Asia boasts a large and heterogeneous health care sector, reflecting the diversity of the region itself. Demographics, rising income and innovation each contribute to the sector's growth, creating compelling long-term investment opportunities. As bottom-up investors, we believe stock selection is key, as the success of individual companies can have a number of complex drivers, from regulatory frameworks, to pricing power and competitive moats. Within this dynamic sector, competition can be fierce, particularly among companies that provide lower value products and services. Investing with a long-term view, we find individual companies most interesting when viewed through the lens of innovation. We define innovative companies as those competing on intellectual property, quality and service. Many innovative health care companies are thriving and making new investments in research and development. As in the past, Asia's consumers will continue to play an important role in the growth of health care-related industries, with patients seeking better quality care and services as incomes rise. Here is a high-level look at some of the themes our investment team is following across the region.

Spotlight—Japan

Fast-tracking regenerative therapies and neurological research

More than a quarter of Japan's population is age 65 or older (see Figure 1), making age-related health care research a national priority. To accelerate investments and innovation, Japanese regulators allow treatments for some age-related conditions to come to market very quickly when they show early promise in small-scale trials. As a result, companies can begin to earn money from treatments, even as treatments are still being tested on a larger scale. This regulatory framework is spurring investments in regenerative therapies for conditions such as macular degeneration, as well as launching a race to treat neurological conditions that currently have limited and often unsatisfactory treatment options, including Alzheimer's and Parkinson's diseases.

While Japan's demographics are particularly challenging, they are by no means unique. Many other North Asian countries face a similar future. South Korea, Taiwan and China will each have roughly a quarter of their populations over the age of 65 in the next 20 years. At present, Japan has gained a significant head start on tackling research into age-related conditions by allowing companies to go to market concurrently while conducting clinical trials. Japan's leadership role has global implications. If a company in Japan can engineer a major breakthrough in treatments for Alzheimer's or Parkinson's diseases, for example, we believe there will be a huge market for such treatments worldwide.

Taizo Ishida
Portfolio Manager
Matthews Asia

Spotlight—China

China's oncology research ecosystem flourishes, enjoying an influx of talent and capital

Over 3.8 million new cases of cancer were diagnosed in China in 2016, according to the China National Cancer Center. Cancer remains a leading cause of death in China, where four people die of cancer every minute. While Western populations tend to have higher incidents of breast and prostate cancers, Chinese patients experience higher rates of stomach and liver cancers. As government health care systems grapple with a high volume of new cancer cases, drug manufacturers in China are conducting clinical trials to test the effectiveness of these new treatments. At present, the number of clinical trials for CAR-T treatments conducted in China—which help patient's T cells attack cancer cells—is nearly double that of the U.S. (see Figure 2).