Medical equipment ushered in high and low melee foreign investment to accelerate penetration of the grass-roots market

Business News Agency June 17th The growth of China's medical device industry is strong. The multinational companies' technological advantages have accelerated their penetration in rural areas, while domestic companies clustering in the low-end and middle-end markets have made efforts to break through into high-profit areas. The balanced pattern of “multinational enterprises monopolizing high-end and domestic SMEs occupying the low end” will be expected to subvert.

In the first five months of 2011, four medical device companies, Dong Fulong (300171, shares), Shangrong Medical (002551, shares), Qianshan Pharmaceutical (300216, stocks), and Libang Instrument (300206, stocks) landed. On the GEM or SME board, the issuance P/E ratio is more than 45 times, and Dongfenglong's issuance P/E ratio is as high as 96 times. Behind these companies' successful IPOs, there are many venture capital institutions that provide strategic or financial support, including many famous venture capital firms such as Fosun Pharma (600196, stocks) and Shenzhen Venture Capital (Table 1). In the booming medical and health industry, the charm of the medical device sub-sector gradually emerges.

Outside the IPO, investment and financing events in this area are also accelerating. According to the latest data released by China Investment Group, from January 2010 to April 2011, the number of private equity investment cases and the amount of financing facilities in the medical device industry accounted for 23% and 18% of the entire healthcare industry, respectively. Second only to the traditional strong pharmaceutical industry. The first RMB pharmaceutical industry fund, Jianyin International Medical Industry Fund, invested RMB 180 million after injection of RMB 100 million into Jiangyin Lanling Cork, a vaccine and packaging product company, and then invested in Push Pharmaceutical Plastics Packaging Corporation under Wuliangye (000858). yuan.

Medical device growth or hypermedicine market

The logic of favoring funds lies not only in the rise of the entire pharmaceutical and biotech industry under the context of the implementation of medical reform in China, but also in the development potential of the medical device sub-sector. The data shows that the global pharmaceutical and medical device consumption ratio is about 10:7, while developed countries such as Europe, America and Japan have reached 1:1.02. However, under the traditional mode of “taking drugs to support medicine” in China, the market size of medicines far exceeds that of the medical device market. The capacity and development depth of the two drugs do not match, and the structure within the pharmaceutical industry will undergo a trend change in the future. The increase in the proportion of drug expenditure is unsustainable, and the proportion of medical devices in the pharmaceutical sector is expected to rise.

In recent years, the profitability data of related companies have further confirmed this point. According to He Pingge, a pharmaceutical industry analyst at Guosen Securities, the compound annual growth rate of revenue and profit of the medical device industry was 28% and 41% in 2001-2008, respectively. %, much higher than the 19%, 21% revenue and profit growth of the pharmaceutical industry over the same period. CICC's Sun Liang predicts that the compound growth rate of China's medical device industry will remain at 20-30% from 2009 to 2015, which is much faster than the drug consumption forecasted by Luoyue, an analyst at Shenyin Wanguo Pharmaceutical in 2008-2015. With a compound growth rate of 16%, SWS also anticipates that the share of medical expenses in healthcare costs will drop from 33% in 2007 to 20% in 2040.

In the process of import substitution and upgrading, China's medical device industry is also expected to occupy more market share in the world. At present, the size of the global medical device market is approximately US$350 billion, and developed countries hold 78% of them. However, the emerging countries represented by China are experiencing rapid growth. According to statistics from the State General Administration of Customs, the total import and export of medical devices in China reached US$22.656 billion in 2010, a year-on-year increase of 23.47%. Among them, the value of exports was 14.699 billion U.S. dollars, an increase of 20.05% year-on-year; the import value was 7.957 billion U.S. dollars, an increase of 30.35% year-on-year, and the trade surplus was 6.7 billion U.S. dollars.

Before the expansion of the cake, the market has become more competitive. The rural market with policy dividends has caused foreign investment to falter, and the high profit of the high-end equipment market is enough to make the domestic-funded enterprises trapped in the low-end price war jealous. As the antennae of both parties extend to the sphere of influence of the other party, the original balance is brewing.

Foreign capital accelerates penetration of the grass-roots market

In the rapidly developing Chinese medical device industry, foreign capital and joint ventures have become the main force. Among the top 10 export companies, there are 7 foreign investment and joint ventures. In the domestic market of large-scale medical diagnosis and treatment equipment, foreign companies led by General Electric, Philips and Siemens have an absolute monopoly. According to a special survey conducted by the China Market Research Center in 2007, about 80% of the CT market in China, 90% of ultrasound equipment, 85% of inspection equipment, 90% of magnetic resonance equipment, 90% of electrocardiographs, and 80% of medium High-end monitors, 90% of high-end physiological recorders, and 60% of the sleep graph meter markets have been dominated by multinational brands.

With the new medical reforms shifting toward primary medical care, the expansion of rural cooperative medical care coverage and the increase in the proportion of reimbursement, transnational medical device companies have invariably turned their attention to the rural grass-roots market, attempting to exploit technological and marketing advantages and take advantage of the high school and low-end fields. It is a common practice for foreign companies to enter the Chinese market through shortcuts such as acquisition and cooperation.

As early as in 2008, Medtronic, which is famous for its pacemakers, coronary stents, and other products, invested 1.726 billion Hong Kong dollars in the stake in Shandong Weigao Group, and became the second largest shareholder of the latter with 15% equity. At the same time, the two sides announced the establishment of a joint venture company to exclusively distribute Medtronic and Weigao Orthopaedic products in China. The medical and health giant GE has also established joint ventures with several domestic companies including Xinhua Medical (600587) and its policy sensitivity is not inferior to that of local companies. In the “Health Ideas” strategy launched in May 2009, GE announced that it will invest US$3 billion over the next six years to develop 100 new products that can increase medical coverage, improve quality, and reduce costs. In addition, when John Dinning, the president of his medical and health department, visited China, he declared that he would most like to visit Sichuan's county-level medical and health institutions.

The world-renowned medical imaging and information technology company Care-stream Health (formerly Kodak Medical Imaging Business Unit, later sold to Canada's equity investment company Onex for US$2.55 billion) has been manufacturing products since 2005. The strategic adjustment of the architecture will gradually increase the proportion of products that are invested in grassroots markets such as rural areas and communities, and will actively lower prices. For example, its imaging system will be reduced from the previous 2 million yuan to 1/2 or even 1/3. Driven by the strategy of “deeply cultivating the grassroots”, its contribution to sales in mid-to-low-end products in 2009 has risen to 40%. Siemens in Germany has also launched “affordable” versions of superior products such as CT machines and ultrasound machines for the community and rural medical markets.

The accelerated penetration of multinational companies into the Chinese grass-roots market is accompanied by a sluggish growth in the high-end medical device market with an annual growth rate of approximately 10%, while the growth rate of medium and low-end medical devices has reached 30%. On the other hand, the large gaps in grass-roots facilities also gave them good reasons. In China, medical resources are mainly concentrated in the second- and third-level hospitals of the city; 15% of the existing instruments and equipment of medical institutions in the country are the last century. Before the 1970s, 60% of equipment was produced before the mid-1980s, and this phenomenon was even more serious in the Midwest and rural areas. According to data from the Ministry of Health, Ministry of Finance and Regulations, at present, the average gap in equipment allocation for more than 2,000 county hospitals in China is 30%, and a large number of medical diagnostic equipments need to be purchased or replaced. The 850 billion yuan of health reform cakes promised by the governments at all levels will also explicitly tilt toward basic medical care.

Under the guidance of the “Development of Medical Devices Appropriate to China's National Conditions” policy, in addition to R&D and product cost-effectiveness, the multinational companies have also adopted new approaches, sinking channels, donating first to build a public image, and borrowing from financial leasing. The practice of driving sales is also generally used by them to quickly enter this increasingly valued market.

Domestic-funded enterprises: advance into high-end

Different from top-down penetration of multinational companies, domestic-funded enterprises mostly gather in the grass-roots market. According to statistics from the State Food and Drug Administration (SFDA), there are currently more than 6,000 medical device manufacturers in China, and 118,000 enterprises. . Before foreign capital disdained, these small and medium-sized enterprises accounted for the vast majority of local medical device manufacturers, and they divided up the low-end market by virtue of their cost and channel advantages. However, the price war caused by disorderly excessive competition, coupled with rising raw materials and labor costs and loss of export exchange, the overall profit margin of the industry has been severely squeezed.

Although the construction of the primary health care system has boosted the market demand for low-end and medium-end equipment, foreign-funded enterprises that understand the direction of policies have done enough homework for splitting new cakes. Once the top-down inertia advantage continues, the threats can not be underestimated. Domestic-funded enterprises are also working hard to enter the high-end while they are actively facing the main battlefield. Dioye Medical (002223, stock bar) established a special laboratory in 2010, hopes to embark on the path of specialization from extensive growth, and can enhance the competitiveness of technology in oxygen and other sub-sectors; the industry ranked second in exports Shenzhen Mindray also stated that while deepening the grass-roots market, it will exert high-end power and focus on the export-oriented market.

Jiang Feng, president of the China Medical Devices Association, pointed out that the medical device industry is at the intersection of multiple disciplines, and the mechanical manufacturing and IT technology involved have comparative advantages. Chen Yun, a partner of China Health Care Fund, also believes that in the pharmaceutical biotechnology industry, this sub-sector has the smallest gap with the international leading level, and the return is fast. In addition, domestic investors have responded positively to the listing of medical device companies. They are enthusiastic about venture capital and have high price-to-earnings ratios. If super-raised funds are used properly, it is not unthinkable to break through high-end market segments. However, apart from the technological gap, the gaps in the soft power of services, after-sales services, and marketing models cannot be compensated in a single day.

In fact, domestic-funded enterprises that are deeply immersed in price warfare to break through to the high-end, although they are facing a counterattack by strong enemies, they should be regarded as an instinctive choice for chasing high profits. Di Yue Healthcare, which has an advantage in the basic medical market, and Lepu Medical, which has successfully broken the monopoly of foreign companies in the drug delivery system, have a huge difference in gross profit margins and net margins in the same medical device market. In the former, 20% of the revenue comes from the government's bidding for the basic medical market, but the net interest rate hovering below 20%, while Lepu Medical, which has an advantage in the subdivided sector, gains relatively strong pricing power through higher market share. The gross profit margin was as high as 80% and the net margin was over 50% (Table 2).