February 2009

ASIAN HEALTH CARE: In keeping with tradition

Chinese medicine is now very visible in Europe, but medically still controversial. Believe it or not, though, it is part of the reason why more European managers invest in China’s healthcare sector, finds Angele Spiteri Paris... European money managers and private equity investors have lagged their US counterparts when it comes to investing in
the Asian healthcare market. Investment opportunities abound, particularly as scientifically advanced China rolls out its much-awaited healthcare reform, which includes revamping hospitals and increased government expenditure to improve healthcare services in rural parts of the country.

Ben Lai, fund manager at Atlantis Investment Management, claims: “This offers one of the best opportunities of a lifetime. Investors have been neglecting this sector for the past 20 years and now the Chinese government has a lot of money to actually pump into the system.”

He says European investors should invest in Chinese health because “this is an area where they can only see growth”.

He adds: “Looking at the size of the population in China, I think the numbers say it all. Consider if everybody was to spend just one dollar!”

But the double-digit growth China has experienced in the past few years has slowed as a result of the global financial situation. What effect will this have?

Sanjay Sehgal, CEO of East West Capital Partners, a private equity firm, says: “If China’s growth rate slows  from 11% to 9%, that’s still pretty good compared to other parts of the world. So the expansion story is still intact.

“The rate at which people are coming out of poverty has maybe slowed down a bit, but there is still continuous growth in
the market – it’s not negative and it’s not recessionary, as yet.”

Sehgal’s explanation for why European private equity funds are late to the Asian healthcare market can be explained as a consequence of Europe’s own healthcare reforms. He says: “The US went through a restructuring [of healthcare] earlier than Europe and a lot of private equity money went into that. The European restructuring opportunity happened later and a lot of the investment in the mid-’90s to 2005 or 2006 in Europe was inward focused.

“[European investors] saw so many opportunities within Europe itself, in Germany and Scandinavia, that the European buy-out and private equity funds didn’t see the need to go elsewhere as early as the Americans did.”

Now they do.

Vicky Chen, healthcare and life sciences analyst at Martin Currie Asia, believes the lack of European investors in the Asian healthcare market is due to a shortage of knowledge and understanding of the region and its healthcare system.

She says: “The healthcare-related sectors are still in the early stages of development, which is why we wanted to get into it.

So there is a lot of fragmentation and as a result the sector is not transparent and you have information asymmetry.”

Therefore managers who are not familiar with the way the Chinese healthcare market works may have found it difficult to successfully break into the market.

Chen has extensive experience of investing in the region and was responsible for building the first dedicated Chinese healthcare franchise among the global investment banks while at UBS.

The Martin Currie fund is the only one in the sector that is a hybrid, mixing stocks with private equity. Many of the investors operating in the region are pure private equity players or fund managers adding Asian healthcare as part of a broader global healthcare portfolio, Chen says.

Lai, of Atlantis, agrees that there is a lack of understanding. “You need to really understand the Chinese healthcare market to be a successful investor in Chinese healthcare. You need to understand government policy, you need to understand how corporates function. You need to understand the Chinese culture.”

He adds: “When I talk to Western investors about traditional Chinese medicine, they know nothing.”

But they better learn fast, because according to Lai, the government-protected recipes used in traditional Chinese medicine make for good investments.
Bitter herbs
Lai explains: “Chinese medicine is a combination of different herbs. When all these herbs are bundled together they have a medical curing effect which cannot be explained by modern science.

“There are a lot of traditional Chinese medicines in China. We have many secret recipes, which are not going to be disclosed. They have different formulas and these are being protected. The Chinese government does not want to see old traditions disappear.”

Hugh Simon, CEO of Hamon Investment Group, an affiliate of BNY Mellon, agrees that the protection of these traditional recipes can be converted into investment opportunities. “The protection of these recipes allows you to know that the intellectual property, the copyright, cannot be stolen,” he says. “Each company in this sector is the lead market player and therefore their business is quite stable.”

The attraction of traditional Chinese medicines will not fade with the so-called Westernisation of China. Both Simon and Lai explain these are remedies that have been passed down from generation to generation and Chinese people would always prefer to use something they are familiar with, rather than a conventional Western product.

Resistance to Western ills
The question is, will these traditional Chinese cures be able to fight Western diseases that are being witnessed with increasing frequency across the country? The population in China and other Asian countries has seen an increase in chronic and lifestyle illnesses like cardiac maladies, diabetes and obesity, usually associated with the West.

Anne Marieke Ezendam, portfolio manager, global healthcare funds, at Credit Suisse, says: “With improved income, you’ll see obesity coming through. This is not so good for the population but creates new demand for drugs.

“If you look at diabetes and insulin, Novanortis has now close to 5% of sales in China and that market is growing much
more rapidly than any insulin market in the Western world. This is because the Asians are getting fatter.”

Although the global financial crisis may have had an impact on Chinese companies exporting their products to the US and Europe, the underlying fundamentals of the Chinese healthcare market are said to be strong and domestic growth is bound
to continue.

Ezendam says: “ I don’t think the crisis will affect the amount of people that want to go to hospital and get treatment.” ©2009 Funds Europe

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