A staggering 71.43% share! Why are medical device companies flocking to the STAR Market?

    Since the launch of the STAR Market in July this year, less than half a year has passed, and 65 companies have already been listed on the STAR Market, of which 14 are pharmaceutical and biological companies, accounting for 21.54%. Among the 14 pharmaceutical and biological companies, medical device companies have made a splash, with 10 companies, accounting for a high 71.43%.

　　Chart 1: Status of Pharmaceutical and Biological Enterprises on the STAR Market

　   Data Source: iFind, Zhongkang Industrial Capital Research Center

   Looking at these 14 pharmaceutical and biological enterprises, their financial data in 2019Q3 performed well, with four enterprises having operating income exceeding 500 million yuan, including three medical device enterprises.

   According to statistics, the number of pharmaceutical and biological enterprises listed on the main board is the largest, reaching 141, but the number of medical device enterprises is only 12, accounting for only 8.51%; the proportion of medical device enterprises to pharmaceutical and biological enterprises on the SME board and the Growth Enterprise Market is higher than that on the main board, being 12% and 36.9% respectively. However, on the STAR Market, this proportion is as high as 71.43%, showing the preference of medical device enterprises for the STAR Market.

　　Chart 2: Proportion of Medical Device Enterprises to Pharmaceutical and Biological Enterprises in Different Sections of the A-share Market

   Data Source: iFind, Zhongkang Industrial Capital Research Center

   Why have so many medical device companies gathered in the pharmaceutical and biological field of the STAR Market, while other sub-fields are rarely seen?

　　1. Medical device companies fit the positioning of the STAR Market

　　The STAR Market is a board specifically for technology-based and innovation-driven small and medium-sized enterprises, reflected in the four news, namely new technologies, new industries, new formats, and new models. Medical device companies on the STAR Market possess key core technologies and have outstanding technological innovation capabilities, perfectly matching the STAR Market's positioning of supporting "technological innovation and emerging industries".

　　In the "Shanghai Stock Exchange STAR Market Enterprise Listing Recommendation Guidelines" released on March 3, 2019, biomedicine is listed as one of the seven key recommended fields, which mentions the field of high-end medical equipment and instruments and related technical services. At the same time, medical device companies have many sub-fields, including high-value consumables, IVD, home care, etc., and have significantly benefited from the STAR Market.

　　Chart 3: The Shanghai Stock Exchange STAR Market Enterprise Listing Recommendation Guidelines are beneficial to medical device enterprises

   Data Source: iFind, Zhongkang Industrial Capital Research Center

　　2. STAR Market listing rules benefit R&D-innovative medical device enterprises

　　Technological innovation has the characteristics of rapid updates, slow cultivation, and high risks. Technology-innovative enterprises need more support from venture capital and the capital market. In the STAR Market rules, there are five sets of standards for the market value and financial indicators of issuing enterprises, and meeting one of them is sufficient to apply for listing on the innovation board.

　　As of December 11, 2019, among the 10 medical device companies listed on the STAR Market, 9 have a market value exceeding 3 billion yuan, and the market value of Nanwei Medical is as high as 21.57 billion yuan. The financial indicators of these companies before listing perfectly meet the listing conditions, and some even meet more than one standard.

　　Chart 4: Relevant Financial Indicators of Medical Device Enterprises Listed on the STAR Market

   Data Source: iFind, Zhongkang Industrial Capital Research Center

　　Looking at the pharmaceutical industry, medical service and pharmaceutical commercial enterprises have relatively low requirements for technological innovation and R&D capabilities, so they are not very suitable for the positioning of the STAR Market. Only innovative pharmaceutical companies that produce chemical raw materials, chemical preparations, and biological products, and medical device companies are more in line with the requirements of the STAR Market. However, the innovative drug industry is still in its early stages of development, and most pharmaceutical companies still have relatively low operating income and net profit. Coupled with the strict review of unprofitable enterprises by the STAR Market, most innovative drug companies have not yet been able to be listed on the STAR Market.

　　3. Medical device enterprises are ushering in a period of rapid development

　　From the statistics of the number of listed medical device companies in the A-share market from 1997 to 2019, it can be clearly seen that since 2014, the proportion of the number of listed medical device companies in the A-share market to the number of pharmaceutical and biological companies has increased year by year. As of December 12, 2019, this proportion has reached 61.11%, almost double the 21.43% in 2014, showing that the growth rate of the number of listed medical device companies is much faster than that of other medical companies.

　　Chart 5: Number and Proportion of Listed Medical Device Enterprises in the A-share Market from 1997 to 2019

　　Data Source: iFind, Zhongkang Industrial Capital Research Center

　　According to statistics from the China Medical Device Industry Association, the compound annual growth rate of China's medical device market sales from 2000 to 2014 exceeded 20%, and now medical device companies have ushered in a period of rapid development. In 2014, the National Health and Family Planning Commission proposed to focus on promoting the use of domestically produced medical equipment in Class-AhospitalsThis policy has greatly encouraged the development of domestic medical device enterprises, and it is also since 2014 that the proportion of the number of medical device enterprises to the number of pharmaceutical and biological enterprises has begun to increase year by year. Coupled with the many sub-fields of medical devices—in vitro diagnostics, orthopedics, endoscopy, diabetes, cardiovascular, ophthalmic instruments, etc.—the market demand is huge, and the market potential is unlimited, and medical device enterprises have seized the opportunity to achieve rapid development.

　　Compared with the research and development of innovative drugs, the cycle of research and development of medical devices is shorter—it takes about three to five years for medical devices to go from research and development to approval and listing, while a new drug may take more than ten years. Considering the amount of funds required, the research and development of medical devices requires less funding than the research and development of new drugs. The short time, small investment, relatively small risk, and quick return are also the reasons why the proportion of listed medical device companies in the A-share market has been increasing in recent years.

　　4. The STAR Market breaks the limit of the Price-to-Earnings ratio, which is beneficial to the Price discovery of medical device enterprises

　　Since 2014, in the A-share market, due to the restriction that the highest initial public offering Price-to-Earnings ratio cannot exceed 23 times, and the initial public offering Price-to-Earnings ratio should not be higher than the industry average, it usually results in the discounted issuance of new shares by enterprises, and the company's financing amount is far lower than the market level. According to the "Opinions on Establishing the STAR Market on the Shanghai Stock Exchange and Piloting the Registration System" issued by the China Securities Regulatory Commission, the STAR Market does not set a limit on the Price of new share issuance, and establishes a mechanism for inquiry, Price determination, and allocation with institutional investors as the main participants, which is conducive to enterprise Price discovery and expanding the enterprise's initial public offering financing amount.

　　Comparing the average Price-to-Earnings ratio of medical device enterprises in different sections of the A-share market, it can be seen that the average Price-to-Earnings ratio of medical device enterprises on the STAR Market ranks first among the four sections with 76.43, while the average Price-to-Earnings ratio of medical device enterprises on the main board,Growth EnterpriseMarket, and SME board are 37.16, 49.00, and 42.58 respectively, all lower than that of the STAR Market.

　　Chart 6: Average Price-to-Earnings Ratio of Medical Device Enterprises in Different Sections of the A-share Market

　　Data Source: iFind, Zhongkang Industrial Capital Research Center

　　From the perspective of the positioning of the Science and Technology Innovation Board, it focuses on supporting the next generation of information technology, high-end equipment, new materials, new energy, energy conservation and environmental protection, and bio-medicineand other high-tech industries and strategic emerging industries, promoting the deep integration of the Internet, big data, cloud computing, artificial intelligence, and manufacturing. Therefore, innovativemedical device companieshave different growth characteristics compared to traditional medical device companies listed on the main board. The high price-to-earnings ratio resulting from market-based pricing is a normal phenomenon. Therefore, the recognition of the Science and Technology Innovation Board has attracted many medical device companies.