The Chinese medical device market continued its rapid growth in the first quarter of 2018-2019, presenting a golden opportunity for domestic companies [chart]

I. Analysis of the Development Scale of China's Medical Device Market

In 2018, the size of China's medical device market reached 530.4 billion yuan, a year-on-year increase of 19.9%, maintaining a growth rate of nearly 20% for consecutive years. From the perspective of sub-sectors, in 2018, the medical equipment market size was 301.3 billion yuan, the highest proportion; the high-value consumables market (orthopedic implants, vascular intervention, neurosurgery, etc.) was 104.6 billion yuan; the low-value medical consumables market was 64.1 billion yuan; and the in-vitro diagnostic market was 60.4 billion yuan. In terms of sub-sector growth rates, in 2018, high-value consumables grew by 20.4%, with vascular intervention, dentistry, and blood purification all maintaining growth of nearly 20%; low-value consumables, medical equipment, and in-vitro diagnostics grew by 19.8%, 20.0%, and 18.4%, respectively.

Market Share of China's Medical Device Sub-sectors

Data Source: Compiled from Public Information

Relevant Report: Zhiyan Consulting's published “2019-2025 China Medical Device Industry Market Research and Development Trend Research Report”

Scale and Growth Rate of China's Medical Device Market

Data Source: Compiled from Public Information

Growth Rate of China's Medical Device Sub-sector Market

Data Source: Compiled from Public Information

II. IVD: Slowdown in Achievements Growth, Expected Future Pressure from Volume Procurement

A significant slowdown in achievements growth is evident. In-vitro diagnostic companies achieved total operating revenue of 29.043 billion yuan in 2018, a year-on-year increase of 31.56%; and attributable net profit of 4.211 billion yuan, a year-on-year increase of 15.17%. Looking at it quarterly, the company's Q4 2018 revenue increased by 23.32%, down 8.77 percentage points year-on-year, and down 9.97 percentage points quarter-on-quarter; net profit growth was 0.31%, down 34.24% year-on-year, and down 17.01% quarter-on-quarter. The unsatisfactory growth rate in 2018 was affected by the slowdown in growth due to intensified competition in traditional areas such as biochemistry. The growth rate increased quarter-on-quarter in the first quarter of 2019, with revenue growth of 25.05% and net profit growth of 23%, but there was still a decline of more than 10 percentage points year-on-year compared to the same period in 2018. This is mainly due to the high base caused by the influenza factor in the first quarter of 2018. Future volume procurement of consumables will also put some pressure on the achievements of the IVD industry.

IVD Industry Revenue (100 million yuan) and Growth Rate (%)

Data Source: Compiled from Public Information

IVD Industry Attributable Net Profit (100 million yuan) and Growth Rate (%)

Data Source: Compiled from Public Information

IVD Industry Quarterly Revenue Growth Rate and Net Profit Growth Rate (%)

Data Source: Compiled from Public Information

From the perspective of sub-sectors, chemiluminescence, molecular diagnostics, and POCT have greater future potential, while traditional areas such as biochemistry are under greater pressure. Currently, the low-end market for IVD is the testing technology that was widely used in the early stages, such as ordinary enzyme-linked immunosorbent products. This type of market has a small development space and fierce competition, and the performance of various IVD manufacturers in biochemical diagnostics is unremarkable. Domestic chemiluminescence immunoassay products will benefit from technological and import substitution, and have huge development prospects.

Molecular diagnostics has the highest technical requirements in the in-vitro diagnostic industry. Domestically, it is still in its infancy, with a small market size but rapid growth and huge market space. Mindray Medical and Antu Bio's chemiluminescence have both maintained strong growth momentum. Molecular diagnostics currently has the highest technical requirements in the in-vitro diagnostic industry, and domestically it is still in its initial stages. The market size is small, but growth is rapid, and the market space is huge. POCT overcomes time, space, and personnel limitations, providing immediate convenience. POCT listed companies represented by Wanfu Bio and Kedi Bio have performed well, and are expected to continue to maintain rapid growth in the future due to factors such as tiered diagnosis and the construction of five major centers.

In terms of profitability, the gross profit margin and net profit margin both slightly decreased in 2018, but saw a certain rebound in the first quarter of 2019, mainly due to the continued rise of high-margin products such as chemiluminescence in the revenue structure.

IVD Industry Gross Profit Margin and Net Profit Margin (%)

Data Source: Compiled from Public Information

In terms of expense ratios, the overall expense ratio of the IVD sector is relatively stable. In 2018, the overall sales expense ratio of the IVD sector was 15.54% (-0.85 percentage points), the management expense ratio (excluding R&D expenses) was 8.18% (+0.19 percentage points), and the financial expense ratio was 1.19% (+0.15 percentage points); the decrease in the sales expense ratio is related to the integration of distribution channels. In the first quarter of 2019, the sales expense ratio, management expense ratio, and financial expense ratio were 15.49%, 8.47%, and 1.74%, respectively.

IVD Industry Period Expense Ratio (%)

Data Source: Compiled from Public Information

The accounts receivable turnover rate and inventory turnover rate of listed companies in the IVD industry remain stable, the asset-liability ratio has increased, and the operating cash flow/revenue has increased significantly, mainly due to the increase in financing lease and factoring collections from companies such as Daan Gene; the R&D expense ratio remains stable with a slight decline.

Relevant Financial Indicators of Listed Companies in the IVD Industry

Data Source: Compiled from Public Information

III. Other Medical Device Companies: Significant Sectoral Diversification

The total revenue growth rate of the other 35 listed medical device companies in 2018 and the first quarter of 2019 was 17.59% and 16.41%, respectively, and the total attributable net profit growth rate was 30.76% and 51.26%. The rapid growth of net profit in the first quarter of 2019 was mainly due to the increase in investment income from Lepu's transfer of Junshi Bio's equity and Xinhua Medical's transfer of Wisted Medical's equity. Excluding these two companies, the attributable net profit growth rate was 17.43%, slightly higher than the total revenue growth rate.

Revenue of Other Listed Medical Device Companies

Data Source: Compiled from Public Information

Attributable Net Profit of Other Listed Medical Device Companies

Data Source: Compiled from Public Information

Due to the numerous sub-sectors in the listed medical device sector (excluding the IVD sector), there is significant diversification among the various sectors. The scale and net profit growth rate of large and medium-sized medical equipment and consumables is significantly higher than the overall industry growth rate. Pharmaceutical equipment has experienced a decline in prosperity due to the impact of industry cycles, and the total profit has also declined to a certain extent. In the home medical equipment sector, leading consumer medical devices benefit from stable end-market demand and lower policy risks, and some individual stocks maintain good prosperity.

Revenue Growth of Other Medical Device Sub-sectors

Data Source: Compiled from Public Information

Attributable Net Profit Growth of Other Medical Device Sub-sectors

Data Source: Compiled from Public Information

In terms of profitability, driven by factors such as high-end domestic medical devices gradually gaining a foothold and the gradual realization of scale effects by leading enterprises, the gross profit margin and net profit margin of the other 35 listed medical device companies showed an upward trend in 2018 and the first quarter of 2019. In terms of expense ratios, the sales expense ratio, management expense ratio, and financial expense ratio all increased slightly.

Gross profit margin and net profit of other medical device listed companies

Data Source: Compiled from Public Information

    Expense ratio of other medical device listed companies

Data Source: Compiled from Public Information

    1. Large and medium-sized medical equipment: Faster growth in performance, prominent R&D investment

    The sector's performance growth rate is relatively fast, and the growth rate slowed down in the first quarter, which is traditionally a slow season. The total revenue growth rate of listed companies of large and medium-sized medical equipment in 2018 and the first quarter of 2019 were 21.5% and 18.35% respectively, and the total growth rate of scale net profit was 43.23% and 22.87% respectively. Affected by the government procurement cycle in the first quarter, the growth rate was not prominent.

Revenue of listed companies of large and medium-sized medical equipment

Data Source: Compiled from Public Information

Net profit of listed companies of large and medium-sized medical equipment

Data Source: Compiled from Public Information

    From the perspective of profitability, the gross profit margin of listed companies of large and medium-sized medical equipment remains stable, and the net profit margin is steadily rising. The sales expense ratio and the management expense ratio excluding R&D expenses have both slightly decreased, while the financial expense ratio has increased significantly, mainly due to the changes in exchange gains and losses of large companies with a high proportion of overseas business, such as Mindray Medical. It is worth mentioning that the R&D expense ratio of large medical equipment companies has remained stable and is higher than the average level of the medical device industry.

Gross profit margin and net profit margin of listed companies of large and medium-sized medical equipment

Data Source: Compiled from Public Information

Expense ratio of listed companies of large and medium-sized medical equipment

Data Source: Compiled from Public Information

    The accounts receivable turnover rate and turnover rate of listed companies of large and medium-sized medical equipment remain stable, the asset-liability ratio has dropped significantly, mainly due to the decline in the asset-liability ratio of Mindray Medical's listed assets, and the operating cash flow/revenue has slightly increased, and the R&D expense ratio has slightly decreased.

Financial data of listed companies of large and medium-sized medical equipment

Data Source: Compiled from Public Information

    At present, China has basically completed the domestic substitution of low-end medical devices, while high-end products still have a large dependence on imports. Population aging, full medical insurance coverage, and technological upgrades have all contributed to the continuous expansion of the medical device market. From the policy perspective, tiered diagnosis and treatment + encouraging domestic substitution + special approval, while expanding the primary medical market, improve the technological level and market share of domestic medical devices. At present, domestic companies still have a certain gap compared with international giants in high-end imaging and other fields, and the future domestic substitution space is the largest. In the future, listed companies of large and medium-sized medical equipment with advanced technologies and the ability to continuously launch new products will have greater development prospects and investment value.

    2. Consumables: Faster growth in performance, but there may be a greater policy impact in the future

    Consumables listed companies still maintained a relatively fast performance growth rate in 2018 and the first quarter of 2019. The total revenue growth rate was 26.75% and 32.59% respectively, and the total attributable net profit growth rate was 30.29% and 61.67% respectively. Excluding Lepu Medical's transfer of JunShi Bio's shares, the attributable net profit growth rate in the first quarter of 2019 was 40.78%, which was still significantly higher than the revenue growth rate.

Revenue of consumables listed companies

Data Source: Compiled from Public Information

Attributable net profit of consumables listed companies

Data Source: Compiled from Public Information

    From the perspective of profitability, the gross profit margin and net profit margin of consumables listed companies also increased significantly in 2018 and the first quarter of 2019. The sales expense ratio has increased significantly compared with the previous period, the management expense ratio has remained stable, and the financial expense ratio has slightly increased.

Gross profit margin and net profit margin of consumables listed companies

Data Source: Compiled from Public Information

    Expense ratio of consumables listed companies

Data Source: Compiled from Public Information

    The accounts receivable turnover rate, inventory turnover rate, and operating cash flow/revenue of consumables listed companies remain stable, while the asset-liability ratio has increased significantly, and the R&D expense ratio has also increased significantly.

Financial data of consumables listed companies

Data Source: Compiled from Public Information

    Currently, 12 provinces across the country have fully implemented the two-invoice system for consumables, 6 provinces have piloted in some cities, and 7 provinces have issued documents pending implementation. Only 6 provinces and cities in the country have not implemented the two-invoice system for consumables. It is expected that by the end of this year, more provinces and cities will enter the implementation stage of the two-invoice system for consumables.

    Low-value consumables are fiercely competitive, and the performance growth rate of some companies has slowed down significantly or even experienced negative growth. In terms of high-value consumables, with the strong intervention of the medical insurance bureau, centralized volume procurement is an inevitable trend. The rapid growth of performance in the consumables field may be significantly affected. If centralized volume procurement of high-value consumables is implemented, it is recommended to focus on companies with larger scales, prominent R&D capabilities, and the ability to continuously innovate in high-value consumables.

    Larger companies have significant advantages in production scale, supply capacity, etc. After standardizing channels, it is also easier to cooperate with distribution channels. Companies with prominent R&D capabilities can continuously upgrade technologies and launch new products to compensate for the price reduction that may be caused by the original old products entering volume procurement.

    IV. Continuous improvement of policies, domestic Brands benefit significantly

    The country continues to increase its support for primary medical care. In 2015, the State Council issued a guiding opinion on promoting the construction of a tiered diagnosis and treatment system, proposing to vigorously improve the primary medical service capacity and comprehensively improve the comprehensive capabilities of county-level public hospitals. The Health Commission has also successively issued a number of policies encouraging the construction of county-level hospital service capabilities. With the improvement of the requirements for primary medical service capabilities, the demand for medical devices continues to be released, and cost-effective domestic medical devices have significantly benefited from national policy support. In 2018, the State Council clearly proposed to promote the domestic production of medical devices in the "Key tasks for the second half of 2018 for deepening medical and health system reform" document. Many local governments have introduced relevant supporting policies for domestic procurement, clearly prioritizing the procurement of domestic Brands. In the medical device procurement plans completed in many provinces, the support for domestic medical devices is significantly reflected.

Favorable policies for the expansion of the domestic medical device industry

Data Source: Compiled from Public Information

Encouragement Policies for Domestic Medical Device Production

Data Source: Compiled from Public Information

    V. A continuously improving R&D and innovation atmosphere brings golden development opportunities for domestic enterprises

    In recent years, the country has continued to increase the incentive system for innovation in the medical device field. The "13th Five-Year Plan" for medical device innovation, released in 2017, clearly set out key encouragement directions and goals, and a number of supporting policies related to finance, approval, etc., have also been successively introduced, resulting in a continuously strong atmosphere for R&D and innovation in domestic medical devices. From the perspective of domestic medical device companies, taking several major A-share medical device companies as a reference, companies such as Mindray Medical, Antu Bio, Le Puy Medical, and others have continued to increase R&D investment and have achieved breakthroughs in multiple technological fields, such as Mindray's high-end ultrasound, Antu's chemiluminescence analyzer, Le Puy Medical's endoscopic system, and Lepu Medical's biodegradable stents, etc.

R&D Expenditure of Some Medical Device Companies in A-shares (Million Yuan)

Data Source: Compiled from Public Information

Some Relevant Encouragement Policies in the Domestic Medical Device Field

Data Source: Compiled from Public Information

    Ratio of R&D Expenditure to Revenue for Some Medical Device Companies in A-shares

Data Source: Compiled from Public Information