CircleTech has submitted its fifth application to the Hong Kong Stock Exchange. How can we tell the story of the "Healthcare-Pharmaceutical-Insurance" closed-loop? | Insights from JZ Research

On December 18, 2023, Beijing Yuanxin Technology Group Co., Ltd. (hereinafter referred to as "Yuanxin Technology") updated its prospectus for the fifth time on the Hong Kong Stock Exchange. The previous four filings were made in October 2021, April 2022, October 2022, and May 2023. Goldman Sachs and CITIC are the joint sponsors for this IPO.

According to the prospectus, Yuanxin Technology is a healthcare company that focuses on providing comprehensive medical services throughout the patient's disease cycle, forming a closed-loop model in the "medical-pharmaceutical-insurance" field.

Prior to this IPO, Tencent and Sequoia were the main external shareholders, holding 19.55% and 13.03% of the shares, respectively. In addition, dozens of well-known institutions such as Qiming Venture Partners, Kunling Capital, and Starbound Capital have also invested in the company.

In terms of financial data, Yuanxin Technology's revenue has shown a continuous growth trend from 2020 to 2022. Specifically, its revenue in 2020, 2021, and 2022 were 3.629 billion yuan, 5.938 billion yuan, and 7.775 billion yuan, respectively. In the first half of 2023, Yuanxin Technology's revenue increased by 43.1% from the same period in 2022, reaching 4.645 billion yuan.

In 2022, Yuanxin Technology was the largest offline and online medical delivery platform focusing on prescription drugs in China.

The company has a nationwide network of offline and online pharmacies, including Yuanxin Pharmacy and Miaoshou Doctor Online Pharmacy. As of June 30, 2023, the company operated 321 pharmacies, of which 265 were located within 1 kilometer of hospitals, and 121 were designated as dual-channel pharmacies for major diseases and medical insurance.

On its offline and online platforms, the company offers approximately 59,710 products, including 96 out of the 123 innovative cancer treatment drugs approved by the National Medical Products Administration since 2015. This highlights the company's position as China's largest online and offline prescription drug delivery platform. From 2020 to June 30, 2023, the company's outpatient service revenue accounted for 97.5%, 94.6%, 93.7%, 95.9%, and 95.0% of the total revenue, respectively. At the same time, the contribution of outpatient pharmacies and pharmaceutical wholesale services to total revenue exceeded 96% during this period. Prescription drugs and drug sales are the company's main business, which is the "pharmaceutical" part of the "medical-pharmaceutical-insurance" model.

For inpatient services, the company has developed supply-side empowerment services, focusing on assisting hospitals, especially tertiary hospitals, in achieving intelligence and operational optimization.

As of June 30, 2023, Yuanxin Medical has cooperated with 467 hospitals in 26 provinces in China, including more than 180 tertiary hospitals. From 2020 to June 30, 2023, the proportion of supply-side empowerment service revenue in total revenue was relatively low, at 0.1%, 0.8%, 1.1%, 0.6%, and 0.7%, respectively. This is the "medical" part of the "medical-pharmaceutical-insurance" model.

Another important business of Yuanxin Technology is targeted at pharmaceutical and insurance companies. The company provides customized solutions for pharmaceutical and insurance companies, covering the entire process from medical treatment to outpatient medical care and health insurance, including disease management, pharmaceutical company marketing services, and insurance services (claims, third-party management, etc.).

Since the end of 2019, Yuanxin Technology has started to provide marketing services to pharmaceutical companies. As of June 30, 2023, Yuanxin Technology has provided marketing services to 321 pharmaceutical companies. According to Frost & Sullivan data, the service targets include the top 10 pharmaceutical companies with the strongest research and development capabilities in China and 15 of the top 20 pharmaceutical companies in global sales.

For insurance companies, in 2018, Yuanxin Technology launched medical insurance products through cooperation with a major insurance company in China, expanding its service scope.

As of June 30, 2023, Yuanxin Technology has served 177 insurance companies and 8 reinsurance companies, launched more than 40 new special drug insurance products, provided inclusive commercial health insurance in more than 120 cities, managed 5.83 million policies, and held the necessary licenses to provide insurance services in China.

It is worth noting that these insurance collaborations focus on drugs that are not covered by medical insurance or new high-priced treatments, including CAR-T and other products.

From 2020 to June 30, 2023, Yuanxin Technology's insurance service revenue was RMB 25 million, RMB 131 million, RMB 243 million, and RMB 121 million, respectively. These revenues accounted for 2.4%, 4.6%, 5.2%, 3.5%, and 4.3% of the total revenue. This is also the "insurance" part of Yuanxin Technology's "medical-pharmaceutical-insurance" model.

Possible compliance issues still exist for some products

The Beijing Regulatory Bureau of the National Financial Supervision and Administration recently issued a notice requiring relevant institutions to provide information on certain special drugs, targeted drug products, and health insurance products in cooperation with third-party companies such as Meixin Health, Spai Health, and Yuanxin Technology.

As soon as these three TPAs (Third-Party Administrators) are mentioned, it is known that it is related to the "medicine-insurance" business. In the "drug-to-insurance" model, patients reduce the cost burden of special drugs or targeted drugs by purchasing health insurance. This model involves insurance companies, pharmaceutical companies, TPAs, and patients.

Simply put, patients use insurance premiums lower than the drug's selling price to purchase insurance from insurance companies; pharmaceutical companies sell discounted drugs through insurance, obtaining value-added tax deduction advantages; TPAs gain bargaining power by aggregating a large number of patients; insurance companies rely on business volume to expand premium scale.

However, such premiums are actually channel fees, which deviate from the principles of insurance products and are not in line with the principle of insurance.

The three third-party institutions of concern to regulators all have drug sales channels, which enables them to form a closed-loop model with insurance companies in the "medicine-insurance" field. This is the main reason why regulators include their cooperative products with insurance companies in the scope of reporting.

Special drug insurance is one representative type, as an innovative insurance product, its essence is to provide insurance protection for specific drugs to help patients reduce their financial burden. However, in the actual operation process, some products may deviate from the original design purpose and become non-insurance businesses in the name of insurance. This is the reason why regulators are concerned and require reporting.

From a business development perspective, Yuanxin Technology has already built a closed-loop model of "medicine-insurance". However, in an environment where regulations are gradually tightening, Yuanxin Technology will focus more on the pharmacy direction.

Yuanxin Technology stated that the net proceeds from this IPO will be mainly used for further development of outpatient services; development of supply-side empowerment services; development of medical industry empowerment services; improvement of technological strength and data analysis capabilities. As for how to leverage the advantages of the closed-loop model of "medicine-insurance", the market still has no clear conclusion.