The medical device market is a turbulent landscape. How can domestic brands compete with international giants?

We have more or less come into contact with large-scale medical equipment in our daily medical care.

Especially X-rays, CTs, and magnetic resonance imaging, which are routine diagnostic treatments, are very close to our lives. When we pay hundreds of yuan for examinations at the window, when we get up early and queue for several hours just for a few minutes of examination, when we face huge and heavy equipment...These complicated medical experiences easily make people ignore the fact that behind these cold, large-scale medical devices, there are actually many wonderful business stories.

In the world of large-scale medical equipment, players generally have abundant capital and are not lacking in large-scale transactions. With the evolution of the industry and policy stimulation, the market is becoming more turbulent. A typical example is Siemens Healthineers' recent $16.4 billion acquisition, the highest acquisition record in the medical field this year.

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Siemens Healthineers and Varian Medical Systems jointly announced that Siemens Healthineers will acquire all shares of Varian Medical Systems for $177.50 in cash per share, with a total acquisition price of approximately $16.4 billion. The two will carry out in-depth cooperation in the radiotherapy of cancer.

Siemens' acquisition can be regarded as an industry veteran acquiring another industry veteran. This sensational level is like Alibaba acquiring Tencent.

If we pay attention to the overall competitive landscape of large-scale medical equipment, we will find that the current focus of players is digitalization, intelligence, and telemedicine. The focus of this acquisition is radiotherapy, which is a relatively segmented track, because not every leading medical equipment company covers this business.

Today, such a large transaction has emerged in the segmented radiotherapy field. Siemens Healthineers and Varian have not only changed the competitive landscape but also sent a signal to the market: the battle for resources in radiotherapy equipment has begun.

The merger of giants has most likely increased the difficulty of competition for Chinese domestic enterprises. So, how will domestic Brands respond?

Siemens Healthineers' Final Piece of the Puzzle

When it comes to the medical device industry, we cannot avoid the three global giants "GPS"—GE, Philips, and Siemens Healthineers. Each company has many similarities in its business but also has its own different focuses.

In 2017, Siemens Healthineers underwent a large-scale organizational restructuring, forming three business segments: imaging diagnostics, in-vitro diagnostics, and clinical therapy.

Siemens Healthineers' Three Major Business Segments Revenue

Imaging diagnostics is the traditional advantage business of the three "GPS" giants. Judging from last year's financial report, Siemens Healthineers' imaging diagnostics business still has a core advantage, with revenue of 8.9 billion euros; the in-vitro diagnostics segment's revenue is second, at approximately 4.1 billion euros. Siemens Healthineers has acquired Depu Diagnostics, Daling Diagnostics, and Bayer Group's diagnostic business over the past ten years, strengthening this business; while the clinical treatment segment is relatively weak in Siemens Healthineers' business system, with only 1.6 billion euros in revenue last year, which is also the segment that Siemens Healthineers wants to strengthen.

Siemens Healthineers, one of the three giants in medical devices, acquired Varian, the leader in radiation therapy. This acquisition not only allowed Siemens Healthineers to complete the final piece of the puzzle but also enhanced Siemens Healthineers' differentiation from competitors GE and Philips.

Global Aging Brings Stable Incremental Growth

As mentioned earlier, unlike emerging technologies such as artificial intelligence, digital medicine, and telemedicine that attract people's attention, radiotherapy technology does not seem to be the focus of people's attention.

In fact, due to the global aging population and changes in the disease spectrum, the radiotherapy market is steadily growing. According to IARC's prediction, the number of cancer patients worldwide will increase from 14 million in 2010 to 21.36 million in 2030. Siemens estimates in its financial report that the market size of tumor treatment will reach $20 billion in 2030.

In the face of tumors, the three mainstream methods are surgery, chemotherapy, and radiotherapy. Surgery is effective for early-stage tumor patients but is limited for advanced or metastatic tumors; chemotherapy is effective for sensitive tumors but is limited for most advanced tumors; in contrast, radiotherapy has more application scenarios, and more than 70% of tumor patients need radiotherapy because radiotherapy is an auxiliary therapy for most tumors and the preferred therapy for a few radiotherapy-sensitive tumors. According to Varian's prediction, the compound annual growth rate of the radiotherapy market will remain stable at 6-10%.

This large-scale acquisition by Siemens Healthineers has sent a signal of competition to the market, and the future competition for resources in radiotherapy equipment will likely become more intense.

In the Chinese market, this market demand will be even stronger because compared with the large population and technology of the Chinese market, the amount of radiotherapy equipment is very scarce, and the equipment is generally concentrated in tertiary hospitals.

In order to address the problem of uneven distribution of medical resources, policies have been working in two directions. One is the tiered medical treatment policy, vigorously developing primary hospitals and private hospitals, so that patients can be diverted from large tertiary hospitals to private hospitals or secondary hospitals, primary hospitals, and primary clinics. The construction of primary hospitals and private hospitals will bring considerable demand for medical equipment. The other is the structural adjustment of the medical system brought about by medical reforms, changing the situation of "medicine supporting medicine," increasing the proportion of diagnosis, and also stimulating the market demand for medical equipment.

How Domestic Brands Can Respond

From the perspective of the industry competitive landscape, the first echelon of radiotherapy equipment is all imported Brands, namely Varian, which has just announced its intention to be acquired by Siemens, and the imported Brand Elekta. It is reported that Varian and Elekta occupy the main market for linear accelerators, and domestic Brands do not have an advantage in market share. Relatively leading domestic enterprises are Xinhua, United Imaging, and Dongsoft.

This merger has likely increased the difficulty of competition for domestic brands. The merger of the giant Siemens Healthineers with Varian, which holds over 50% of the global market share, is undeniably huge. According to the 2019 fiscal year report, the total revenue of Siemens Healthineers and Varian reached $19.942 billion, exceeding that of Siemens Healthineers' long-term competitor, GE Healthcare.

After the merger, the trend of giant companies joining forces may become even stronger. As early as January 2019, Philips and the top-tier company, Medtronic, signed a strategic cooperation agreement in the Chinese market, focusing on precise radiotherapy for tumors. Stimulated by the merger of Siemens Healthineers' direct competitors, it is speculated that Philips and Medtronic may deepen their cooperation.

The situation of industry giants monopolizing the market is becoming increasingly apparent. How can domestic brands respond?

The opportunities for domestic brands lie in the fact that the domestic market is steadily growing, the market share is becoming larger; the policy benefits of "domestic substitution" encourage domestic enterprises to enhance their R&D capabilities, which is a growth opportunity that domestic brands must seize; according to research by SWMH, the price difference between imported and domestically produced radiotherapy equipment is about 10 times, which also brings competitiveness to domestic enterprises.

In addition, in the face of the changing competitive landscape, we can see that both domestic and foreign brands are focusing on new technologies. The application of new technologies such as artificial intelligence and telemedicine may bring about a window to change the competitive landscape.

Varian's product innovation is to introduce the RapidPlan artificial intelligence module on the basis of traditional chemotherapy equipment, shortening the treatment plan design that used to take more than ten days to just a few hours. This technology has been applied in the nasopharyngeal cancer treatment case at Beijing Cancer Hospital.

Following the trend of tiered medical treatment in China, Varian applies the concept of telemedicine to radiotherapy products, and launches the Zhiyun platform for radiotherapy specialist medical consortia, providing technical support such as remote delineation, remote planning, remote quality control, and standardized radiotherapy clinical pathways.

Similarly, the domestic Brand Dongsoft Medical is also transforming to a "cloud radiotherapy" model, providing remote radiotherapy services based on big data and artificial intelligence, allowing tumor patients to receive high-quality radiotherapy locally through remote technology. This attempt led by Dongsoft Medical has been approved as a national key research and development project.

As a competitor of Siemens, Philips focuses on building a comprehensive solution around the disease. Philips has built a comprehensive radiotherapy system, Pinnacle, which integrates various types of radiotherapy functions, including photons, protons, electrons, stereotactic, brachytherapy, simulation, image fusion, intensity-modulated radiotherapy functions, and volumetric modulated arc therapy functions with a SmartArc module. In other words, it combines multiple radiotherapy technologies, so that patients can receive a more comprehensive treatment plan.

Radiotherapy technology is undergoing an evolution process, from two-dimensional to three-dimensional and four-dimensional. The trend is more precise positioning, higher radiotherapy efficiency, and less impact on other parts of the body. In the face of the changing competitive landscape, domestic and foreign brands generally focus on artificial intelligence technology and telemedicine.

At present, domestic brands are still catching up. Siemens Healthineers' acquisition of Varian, the industry leader, is expected to make its market share advantage even more pronounced. In the face of these two new technologies, artificial intelligence and telemedicine, domestic and foreign brands are in a similar exploration stage, and it is not yet certain who is faster or slower. This may be a breakthrough point for domestic brands.

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