At present, the medical device industry has the following investment highlights:
China's medical device industry is at the critical point of integration and development. Specialized M&A cultivates market segment leaders, while comprehensive M&A breeds industry giants. From the initial stage dominated by primary medical materials to the initial stage of category expansion, and then to the stage of structural change driven by private capital in the 1990s, China's medical device industry has completed the accumulation of original technology and capital, and initially realized the adjustment of product structure and regional industrial layout. After the launch of the new medical reform in 2006, the industry ushered in a new historical period. Diversified strategic demands, fierce industry competition and capital power have become catalysts for industry integration. Under the combined action of endogenous characteristics of the industry and external environment, the degree of concentration has been enhanced and the trend of diversified development has been formed. China's local medical device companies will push the industry toward concentration through mergers and acquisitions. In the process of integration and professional development, more market segmentation leaders will emerge, and give birth to future industry giants.
Strategic positioning determines future development, the first and expansion of enterprises are expected to become industry giants. In the period of integration and development, Chinese medical device enterprises will face three development patterns: 1) focus on market segmentation and achieve market segmentation leader; 2) To become a comprehensive giant through merger and acquisition; 3) Realize the integration of medical electricity with the help of scientific and technological advantages. Both focus and diversification are essential, and we believe that companies that are diversified and actively integrating and expanding are more likely to be winners. Mindray Medical, Weigao Holdings, Diving Medical and Lepu Medical have diversified through joint ventures and mergers and acquisitions, and become the leader of integration. Minimally Invasive Medical, Comfort Medical, Tronson Medical, Jiuan Medical, Yangpu Medical and Xinhua Medical are the leaders in the field of segmentation. Although Wandong Medical only focuses on a niche field, it carries the expectation of China Resources Group for the development of the medical device industry.
The trend of industrial upgrading, China's medical device industry from traditional manufacturing to high-tech development road. Manufacturing and processing is the foundation of the development of China's medical device industry. Through accumulation, it has established a complete product system, and has established a pivotal position in the field of middle and low-end products. China's medical devices are actively upgrading technology, striving for domestic market and external industry transfer opportunities. The improvement in product quality and technology structure has enabled Chinese companies to achieve remarkable achievements in the fields of monitoring, medical imaging equipment, clinical laboratory equipment and minimally invasive interventional therapy. The trend of innovation and development is irreversible. Computed tomography, nuclear magnetic resonance, electrophysiological instruments, artificial joints and so on will be the commanding heights of the next occupation.
China's medical device market has great potential and will maintain rapid growth. The growth of the global medical device industry is better than that of the drug market, and will maintain a compound growth rate of 10%-15% in the future. Although developed countries occupy 78% of the market share, developing countries represented by China are experiencing rapid growth, relying on cost advantages and R&D accumulation to improve their position in the industrial chain. The increasing medical expenses, increasing consumption capacity and health awareness will be the positive factors to promote the development of the industry. The reform of the medical and health system will inject additional impetus to the development of the industry and become the inducing force to release the pent-up demand and open up the potential space in the future. The internal and external forces such as resource allocation rebalancing, upgrading and industrial transfer are interwoven, and the compound growth rate of China's medical device industry will remain at 20%-30%.
1) Economic recession and fiscal spending cuts may depress demand in high-end export markets; 2) RMB appreciation reduces the global competitiveness of Chinese-made 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 manufacturers; 4) The accelerated entry of large foreign medical device enterprises into the Chinese market and the intensified competition of domestic brands may depress the industry profits.
Sales are buoyant and profit margins are worrying
Large medical device companies will benefit from new GMPs and infrastructure expansion. Both companies are optimistic about the medium - to long-term growth prospects of large medical device companies, thanks to rising industry standards in China and growing demand for cost-effective manufacturing equipment from global generics makers, particularly from Indian pharma companies. We reiterate our positive view of New China Medical due to the expected strong earnings growth of 96.8% in 2011 following the implementation of the new GMP and the continued introduction of new products and services (total operating room solutions) due to our strong research and development capabilities.
Cost and speed are critical in the medical consumables market. We think domestic companies have the potential to grab market share from multinational companies. Domestic manufacturers are moving up the chain by focusing on higher-margin products, such as switching from traditional syringes to prefilled syringes. To stay competitive in the bidding, companies such as Tronio and Minimally Invasive are trying to break into the market for joint (knee and hip) devices by offering a range of products rather than a single one. However, due to the poor reputation of product quality, whether the market can accept the domestic joint products is still questionable.
Strong volume growth is expected, but margin pressure is a new worry: first, getting ready for a tender in the second half of 2011. The companies we surveyed are generally positive about the long-term growth potential of China's medical device industry, as most believe that sales demand will remain strong in the next 2-3 years with a compound annual growth rate of 25-30%. But the uncertainty of bidding (provincial policies are different from central policies) is the main policy pressure on industry profit margins. China is likely to start provincial bidding for high-end medical devices and consumables in the second half of 2011 to control overall healthcare costs, according to the companies we surveyed, as the government believes regional bidding prices are better managed than those of the central government and easier to monitor. Many newly developed products are waiting for pre-market bidding, and companies expect prices to fall in the next round of bidding.