National 'Little Giant' Medtech Firm WindRiver Medical Halts IPO Amid Patent Disputes with Johnson & Johnson

Source: Medical Device Business Review

Author: Commenter

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Since the beginning of this year, as various measures to strictly control the IPO "entrance" have been implemented, a wave of IPO "withdrawals" has surged in the A-share market.

Recently, according to the announcement documents of the Shanghai Stock Exchange's STAR Market,National Key "Little Giant" Enterprises with Specialization, Refinement, and Innovation、Medical UnicornFengh Medical's IPO Falls Through Due to Withdrawal of Application and SponsorshipTermination。

It is reported that Fengh Medical Co., Ltd. was established in 2011, with a registered capital of up to 79,686,855 yuan, and is a...An innovative enterprise in China that focuses on the research, development, production, and sales of minimally invasive surgical instruments and consumables.。

After years of dedicated research and clinical practice, the company has successfully developed and mastered minimally invasive surgical instruments such as staplers and trocars.Key core technologies；

Among them, single-motor multi-function drive technology, intelligent pre-compression control technology, one-touch multi-function technology, reciprocating cutting control technology, dual retraction technology, and sutureable trocar technology areFirst of Its Kind in China, Core Performance IndicatorsReach the same level as international medical giants。

In terms of market performance, according to Frost & Sullivan analysis, in the Chinese electric endoscopic stapler market in 2022, the company rankedTop Three; In the export market for domestically produced electric endoscopic staplers, the company ranksThe First; In the Chinese manual endoscopic stapler market, the company ranksThe Eighth, Domestic BrandsThe Sixth。

With technological innovation and R&D strength, Fengh Medical Co., Ltd. has also garnered numerous honors, including being recognized asNational Specialized and Innovative "Little Giant" Enterprise、National High-tech Enterprise、Jiangsu Province Potential Unicorn Enterprise、Gazelle Enterprise in High-tech Zone of Jiangsu ProvinceThe invention patent "Surgical Instrument" (Patent No.: ZL201911294293.8) won the Silver Award of the 14th Wuxi City Patent Award. The company's "Fengh Medical Minimally Invasive High-End Medical Consumables and Robotics" project has been included in the 2022 list of major projects in Jiangsu Province.

So, why didn't the IPO of such a commendable top medical device company with both qualifications and strength pass smoothly? Let's find out.

For enterprises seeking to list on the Sci-Tech Innovation Board, product technology is undoubtedly the top priority in the company's assessment.

As of the date of signing the prospectus, Fengh Medical17 products have been approved.Among them, 3 products have obtained the NMPA Class III Medical Device Registration Certificate, 14 products have obtained the NMPA Class II Medical Device Registration Certificate, 3 products have obtained FDA certification, and 12 products have obtained CE certification.

In terms of technological content, the company's electric endoscopic stapler Lunar® has obtained CE certification, FDA certification, and NMPA Class III medical device registration certificate, involving a total of 65 domestic invention patents and 10 foreign invention patents.

Data shows that Lunar® is among the domestically produced brands in China.The FirstObtained FDA certification,The FirstElectric endoscopic stapler that has obtained the NMPA Class III medical device registration certificate through registered clinical trials;At the same time, it is followed byJohnson & JohnsonThe second domestically produced and the first domestically branded electric endoscopic stapler in China to cover vascular indications, with a broader clinical application range.

It is worth mentioning that most of the honors and nearly 90% of the income of Fengh Medical in recent years have come from staplers.In the Chinese laparoscopic stapler market, Johnson & Johnson has always held the leading position, especially in the Chinese electric laparoscopic stapler market, with a market share as high as 72.3%.

Highly overlapping competitive tracks are often the frequent grounds for patent disputes.

In 2019, the dispute between two medical device companies was brought to the forefront in the form of a patent war.

At that time, Johnson & Johnson's subsidiary Ethicon and Shanghai Johnson & Johnson (collectively referred to as "Johnson & Johnson") filed four lawsuits with the Shanghai Intellectual Property Court, accusing Fengh Medical Co., Ltd.'s disposable laparoscopic stapler and cartridge of infringing on their patent rights.

Among them,Fengh Medical Co., Ltd. lost the cases of (2019) Hu 73 Zhimin Initial No. 658 and (2019) Hu 73 Zhimin Initial No. 659., the court ruled that the company must immediately cease its infringement on Johnson & Johnson's patent and pay a total ofCompensation for Johnson & Johnson's economic losses totaling 10.2 million yuan; Fengh Medical won the cases numbered (2019) Hu 73 Zhimin Chu 660 and (2019) Hu 73 Zhimin Chu 661.Court Dismisses All Claims Against Johnson & Johnson。

Johnson & Johnson and Fengh Medical Co., Ltd. respectively filed appeals to the Supreme People's Court in October 2021 and January 2022 regarding their losing cases, among which Johnson & Johnson's appeal against case number (2019) Hu 73 Zhimin Chu No. 660 has been withdrawn.

As of the date of signing the prospectus, the second-instance judgments for cases (2019) Hu 73 Zhimin Initial No. 658, (2019) Hu 73 Zhimin Initial No. 659, and (2019) Hu 73 Zhimin Initial No. 661 have not yet been made.The company still has three pending lawsuits.The compensation amount involved exceeds tens of millions of yuan.。

Not only in China, but a series of patent disputes have also erupted in the Netherlands, Brazil, and other places. In 2021, the company's return and exchange amount due to litigation in Brazil was approximately 2.3 million, accounting for the highest proportion of the total return and exchange amount that year, reaching 43.7%.

Fengh Medical Co., Ltd. signed a "Settlement Agreement" with Johnson & Johnson Netherlands on June 14, 2023, and paid a settlement compensation to Johnson & Johnson Netherlands. Fengh Medical stated that the compensation has been fully paid and will not have a significant adverse impact on the sales and business operations of its products.

Nevertheless, patent disputes have always been complex and protracted, often turning into a war of attrition where, regardless of the outcome, the party with greater endurance and resources will hold a more advantageous position.

As for this series of "soul-searching questions," Fengh Medical Co., Ltd. may find it difficult to provide investors with a reassuring pill.

Apart from the patent tug-of-war with the giant Johnson & Johnson, since last yearHealthcare Anti-CorruptionAfter the launch, the company's sales expense ratio became a stumbling block for many medical device companies and also a key focus of regulatory attention.

From the disclosed data, compared with the sales expense ratio of comparable companies in the same period,Fengh Medical's sales expenses are overall higher than the average level.

Changes in the number of sales personnel during each reporting period, per capita compensation, per capita reimbursement, per capita revenue generation, and comparison with comparable companies.

Looking at the vertical comparison with its own sector's expenses, its sales expenses are also much higher than its R&D expenses.

From 2020 to 2022, the company's sales expenses were 38.22 million yuan, 59.58 million yuan, and 75.50 million yuan, respectively, totaling approximately 173 million yuan; however, the R&D expenses for the same period were 13.33 million yuan, 23.08 million yuan, and 38.91 million yuan, respectively, totaling approximately 75 million yuan.Sales expenses over three years were approximately 2.3 times the R&D expenses.

Excerpt from the Exchange's Inquiry Letter

In terms of personnel compensation, from 2021 to 2023, the average compensation for the company's R&D staff was 293,700 yuan, 317,000 yuan, and 369,800 yuan, respectively. Meanwhile, the average compensation for sales personnel during the same three years was 373,300 yuan, 374,800 yuan, and 449,800 yuan, respectively. Taking 2023 as an example,The average salary of R&D personnel is only 82% of that of sales personnel.

Despite the company's response attributing the situation to its products being in the market expansion phase, denying any unfair competition practices,But for companies applying to the Sci-Tech Innovation Board (STAR Market), the importance of their scientific and technological quality goes without saying. The fact that Fengh Medical's R&D investment is far lower than its sales expenses is hard to overlook and has inevitably drawn criticism.

What cannot be ignored is that medical device companies in the competitive market,The market's own capacityClosely tied to its future and fate.

01

Limited Market Space

Although Fengh Medical positions itself as a "minimally invasive surgical instruments and consumables" company, a closer look at its main business composition reveals that...Nearly 90% of the turnover comes from staplers, and the "relatively single product structure" has been confirmed.

According to Frost & Sullivan analysis, in China, the market size of staplers reachedRMB 8.63 billionIt is estimated that by 2025, the scale of China's stapler market will grow to 11.89 billion yuan.

The compound annual growth rate from 2022 to 2025 is 11.3%, and it is expected that by 2030, the market size of staplers in China will further increase to 20.5 billion yuan.

Although the scale of China's stapler market is also increasing year by year, the domestic market size in recent years has still been hovering below 10 billion yuan, and it may not break through 20 billion yuan until 2030.

Such a space cannot be considered a long slope and thick snow for medical device companies focused on this field.

03

Difficult to Break the Import Monopoly

Moreover, the challenges faced by Fengh Medical also come from competitors.

As mentioned earlier, in the Chinese stapler market, Fengh Medical ranks among the top.In 2022, in ChinaElectric Endoscopic Stapler MarketIn China, the company ranksThe top three,This achievementAt first glance, it seems promising, but in reality, Johnson & Johnson alone holds a market share as high as 72.3%.Fengh Medical ranks third with a market share of only 1.64%.。

The market for manual endoscopic staplers in China is also dominated by imported brands, with Johnson & Johnson and Medtronic, the two giants, together holding 54% of the market share. They are closely followed by domestic brands such as Ease Medical, Ruiqi Surgical, Piert, Lepu Medical, and Tianchen Medical, which account for 10.9%, 7.5%, 6.5%, 5.9%, and 2.7% respectively.

Fengh Medical, ranked eighth, holds only a 2.2% share.

In this situation, Fengh Medical Co., Ltd. also faces the uncertain impact of bulk procurement and a patent dispute with Johnson & Johnson. Amid internal and external challenges, the company's predicament is imaginable, and the decision to withdraw its IPO application is understandable.

Conclusion

However, failing to go public as planned may not necessarily be a bad thing, given the ever-changing landscape of the capital market. While an IPO can raise funds, it may also expose or even magnify problems.

Medical device companies also need to focus on R&D, diversify their industrial structure, enhance core competitiveness and risk resistance capabilities, and lay a solid foundation in order to go further in the future market.

*Source of some information: Fengh Medical Co.,Ltd. Prospectus