Q&A with L.E.K.'s Evan Zeng on China's healthcare industry

12 March 2020 Consultancy.asia 10 min. read

Evan Zeng is a Principal in L.E.K. Consulting Healthcare & Life Sciences practice, based in Shanghai office. A Q&A with the consultant on the state of China’s healthcare industry and the outlook for the coming period.

What does the experience of the coronavirus epidemic in China and the government’s response to it, especially in Hubei, say about the state of healthcare in the country and China’s preparedness for future emergency situations?

I would say that the response system has greatly improved in general, both in terms of competency and speed, and leveraging past experience in handling the SARS epidemic back in 2003. We can see that the Chinese government has organised a series of actions at both the local and national level. 

Take for example centralised patient management and building the makeshift hospitals in days in Hubei. These are experiences learnt from SARS. China’s National Medical Products Administration (NMPA) and its equivalent local administrations also accelerated their registration and approval processes for drugs and medical equipment related to the epidemic, such as providing a green channel for Gilead’s Remdesivir to head start phase III clinical trials in China, using international phase I & II clinical data. Municipalities also acted quickly to include relevant drugs in their local reimbursement systems. 

Evan Zeng, Healthcare & Life Sciences expert, L.E.K. Consulting

Moreover, technology advances also helped the government to contain and analyse the epidemic situation and maintain undisrupted healthcare services to the public. These were measures not available back in 2003 to contain the epidemic. For example, using big data to track potential patients or, say in Shanghai, issuing personal QR codes with quarantine status to limit potential virus carriers’ access to buildings or public areas.

Patients with chronic illnesses can now have online consultations and medicine delivered to monitor their illnesses, instead of going to the hospitals, which would increase their infection risk. 

What are the key weak points of the healthcare system that, in light of this epidemic, need to be addressed immediately?

One issue is about coordination within the healthcare system. There needs to be a more standardised procedure in relation to patient treatment and incident escalation. The epidemic will likely push for better contingency planning within hospital systems to cover medical materials supplies to better prepare for future epidemic outbreaks. 

Another issue may be around testing capabilities or allocation of testing resources. On the one hand, we have seen news reports saying hospitals have limited testing resources or testing kits due to the sudden surge of infectious incidents. On the other hand, there were reports on idle testing capacity from third-party testing agencies, such as BGI, which is one of the 35 qualified 3rd party labs in Wuhan.

For example, news mentioned that BGI’s daily testing capacity was 10,000 cases in Wuhan, but the actual daily sample volume was only over 1,000. There could be more discussion on how to better utilise external third-party testing capacities, so that public hospitals will not be overloaded in emergency situations.  

Do you expect an acceleration of investment into public hospitals and epidemiological disease research?

If we look at what happened after SARS in 2003, the central government and local governments significantly increased investment in the healthcare sector. They invested around RMB 10.5 billion to establish the provincial, city and county 3-level disease prevention and control systems between 2003 and 2006. They also spent another RMB 16 billion to build an improved emergency medical service system covering both urban and rural areas. So based on this history, I believe the government will continue to make similar investments in the healthcare sector in the future.

May this crisis cause the government to liberalise more sectors of the healthcare market to foreign and private investment?

Yes, the government has already been encouraging private investment and I believe this trend would continue even without this epidemic. During this difficult time, we can see that private hospitals are taking on increased responsibilities. For example, statistics from the Private Hospital Branch of the Chinese Hospital Association show that as of February 7, 633 non-public hospitals participated in the fight against the epidemic in 13 provinces. In Hubei, about 10% of designated medical institutions are private medical institutions. The development of private investment in the healthcare market will likely be further encouraged. 

What areas of the healthcare sector will see increased demand and growth in the coming months?

Many areas will see increased demand and growth in the short term. One is the pharmaceutical industry. Of course, anything related to anti-viral medication, including traditional Chinese medicine (TCM), is already seeing a significant demand increase. Compelling growth is witnessed especially in specific medications such as Ribavirin and Chloroquine that the government has emphasised for treating the coronavirus.

Medical protective devices, such as masks and anti-virus protective clothing, and ventilation devices, whether for professional usage or personal use, also had demand increases. The same goes for medical equipment used for testing, whether it’s testing kits or IVD (in vitro diagnostic) devices.

Other areas include personal health products, such as nutritional supplements and other supplements perceived to strengthen the immune system, as well as medical and life insurances.

What production challenges is the healthcare industry facing now due to the coronavirus, and are they similar to those other industries face (staffing issues, supply chain disruption, inventory management, etc.)?

The healthcare industry is facing many production challenges similar to what other industries are facing. 

One of the challenges is the additional cost burden. For example, labour costs will rise given a temporary labour shortage. Other related costs, such as accommodation costs, will also increase. I imagine that those factory owners may want their workers to live near the plant, or they will need extra workers, given the increased demand.

There is added pressure on the availability of raw materials and other materials needed in production. Costs for some raw materials, such as those needed for anti-viral medication or TCM (Traditional Chinese Medicine), have gone up because of the short-term demand surge. These are all additional costs that players in healthcare sectors need to resolve. 

Overall production efficiency is still lower than normal. There is still a shortage of labour as some workers may be still under quarantine at their home city after they returned home for Chinese New Year. Supply chains are also affected, particularly for some medical device industries. For example, the production of hospital-grade air purifiers requires hundreds of different components. Can supply and logistics of all suppliers for the device adapt to the recent change in the short term? That is a question. They might need half a month or a full month before their production returns to normal. 

On the upside, the fact that this epidemic coincided with Chinese New Year when workers were already on holiday for the week, dampened the impact a bit. A lot of plants had already accumulated stock in preparation for that. Many seem to have already resumed production since February 10. That is a positive sign.

What is the global impact? Many of the key ingredients of pharmaceutical products are made in China. Do you think that there will be a drug shortages risk as a result of suspension of production lines?

Indeed, China is the world’s biggest producer and exporter of pharmaceutical raw materials. Our current outlook on global supply impact is pretty neutral. Multiple media sources have mentioned that currently pharma companies are not facing shortage issues, as companies have stocked up before the Chinese New Year holiday, so there is some leeway. You may also have read statements from the US FDA and the India Pharmaceutical Alliance saying that at the moment there are no key shortages reported in drugs, devices or APIs in general. 

Many Chinese companies, whether they are upstream or downstream companies, have already resumed operations in early February. The market does harbour some worries, particularly if the epidemic prolongs causing further production interruption. We do see concerns from certain companies in India, which imports around 70-80% of active pharmaceutical ingredients from China.

But overall, our outlook is neutral. Companies see that they have enough stock to last two to three months. So if production in China can fully get back to normal by this time, there shouldn’t be a problem.

Will risks such as this compel more healthcare companies to shift their supply chains away from China?

It is still a sensible choice to have supply chains based in China. There are many other aspects to consider in supply chain-related decisions, such as proximity to the market, market size, cost advantage, technology, talent pool and favourable government policies. These are all important factors for the CEOs and procurement managers to think about for long-term strategy and daily operation. The epidemic is just one of these many factors.

Another point to note is that China is the “world’s factory” with an entire industrial chain. Material and services suppliers or vendors are linked up like a package. It is not easy to shift your supply chain out of the country for healthcare industry players; same for other industries.

Under the influence of the epidemic, it’s rather important for companies to ask questions on how to improve their contingency planning in terms of inventory management, logistics and supply chain agility. 

This interview was conducted by Ruoping Chen and has also been posted in Insight Magazine, an edition of AmCham Shanghai.