Chindex Ready For China's Healthcare Reform, Competitors

WASHINGTON - Private health care services are finding their niche in China, and Bethesda, Md.-based Chindex is well positioned to withstand future competition and capitalize on China's health care reform.

Chindex distributes medical products for Chinese hospitals and clinics and runs private hospitals under the United Family Hospitals Network, the first foreign-invested and managed health care group in China.

During an Aug. 10 earnings call for the first quarter of 2010, CEO Roberta Lipson reported an 86 percent year-on-year revenue increase for the company's medical products division - from $12.5 million to $23.3 million - and the health care division increased 13 percent to $22 million from $19.6 million in the first quarter of 2009.

Chindex opened its first hospital in China in 1997, and the company's experience gives it an advantage over newcomers trying to capitalize on China's growing middle class, which is increasingly seeking higher-end health services, according to Maxim Group analyst Anthony Petrone.

"They are more seasoned in going through the process of securing a joint venture partner for facilities, securing the 120-plus approvals that you need from various healthcare bodies in China, and now brand recognition. … I think they have a pretty healthy lead," Petrone told PharmAsia News.

If Chindex continues to perform as it has and expands its health care network, Petrone considers the company an "attractive takeout" target for a larger company or financial buyers.

Chindex announced Aug. 6 plans to launch an outpatient oncology facility in Beijing called the New Hope Cancer Center. Lipson told investors she expects the center to open later this year and will offer chemotherapy and radiation therapy treatments.

Petrone, who already considers Chindex a leader in private inpatient and outpatient services in China, sees the company becoming a leader in oncology services as well.

"I think it's a big opportunity for the company. If you're an expat or a local Chinese maybe you still want to fly out of country if you're looking at cancer surgery, but you're looking at follow-up chemotherapy or radiation or psychological support. They can perform well there."

Breaking Even

The company's Guangzhou clinic, which opened in October, will soon break even, CEO Lipson said, adding that the quick ramp-up is on par with the company's other clinics and hospitals. CFO Lawrence Pemble told investors the company consistently breaks even on its hospitals within four to six financial quarters.

Lipson attributed the Guangzhou ramp-up in part to receiving licensing approval to provide examinations required for patients trying to obtain visas. She said the next step is to obtain approval to provide vaccinations for those patients. The vaccination approval, expected within the next month, could provide a 20-30 percent increase in revenue per patient, Petrone suggested.

Distribution and Healthcare Services Expansion

Aside from the cancer center, Chindex has a number of expansion efforts planned for the coming year. It started construction on an expansion of its Beijing hospital which will double the number of patient beds as well as add neurosurgery, cardiovascular care and expanded orthopedic and infertility services.

The company announced two agreements Aug. 10 to expand its medical product distribution network. The company will distribute German firm Biotest AG's Tango Optimo automated blood bank System used for blood banking and California-based Cutera's aesthetic laser platforms Xeo , Solera and CoolGlide , which are already approved with China's State FDA. Tango Optimo is expected to receive regulatory approval later this year.

Due to the success of a Chindex hospital in Shanghai, the company is also assessing the possibility of opening new outpatient sites in nearby Pudong.

Petrone said Chindex will likely see wide growth in the heathcare sector, particularly now that the company is free of expenses associated with obtaining Joint Commission International accreditation for its Beijing and Shanghai hospitals last year. There are six JCI-accredited hospitals in China.

Reform and Stimulus Impact

China's ambitious healthcare reforms, including $123 billion for building new medical centers and upgrading medical equipment in existing hospitals, is expected to be a boon for device companies able to break into the Chinese market (Also see "Beijing's Health Reforms, With Push For Made In China Products, Impel Some Global Device Makers To Create Joint Ventures" - Scrip, 27 Jul, 2009.).

While the stimulus is not directly committed to the high-end medical equipment Chindex provides, the company still views the reform as a great opportunity for expansion.

Lipson said she views the government's plan to increase basic medical insurance coverage to 90 percent of the population as an indirect positive for the company. The coverage plan is intended to increase basic primary care, but Lipson believes this will also affect demand for high-end services.

"There are going to be a lot more people seeking service and flowing into the system. … When the system absorbs so much extra demand, even if it absorbs it first on the primary care basic level, it pushes the referrals up in the system in general. So all of those urban hospitals that are our great customers will have greater demand and they will need more equipment."

Ultimately the company is pressing the government to change its insurance policy to allow public insurance to be allocated to private health care institutions at the same level as public facilities.

- Daniel Poppy ([email protected])