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1、Buy,Buy,Buy,Buy,Buy,Buy,Deutsche BankMarkets Research,AsiaChinaHealth CareHealth Care,IndustryChina Healthcare,Date3 December 2012Industry UpdateJack Hu,Ph.D,China Edge P100:Key takeawaysfrom recent hospital visitsHospital reform inching forwardWe recently visited several hospitals from county-level
2、 hospitals inSouthwestern China to the best hospitals in Beijing/Shanghai,and interviewedhospital executives.Key takeaways include:1)hospital executives concur thatcost control is a long-term trend;2)in the near term,hospitals are creative ingenerating revenues,regardless of their sustainability.We
3、believe this ispositive for companies with innovative mimics,such as Sino Biopharma(1177.HK),as well as companies with exposure to supportive drugs,includingFosun Pharma(2607.HK)and Sihuan Pharma(460.HK).Attractive opportunity from tier-1 hospitals,not just county-level hospitalsAll 11 hospitals tha
4、t we visited had either just completed construction of new,Research Analyst(+852)2203 Top picksSino Biopharmaceutical(1177.HK),HKD3.73China Shineway(2877.HK),HKD11.66Mindray Medical(MR.N),USD33.83WuXi PharmaTech(WX.N),USD16.39Companies FeaturedSino Biopharmaceutical(1177.HK),HKD3.732011A 2012E 2013E
5、,facilities or were constructing new buildings,suggesting that the current waveof infrastructure build-up is still ongoing.While this only represents one side ofthe growth story on the supply side,we have conviction that all value chain,P/E(x)EV/EBITDA(x)Price/book(x),20.18.93.0,22.49.84.2,19.08.33.
6、9,components,particularly equipment manufacturers,such as Mindray(MR.N),will continue to benefit from both tier-1 and tier-2 hospital opportunities.Additionally,more than 95%utilization of new facilities could be achievedwithin a few months,confirming demand growth is synchronizing with supplygrowth
7、.While we attribute this to the populations overdependence on tier-1and tier-2 hospitals,it seems there is excess demand over supply at present.Success of hospital reform pending on government determination,China Shineway(2877.HK),HKD11.66 Buy2011A 2012E 2013EP/E(x)13.9 10.9 9.4EV/EBITDA(x)8.8 6.0 5
8、.0Price/book(x)2.1 1.9 1.6The United Laboratories Buy(3933.HK),HKD3.83,With the omnipresence of creative revenue generation and risk managementstrategies,hospital executives conceded that any policy would be strictlyimplemented,as long as the government was determined to push it forward,because hosp
9、itals executives are appointed by the government.This was,P/E(x)EV/EBITDA(x)Price/book(x),2011A 2012E 2013E121.2 19.9 15.919.6 8.5 7.21.1 0.9 1.0,demonstrated by the effective implementation of the prescription restriction onantibiotics,the then-largest revenue source of tier-1 and tier-2 hospitals.
10、While,Mindray Medical(MR.N),USD33.832011A 2012E 2013E,we anticipate that hospital reform will accelerate,it may not happen until thecompletion of the relevant healthcare leadership transition in 2013.Other pertinent takeaways,P/E(x)EV/EBITDA(x)Price/book(x),16.811.52.6,18.912.43.0,16.710.62.6,Other
11、takeaways include:1)hospitals are prepared to increase the medicalservice contribution to overall revenue,creating healthy prospects for changesin prescription pattern in the long term;we think this will be positive for drugswith actual therapeutic values;2)reimbursement reform is unlikely to bepush
12、ed forward due to lack of infrastructure support and experienced,WuXi PharmaTech(WX.N),USD16.39 Buy2011A 2012E 2013EP/E(x)12.0 12.0 11.0EV/EBITDA(x)7.0 6.3 5.1Price/book(x)1.5 1.9 1.6,personnel;and 3)supportive drugs are among the best selling drugs inhospitals,despite the lack of clinical data supp
13、ort;however,it is unlikely thegrowth will slow down in the near term.Valuation and risksWe use a multiples-based valuation approach in light of the relativelysustainable growth that we expect from the sector.Industry risks relate mainlyto government policies and regulatory changes in China,particula
14、rly healthcarereforms,which could negatively affect pricing._Deutsche Bank AG/Hong KongDeutsche Bank does and seeks to do business with companies covered in its research reports.Thus,investors shouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this repo
15、rt.Investors shouldconsider this report as only a single factor in making their investment decision.DISCLOSURES AND ANALYSTCERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P)072/04/2012.,3 December 2012Health CareChina HealthcareTop 10 Q the other 25%comes from medical services.,Page 2,Deutsche Bank AG
16、/Hong Kong,3 December 2012Health CareChina HealthcareAntibiotics contribution is about 16%of drug revenue,vs.28%previously.Theproportion continues to go down.3.How is government funding on operations?Hospital 1:In 2011,we had RMB2.81m(DB friendly reminder:about 3.9%of revenue).Hospital 2:In 2011,we
17、had about RMB18-19m(DB friendly reminder:about 7.3%ofrevenue).4.What is your expansion plan and what was the source of funding for new hospitals?Hospital 1:We do not have anything new planned now but will soon,as we just had thegrand opening of the new facility in April.The new building had a final
18、budget of more than RMB60m,almost double the originalplan.Of that,RMB13m came from the RMB4 trillion package in 2009,another RMB2-3m from the province and RMB1m from the city.The rest came from two sources,1)our accumulated profits from all these years,as we saved them;2)the accountpayables to drug
19、manufacturers/distributors.We barely borrowed from the bank.Hospital 2:We will have another branch open in 2014 but off-site of the main campus.As it is still under construction,the budget is likely to go up so I do not have a number.For the building we completed last year,we had a budget of approxi
20、mately RMB200m.Less than 20%came from the government and the rest came from our own efforts.Bank loans are approximately half of that and we plan to pay them back in 6-8 years.5.Hows the composition of the reimbursement status of all patients?Hospital 1:About 20%from the urban employee and resident
21、program,and 50%fromthe new rural program.However,the county town was converted to a city last year,somost people in the new rural program converted into the urban program.In total,about70-80%are reimbursed.Indeed since 2009,we have seen a rapid increase in thenumber of patients with reimbursement,as
22、 they previously had nothing.Hospital 2:About 60%are reimbursed.Back in 2008,only 30%were reimbursed,wehave seen a significant increase in reimbursement since 2009.6.Whats the status of equipment here?Hows the decision made to purchaseequipment,specifically regarding MNC vs.domestic equipment?Hospit
23、al 1:That information is in the brochure that we just gave to you,which is alsoavailable in the lobby here.Over 90%of the equipment was purchased from MNCs,with a minimum fromdomestic companies,as the quality is not good.We will continue to buy from MNCs.You mentioned ultrasound,which we bought from
24、 GE,for both color and black/white.Our decision-making on new equipment purchases is pretty simple,which is ROI.Wehave to propose to a committee,with estimated costs,fees that we could generate,aswell as depreciation.Only after we have passed the internal threshold could we get aGO,for any equipment
25、.Hospital 2:Almost all large/mid-sized equipment was from MNCs,and all treatmentrelated devices were purchased from MNCs.We have domestic machines in thefollowing categories,maintenance(such as PMD)and diagnostic(with the lowestmedical liability).But again,for treatment and imaging devices,almost al
26、l were fromMNCs.We will continue this purchasing pattern.,Deutsche Bank AG/Hong Kong,Page 3,3 December 2012Health CareChina HealthcareTo purchase new equipment,ROI is the only criteria.Devices have to generate revenuesfor us to justify our investment.7.Whats the status of drug/medical consumable pro
27、curement here?Hospital 1:Drug procurement was done online,through city-wide centralizedprocurement.We do not have a quota for self-procurement.EDL drug sales represent40%of drug sales,but we have not implemented a zero mark-up policy.Medical consumables are all purchased by us,and there is no centra
28、lized procurement.As for the high-end medical consumables you asked about,we do not look at it thatway.Of the 8%revenue contribution from medical consumables,5%is from those thatwe could charge fees for and 3%was our cost center.Hospital 2:Drug procurement was largely done online,through province an
29、d city-widecentralized procurement.We do have a quota for self-procurement.EDL drug salesrepresent about 15%of drug sales,and we have zero mark up here.Medical consumables are all purchased by us,and there is no centralized procurement.As for the high-end medical consumables you asked about,this is
30、an important part ofour revenue source.If we split them into two categories,those we could charge a feefor and those we could not,the former is more than half and the ratio has increased.We have already started to control costs on those consumables that we cannot chargepatients for.8.What do you thi
31、nk of global budgeting on reimbursement reform?Or DRG-basedbilling/reimbursement?Hospital 1:What is global budgeting?We have not heard of that.However,in 2011,we could only get reimbursed for 90%of our claims to MOLSS.Theytook a 10%haircut on us.Hospital 2:We do not have that here but it is coming,p
32、robably soon.9.Hows account payable to drug manufacturers,distributors and device companies?Hospital 1:Definitely getting longerHospital 2:That is where we have some leverage,so it is getting longer and the trendwill continue.But for companies with good drugs,we tend to pay promptly.10.Whats your vi
33、ew on the zero mark-up policy?Can you increase service fees tomake it up?Hospital 1:We have not started to implement zero mark-up for EDL drugs(DB friendlyreminder that hospital executives misunderstood our question,and we did not followup to clarify,since this is NEW to us).As for service fees,we d
34、o not have the right toincrease fees.The local MOH and Pricing Bureaux control pricing.We have not evenconsidered proposing increasing our prices to MOH.Hospital 2:It is highly likely that we would start to implement this soon,possibly in2013,as the local MOH has started to have meetings with us on
35、this.That would cutour revenue significantly,but there is nothing we could do to stop it.On the service feefront,we have made it clear to city MOH that the fees would have to be increased tomake up the loss.We are confident that we could do that.,Page 4,Deutsche Bank AG/Hong Kong,3 December 2012Heal
36、th CareChina HealthcareFeedback from tier 1 hospitals1.Can you share with us some basics on your hospital operations?(We only list twoanswers here as examples)Hospital 1(Shanghai)In 2011,the number of out/in-patients was 2.2m and 52,000 respectively;the averageturnaround time for in-patients was 10-
37、11 days.In 2011 and 2010,revenues were RMB1.9bn and over RMB1.7bn respectively.In 2012,we may have high single-digit growth.The growth is entirely from patient volumegrowth,not pricing.We have 1,500 beds and the utilization rate is almost 100%.I believe you saw weadded beds in the hallways.Hospital
38、2(Beijing)In 2011,the number of out/in-patients was 1.9m(7,000-8,000 per day,five days aweek)and 47,676 respectively.We also admitted 150,000 patients in emergency in211.The average turnaround time for in-patients was 11 days,as it is regulated.In 2011,revenue was about RMB2.4bn.We have 1,663 beds n
39、ow,and the utilizationrate is 98%.2.Whats your revenue composition?Hospital 1:Drug revenue is about 48%,lab testing is about 14%now,and imaging isabout 18%,the rest comes from medical services/surgeries/in-patient stays.Antibiotics contribution is about 18%of the drug revenue,vs.25%previously.Thepro
40、portion continues to go down.The best-selling drugs are mostly supportive drugs actually.Yes,we are aware that theyare not approved in the US/EU and we need clinical data to support their usage.But thefact is that we use them a lot here.Examples include calf serum,GM1 etc.Theirprescriptions are bein
41、g closely watched internally by us,and externally by payors.Hospital 2:Drug revenue is about 40-45%;lab testing is about 15%and imaging isabout 20%,their contribution is going up as we speak,the rest comes from medicalservices.Antibiotics contribution is about 18%of drug revenue,vs.24%previously.The
42、proportion continues to go down.We have a task force on that.3.How is government funding on operations?Hospital 1:In 2011,all totaled,government funding/subsidies was about 8%ofrevenue.Hospital 2:In 2011,the scale was about 6-7%of revenue,but excluding R&D/researchfunding.,Deutsche Bank AG/Hong Kong
43、,Page 5,3 December 2012Health CareChina Healthcare4.What is your expansion plan and what was the source of funding on new hospitals?Hospital 1:We opened a new facility last year off the main campus,and we will haveanother one coming online,also off campus in 2013.The total budget is aboutRMB200-300m
44、 for the two combined,but the land is free.The majority of the fundingcame from our own pocket and bank loans.Hospital 2:We are opening two new facilities in the city,both off the main campus,andwe are also collaborating with a private group to open a new hospital as a JV.Not sureabout the funding.5
45、.Hows the composition of reimbursement status of all patients?Hospital 1:About 40%from the urban employee and resident program,15%fromgovernment employees,the rest from self-paid and the majority are patients fromoutside of Shanghai.Hospital 2:About 50:50.6.Whats the status of equipment here?How are
46、 decisions made to purchaseequipment,specifically regarding MNC vs.domestic equipment?Hospital 1:Over 80%of the equipment was purchased from MNCs.We follow ageneral principle that we buy MNC products for treatment-related functions,whiledomestic ones are for maintenance or something passive,such as
47、PMD,as youmentioned.We have seen an increasing contribution from domestic companiesrecently,as their quality improves.We have a committee headed by VP,the most important criterion for new equipmentpurchase is ROI.Hospital 2:All large equipment including treatment and critical devices,such as DaVinci
48、,MRI,PET/CT,and CTs,are from MNCs.We do have lots of ultrasound and PMDfrom domestic companies.For example,we have 135 PMDs and they are almost allfrom Mindray.In 2011,we had a RMB70m budget for equipment,RMB200m for high-end medicalconsumables and another RMB200m for low-end medical consumables.In
49、theory,equipment has a life cycle of five years in our hospital.ROI is the only criteria for new equipment purchases.7.Whats the status of drug/medical consumable procurement here?Hospital 1:Drug procurement was done through city-wide centralized procurement.Wehave a limited quota for self-procureme
50、nt.EDL drug sales represent less than 10%ofdrug sales,but we may increase this ratio pretty soon.Medical consumables are all purchased by us and there is no centralized procurement,except some high-end medical consumables such as stents.Hospital 2:Drug procurement was largely done online through cit
