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China's digital health care start-ups get a boost from the coronavirus, Beijing and investors

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Key Points

BEIJING — The coronavirus pandemic is proving to be the accelerator that China's health care technology start-ups needed.

In a country of 1.4 billion, many people who used to travel and wait for hours to see doctors are turning more to online products, companies say. The government is rolling out needed policy support for internet-based health care. And investors are pouring in money. 

Before the coronavirus outbreak, much of the health-tech investment in China was focused on scientific research for medical treatments, said Kitty Lee, Singapore-based partner and head of the Asia Pacific health and life sciences practice at Oliver Wyman.

Going forward, she expects the portion of investment focused on consumer health care and infrastructure will grow more rapidly than biotech.

In the second quarter, global health-care funding to private companies reached a quarterly record of $18.1 billion, according to CB Insights. Health-care funding in Asia nearly doubled from the prior quarter to $5 billion, and deals to China-based start-ups recovered to pre-coronavirus levels, the analysis found.

"The entire Chinese health industry has really only begun to be cultivated after the passing of the (coronavirus) epidemic," JD Health CEO Xin Lijun said in an interview last week, according to a CNBC translation of his Mandarin-language remarks.

The company is a subsidiary of Chinese e-commerce giant JD.com and is set to receive an investment of more than $830 million this quarter from Hillhouse Capital.

During the worst of the outbreak in China, JD Health offered free online consultations, drawing roughly 150,000 patients or more a day, who then realized they didn't necessarily have to go to a physical hospital, Xin said. He now claims that in less than three years, his health tech company has the highest income among its peers in China.

Covid-19 first emerged late last year in the Chinese city of Wuhan. The disease began to spread within the country in January and February, before hitting the rest of the world in a global pandemic that has infected more than 27.6 million people and killed more than 900,000 people. In an effort to curb the outbreak, authorities have restricted social gatherings, forcing people to turn more to online platforms.

In the first six months of the year, visits to health care institutions in China dropped 21.6% from a year ago, according to data released Aug. 21 by the National Health Commission. Visits were still down 9.7% year-on-year in June to 630 million, the commission said.

On the other hand, Tencent-backed WeDoctor said that during the coronavirus outbreak, customer orders for online consultations increased 3.6 times from a year ago. More than 50,000 doctors joined the platform for a total of about 250,000 physicians, according to WeDoctor.

More high-level support

The Chinese government has also stepped up efforts to back the health tech industry's development. Notably in July, 13 major national departments and ministries jointly announced support for developing online medical services, as part of a broader plan to promote consumption and employment. On Wednesday, a meeting of the country's top executive body, the State Council, again noted the need to expand internet-based health clinics.

"Really after the serious stage of the pandemic ..., the central government and the local government they delivered a lot of different policies to help the internet hospitals," Tang Bochen, vice president at Qi'e XingRen, also known as Tencent Trusted Doctor, said in a phone interview on Sunday. "What I saw was almost every city, their public hospitals are now building up an internet hospital system to help their patients (move) from offline to online." 

The company operates an online consultation platform as well as offline clinics. Tang said about 450,000 physicians with 20 million patients are already part of XingRen's network, and that more than 30 of the 135 clinics have already received licenses to work with the government's social insurance program. He said the company aims to build user traffic through general patient care, and rely more on specialist clinics such as dental and eye care to generate profit.

Major corporations have also been pushing into the emerging industry.

Ping An Good Doctor, a Hong Kong-listed subsidiary of the insurance giant Ping An, reported 26.7% year-on-year growth in average daily online consultations to 831,000 in the first half of the year, with revenue from online medical services doubling to 694.9 million yuan ($101.56 million). Registered users grew by more than 56 million in 12 months to 346.2 million.

Hong Kong-listed Alibaba Health says that through the Alipay app it has more than 15,000 contracted medical institutions, including nearly 400 Class III hospitals in 17 provinces, that are connected to medical insurance payment services. The company said in the first quarter, the net total of frequent active users of Alipay's health-care channel exceeded 390 million.

"Telehealth or internet hospital or however you want to call it in China, it's here to stay," said He Wang, senior health care analyst at CB Insights. He expects at least roughly a quarter of health care services spending can be digitalized.

"A key indicator in telehealth's momentum in China is integration with basic medical health insurance program," Wang said. "You're seeing insurance companies and hospitals and governments all form telehealth platforms themselves. I think it's increasingly a crowded space. The platform players, like JD Health, Ping An, WeDoctor are probably the ones that are going to continue to play."

But whether JD's Xin or other industry players CNBC interviewed for this article, they generally agreed that online health in China is still in the very early stages of development.

"I think this health care market is very large. It is very far from a time of splitting the cake. (Right now) it is all about making the cake larger," said New York-listed 111 co-founder and Executive Chairman Gang Yu, according to a CNBC translation of his Mandarin-language remarks. 

The company works with local pharmacies to sell medicine, and also has an online consultation program. Since the coronavirus outbreak, the proportion of its users age 40 or older has increased to more than half, the company said. In August, the company said it received a capital injection of 419.82 million yuan ($61.36 million), ahead of plans for another listing on China's Star board. Net revenue surged 93.5% in the second quarter from a year ago to 1.62 billion yuan ($236.77 million), and net losses narrowed. 

"Profitability long-term is still a question long-term for every single one of these telehealth companies," CB's Wang said. "How you turn government support into cash flow is still on the table. It's not solved yet internationally."

The extent to which health tech can transform such a traditional industry also remains to be seen. While online consultations can give doctors a flexible source of income, they cannot replace a physical check-up.

"The medical industry remains relatively closed, with highly uneven resource allocation, and a virus-induced internet-based transformation cannot occur overnight," Yipin Ng, founding partner of Shanghai-based Yunqi Partners and a former partner at GGV Capital, said in a Chinese-language statement, according to a CNBC translation. "Data islands and short-term shortage of quality medical resources remain a long-term problem for China's medical industry, and will continue to bring entrepreneurial opportunities for specific sub-sectors and improving efficiency."

The roughly six-year-old firm has invested in Intco Medical Technology, whose shares are up 650% so far this year. Yunqi's more recent investments include V Daifu, which develops software for medical clinics, and Doctopia, which focuses on health tech for mothers with young children. 

— CNBC's Iris Wang contributed to this report.