ClouDr Suffers Chronic Losses but Still Set for High-Value Health IPO

Online medical services provider ClouDr is about to list on the Hong Kong Stock Exchange. Its losses over three years amount to 7.6 billion yuan, but its IPO valuation is still much higher than peers such as Ping An Healthcare and JD Health

Key Takeaways:

  • ClouDr’s big investments in marketing and R&D have turned rapidly growing revenues into mounting losses
  • Although far from profitable, the company has been popular with investors, worth 14.6 billion yuan after the final round of financing and seeing its valuation rise to 15.4 billion yuan in the IPO

By Molly Wen

China’s telehealth industry boomed during the Covid pandemic, causing a crush of IPO hopefuls from the online medical sector, but the valuation bubble burst last year and shares of market leaders plummeted. Despite the market malaise, digital healthcare company ClouDr Group Ltd. (9955.HK) looks to be on track to debut its shares at a robust price.

On the face of it, the IPO timing is not ideal for ClouDr, a digital services provider specializing in chronic disease care that is set to list shortly on the main board of the Hong Kong Stock Exchange.

Share prices of sector leaders JD Health (6618.HK), Alibaba Health (0241.HK) and Ping An Healthcare (1833.HK) more than halved in the market rout last year after Covid control measures gained traction. Prospects darkened for companies that had rushed to file for IPOs that year such as WeDoctor, Dingdang Health Technology, Medbanks Health and Yuanxin Technology.

Nevertheless, ClouDr hopes it has the right prescription for success with its mix of digital services for hospitals, pharmacies, and patients with long-term health conditions.

The company failed in an IPO last year but made a second filing in March. It passed its IPO hearing in mid-June and is expected to list soon.

The company provides medical supplies and software services for hospitals and pharmacies, as well as digital marketing services for pharmaceutical companies. With its telehealth services, including online consultations and prescriptions, ClouDr focuses on patients with cardiovascular diseases such as hypertension or chronic diseases such as diabetes.

Looking to be a leader in digital solutions for chronic care, the company has sought to prioritize the in-hospital market and expand from there to provide online out-patient support. The strategy has made in-hospital solutions the company’s biggest growth segment, with revenues jumping more than seven-fold from only 177 million yuan ($26 million) in 2019 to 1.27 billion yuan in 2021, making up 72% of total revenue.

In the hospital-based part of the business, ClouDr sells devices, drugs and other medical products while providing clinics with software for managing chronic diseases. Using its hospital networks, it also provides digital marketing services for pharmaceutical companies, charging a fee based on sales revenue. Among these business strands, the most lucrative services are sales of medical supplies and digital marketing, contributing around 49% and 23% respectively to total revenue in 2021.

Services targeted at pharmacies are the company’s second most profitable segment, comprising sales of medical supplies and, since 2019, digital consultation software.

By the end of 2021, ClouDr’s consultation software had been installed in more than 170,000 pharmacies, amounting to around 30% of China’s drugstores. The resulting annual revenue ranged from 330 million yuan to 350 million yuan over the past three years, contributing about 20% of the company’s total revenue last year.

By comparison, services extending outside of hospitals or drugstores account for a small slice of revenue but are growing rapidly. Using these services, patients suffering from chronic conditions can get out-of-hospital monitoring, consultations or prescriptions through three online medical platforms. Revenues from this business rose from 20 million yuan in 2019 to 134 million yuan last year, contributing about 7.7% of overall revenue.

Three years of big losses

In a broad sense, chronic diseases are conditions that last for a year or more, require continuous medical care and restrict daily activities. With China’s rapidly ageing population, demand for products and services to manage chronic diseases is expected to soar.

Chronic illnesses already inflict a heavy toll, according to State Council data. Diseases such as cancer, diabetes, respiratory and cardiovascular disorders cause 88% of deaths in China and make up around 70% of the overall disease burden, a metric for the impact of illness and morbidity.

Protracted care for chronic diseases, requiring ongoing monitoring and a systemic record of medical data, can be better suited to digital solutions than ailments needing to be diagnosed or treated in person.

China’s digital market for chronic disease management has jumped from around 58 billion yuan in 2016 to 176 billion yuan in 2020, a compound annual growth rate of 32%, according to a report quoted in the prospectus. The study projects further accelerated market expansion to 800 billion yuan in 2025, a compound growth rate of around 35% from 2020 to 2025.

As the market has expanded, ClouDr’s revenue has skyrocketed. Its revenue of 1.76 billion yuan in 2021 was three times bigger than the 2019 figure.

However, the company’s losses have also swelled sharply as it invested heavily in marketing and its sales network to support the expansion strategy.

The company posted a net loss of 4.15 billion yuan last year, dwarfing the 565 million yuan shortfall in 2019, taking its cumulative losses to 7.6 billion yuan in the three years.

Sales and marketing expenditure was equivalent to only about 28% of revenue in 2019 but jumped to nearly 75% in 2020 and 45% in 2021. R&D expenditure also shot up from less than 24 million yuan in 2019 to 236 million yuan in 2021.

By way of explanation, the company prospectus cited new marketing measures from 2020 in which more than 960 sales staff were deployed to hospitals and pharmacies to expand the customer base and boost efficiency.

High IPO valuation

Mounting losses have not overly deterred investors. ClouDr has completed 11 rounds of financing so far from shareholders including big names such as China Merchants Bank International, SIG Global, IDG Capital and Ping An Ventures. In the past two years, the company received $65 million and $184 million in two rounds of financing, giving it a valuation of $2.184 billion (14.6 billion yuan).

ClouDr has sought to differentiate itself from China’s homogenized telehealth sector, helped by its digital marketing and drugstore services. Its gross margin has steadily increased to around 32% last year, better than the margins of industry giants JD Health International Ltd. and Ping An Healthcare, which were about 23%.

The relatively higher gross margin could help bolster ClouDr’s valuation after the listing. At present, the price-to-sales (P/S) ratio of Ping An Healthcare is 2.8 times and JD Health has a ratio of 4.8 times.

According to the latest prospectus uploaded on Thursday, ClouDr’s market value will be 15.4 billion yuan ($2.29 billion) at an offer price of HK$30.5 per share, with a P/S ratio of 8.8 times, much higher than the two major peers.

With Hong Kong shares ailing in a bear market, will investors be willing to pay a high price for the potential for healthy returns over time from the online medical services business? The offering results next month will reveal whether the market thinks the company can deliver an effective investment tonic.

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