China medical IPO comes with health warnings

The app is one of a handful in China trying to treat an ailing healthcare sector

  
Medical workers inoculate students with the vaccine against the coronavirus disease (COVID-19) at a university in Qingdao, Shandong province, China March 30, 2021. Picture taken March 30, 2021. China Daily via REUTERS. Image used for illustrative purpose.

Medical workers inoculate students with the vaccine against the coronavirus disease (COVID-19) at a university in Qingdao, Shandong province, China March 30, 2021. Picture taken March 30, 2021. China Daily via REUTERS. Image used for illustrative purpose.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

HONG KONG - China’s first online hospital may benefit patients but not necessarily investors. Tencent-backed We Doctor is shaking up a sector plagued by inefficiencies. An untested business model however may cause unwanted financial side-effects.

Founder Jerry Liao created a website to make booking medical appointments easier a decade ago. Since then, his company has transformed into a so-called e-hospital, where users on an app can virtually consult a network of 270,000 doctors, manage chronic illnesses, and fulfill drug prescriptions, among other things. We Doctor even operates bricks-and-mortar clinics offering basic health check-ups and specialty care like reproductive services. The company is now gearing up for an initial public offering in Hong Kong at a mooted $12 billion valuation, IFR reports.

The app is one of a handful in China trying to treat an ailing healthcare sector. A dearth of primary care practitioners has overburdened the country’s medical resources: less than 3,000 of the largest hospitals – the equivalent of just 8% of China’s medical institutions – received over half of all outpatient visits, roughly 2 billion, in 2019, according to research cited in We Doctor’s prospectus.

The company is in poor financial condition. We Doctor makes most of its money from charging users membership and service fees, as well as from selling medical supplies to hospitals. A pandemic-induced boom in demand helped lift revenue 262% last year to 1.8 billion yuan ($276 million). But the company is splurging on equipment as it builds up a network of clinics while making huge investments in research and development. Adjusted net loss widened to 869 million yuan last year. In contrast, Alibaba Health Information Technology, which operates a similar app, was in the black for the first half of 2020, while JD Health International 6618.HK delivered an adjusted net profit last year. That’s partly thanks to the pair’s focus on lucrative drug sales.

The two rivals, along with loss-making Ping An Healthcare and Technology, are forecast to increase sales on average by 42% this year, according to Refinitiv. Applying the same growth rate, We Doctor’s enterprise wants to be valued at an eye-watering multiple of 31 times this year’s sales, versus less than 10 times at its three competitors. Liao's "healthcare for the masses" will need to survive a financial fitness test first.

CONTEXT NEWS

- Chinese online healthcare service provider We Doctor filed for an initial public offering in Hong Kong on April 1. The offering could raise about $2 billion in the second quarter of 2021 and would value the company at around $12 billion, Refinitiv publication IFR reported on April 6.

- Citigroup and CMB International are the sponsors, and Credit Suisse, CICC and JP Morgan are the joint global coordinators.

- We Doctor’s revenue rose 262% last year to 1.8 billion yuan ($276 million) thanks to surging demand amid the pandemic. Its adjusted net loss for 2020 was 869 million yuan, compared to a 757 million yuan loss in 2019.

- We Doctor operates a network covering over 7,800 hospitals and 270,000 doctors, according to its prospectus. As of 2020, it had 222 million registered users and 25.4 million average monthly paying users.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe | Editing by Robyn Mak and Katrina Hamlin) ((yawen.chen@thomsonreuters.com; Reuters Messaging: yawen.chen.thomsonreuters.com@reuters.net))

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