China is bifurcated into two distinct health care and biopharmaceutical markets. The urban market is rapidly growing due to young people migrating to cities in search of jobs and government policy mandating the physical relocation of whole regional populations into increasingly urban settings – with the concomitant increase in onset of western syndromes and diseases such as obesity and diabetes. This leaves the rural population, which, while dwindling, is still – and will remain – substantially large, primarily comprised of an aging population still suffering from third-world diseases with less access to health resources.

So where will the greatest future growth occur? Whereas today, total hospital revenue across all Tier A cities exceeds the 1,900+ counties that make up our rural category, by 2020 we predict that rural hospital income will exceed that of Tier A and Tier B hospitals. While hospital revenues in all city tiers are predicted to grow at a healthy 8% to 10% rate over the next five years to seven years, we predict that rural hospital income growth rate will almost double that, to 17.5%. According to 12th Year Plan goals, new hospitals will be primarily added in rural areas, and that the source of growth for the cities will come from capacity expansion resulting from hospital upgrades. In addition, as the infrastructure improves, greater training will be provided for rural health care providers, and clinic and hospital upgrades, including those from Class I to Class II hospitals will occur. Many conditions for which the rural populace are referred to larger city hospitals for treatment today will instead be treated locally driving utilization rates for hospitals to increase from 55% to 85% in rural locations.

While the absolute RMB expenditure in Tier D and rural areas is currently dwarfed by Tier A expenditures, the “make market share” opportunity for novel tech developers focusing on low cost, rapid diagnostics, and simple-to-implement health care IT systems, is tremendous, especially for those with five- to 10-year time horizons.

Source: Lux Research report “China: One Country, Two Health Care Markets (client registration required).”

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Recently, Mr. Jianlin Cao, the vice minister of the Ministry of Science and Technology (MoST), mentioned during a meeting that Chinese investment in R&D is now on par with an average developed country. According to MoST, government R&D funding reached RMB 861 billion in 2011, or 1.82% of GDP, an increase of 21.9% from the year before. R&D output has also seen a dramatic increase, with 172,000 patents of invention granted in 2011, a 27.2% increase from 2010. Chinese research publications have also seen solid improvements in both numbers and quality (client registration required), according to the Nature Publishing Group.

However, the outburst of R&D output in publications and research articles have not yet had their impact felt at the industrial level. The reason lies with the Annual Report of Science and Technology Development of China, in which it was pointed out that of the 30,000 “Major Science and Technology Achievements” named by MoST, commercialization attempts were made for only 20%. This number is even lower when it comes to medical technology, a meager 8%. “There lacks a mechanism of technology transfer from universities and research institutes to companies,” as Mr. Jiancong Li, from the Ministry of Education, put it. In the latest Five-Year Plan, plans and efforts were made to change this situation, especially in health care related areas, although it will take time for effects to be felt. For instance, 30 to 50 clinical and research centers for translational research and eight to 10 collaborative networks among relevant medical specialists are to be set up before 2015.

Meanwhile, as China continues its spending on R&D, more and more innovations will be trapped at the R&D level, i.e. universities and research institutes. According to Mr. Cao, China plans to increase the investment in R&D to 2.2% of GDP in 2015 and to 2.5% of GDP in 2020. Bearing this innovation bottleneck in mind, clients should extend their technology scouting beyond commercial organizations in China while keeping in mind the lack of entrepreneurial experience among the Chinese academics and the need for flexibility when negotiating IP rights with academic organizations.

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