This article is from WeChat official account:Arterial Network (ID: vcbeat)< span class = "text-remarks">, author: Yang Xue, head from FIG: visual China
A student once asked the famous anthropologist Margaret Mead a question-what is the original sign of human civilization? Many students guess the answer is fish hook, stone tool, fire and so on. However, Mead said that the initial sign of human civilization was that we found “a piece of femur that was broken and healed.”
The healing of the femur after a fracture means that humans are beginning to learn to help others in difficulty. Healing bones and wounds, a symbol of human civilization, has developed into a global market with a scale of tens of billions of dollars. This product-used market with a wide variety of products has become a must-see for the medical device giants. There have been frequent large-scale M&A transactions in the orthopedics field. In 2014, Johnson & Johnson acquired Syndicate for US$19.7 billion; Medtronic acquired Kanghui Medical for US$816 million; MicroPort Medical acquired Wright Medical’s joint reconstruction business for US$290 million in 2014.
However, the turbulent market of orthopedics will usher in the darkest moment in 2020. Observing the stock price trend of listed domestic orthopedics companies, in the second half of 2020, without exception, the market value of the orthopedics field has evaporated by tens of billions.
Dabo Medical’s share price has been cut in half. The stock price has fallen from 119.78 yuan on June 30, 2020 to 47.60 yuan as of March 10, 2021. The company’s market value has evaporated by over half, leaving only 19.146 billion yuan; Kailitai from 2020 It was 30.64 yuan on July 13, 2021. As of March 10, 2021, it fell to 10.02 yuan, leaving only 7.244 billion yuan in market value. Chunli Medical has dropped from HK$63 on July 13, 2020 to HK$19.280 as of March 10, 2021, with a market value of only 6.668 billion.
Along with the continued decline in stock prices, there are also institutional reductions. Chunli Medical (01858-HK) was approved by Morgan Stanley Danli reduced its holdings of 54,825 million. Big BoThere were 213 medical fund holdings in the second quarter of 2020, and only 11 in the third quarter of 2020. Hillhouse Capital, which had increased its holdings of 50 million shares of iKang Medical for 350 million yuan in 2019, also reduced its holdings of iKang Medical in the second quarter of 2020.
After research on Artery Network, the main crux behind the crash is the pessimism expected to be released by the collection. The point in time when the stock price of leading orthopedic companies went down was the period from the introduction of the method to the implementation of the purchase of high-value consumables nationwide. Although the first batch of centralized procurement did not involve orthopedics, orthopedic faucets have already felt the lethality of centralized procurement in the process of centralized procurement of heart stents.
We believe that the impact of volume purchases on the orthopedics industry will not stop at the level of stock prices. Volume procurement is not just a phenomenon-level event, it will bring systemic opportunities to the entire industry.
Industry gross profit margin exceeds 80%, there is room for compression of artificial joint prices
Choosing this moment to discuss the impact of volume purchases on the orthopedics industry is of special significance. On the one hand, at this time, the coronary stents purchased in quantity have entered the stage of clinical use, and the influence of the quantity procurement has been precipitated from predictions to facts, and it is also more meaningful for orthopedic department purchases. On the other hand, the results of the nationwide procurement of orthopedics are expected to be finalized in May and June of this year. On the eve of the implementation of this key policy, the leading orthopedics department of Weigao Orthopedics(IPO has passed), Chunlizhengda (IPO acceptance) have also reached the critical moment of sprinting the science and technology innovation board, interpretation Volume procurement, the biggest variable in the future orthopedics field, can help us better understand the potential of leading orthopedic companies.
Shortly after the first batch of centralized procurement landed, and soon, the second batch of medical consumables procurement list came out, including artificial hip joints, artificial knee joints, defibrillators, occluders, orthopedic materials, and staplers. , Orthopedic products are the focus. Nowadays, the collection of orthopedics is already on the line. Industry insiders predict that the results of the collection will land in May to June this year.
The Medical Insurance Bureau has launched an intensive investigation into the collection of orthopedics. From February 22 to February 23, Hu Jinglin, director of the National Medical Security Administration, went to Sichuan to carry out investigations.Procurement, management and use of medical consumables for dentistry. And listened to Sichuan, Jiangsu, Inner Mongolia, Tianjin and other provinces (districts, cities)‘s ideas on in-depth development of concentrated procurement of high-value medical consumables. And the opinions and suggestions of medical institutions.
From February 25 to 26, Chen Jinfu, deputy director of the National Medical Security Administration, investigated the Tianjin Medical Device Quality Inspection Center and Zhengtian Medical Devices Co., Ltd. to understand the production and circulation of orthopedic consumables and listen to the opinions and suggestions of enterprises.
After the heart stent, why has orthopedics become the second field of medical insurance? The reason is that there are many similarities between orthopedic artificial joints and cardiac stents: the national consumption is large, the price is high, and the gross profit is high. At the same time, there is sufficient competition in this field, and a large domestic comprehensive company has emerged, with a certain share of domestic products. .
In terms of the number of operations, there are nearly 700,000 joint replacement operations nationwide. According to the Chinese Medical Doctor Association, in 2018, China had 439,324 artificial total hip replacement operations, 249,259 artificial total knee replacement operations, and a single knee joint. 11,200 condyle replacement surgeries. The number of PCI interventions in my country reached approximately 700,000 cases in 2017.
At the same time, according to data from the American Academy of Orthopaedic Surgeons (AAOS), in 2014, there were 370,770 hip replacement surgeries and 680,150 hip replacement surgeries in the United States. There are more than one million knee replacement surgeries in total. The penetration rate of artificial joint surgery in my country is still low. With the aging process and the improvement of people’s living standards, it is expected that the amount of joint replacement surgery will continue to increase.
In addition to the large quantity, the artificial joint has a lot of room for compression at the same price as the heart stent.
As for the collection of orthopedics, what everyone is most concerned about is the price reduction. The price of centralized procurement of coronary stents has dropped from tens of thousands of yuan to several hundred yuan, and the price reduction rate for national-level volume purchases is much higher than the previous lowest price for local volume purchases. In the field of orthopedics, will the extent of breaking the floor price repeat itself again? We believe that at least in terms of gross profit margin and cost, the price of artificial joints has a lot of room for compression like heart stents.
First of all, like coronary stents, orthopedic artificial joints also have a lot of profit compression. The gross profit margin of the orthopedics industry is generally higher than 60%. In 2019, Dabo Medical’s comprehensive gross profit margin was 85.The top three hospitals in the first-tier cities where the volume is concentrated are still dominated by imported products. “
From the perspective of subdivisions, the four major subdivisions of orthopedics are trauma, spine, joints and sports medicine. Among them, trauma is the largest market segment, accounting for 29.80%; spine is ranked second, accounting for 28.23%; joints ranked third, accounting for 27.77%.
In the field of trauma, domestic companies and foreign companies have relatively small differences in product types and quality, but there are many types of orthopedic trauma products, and sufficient category specifications need to be prepared. The liquidity requirements for agents are relatively high. Foreign companies Compared with domestic companies, it has more advantages in agent management, national academic hospital control, inventory optimization, and surgical tool deployment. In the high-end spine and joint fields with higher technical content, import companies have always occupied a dominant position, especially in the joint field, which has a low degree of localization.
In addition to being dominated by imported products, this market is characterized by a large number of small and medium-sized enterprises and low industry concentration. An industry insider stated that the market concentration of CR5(the concentration rate of five companies) in the trauma field is less than 40%, while in the United States, the market concentration rate is less than 40%. Can occupy more than 40% of the market.
Bulk procurement will undoubtedly force the integration of the industry, change the scattered, chaotic, small, and mixed status of the medical device industry, produce internationally influential brands, and participate in international competition. It is beneficial to advantageous manufacturers with larger scale of operation and high ranking in the industry.
In addition to forcing industry integration, mass procurement will also change the business model of the orthopedics industry, shifting from a distribution-oriented approach to a direct selling approach. In the short term, to adapt to this model change, orthopedic companies will have to face a period of pain. One of the purposes of centralized medical procurement is to reduce the cost of distribution channels and reduce the marketing costs of orthopedic companies. However, Artery Network found that after losing the distributor, the sales expenses of orthopaedic companies increased instead of falling.
The reason is that in the distribution model, dealers often provide follow-up services during the process of selling products to hospitals, and are responsible for channel development, customer maintenance, and provide end customers with preoperative consultation, logistics assistance, and follow-up services. Supporting professional services for orthopedic products such as guidance, cleaning and disinfection, post-operative follow-up, etc., to meet the surgeon’s surgical needs to the greatest extent.
Under the volume procurement mode, the selected products are expected to be directly sold to hospitals, and the corresponding distributors will be determined in the distribution link according to needs. The company’s customer structure will be changed from distributors to hospitals and other medical institutions.. Under the direct sales model, the company needs to directly purchase services such as preoperative consultation, follow-up guidance, cleaning and disinfection, and postoperative follow-up from service providers. From the prospectus data of Weigao Orthopedics, after the implementation of the two-invoice system, the proportion of Weigao Orthopedics direct sales model has continued to increase, resulting in an increase in Weigao Orthopedics sales from 33.93% to 40.25% from 2017 to 2019.
Although some people questioned that centralized procurement has compressed profit margins, it will affect the subsequent R&D investment of orthopedics companies. However, an industry insider said that the domestic leading companies in the orthopedics field have a stable structure and the major companies have relatively high economic strength. They are all listed companies, have a certain amount of R&D reserves and a rich product line, and they have been separated from a single product line to resist risks. Ability is higher.
But the lower the price is not the better. A secondary market securities analyst said that referring to the price of foreign orthopedic consumables, the 70% price cut is about the same as the foreign price. The domestic price drop is too much, in fact, it is not good for patients, doctors, and industry development. In the long run, it may also lead to an increase in medical insurance expenses.
Surgery robots and high-end product lines, which one is the second growth in orthopedics?
Reviewing the development of orthopedics for more than 20 years, China’s orthopedics industry has grown into a number of leaders, orthopedics has bid farewell to the period of disorderly growth, and the competition between enterprises is more comprehensive. How to build a diversified growth pole from providing a single product to providing a diversified solution from China’s subdivision leader to a global comprehensive leader has always been the key point that the orthopedics industry needs to break through. And the volume purchase just accelerates this original process.
Through combing and interviews, we divide the attempts of domestic orthopedics companies to find new business growth points into two categories: one is to expand product lines through mergers and acquisitions; the other is to increase R&D investment, Higher-end products and emerging technologies in the field, such as orthopedic surgical robots and 3D printing.
Let’s first look at the products that can consolidate the fundamental R&D investment. The R&D investment of major domestic orthopedics companies in the past three years has not accounted for more than 10% of operating income, and the capital scale and R&D investment are still small. my country’s orthopedics industry is still at a relatively early stage, and there are still many technical gaps that need to be filled for major domestic orthopedic companies to equalize foreign companies.
An orthopedic manufacturer said: “The smallest gap between domestic orthopedic products and imported products is trauma products, followed by spine. Domestic manufacturers also mainly focus on trauma and spine. Artificial joints have high technological content. The orthopedics segment with high added value and high barriers to entry. The gap in sports medicine is the biggest. In addition to solving the technical bottleneck, domestic substitution has to go through the process of industrialization. In some areas, the technical bottleneck has broken through. Industrialization is not good enough.”
From a specific technical point of view, domestic brands still have a gap with imported products in technologies such as prosthesis materials, prosthesis shape design, surgical positioning equipment accuracy, joint surface finish, and bone contact surface treatment. These gaps are also the focus of domestic orthopedics companies’ R&D investment.
Take Weigao Orthopedics as an example. Weigao Orthopedics’ main research products include double-coated fusion cages, unicondylar knee joints, trabecular interbody fusion cages, new 3D printed hip joint systems, and bio-inducible absorbable With wire anchors, projects with a budget of more than 10 million are mainly focused on sports medicine, joints and processing techniques for contact with bone.
Focusing on high-end products and filling domestic gaps is one of the focus of orthopedic leaders. In addition, we found that domestic orthopedic leaders are shifting from focusing on endogenous growth to exogenous growth in mergers and acquisitions. Through mergers and acquisitions, companies can bypass the long R&D stage and have international leading technology, quickly occupy the blank areas of the market, and accelerate the pace of product launches.
Referring to the development path of foreign giants, there are also more mergers and acquisitions in the growth process of foreign giants, consolidating advantages, making up for shortcomings, and gradually reaching a leading position in the field.
In the M&A layout, the most concerned area is surgical robots.
Minimally Invasive Medical has announced its entry into the field of surgical robots in 2020. As soon as it enters the field, it covers the five “golden tracks” of endoscopy, orthopedics, vascular intervention, natural cavity, and percutaneous puncture. Weigao’s laparoscopic surgical robot has completed 168 clinical trials in 2020. In 2015, Weigao also established an orthopedic surgical robot company with a registered capital of 20 million yuan, and Weigao Group holds 95% of the shares.
Johnson & Johnson, Medtronic, Zimmer and other giants have not missed the handAs for technological robots, domestic companies have narrowed the gap with giants through acquisitions and R&D investment. It can be expected that the future competition in the field of orthopedics will not be limited to the four traditional fields of trauma, spine, joints, and sports medicine. The field of orthopedic surgical robots will also become an arena among orthopedic companies.
Although the outcome of orthopedic centralized procurement does not know when it will come, the test of how to undertake centralized procurement is not just whether the cost is low enough and the bottom line of price reduction is low enough. The test is actually whether the company has the ability to continuously innovate and diversify. Product lines and localization and overseas business capabilities. Centralized procurement will rewrite the industry structure, but it cannot change the fact that a great high-value consumables company will be born in China.
This article is from WeChat official account:Arterial Network (ID: vcbeat)< span class = "text-remarks">, author: Yang Xue