[News]Lepu sets foot in hospitals and faces managerial dilemmas; the truth after the hospital purchasing cases

Medical apparatus and instrument manufacturers are keen in purchasing of medical care institutions

After suspension in the stock market for one month, the Lepu Medical Technology (Beijing) Co., Ltd. (hereafter referred as Lepumedical) publicized resumption and other announcements recently, among which the wholly purchase of Luoyang Municipal No. 6 Hospital (hereafter referred as No. 6 Hospital) drew high attentions. It is said that the listed pharmaceutical companies launched a hot wave to purchase the hospitals after the release of the document “Several Opinions on the Promotion of Development of Health Service Industry” by the State Council in September 2013. The hot wave has not cooled down yet. After the acquisition of hospitals by domestic enterprises, experts say that there are a lot of problems happened such as overall management and branding.

The true intention of hospital purchasing by Lepumedical

Lepumedical is a medical apparatus company listed on the Growth Enterprise Market of Shenzhen Stock Exchange Market with its main business scopes as research and development, producing and sales of cardiovascular drug and implant/intervention medical apparatus and equipment for cardiovascular diseases. The capital movement indicated in the announcement includes establishment of venture capital fund, purchase of hospital, pharmaceutical enterprises, private placement for acquisition, overseas investment, online to offline, from medical apparatus and instrument manufacturers to pharmaceutical factories to hospitals covering the whole industry chain of big health.

Via its wholly-owned subsidiary Luoyang Lepu Hospital Co., Ltd, the announcement indicated that Lepumedical bought 100% share of the No.6 Hospital at the cost of RMB 93.2 million and it became the first wholly-owned hospital acquired by Lepumedical for its ambitious layout in the big health industry chain. The relevant document shows, the No.6 Hospital is a non-profit Class A Grade 2 hospital with specialty of orthopedic cardiovascular department, it realized revenue of RMB 110 million with debt of RMB 98 million with total assets of RMB 120 million in 2014, revenue of RMB 128 million with debts of RMB 150 million with total assets of RMB 160 million in 2015.

Spokesman of Lepumedical said that to be the first acquired hospital, the No.6 hospital will play a very important role in its effort to construct a chain of hospitals in cardiovascular specialty. The No. 6 Hospital will become one of the regional carriers of Lepumedical’s 3-layer cardiovascular network hospital service system. This will synchronize with the consultation, transfer and third party clinical laboratory services which are beginning to take shape. Hopefully, this hospital will serve as the junction to link high-end medical care and connect with the demand at the grass root. With this pilot effect, Lepumedical has a mission to establish groups of hospital with cardiovascular specialty at second and third tier cities and further construction of its giant ecology circle covering the whole healthcare industry chain.

Referring to the above-mentioned explanations, Cao Jian, researcher of Medical Care Management Research Center of Tsinghua University and China Economic Development Research Center of University of International Business and Economics, does not evaluate the 6th Hospital of high quality. He says that Lepumedical tried to look for other hospitals, but the transactions can hardly be reached due to high price.

Cao Jian says that to build an industrial chain platform for cardiovascular diseases is what Lepumedical pursuing for long time. It started its business from manufacturing of medical apparatus and instrument such as heart stents. “The down going price for heart stents and limited profit forced Lupumedical to pursue new profit growth points”, Cao says.

Refer to this elaboration, so far there is no response from Leupmedical.

The truth behind the frequent happened hospital acquiring cases.

In recent years, it becomes a common practice to merge the hospitals by capital of various sources. With the issue of favorable policies constantly in recent two years to encourage social capital to invest in the hospitals, there are more and more medical care or related listed companies are engaged in hospital investment.

As per revealed by reporter of Beijing Business Today, the State Council has issued three documents to encourage the investment of medical institution by social capital from September 2013. The Several Opinions on the Encouragement of the Development of Health Service Industry issued by the State Council in September 2013 pointed out that China will establish a health care service industry covering the whole life cycle of people by 2020 and the total scale of health care industry will reach more RMB 8 trillion. The Opinion indicated that the private-run medical institutions and programs of up and down stream of the industry chain are encouraged. In August, 2014, the executive meeting of the State Council declared again its support to social capitals investment in medical institutions. As a matter of fact, during the course of the deepening reform of state-owned hospitals. Buy-out capitals, with private capital as dominance, was participating in secretly even many private capital merged public hospitals directly. In June 2015, a new preferable policy was issued after constant encouragement from the government. The “Several Policies on the Acceleration of Investment in Medicine by Social Capital” provided more promotional measures to speed up the investment of social capitals in medical industry.

The relevant data shows that by end of 2014, there were 13,000 non-public hospitals nation-wide that accounted for 50% of the overall number of hospitals, the total number of medical bed was 837,000, accounted for 16.9% of the total number of hospital beds. However, 80% of the non-public hospitals were specialty hospitals and lack of patients. The total clinical visit to non-public hospital was 320 million, number of discharge was 20 million person-time, and these represented 10.8% and 13.3% of the number nation-wide.

With the emerging of the huge non-public medical market, domestic pharmaceutical companies accelerated their involvement. In May 2015, the Guangzhou Pharmaceutical Holdings Limited declared capital injection of RMB 46.5 million to its member hospital, Guangzhou Baiyunshan Hospital, to restructure its present medicine institution system. Gloria Pharmaceutical and Neptunus Biological, both are listed companies declared their presence in non-public hospital by means of merge and acquisition. For Lepumedical, it follows the tide and stepped in big health industry chain by buying hospitals.

Shi Lichen, the director of the Beijing Dingchen Pharmaceutical Management Consulting Center, introduced that, with the recent favorable policies issued by the government, there are more and more domestic pharmaceutical giants stepped into the terminal services of health care industry including hospitals. However, the successful cases are rare and the earlier M&A cases by pharmaceutical company have exist hidden many troubles.

Management Problem Occurs after Acquisition

Shi Lichen told Beijing Business Today that most of the companies are facing the management problems after their acquisition of hospitals such as how to build the hospital brand, how to deal with the hospital internal management and how to allocated the doctors resources. To Shi Lichen, the reasons behind the merging and acquisition of hospitals by listed company are perfection of its industry chain to fulfill the corporate strategy and attraction of the government policies. “The major reason is that part of the companies involved in hospital invested by social capital. Some of the acquirer did not manage the hospital it acquired, they were just for the perfection of the industry chain. Some even did the acquisition because they saw that other companies did so, and they had no sense of synergy of the self-owned asset after hospital merger so as to stimulate the development of big health industry effectively.

What is synergy?  To be simple, it means the integration of all corporate resources together. For Lepumedical’s case, its major business is research and development, manufacturing and distribution of interventional diagnosis and treatment and medicine for cardiovascular diseases. Most patients will ask the expert for consultation before they buy the medical apparatus and instrument. With its own hospitals and doctors, Lepumedical can offer help to the consumers and also enlarge and strengthen the company with the help of the experts. However, whether this virtue cycle can be realized, it takes time to prove.

To the prospects of Lepumedical after its merger of No. 6 hospital, Cao Jian says that they had no experience in hospital management and it maybe far from their past experience in pharmaceutical and medical apparatus. Furthermore, whether the doctors’ resources turn to be the source of profit is also a problem.

Additionally, Shi Lichen says that for the moment, there are no concrete measures issued by the government for public hospital reform. He does not suggests blind acquisition of private or public hospital with poor performance. “Once the government issues substantial policies and measures, there will be some experimental cases. Till then, the hospital with good performance, even those 3A hospitals will be introduced to the social capitals.
(Wu Ying, Guo Xiujuan of Beijing Business Today)