Rapid Growth of the Medical Device Industry
Currently, the medical device industry has the following investment highlights:
China's medical device industry is at the critical point of integrated development. Specialized mergers and acquisitions cultivate leaders in niche markets, while integrated mergers and acquisitions give birth to industry giants. From the start-up stage dominated by primary health materials, to the initial stage of category expansion, and then to the structural change stage promoted by private capital in the 1990s, China's medical device industry has completed the accumulation of original technology and capital, and initially realized product structure adjustment and regional industrial layout. After the launch of the new medical reform in 2006, the industry entered a new historical period. Diversified strategic demands, fierce industry competition and capital forces have become catalysts for industry integration. Under the joint effect of the industry's endogenous characteristics and external environment, the trend of increased concentration and diversified development has taken shape. China's local medical device enterprises will promote the industry to move towards concentration through mergers and acquisitions. In the process of integrated and specialized development, more leaders in niche markets will emerge, and future industry giants will be bred.
Strategic positioning determines future development, and enterprises that take the lead and expand are expected to become industry giants. During the period of integrated development, China's medical device enterprises will face three development pattern choices: 1) Focus on niche markets and become niche leaders; 2) Expand through mergers and acquisitions to become a comprehensive giant; 3) Achieve medical-electronic integration by virtue of technological advantages. Both focus and diversification are indispensable. We believe that enterprises with diversified development and active integration and expansion are more likely to become winners. Mindray Medical, Weigao Co., Ltd., Yuwell Medical, and Lepu Medical have already become diversified through joint ventures and mergers and acquisitions, becoming the leaders of integration. MicroPort Medical, Contec Medical, Trauson Holdings, Jiuan Medical, Winner Medical, and Shandong Xinhua Medical are leaders in their segmented fields. Although Wandong Medical only focuses on one niche area, it carries the expectation of China Resources Group for the development of the medical device industry behind it.
Industrial upgrading is the general trend, and China's medical device industry is moving from traditional manufacturing to high-tech development. Manufacturing and processing are the foundation for the development of China's medical device industry. After years of accumulation, a complete product system has been established, and a pivotal position has been established in the field of middle and low-end products. China's medical device industry is actively carrying out technological upgrading, seizing the opportunities of the domestic demand market and external industrial transfer. Improvements in product quality and technical structure have enabled Chinese enterprises to achieve remarkable results in monitoring, medical imaging equipment, clinical laboratory equipment, minimally invasive interventional therapy and other fields. The general trend of innovative development is irreversible. Computed tomography, nuclear magnetic resonance, electrophysiological instruments, artificial joints, etc. will be the commanding heights to be captured next.
China's medical device market has huge potential and will maintain rapid growth. The global medical device industry has better growth than the pharmaceutical market, and will maintain a compound growth rate of 10%-15% in the future. Although developed countries account for 78% of the market share, the markets of developing countries represented by China are experiencing rapid growth, relying on cost advantages and R&D accumulation to enhance the status of the industrial chain. Increasing medical expenditure, rising consumption capacity and health awareness will be positive factors driving the development of the industry. The reform of the medical and health system has injected extra impetus into the development of the industry, and has become an inducing force to release suppressed demand and open up future potential space. Intertwined with internal and external forces such as rebalancing of resource allocation, upgrading and industrial transfer, the compound growth rate of China's medical device industry will remain at 20%－30%.
Industry risks:
1) Economic recession and cuts in fiscal spending may suppress demand in high-end export markets; 2) RMB appreciation weakens the global competitiveness of Chinese manufactured products; 3) The production and sales of medical devices are subject to strict supervision in all countries, and policy changes may significantly increase the costs of manufacturing enterprises; 4) The accelerated entry of large foreign medical device enterprises into the Chinese market and the intensified competition among domestic brands may lower the industry's profits.
Strong sales volume worrying profit margin
Large medical device companies will benefit from the new version of GMP and the expansion of infrastructure. Due to the increasing industry standards in China and the growing demand for cost-effective production equipment from global generic drug manufacturers (especially Indian pharmaceutical companies), both Shandong Xinhua Medical and Tofflon are optimistic about the medium and long-term growth prospects of large medical device companies. We reiterate our positive view on Shandong Xinhua Medical, because after the implementation of the new version of GMP in 2011, the company's profit is expected to achieve a strong growth of 96.8%. In addition, with strong R&D capabilities, the company will continue to launch new products and services (overall operating room solutions).
Cost and speed are very critical in the medical consumables market. We believe that domestic enterprises have the potential to seize market share from multinational corporations. Domestic producers are moving upstream in the industrial chain by developing high-margin products (such as shifting from traditional syringes to pre-filled syringes). Companies such as Trauson Holdings and MicroPort Medical are striving to enter the joint (knee and hip) device market by providing a range of products instead of a single product in order to remain competitive in bidding. However, due to the poor reputation of product quality, there are still doubts about whether the market will accept domestic joint products.
The market expects strong sales growth, but profit margin pressure is a new concern: first, prepare for bidding in the second half of 2011. The enterprises we surveyed generally hold a positive view on the long-term growth potential of China's medical device industry, because most enterprises believe that sales demand will remain strong in the next 2-3 years, with an average annual compound growth rate of 25-30%. However, the uncertainty of bidding (different provincial policies vary) is the main policy pressure facing the industry's profit margin. The enterprises we surveyed stated that China may start provincial-level bidding for high-end medical devices and consumables in the second half of 2011 to control overall medical costs, because the government believes that regional bidding price management is better than and easier to supervise. Many newly developed products are waiting to enter the bidding range before listing, and enterprises expect prices will be lowered in the next round of bidding.