China's high-value consumables industry officially enters the era of volume procurement

On November 5, 2020, the national volume procurement of coronary stents was completed, with the average terminal price of the 10 selected products decreasing by more than 90%. On April 1, 2021, the National Organization of High-Value Medical Consumables Joint Procurement Office issued the "Notice on Conducting Information Collection on Some Orthopedic High-Value Medical Consumables." This is the second centralized procurement for orthopedics; last November's orthopedic procurement only took a few months before starting a second batch for orthopedics.

At the local volume procurement level, as of November 20, 2020, 6 provincial alliance procurements have been completed or are underway, 11 provincial and municipal independent procurements, and more than 30 city-level (including alliance) procurements, concentrated in the three major fields of cardiovascular intervention, orthopedics, and ophthalmology, with an average terminal price reduction of about 60%. China's high-value consumables industry has officially entered the era of volume procurement.

Under the volume procurement policy, the primary goal is to reduce the burden on medical insurance and improve the efficiency of medical insurance fund utilization. In terms of industrial impact, industrial enterprises, relying on their comprehensive advantages in research and development, production, quality control, and management, can win bids at low prices while ensuring quality. Through the implementation of payment by the payer—medical insurance—it reduces channel and terminal promotion costs, freeing industrial enterprises from disorderly circulation and guiding enterprises with a foundation to strengthen innovative research and development, avoid homogeneous competition, and guide industrial innovation and upgrading.

In fact, the National Healthcare Security Administration has a full understanding of the difficulties encountered in the development of medical devices and consumables over 30 years. A series of corresponding policies and regulations have also been introduced.

Data Source: Government websites, Guotai Junan Securities Research

The impact of substitutability between different Brands on the scope of applicable products in volume procurement:Reducing doctors' Brand choices requires ensuring that the clinical efficacy of different Brand products participating in the bidding is substitutable, that doctors can switch between different Brand products at low cost, and that the Brand switching risk is low.

Grouping by core function is currently the suboptimal choice:High-value consumables have numerous categories and Specifications, and the degree of standardization varies. If there is a clinical efficacy and quality consistency evaluation of the product, low-price bidding is possible; in the absence of a consistency evaluation background, bidding grouping based on the core functions affecting product clinical efficacy is the next best choice.

Whether it can reduce enterprise sales expenses affects the policy implementation effect:If enterprises are still required to invest a large amount of sales expenses after a significant drop in terminal Price, and there is a lack of sales guarantees, it may harm the profits of industrial enterprises; clarifying the procurement volume or allocation ratio before the enterprise bidding, and strictly implementing the procurement volume, is conducive to ensuring the implementation of the policy.

The existing consumable coding system cannot solve the consistency problem:The existing consumable coding system cannot completely solve the product consistency problem and still needs to determine core functional indicators category by category.

On July 31, 2019, the State Council's General Office proposed,"For high-value medical consumables with large clinical usage, high procurement amounts, mature clinical use, and production by multiple enterprises, explore centralized procurement by category, encourage medical institutions to jointly conduct volume negotiation procurement, and actively explore cross-provincial alliance procurement."Formally determined the categories and scope of high-value consumables.

 "Large clinical usage" and "high procurement amounts"Refer to consumables that occupy a large amount of medical insurance funds and have a greater impact on patient burden; we need to focus our energy on important tasks.

"Mature clinical use" and "production by multiple enterprises"Refer to the fact that the quality and efficacy differences between different Brands are not large; the conversion cost and risk for doctors between different Brands are low; the annual usage changes little, allowing for the accurate advance determination of procurement volume, saving enterprises subsequent promotion costs; manufacturers have already recovered innovation costs on the products; competition is sufficient, Price can be lowered through market mechanisms; and the risk of supply security is avoided.

Data Source: National Development and Reform Commission, Guotai Junan Securities Research,

2019 China Medical Devices Blue Book, Wego Prospectus, Kangji Medical Prospectus

Taking coronary stents as an example, coronary stents have been implanted in China for more than 30 years. As early as 2004-2005, domestic drug-eluting coronary stents with performance similar to imported products were launched and rapidly completed domestic substitution; the competitive landscape is relatively concentrated, with Lepu, MicroPort, and JW occupying about 70% of the market share. Compared with the United States and Japan, there is only 2-3 times the penetration rate space, and the market has entered a mature stage of development.

Data Source: Frost & Sullivan analysis, China Cardiovascular Disease Report,

Company announcements, Guotai Junan Securities Research

The relevant national policies have stipulated the allocation of procurement volumes; the most similar generic coronary stents should be selected, allowing hospitals to report their intended procurement volume and fully respecting doctors' clinical use habits. The procurement volume after the enterprise wins the bid should be determined in advance, saving the winning enterprise's sales expenses.

 Data Source: National Healthcare Security Administration's "National Organization of Coronary Stent Concentrated Volume Procurement Document," Guotai Junan Securities Research

Before volume procurement, compared with the Price of similar overseas coronary stent products, domestic product Prices were higher. However, the introduction of the centralized procurement policy has led to a significant Price reduction. Compared with 2019, the average Price reduction for the same products from the same enterprises was 93%, the average Price reduction for domestic products was 92%, and the average Price reduction for imported products was 95%. The current Price reduction is in line with expectations, with the Price of the selected stents expected to fall below 1,000 yuan.

Note: Yellow indicates the selected products

It is expected that the ex-factory Price of the winning coronary stents will decrease by more than 70%, and the gross profit margin is already lower than the overall profitability of overseas consumable leaders:The gross profit margin of global high-consumption leaders is generally between 65% and 70%, and that of low-consumption leaders is around 50%. Our calculation shows that the gross profit margin of the selected Chinese coronary stents is below 30%, which is already lower than the overall profitability of overseas consumable companies.

Data Source: Company announcements, National Healthcare Security Administration, Bloomberg, Guotai JunAn Securities Research