For much of 2022, China relied on requiring large parts of the country to implement mass nucleic acid tests to track outbreaks of the highly transmissive Omicron variant of Covid-19 under its strict zero-Covid policy.
Regular Covid testing became part of life in China, as a negative test result from within 48 to 72 hours was required for any outing, ranging from taking public transportation to entering workplaces and shopping malls. Many workers needed to test daily if they were in healthcare or some public-facing roles.
According to data from China’s National Health Commission in April 2022, there were 13,100 medical and health institutions credentialed to conduct Covid tests, with a total capacity to conduct 51.65 million nucleic acid tests a day. By April 16, 2021, 1.15 billion nucleic acid tests had been conducted in China, the NHC said.
Since then, the NHC has not released updated figures, which observers believe had multiplied many times over as frequent outbreaks led to more stringent testing requirements. In major cities such as Tianjin, Xi’an, Shaanxi Province and Zhengzhou, Henan Province, 12 million tests were conducted daily for several months until China dropped the zero-Covid policy in early December 2022.
The soaring demand for Covid tests led to a boom in the testing business. A search on website Tianyancha, a major enterprise information and data provider, shows that more than 24,500 new businesses engaged in medical testing were registered since the beginning of 2020.
According to data compiled by Hithink RoyalFlush, a leading internet financial information service provider, 109 companies are listed on the Chinese stock market with businesses related to Covid-19 testing. In 2021, their combined profits amounted to 74.1 billion yuan (US$10.8b). In the first three quarters of 2022, their profits increased to 85.78 billion yuan (US$12.4b), 41.3 percent higher than the same period in 2021.
Dian Diagnostics, one of the largest medical diagnostics providers, reported revenue of 15.63 billion yuan (US$2.3b) in the third quarter of 2022, almost double its revenue of 8.45 billion yuan (US$6.6b) in the fourth quarter of 2021. In the same period, its profit increased sixfold from 347 million yuan (US$51.1m) to 2.43 billion yuan (US$358.3m).
Jinyu Medical, another testing firm, followed a similar trajectory, reporting revenue of 12.21 billion yuan (US$1.8b) with a profit of 2.49 billion yuan (US$367.2m) in the third quarter of 2022, an increase of 132 percent and 509 percent.
According to a July 2022 estimate made by a team led by Tao Chuan, chief macro analyst at Soochow Securities, assuming that all first- and second-tier cities conducted routine mass testing, the cost would total about 1.7 trillion yuan (US$250.7b) a year, equivalent to about 1.3 percent of China’s annual GDP.
As public testing fatigue grew over time, so did public anger over testing firms, which are accused of having profited off taxpayer money under China’s zero-Covid strategy. Reports of inconsistent test results, which led to large-scale lockdowns and criminal investigations of staff from some testing firms, further fueled the sentiment. As a result, authorities halted the initial public offering (IPO) of 13 testing companies.
While the testing requirements created a booming industry, many insiders contend that profit margins rapidly declined for testing firms and they should not be the ones blamed for strict Covid policies.
According to Zhang Honghua, a branding strategist for the in vitro diagnostics (IVD) industry (which refers to tests taken from vialed samples like blood or tissue), while some companies hit the jackpot in the early stages of the Covid-19 pandemic when demand far exceeded supply, this was no longer the case as huge amounts of investment poured into testing firms.
In the pre-Covid era, testing labs could only provide testing services as departments within medical institutions. On April 18, 2020, the State Council released a decree to allow test firms to serve as independent third-party institutions for hospitals and disease control agencies for the first time. Since then, the IVD industry has seen exponential growth.
But over time, local governments resorted to centralized procurement for test services, which substantially lowered the price of Covid tests. The procurement cost of a nucleic acid test plummeted from 200 yuan (US$29) in early 2020 to about 16 yuan (US$2) in May 2022.
People line up for nucleic acid tests outside a sports center, Nanshan District, Shenzhen, Guangdong Province, June 19, 2021 (Photo by VCG)
As anti-Covid control measures halted many economic activities, governments at all levels became fiscally squeezed and testing firms struggled to collect payment on time. Selling on credit became the industry norm, which caused serious cash flow problems for testing firms.
Dian Diagnostics Group and many other companies reported negative cash flows for the first three quarters of 2022. More than two-thirds (69 percent) of its gross revenue of 10.8 billion yuan (US$1.57b) over the period was payments owed.
Jinyu Medical faced a similar situation, with 61 percent of its 12.2 billion-yuan (US$1.77b) revenue in the third quarter of 2022 listed as accounts receivable. Shanghai Labway Clinical Laboratory, another major testing company, reported enormous growth in both profit and accounts receivable in the first three quarters of 2022. While profit increased by 144 percent to reach 3.11 billion yuan (US$451m), its accounts receivable reached 2.36 billion yuan (US$342m), almost three times the figure at the beginning of 2022.
“The number of testing labs stopped growing in the first half of 2022,” Zhang told NewsChina, “It may look like a lucrative business, but [with the risk of bad debt] it’s also like riding a tiger.”
While public anger targeted testing firms, it was the raw material suppliers in the upstream sector of the supply chain that enjoyed the greatest profit margins.
In the IVD industry, upstream companies provide the raw materials needed for tests such as enzymes, antigens, antibodies and precision electronic equipment. Despite the expansion of domestic IVD sectors, Chinese testing firms relied on foreign companies for raw materials such as Roche Diagnostics of Switzerland and US-based firms Meridian Life Science, Solulink, Surmodics and Ilumina.
According to Huajing Production Research Institute, an industry consulting firm, domestic raw materials companies only have a market share of 11.9 percent in 2021. But with the outbreak of the Covid-19 pandemic, which drove up prices for raw materials, the field attracted growing amounts of investment. According to a report by Vbdata, a Chinese health industry consultancy, 12 domestic companies in the IVD raw materials sector completed 15 rounds of financing, with a total amount of over 3.4 billion yuan (US$501.4m).
Several companies also filed to list on China’s stock market. Among them is Shenzhen-based Fapon Biotech, a leading domestic provider of IVD raw materials like reagents. In 2021, the company reported gross revenue of 2.33 billion yuan (US$343.6m), eight times its revenue in 2019 before Covid. In the meantime, the company maintained a high gross profit margin of around 90 percent between 2019 and 2021.
But when China abruptly ditched all mass testing requirements, China’s IVD industry was left to face another aboutturn. With demand for nucleic acid tests plummeting, some shifted focus to rapid antigen tests, as the easing of anti-Covid restrictions led to a shortage of Covid antigen test kits in December 2022 when the majority of free public test stations closed, yet many people became infected.
But the antigen test market cannot make up for the disappearance of the mass nucleic acid test market. As China is a major exporter of antigen test kits, there is no shortage of production capacity in the field. Although the sudden surge in demand caused a shortage of supply, it was quickly eased in January 2023.
According to a report by leadleo.com, a Chinese industrial consultant and data provider in July 2022, China’s antigen test market reached its peak in 2022 of 38.3 billion yuan (US$5.57b) and will decline by more than a half to 18.8 billion yuan (US$2.73b) by 2026.
To many analysts, the boom is over. The major concern for testing firms in 2023 will be chasing down unpaid accounts. Some have already filed lawsuits against local governments. In November 2022, Meiyin Medical, a Beijing-based testing firm, sued the local government in the city’s Mentougou District for failing to pay for provided testing services. “For minor players that do not have enough market share and financial resources, they may not survive long enough to collect their payments,” Zhang Honghua said.