Healthy investments

Long before the term ‘unicorn’ was popularised in the investment world, Jim Clark was founding billion-dollar companies. In fact, Clark was the first man to create three multi-billion dollar tech firms. His incredible story is told by Michael Lewis in The New New Thing, a riveting account about the dotcom era of the late 1990s.

Clark made his first fortune with Silicon Graphics in computer hardware. He made his second co-founding the internet browser Netscape (introducing the web to Wall Street via its IPO). It was at this point that Lewis began shadowing him for a fly-on-the-wall account of what he would do next. Clark had decided that America’s healthcare system was ripe for disruption and he drew what he termed the ‘Magic Diamond’ distilling the industry to its most basic components – patients, doctors and healthcare institutions. He positioned his new internet firm Healtheon at the centre of his diagram, envisaging massive rewards from “fixing” healthcare and eliminating bureaucratic waste.

Clark’s prior successes persuaded venture capitalists and investment bankers to back his vision and in February 1999 Healtheon had one of the most successful IPOs ever, rising 400% on its first day.

Institutional investors were persuaded by a simple pitch, recalls Lewis: “Each time a physician hit a button on his computer to order a lab test, or a prescription or a patient’s medical record, Healtheon would be paid between 9 and 35 cents… [it] was expected to handle 500 million transactions in 1999, 1.5 billion in 2000, and so on for some time, until, presumably, every single healthcare transaction in America ran through its computers. You do the math.”

But Clark and his software engineers found healthcare harder to crack than they had anticipated. In fact, within three months of the IPO the Wall Street Journal was reporting that Healtheon was merging with WebMD in a $5.5 billion deal. And the dream of disrupting the sector never came to fruition. Private equity firm KKR took Healtheon private last year at a valuation of $2.8 billion.

In the same year that Healtheon went public, Amazon bought a 40% stake in Drugstore.com, with Jeff Bezos similarly keen to upend the healthcare sector. That didn’t work as planned either but Bezos is having another go almost 20 years later, with the announcement late last month of a Big Data-driven healthcare business backed by Warren Buffett and Jamie Dimon.

The news saw US health insurer stocks plunge by over 5% as investors pondered whether the newest tie-up might have a better chance of success this time round.

Over in China a company has been on a disruptive path of its own in the healthcare sector. And thanks to its unique positioning as both an insurer and a leading tech player, it is further down the road than the venture headed by Amazon.

That company is Ping An and in the coming months it plans to IPO its own Big Data-and-AI-driven health business Good Doctor.

What is Ping An’s platform?

Any move by Bezos or Buffett catches a lot of attention in China, stoking debates on how the Chinese can learn from their decisions. This time around, the reactions have been muted. One reason is that the Chinese have seen similar moves before. Under the buzzword of Dajiankang, or literally “Big Health” (more on this later), there have been lots of cross-sector collaborations between Chinese firms wanting to innovate in the medical industry.

Ping An’s Good Doctor combines its insurance, finance and technology businesses. The amalgam offers online consultations for people looking for quick and simple medical advice, with an AI-empowered app linking customers to an in-house medical team, as well as an external network of 3,100 doctors (or hospitals) and 7,500 pharmacies.

Seriously ill patients are advised to seek more conventional diagnosis, and Good Doctor also puts more emphasis on the “prevention is better than cure” principle.

Its online service collects health information from its users, advising them on wellness and beauty products that they should purchase (based on Big Data analytics of their lifestyles). Of course, the goods are available via an online mall that Good Doctor operates.

Founded in 2015, the platform has more than 192 million registered users, of which about 30 million are monthly active users (MAUs). Online consultations more than doubled year-on-year to 370,000 in 2017 – which was a strong enough performance for the start-up to position itself as China’s “largest healthcare platform in terms of average MAUs”.

Is Good Doctor a good bet?

Ping An is focusing on the cross-selling opportunities between Good Doctor’s customers and its insurance business. The mission, Good Doctor says, is to “build the largest healthcare ecosystem in the world”.

Ping An Healthcare and Tech, the holding firm of Good Doctor, is expected to go public in Hong Kong in the coming months. According to Hong Kong Economic Times, it is seeking to raise up to $1 billion in an IPO, valuing the three year-old venture at about $5 billion. But investors will need to disregard hefty losses of Rmb758 million ($120 million) in 2016 and a further Rmb497 million loss for the first nine months of last year. There are legal risks too: the listing documents warn that some of Good Doctor’s operations could be vulnerable to medical liability claims or even deemed as offering medical treatments without proper licences.

This hasn’t deterred Japan’s Softbank from becoming a pre-IPO investor. Caixin Weekly reported last month that the Japanese tech giant’s $100 billion Vision Fund paid $400 million for a 7.4% stake, valuing the Ping An unit at $5.4 billion.

Reportedly, the insurer is preparing for four lucrative spin-offs this year, including China’s biggest online wealth management platform Lufax, as well as another health insurance unit. The four businesses combined could be worth more than Rmb600 billion, the Hong Kong Economic Times has reported.

The prospect has propelled the share price of the parent firm to new highs. Since the beginning of September, when we reported that Ping An could be poised for a rerating because of the forthcoming IPOs (see WiC379), its shares have climbed as much as 60% (though this week’s massive stock market correction has seen its value fall).

What exactly is “Big Health”?

Warren Buffett described healthcare costs in the US as “a hungry tapeworm on the economy” when Berkshire Hathaway announced its healthcare joint venture with Amazon and JPMorgan last month.

The Chinese government, struggling with an underinvested infrastructure of hospitals and medical care, has been trying to tackle a similar problem. The solution will need to be radical: along with a rapidly aging population, China has the largest number of obese children in the world, as well as more diabetes patients than anywhere else. The best healthcare is heavily concentrated in the capitals of the richest provinces – the hope is that new technology will open up access to poorer rural areas too.

The “Healthy China 2030” blueprint, first mentioned by Premier Li Keqiang in 2015 describes “having good health and a long life is an important sign of the national prosperity and rejuvenation”. Policy documents since then have set more quantifiable objectives, such as raising life expectancy to 79 (from about 76) and increasing the five-year survival rate on cancer diagnosis by 15 percentage points by 2030 (see WiC386).

These top-down directives have fuelled talk of “Big Health” as an investment theme. The market for general health and wellness was Rmb8.6 trillion in 2016, Good Doctor estimates, and it expects it to surpass Rmb26 trillion by 2026.

According to 21CN Business Herald, which held its own summit on the theme last year, Big Health has already become “a key national strategy”. For the medical authorities, the measures should help in identifying individuals classed as “sub healthy”, allowing practitioners to deal with cases before they become chronic diseases. More resources will be steered into precision medical care to tackle serious illnesses and disease. But the overarching idea is to change the country’s medical system from a “disease-centred” approach to a suite of services covering different stages of a person’s life, with an emphasis on prevention and health management. The implementation of these initiatives, 21CN says, will allow medical professionals to understand their patients better. But more importantly, it will boost understanding of a healthier lifestyle among the population at large.

How will Big Health be implemented?

The concept reaches out across a variety of sectors. Companies from different backgrounds are trying to find a path to profit. In April last year, a number of state-owned enterprises including China Electronic Information Industry Group and the telco China Unicom teamed up to establish the China Healthcare Big Data Industry Development Group (BDID). Two months later the largest telco China Mobile said it had joined forces with Inspur (a domestic maker of computer operating systems) and a number of state banks to set up a rival grouping, China Healthcare Big Data Technology Development Group (BDTD).

If the alliances can establish viable platforms, they will encroach into parts of Good Doctor’s market. Perhaps the competition will speed up the industry’s progress – Xinhua already expects BDID and BDTD to spearhead the state-driven effort to build national databases on health information and medical records.

Of course, when it comes to Big Data, there is no larger national dataset than China’s 1.4 billion population. By 2020, this new trio (including Ping An) will have collected as much as 1,000 zettabytes of information (according to Cisco the entire data centre traffic in Asia-Pacific is currently about 2.1 zettabyte). Much of the information will come from within the public medical system, where the government is already trying to improve collection of patient records and generate more accurate evaluations of the impact of treatment. This sounds like a potential disaster for personal privacy (not always a concern for the authorities: see WiC352). However, a data pool as deep as the one healthcare administrators are trying to compile could go a long way in revolutionising treatments and influencing behaviour. For instance, would you consider drinking a glass of warm water first thing in the morning, if analysis from hundreds of millions of cases in China suggested that doing so makes you less vulnerable to certain illnesses?

Surely the BAT is involved too?

If Bezos and Buffett, the world’s richest men present and past, are taking healthcare seriously, Chinese tycoons will too. Indeed, Alibaba’s founder Jack Ma has already predicted that Big Health will produce China’s richest man in the future and unsurprisingly the BAT troika are trying to steer China’s healthcare revolution to their own advantage.

Pony Ma, the boss of Alibaba’s archrival Tencent, told the Fortune Forum in December that his firm has invested in a company that uses AI in medical scanning, for instance, claiming it was better than doctors at spotting cancer (see WiC391). In late 2017, the internet conglomerate launched its own medical information platform called Tencent Yidan, providing health-related advice to more than 800 million users of WeChat. Tencent’s WeDoctor, a smartphone app that rivals Ping An’s Good Doctor, already has 150 million registered users and the company told Reuters in December that it is in talks with Hong Kong and Southeast Asian hospital chains about catering to mainland Chinese who want international-standard treatment.

AliHealth offers similar services and the Alibaba platform is partnering with foreign pharmaceutical firms such as Bayer to promote “self-care concepts” and sales of medical products.

Following a scandal in 2016 – involving medical advertising on its search engine (see WiC324) – Baidu shut down its healthcare business, which had allowed patients to book doctors appointments through an app. But it hasn’t given up, switching from the provision of lower-end services to a focus on AI-powered research and innovation instead.

And the other interested parties?

Even the cash-strapped Wanda Group has decided to expand into the area – it set up a Big Health unit in the second half of last year. In January 2016, the property conglomerate also said it would invest $2.3 billion in the construction of three hospitals in Shanghai, Chengdu and Qingdao, all to be managed by International Hospital Group of the UK.

Wanda is not alone. According to Sohu Finance, at least 30 real estate developers have expanded into healthcare services, investing more than Rmb100 billion in Big Health plays. Many of these businesses involve the construction of medical facilities or homes for the elderly, as local governments are typically more willing to sell land to developers when projects fall under the Big Health category. (Even Kweichow Moutai, China’s most valuable liquor maker, is building a hospital – although in its case more as an example of its commitment to social responsibility.)

The investments are designed to help China close the gap on core medical provision with countries like the United States: Sohu Finance noted that the Chinese have access to 1.5 doctors per 1,000 patients, which is less than half the American level.

But the bigger picture is that the new entrants are pinning their hopes on profiting from the nexus between the harder infrastructure of hospitals and medical services, and the softer assets of customer databases and technology. In the process, they hope to dislodge the vested interests in China’s medical system. If the outcome is cheaper and better healthcare, the central government isn’t going to object.

Sohu Finance makes a final comparison with the US. It notes that while Washington is convulsed with political debate over Donald Trump’s repeal of Obamacare, more than 130 Chinese firms have chosen to invest in healthcare-related Big Data and AI, sensing a transformative opportunity in Big Health.

Could the provision of smarter, more effective healthcare be another area where China leapfrogs America in the decade ahead? Clearly, that is what many investors are betting on…

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