Update on the Anticorruption Initiative for China’s Healthcare Industry

We recently spoke with the management teams of several healthcare companies to get an update on the progress of the anticorruption movement in China’s healthcare sector to assess how this could affect companies under our coverage for the long term. We believe that this will likely become a long-term driver for companies that provide data-driven studies to facilitate research and drug promotion, such as Medlive and Yidu, as they provide doctors a legitimate medium for them to prescribe medicines that could otherwise be perceived as taking kickbacks from pharmaceutical companies. We believe that the anticorruption movement is likely a positive for the long-term clinical development of drugs and this should provide transparency for hospital policies. As for healthcare e-commerce companies such as JD Health and Alibaba Health 00241, we believe the initiative is likely to have less of an impact on their revenue growth in the long term, as they rely on greater healthcare retail demand. However, we think the policies could provide greater consumer confidence for online retail—and we estimate penetration of healthcare e-commerce is low at 5%-10% in China.

Even so, we believe that in the short term, there could be demand headwinds. We expect a moratorium on medical associations and healthcare conferences conducting large-scale activities—given that scrutiny is likely high right now—and hospital officials are likely cautious about perceived actions that would put them at risk. Of the companies under our coverage, we believe that Medlive should benefit the most given that the platform services 80% of China’s 4.4 million doctors and can benefit from a known, successful blueprint from its partnership with M3. The latter owns 36.91% of Medlive and has a leading market share in Japan, which follows similar healthcare marketing laws as those in China, where pharmaceutical companies can only advertise their products to doctors and hospitals.