Medical Device Daily National Editor

NEW YORK -- So you want to invest in the Chinese healthcare market.

A group of panelists at the Piper Jaffray Health Care Conference, held as usual at the venerable Pierre Hotel, provided some of the answers to the questions would-be investors might -- and did -- ask in a Tuesday afternoon session.

The Grand Ballroom session, dubbed "A Glimpse into China's Healthcare Industry," drew a diversified panel and an audience anxious for insight both into broad philosophical issues and more down-to-earth how-to questions.

Panelist Charles Hsu, PhD, a veteran life sciences executive and a co-founding investor in Asia Renal Care, a pioneering Asian venture-backed firm, characterized the Chinese market as "still looking outward from China to global markets," rather than inward.

Hsu, founder and chairman of Eureka Pharmaceuticals, said that "most of the interesting opportunities are ones that you can view as global, rather than just in China." But he acknowledged that, with China, "there's always the risk of being too conservative" in forecasts.

Piper Jaffray research analyst Hongbo Lu, co-moderator of the panel discussion, asked Hsu why Asia Renal Care, hailed as a notable success story when it became Asia's largest independent kidney dialysis provider, never began operating in China.

Hsu offered some insight into barriers to success in that country.

"Healthcare is a privileged industry in China," he said, "so the government has been very conservative in granting licenses" to operate in the world's most populous country. "The license fee was $2.3 million per facility," he added, "and they were pretty unyielding on that licensing fee."

At $2.3 million per facility, this was "a financially unviable opportunity" for a company that was successfully operating in seven other Asian countries when it was sold by Hsu and his fellow investors early this year.

Thus, one key tip for investing in or doing business in China: "You must be sensitive to political feelings," Hsu said. He acknowledged that the government "might feel somewhat differently about such licenses today."

David Chen, MD, of 3S Bio — whose responsibilities include fashioning external alliances and partnerships — said of China: "The demand for better healthcare services is there, but the question is, who is going to pay for it?"

He said that as healthcare spending continues to grow, "the issue is how much the government will pay. We think future growth will come from those who pay for their insurance out of pocket, as well as from increased government spending."

Fellow panelist Alice Young, partner and chair of the Asia Pacific practice at Kaye Scholer, an international law firm, predicted "a lot of innovation will be coming out of China," spurred both by investments in domestic companies and by the rapidly growing trend of Chinese scientists who have been working in the West returning to their homeland.

Young has extensive experience in the Asian markets, serving as lead advisor to firms on projects in China, Japan, Hong Kong, Singapore, Indonesia and the Philippines, as well as in the emerging potential mega-market of India.

She added that because of that flow of innovation, "The Chinese government has been very concerned about local innovation, so [companies] will have to register their patents in China."

China uses the first-to-register approach on trademarks, Young said, so it's of even greater importance than usual to protect brand names on a timely basis.

As for the larger issue of China's historic indifference to international patent-protection rights, Young said, "The Chinese people have decided that IP protection is good for them — which is good."

The panel also discussed the push to grow Western-style healthcare and the status of traditional Chinese medicine, or TCM.

"The Chinese government is putting a lot of effort and money into TCM," said Hsu.

Panelist Wilfred Chow, senior VP of finance at American Oriental Engineering and a former holder of senior positions at global accounting/consulting giants PriceWaterhouseCoopers and Deloitte & Touche, warned his audience not to make assumptions about Western medicine leading to a decline in the practice of Asia's traditional medicines. The growth rates of TCM and Western medicine, Chow said, "have been very much alike."

One of the factors impacting the growth of Western-style healthcare is the distribution system for such products.

Responding to an attendee question, Hsu said "an estimated 6,000 companies sell to hospitals in China," many of them more "Mom-and-Pop" businesses rather than the kind of substantive, full-featured distributors found in many other parts of the world.

"The vast majority of products distributed in China are generics in every sense of the word," he said, adding: "Everyone involved would benefit ... if there were some consolidation at that level."

Success at the distribution level, said Hsu, will come from "companies that will ... differentiate themselves by bringing better products into this market."

Responding to another question about whether the drive for Western-style healthcare is centered only in Beijing and other large cities familiar to those in the world knocking on the door of the Chinese market, Young said the opposite may be true.

"The Chinese government is concerned about rural unrest," she said, "so they are trying to create an environment for incentives to push modernization, such as Western healthcare into rural areas."

The Chinese government "wants the perception to be that they're trying to do that," Young said.

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