Medical device industry welcomes new policy benefits; is the market outlook worth the wait?

Starting June 24th, China officially launched electronic registration for medical devices. This means that medical device registration in China has transitioned from offline to online, allowing applicants to complete the registration process with just a computer. The medical device industry encompasses a wide range of products, with in-vitro diagnostics being a rapidly developing sub-sector in recent years. So, what is in-vitro diagnostics, and what is the current state of the industry?

Medical Device Registration Electronic Submission Launches, Transitioning from Offline to Online

Hu Jian's company primarily manufactures wearable medical devices, currently holding over 100 patents and selling more than a dozen products. He told reporters that to register these products, the company's legal personnel had made countless trips between the company, the drug regulatory authorities, and testing centers, highlighting the stringent nature of medical device product registration.

Hu Jian, Chairman of Shenzhen Hu Tao Medical Technology Co., Ltd.: In fact, we also needed to redo the materials, and after redoing them, we had to go to the drug administration bureau, the review center, and the testing center again. Now the whole mechanism has become very convenient, because now we can directly communicate and make real-time changes to the content that needs to be changed online.

Hu Jian used,the National Medical Products Administration's medical device registration electronic submission information system, officially launched on June 24th, referred to as the medical device eRPS system. Now, medical device company applicants can use this system to submit and manage product electronic format declaration materials and can also understand the product declaration progress in real time, which is very efficient. Furthermore, the eRPS system adopts the electronic submission standards recently released in January 2019 by the International Medical Device Regulators Forum. This means that from now on, while medical device applicants conduct electronic submissions domestically, the prepared submission materials can also be used for listing applications in other countries.

Cheng Pei, a medical industry analyst at CITIC Securities:(Electronic) submission in this area may now be similar to the STAR Market. If various submission data are directly recorded online, it should be more beneficial for future enterprise inquiries and clarification of future responsibilities.

Domestic In Vitro Diagnostics Market Shows Rapid Growth, with Focus on Independent R&D Enterprises

In recent years, the incidence of dry eye disease in China has been steadily increasing. In most cases, doctors need a series of comprehensive examinations to make a final diagnosis, some of which can be uncomfortable for patients, and one-on-one consultations and examinations are also time-consuming and laborious. Because of this, Huang Jingfeng and his team decided to introduce in-vitro biological detection in ophthalmology and develop a series of in-vitro diagnostic products that can address clinical pain points in ophthalmology. Currently, such an ophthalmic in-vitro diagnostic product is still in its early stages, even globally, but its clinical needs and market potential are enormous.

Huang Jingfeng, President of Guangdong Shengze Kanghua Co., Ltd.: When Allergan's dry eye treatment eye drops reached peak sales, it was$1.7 billion annually. And it was only approved in the United States and Canada, showing the huge dry eye market. I think the domestic market is certainly even larger in terms of technology.

In-vitro diagnostics mainly refers to products and services that obtain clinical diagnostic information by testing human samples, including blood, body fluids, and tissues, outside the human body, to judge diseases or bodily functions. They are mainly composed of diagnostic equipment and diagnostic reagents. According to research data from the Zhongshang Industry Research Institute, in terms of market size, it is expected thatfrom 2016 to 2021, the global in-vitro diagnostics market will grow steadily at a compound annual growth rate of 4%, while the compound annual growth rate of the Chinese in-vitro diagnostics market will reach 15%.

Eight Provinces and Cities Cancel Surcharges on Medical Consumables; New Regulations Focus on Cost Control

In recent years, the use of high-value implantable and interventional medical consumables in China has increased year by year. Due to strict safety requirements and high added value, the unit Price of such consumables is also relatively high.

Wan Minyuan, fund manager of Rongtong Fund Management Co., Ltd.: A single productover 500 or 1000 yuan is considered a high-value consumable. For example, the simplest example is cardiac valves in cardiology, which cost tens of thousands of yuan, stents are the simplest, and there are many others in orthopedics, such as nails.

Industry insiders told reporters that the sales of high-value consumables have increased rapidly in recent years, affected by factors such as the growth of the medical population. In the past few decades, China has allowed public medical institutions to charge patients a certain percentage markup when using medical consumables.

Cheng Pei, a medical industry analyst at CITIC Securities:Previously, many hospitals chose a 5% markup for items over 500 yuan and a 10% markup for items under 500 yuan. Implementing a consumable markup, like the previous drug markup, would lead hospitals to purchase high-Price items instead of making purchases based on cost-effectiveness.

As of now, Anhui, Fujian, Tianjin, Guangdong, Beijing, and8 provinces and cities have completely canceled the surcharges on medical consumables. Industry insiders believe that the joint procurement and centralized procurement of medical consumables will likely continue to advance in the second half of this year, presenting both opportunities and challenges for domestic medical consumable companies. With medical institutions reducing procurement costs, imported consumables with high Prices may be replaced by domestic consumables with lower Prices and better quality. However, the challenges facing the entire industry are also considerable, and consumable manufacturers need to transform their existing circulation links and sales models.

Lai Hao, senior researcher in the pharmaceutical industry at Zhongou Ruibo: The main issue with high-value consumables is that their channel markups are too high, with some high-value consumables having markups of two to five times. Therefore, the water content in the intermediate channels is quite large. Perhaps the first step may not have a significant impact on the ex-factory Price of our listed companies.

Medical Device Sector Maintains High Growth; Focus on Leading Medical Equipment and In Vitro Diagnostics Companies

The Shenwan medical device sector includes a total of52 companies. As of the close of trading on June 26, the total market capitalization of the sector exceeded 600.8 billion yuan. According to the first-quarter report of this year, the gross profit margin of the entire medical device sector was approximately 49.75%, and the net profit margin was approximately 18.55%. Analysts said that high profit margins are a significant characteristic of the medical device industry, but due to the numerous sub-sectors in the medical device sector, the differentiation of sub-sectors has always been prominent. Currently, the net profit growth rate of large and medium-sized medical equipment is significantly higher than the overall growth rate of the industry.

Wan Minyuan, fund manager of Rongtong Fund Management Co., Ltd.: We are optimistic about innovative and high-end import substitution products, such as the release of demand for China's primary medical care, the consumption upgrade of household appliances, and the import substitution of high-end and large-scale equipment.

Data shows that from the beginning of the year to the present, the Shanghai Composite Index has risen by over19%, while the medical device and pharmaceutical sectors have both risen by about 22% during the same period, with the overall performance of the medical industry outperforming the broader market. However, since mid-April, the correction amplitude of the two sectors has diverged. From April 15th to the present, the medical device sector has fallen by more than 6%, and the pharmaceutical sector has fallen by more than 8%. Analysts believe that compared to the pharmaceutical and biological industry, the medical device sector has been relatively less affected by recent policy shocks, combining defensive and growth characteristics.

Cheng Pei, a medical industry analyst at CITIC Securities, said: We believe that the medical device sectorshould be able to further extend the favorable conditions of 2018 in 2019. Of course, the current cancelation of consumable surcharges may have a slight impact on the high-value and low-value consumable sectors. However, the impact on companies in the equipment and in-vitro diagnostic sectors will not be significant, and it is currently worth considering.