Maryland-based Chindex International Inc provides an excellent case study of a major player in the Chinese health-care market, both in hospitals and medical-product distribution, that is aiming for growth even as it sustains losses.

Chindex lost $5.7 million, or $1.06 per share, for the 2005 fiscal year. That was partly because of expenses related to a delayed hospital opening in Shanghai, according to the company's recent annual report. The company also lost $2 million, or 53 cents per share, in fiscal year 2004 because of the SARS (severe acute respiratory syndrome) epidemic, according to that year's annual report. But Wood sees different reasons for losses.

Lawrence Pemble, executive vice president of finance for Chindex, countered that overall in China, "Our hospital group has been extremely profitable over time." What has taken losses is the group's health-care products distribution segment, and it recently was shut down, Pemble said.

That segment reported $2.6 million in operating losses for the year, as well as a 9% decrease in revenues. A major factor in the division's fate was a significant reduction in the distribution territory for its major L'Oreal product line, a company report said. L'Oreal also mandated stricter trade terms, hurting the division's gross profit margin and cash flows. As a last attempt at success, the division planned to market its own branded pharmacy products, but problems with registering and marketing them properly got in its way.

Pemble maintains that with the distribution outfit gone, Chindex is positioned better to focus on what it does best: health-care services and medical capital equipment. It is planning on more expansions, nearing another joint-venture hospital agreement in Xiamen, a port city opposite Taiwan.

"There are timing restrictions as to when we can proceed with it," Pemble said. "It's a typical Chinese project in that it moves from point to point with a lot of issues to be solved along the way." The company also is planning another joint venture in Guangzhou.

Wood placed his remaining confidence in another health-care sector making a run for the money in China - the insurance industry. While foreign health-insurance companies are currently barred from selling in the domestic Chinese market, they should be permitted to enter within a few years, Wood said. "Several of our clients expressed a lot of interest."

In addition, Westerners generally understand that an insurance policy written for a maximum number of visits, inpatient days and other items doesn't mean they should necessarily take full advantage of the allotment, but rather, use them only if necessary. But given their cultural habits, the Chinese would likely want to take advantage of the maximum allotment allowed, potentially driving costs way up for insurers.

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