PGIM Fixed Income 2Q 2021 Outlook
PGIM Fixed Income shares views on the markets.
While countries around the globe have long been working towards modernizing their healthcare systems and infrastructure, COVID-19 has put these efforts into overdrive. In recent years, an accelerated pace of technological and scientific advances has led to new medical breakthroughs and more efficient supply chains around the globe. The crisis has intensified the dire need for increased research and novel therapeutics that provide innovative ways to help combat the world’s deadliest diseases. The implications will be far reaching and profound, creating compelling opportunities for long-term investors.
Many investors would be surprised to learn all the ways that China is transforming its healthcare ecosystem into one that is incubating a promising culture for future healthcare innovation. In fact, China is one of the world’s fastest-growing major healthcare markets with a 5-year compound annual growth rate of 11%, or almost triple the U.S. rate of 4%—and these estimates don’t account for the significant enhancements since the coronavirus outbreak.1 A determined country in desperate need of a better healthcare system has been mobilizing to seal the infrastructure and innovation gaps and embrace new technologies and novel approaches to push China’s aggressive healthcare transformation agenda forward.
As the world’s most populous nation with the second-largest economy, China offers long-term growth opportunities in its healthcare sector, driven by several dynamic trends: an aging population, an increasing prevalence of chronic diseases, growing wealth to afford medical care, regulatory reform, and an influx of capital and talent. Its healthcare industry is projected to be worth $2.4 trillion by 2030, based on the government’s ambitious Healthy China 2030 plan. And while its $232 billion pharmaceutical market is still relatively young, it’s already the second-largest in the world and is expected to soar to $574 billion by 2022.2
Jennison Associates’ Global Equity team believes the Chinese healthcare sector offers compelling growth opportunities with strong long-term catalysts, especially in the pharmaceutical and biotech arenas. While the U.S. is the world’s leading biotech superpower, China has become an increasingly important player in biotechnology.
China’s rapidly aging population and accelerating rate of diseases has created an urgent need to improve the nation’s medical care. Rapidly adopting sophisticated policies common in western nations, Chinese leaders have implemented various reforms to make healthcare an integral element of China’s transformation into an epicenter of innovation.
Faster Drug Approvals: China’s State Drug Administration has created regulatory rules encouraging innovation, such as instituting a “priority review” of cutting-edge foreign drugs to speed up approvals.
National Reimbursement: The Chinese government has instituted a more formal reimbursement process and started paying for more novel drug treatments, opening up commercial opportunities for both Chinese and foreign healthcare companies.
Despite plans to transform its economy, China continues to play catchup with other nations. China currently spends only 5% of its gross domestic product on healthcare, compared with 17% in the U.S. and 12% in aggregate for 36 countries belonging to the Organization for Economic Cooperation and Development.5 That gap is expected to narrow as China continues to increase spending on its healthcare ecosystem to foster a positive environment for innovation and growth.
In April 2018, as part of its effort to increase incentives to local talent and attract additional capital into the sector, Hong Kong began allowing pre-revenue/pre-profit companies to list their shares on its stock exchange. This decision has led to an influx of capital into China’s healthcare and biotechnology sectors and has enticed Chinese healthcare experts to return from abroad to start biotech companies. Contract research organizations (CROs) like Wuxi Biologics—a provider of research, development, and manufacturing of biologic services—have been catapulting growth rates by increasing R&D outsourcing activities from drug companies as biologics are favored over chemical drugs.
While the Chinese healthcare market is still young and unproven, Jennison believes that China’s promising drug research in recent years combined with ongoing support from Chinese leaders can provide the country’s healthcare market with a solid foundation for innovation and long-term investment opportunities.
1 Source: World Health Organization, as of December 2016.
2 Source: Statista as of October 2020.
3 Source: Organization for Economic Cooperation and Development as of September 2019.
4 Source: World Health Organization, NCBI as of 2019.
5 Source: Statista, OECD as of May 2020.
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