How long will it take for domestically produced ultrasound technology to replace imported technology (Rencheng Medical)

The medical industry is highly correlated with policies, especially in recent years, with drug price reductions being the biggest concern for capital. However, medical devices, due to the lack of unified guidance prices for procurement and charging based on services, as a cost item, see the market mechanism play a positive role. Future development paths will follow the normal commodity market competition path. Products with high quality and low prices and strong Brands will be able to develop, continuously iterate technology, upgrade industries, and gradually replace imports.

Medical integrity reform. Since 2016, the ultrasound industry has seen its business climate pick up. In 2017, the global ultrasound market was approximately \$6.9 billion, with an industry growth rate of 4%, of which China's 2017 market capacity was approximately 8.4 billion yuan. In actual industry tracking, China's market capacity is underestimated by at least 1 billion yuan. The compound growth rate from 2014 to 2016 was approximately 6-10%. With the impact of tiered medical treatment, increased industry concentration, strengthening of primary medical care, and recovery of Bidding, the industry growth rate from 2017 to 2020 is expected to increase to 10-20%.
Major domestic ultrasound manufacturers include Mindray and Esaote. After about 20 years of development, the ultrasound technology platform has rapidly iterated, and the target customer group has also shifted from low- and mid-range hospitals to high-end hospitals. The high-end hospital market is a brand-new and larger market for domestic enterprises, and we are optimistic about the further replacement of imported Brands by domestic Brands.
Prediction of the sustainability of the high prosperity of the ultrasound industry. Short-cycle Bidding, long-cycle tiered medical treatment, accelerated expansion of the primary medical care market, and significant benefits for domestic leading companies.

Tiered medical treatment was reiterated at the Two Sessions in 2017, aiming to achieve 85% coverage by the end of 2017. Based on industry research and data monitoring from the Ministry of Health and Family Planning, we believe that the implementation of tiered medical treatment is faster than expected. The establishment of the Health Commission has improved efficiency, and outpatient services have once again become a focus. We believe that the incremental market brought about by outpatient services will accelerate the expansion trend. The main target customer groups for domestic medical equipment are still concentrated in secondary and below hospitals. The expansion of the primary care market will continuously benefit domestic Brands. From 2017 to 2020, Bidding will recover, and it is expected that most provinces and cities will complete Bidding by around 2020, ensuring at least 3 years of high growth. In the longer term, we are optimistic about the continuous expansion of the primary care market, the increase in medical consumption demand, and product upgrades.

The addition of clinical POC, five major centers, and other markets is expected to double the market capacity. With the development of clinical needs, ultrasound is no longer limited to the ultrasound department. Anesthesia, obstetrics and gynecology, ICU, and other clinical departments, as well as surgical departments, have an increasing demand for ultrasound. In this article, we have calculated the market capacity based on industry tracking, and it is expected to achieve a market capacity expansion of more than double the existing market.

Import substitution is no longer just a slogan, and product upgrades can already meet most clinical needs. In the past few decades, domestic ultrasound companies have focused on low- and mid-range hospitals. Early domestic ultrasound Brands mainly targeted township health centers, and their competitiveness in tertiary hospitals was relatively weak. In recent years, with the accumulation of technology and clinical needs, domestic ultrasound has developed rapidly, leading ultrasound companies continue to launch new high-end equipment and enter the once forbidden zone for domestic products - tertiary hospitals, the future main battlefield.

Ultrasound products in tertiary hospitals are divided into research instruments and working instruments. Research instruments are mostly high-end equipment from imported Brands, with extremely high performance requirements or different functional needs, which remain the domain of imported Brands. However, due to advantages such as cost-effectiveness, ease of use, operation flow, and fast product iteration speed, high-end domestic Brand instruments are continuously squeezing the market share of imported mid-to-high-end equipment. Demand has accumulated for many years, and product performance continues to improve and optimize, gradually reaching the level that can replace imports. Different equipment starts a cycle based on the iteration of the technology platform. High-end equipment will usher in a new round of high growth. With the increase in the prosperity of domestic products, domestic Brands are expected to maintain growth exceeding the industry growth rate within 3-5 years.
As Chinese national enterprises continue to challenge technology, imported Brands are unable to cope with the loss of market share in the low- and mid-range markets and are gradually focusing their markets on the top high-end market, releasing more space. The effective space for domestic enterprises continues to expand. With the increase in scale, the General Strength of domestic enterprises continues to strengthen, forming a virtuous cycle of domestic substitution.

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