals are growing faster (16 percent) than public hospitals (2 percent). Overall revenue in the sector is growing at 22 percent per year with room to grow compared to advanced economies, she said.

INNOVATIVE DRUGS SEE THE FASTEST SALES

The government’s ongoing cost containment efforts, which are expected to continue with a focus on primary care products, will likely stay away from innovative drugs and specialty therapeutic areas.

“Innovative drugs enjoy faster sales trajectory and less pricing pressure,” she said.

Taking three drugs as an example, she looked at Lipitor (atorvastatin, Pfizer Inc.) and Crestor (rosuvastatin, Astrazeneca plc), both not found on the government’s Essential Drug List (EDL), and have only faced limited price erosion of 7 percent and 1 percent respectively from 2008-2012, with limited generic competition. Conversely, Zocor (simvastatin, Merck & Co. Inc.), which is found on the EDL, has suffered 52 percent price erosion in the same time frame, and has 110 generic competitors.

Most local pharma companies, constituting about 80 percent of the market, play in the generic space. They are the key beneficiaries of the health care reform cost containment strategies, which are eroding the MNC premium drug margin. Those generics makers that are first to market benefit from others in terms of pricing, bidding and sometimes listing, she said.

For the adept, opportunities still exist to grab a large market share. While local players may dominate overall, the largest individual players only capture 2 percent to 3 percent of a given market.

Overall, she said “innovation is on the rise” and that the government is not only “providing strong support for innovation in local companies, with some showing early promise, but also MNCs are increasingly seeking partnerships to improve their China R&D capabilities.”

“Biologics will become an attractive investment area with tremendous growth backed by government funding” she said, further listing programs targeted for particular government attention: DNA sequencing, synthetic biology technology, bio-IT, stem cell and regenerative medicine, gene therapy, molecule typing and individualized treatment, biochips and bio imaging tech, and biomedical engineering.

Suessmuth Dyckerhoff’s list of potentially attractive areas of bio investment:

• Companies focusing on developing first-to-market generics (e.g., Jiangsu Hengrui Medicine Co.) that benefit from favorable conditions such as pricing

• Companies with a strong portfolio in specialty therapeutic areas on the market or under development (e.g., Jiangsu Hansoh Pharmaceutical Co. Ltd.)

• Leaders in developing “innovative” molecules in attractive therapeutic areas (e.g., Zhejiang Beta Pharma Co. Ltd.)

• Leaders in developing biosimilars (e.g., Shanghai CP Guojian Pharmaceutical Co. Ltd., Gan & Lee Pharmaceutical) that offer lower priced alternatives to premium MNC drugs for unmet needs.