The COVID-testing profit party is over

Back in April, we reported on the COVID-testing companies that were making billions in profits from the pandemic. Some of these companies were making other health equipment before COVID and consistently failing to turn a profit, but switched to diagnostic laboratory tests, which became highly lucrative as the government pursued its COVID-zero policy depending on frequent mass testing.

But now, some of these companies are again transitioning away from COVID testing. With the current reporting season for the first half of the year in full swing, it’s clear that the huge profits are gone, too.

What happened? In brief, the industry has been shaken up by a government crackdown that sent prices spiraling downward and made profits disappear.

From the second quarter of this year, various cases have been reported in the domestic media of poor quality control at testing institutions, leading to false positives, late test results, and other issues. In early June, the National Health Commission issued two regulations (which the media would later call “the most severe COVID-testing regulations”) to strengthen the management of COVID-testing organizations, and to standardize their operations. These regulations kicked off a wave of investigations across the country:

• As of this week, at least 40 testing companies and institutions have been suspended, nearly 350 have been ordered to rectify their operations, and others have been placed under investigation. Affected organizations include hospitals, medical centers, third-party laboratories, and listed companies.
• The problem was particularly severe in Hunan Province, where no fewer than 103 institutions have been investigated, including the provincial center for disease control, public hospitals, and various listed companies.
• In Beijing, several personnel from third-party testing institutions and a laboratory were arrested in June and July for not conducting COVID tests correctly, in order to save costs and boost profits.

The context

According to the business database Qichacha 企查查, the number of registered COVID-testing companies has increased this year: As of July 18, there were nearly 2,000 such companies in China, compared with 1,781 at the end of 2021.

Since June, 11 testing companies have been removed from the database, and 70 new ones have been added. But as more players have entered the market, the cost of a single COVID test has decreased over the last few months by 90% from 100 yuan ($14.80) to just 10 yuan ($1.48). Profitability was further affected when the National Healthcare Security Administration decreed in May that medical insurance could no longer be used to pay for COVID tests.

The end of the profit party is clearly reflected in recent forecasts by COVID-testing companies for the first half of the year, for example:

• Lepu Medical 乐普(北京)医疗器械 expects revenue of up to 5.33 billion yuan ($789.21 million), a decrease of 18% year-on-year, and net profit of up to 1.38 billion yuan ($204.33 million), a decrease of 30% year-on-year. Revenue from the company’s COVID-testing business is expected to tank by 80% year-on-year.
• BGI Group 华大基因 expects a net profit of up to 720 million yuan ($106.61 million), a decrease of 46.59% year-on-year.
• Shanghai Kehua Bio-Engineering 上海科华生物工程 expects a net profit of up to 50 million yuan ($7.40 million), a decrease of more than 90% year-on-year.

In response to the stricter requirements, testing companies are now increasingly turning to automation to preclude human error and a lack of trained personnel: In Shanghai, for example, test-sampling robots and fully automated testing equipment are already being used.

The takeaway

A government crackdown has curtailed the ability of COVID-testing companies to make huge profits off the pandemic, with the effect of increasing quality standards for tests and promoting automation in the industry.