SHANGHAI – In March 2014, the Chinese government set an ambitious target of privatizing 20 percent of hospital beds by the end of 2015. For most, the target seems unrealistic and unlikely to be met in time, while a few are wading into this unknown territory and finding opportunity.

"Private health care is very exciting," said Robert Braithwaite, founder and CEO of Luqa Pharmaceutical based in Shanghai. "We try to be innovative and see health care outside of the public hospitals."

Braithwaite, a foreign national of British and Spanish origins, is one of the few company founders in the pharma space not born in China. He founded his specialty pharmaceutical company with a strategy firmly centered on in-licensing products with potential in China's relatively untapped market.

"We find products suitable to the China market and take them from registration to approval," explained Braithwaite. "We look at products that get approved in a faster time frame."

The company has 10 drugs in the pipeline with four products on the market generating revenue. Many of the products that Luqa focuses on fall under the category of dermatology and aesthetics, a key area of growth in China's private hospital sector.

Currently, more than half of China's hospitals are private, but with many of them on the small side, it is estimated that only about 10 percent of hospital beds are privately owned.

The vast majority of China's health care expenditure is still in public hands, variously reported at 90 percent of the overall pie.

As is well documented, China has a complex and lengthy tendering system for public hospitals that can often delay a drug getting to patients for several years, on top of the already lengthy process to see a drug through trials and approved by regulatory authorities. The time it takes to list and win tenders and then liaise with key hospitals is a frequent complaint of drug companies here.

Private hospitals are typically class 1 hospitals (with class 3 designating the best) in less populated counties or towns. There are a only handful of class 3, comprehensive, general hospitals in the entire country, with the United Family network being one of the better known for introducing Western-style health care.

Another type of private arrangement is seen in the many specialty clinics for dermatology, plastic surgery or gynecology; this growing segment is a perfect fit for Luqa.

"If you look at our plastic surgery and aesthetics interest," said Braithwaite, "an area where the hospital monopoly is already broken and there are more private clinics, we are playing in a field that is much more interesting for us."

Although they still work with distributors, private hospitals offer a way to bypass some of the pain of the tendering process, and get to patients more directly, a tantalizing prospect for biotech companies with a message to convey.

As Braithwaite explains, "with private clinics, we can transmit our value much more clearly; we can explain the the value of the product and the benefits we bring. There are few obstacles for that choice, where with [public] hospitals there are budgets, listings, market access is very controlled. There are a lot of rules and regulations getting to hospitals."

Braithwaite said, "we see the emerging health care channels in private hospitals [and OTC] will change dramatically in the next five to 10 years."

It's a sentiment echoed by Ellon Xu, principal at Bain Consulting in Shanghai and a health care expert who advises private equity (PE) investors. He said while in the short term it is unclear what will happen, over the long term, privatization cannot be ignored.

Xu sees an increase in investors asking for advice on hospital investments, citing a recent phone call from a local company committed to make a billion dollar investment in a relatively poor city of Ningxia to build a class 3 hospital, as just one of numerous recent examples. However, it takes about five years to build and another five years to see a reasonable return on the investment on a major hospital, and this says Xu, scares away many other PE investors.

It is the potential increase in class 3 hospitals that could offer an interesting prospect of getting innovative and often costly medicines into the hands of patients a little bit faster, since it is these where patients seek treatment for complicated illnesses.

And while the most expensive biologics are not be covered by China's national insurance plan, according to Xu, there is a policy direction to consider insurance coverage at private hospitals. One idea being discussed is the possibility of dropping a percentage reimbursement system and moving to a cap, or absolute yuan amount, that would allow government to control costs.

"Within the next five years, most people believe that private hospitals will continue to play a minor role in health care development, but they will gradually become more important over time, said Xu. "In the immediate future, companies will still have more business in the public arena than the private. However, the private is a power not to be neglected. The majority of the pharmaceutical industry is not prepared since they have not dealt with it at all."