The Biggest Winner of China's ¥1,000 Artificial Joint Tender Revealed with IPO Filing

After April 15, the second batch of national procurement of artificial joints began to enter hospitals successively from the negotiation table. Artificial joints have moved from the ten-thousand-yuan era into the thousand-yuan era.

A patient in Erdos spent more than 30,000 yuan on an artificial joint surgery four months ago, but when she had another artificial joint implanted in April, it only cost her 4,000 yuan.

The significant reduction in surgery costs has driven the growth of artificial joint surgeries in China, with doctors reporting a surge in such procedures in April. Patients who previously couldn't afford the surgery due to high costs are now able to proceed with the operation.

But for doctors, the introduction of artificial joints into hospitals after centralized procurement has brought more uncertainty. On the one hand, there is a direct impact on income. Although the price of artificial joints has been implemented according to the post-centralized procurement price in many parts of China, only some provinces have adjusted the pricing for doctors performing surgeries.

On the other hand, it represents a change in the past service model. In an artificial joint surgery, the manufacturer's role is not only as the provider of artificial joint consumables but also indispensable in preoperative training, surgical tool provision, postoperative sterilization, and other aspects of orthopedic surgery. After the centralized procurement of artificial joints, with the profit margins of manufacturers and distributors compressed, will there still be motivation to provide professional services beyond high-value consumables?

For enterprises, the butterfly effect of the artificial joint centralized procurement is beginning to slowly emerge, and its impact on the market is more profound than just price reduction. The experience of vascular stent centralized procurement has told the market that the bidding results are far from the endgame of enterprise competition. In the orthopedic artificial joint centralized procurement, what kind of changes will occur in the ranking competition among enterprises?

As the national procurement of spinal products gradually approaches, VCBeat (WeChat ID: vcbeat) conducted interviews and analysis on the impact of the centralized procurement of artificial joints after they enter hospitals, attempting to explore new changes and insights in the market.

After the centralized procurement, the entry of artificial joints into hospitals, the decline in doctors' income, and the changes in the number of patient surgeries are still within the expectations of practitioners in China's orthopedic industry.

After the implementation of China's national volume-based procurement policy for artificial joints, the average price of artificial hip joints decreased from 35,000 yuan to around 7,000 yuan, while the average price of artificial knee joints dropped from 32,000 yuan to approximately 5,000 yuan, with an average reduction of 82%. As artificial joint surgeries are elective procedures, upon learning about the volume-based procurement of artificial joints, most patients chose to postpone their surgeries until the procured artificial joints were available in hospitals.

But even with the increase in the number of surgeries, doctors' incomes are also affected. In the past, a doctor's income from a single artificial joint surgery was around a thousand yuan, and the reduction in the price of consumables will have some impact on doctors' income.

A doctor said that since the surgery still needs to be performed, the impact on income is viewed more openly.

In terms of the impact on doctors' income, the Medical Insurance Bureau has also provided some compensation. The medical insurance adjusts the price of artificial joint surgery projects to highlight the labor value of medical staff.For example, in Erdos, the Erdos Medical Security Bureau held an expert argumentation meeting on April 11 to adjust the pricing of artificial joint replacement surgery projects. The prices of 18 artificial joint surgery projects were reviewed, with the maximum price increase being 1000 yuan, the minimum increase being 300 yuan, and the average increase being 807 yuan.

But the adjustment of project prices has only been carried out in some provinces and cities, and most provinces and cities have not made adjustments.

The impact on income is not yet the biggest concern for doctors. After the centralized procurement of artificial joints, doctors are more worried about whether the service quality of manufacturers and channels can remain as good as before.

In the past, during clinical surgeries, manufacturers and channel distributors needed to provide doctors with preoperative consultations, logistics assistance, on-site guidance, cleaning and disinfection, postoperative follow-up, and other professional support services for orthopedic products in order to meet the needs of doctors to the greatest extent.

Although accompanying services were also included in the bidding scope during China's national artificial joint procurement, some manufacturers stated that the prices for accompanying services awarded through the procurement process do not fully cover the cost of providing these additional services.

An industry insider stated, "The中标价格 (bid-winning price) for accompanying services in this人工关节 (artificial joint) group purchase is between 50 to 200元 (RMB), while the industry consensus is that the service cost for a single人工关节手术 (artificial joint surgery) is between 1,000 to 1,500元. For instance,动力工具 (power tools), as well as consumables like saw blades, suction devices, bone cement, and other耗材 (consumables) are required during joint surgeries. These tools were previously provided free of charge by manufacturers or agents. A single service fee of 50 to 200元 cannot fully cover these costs and may lead to a significant decline in overall service quality."

Who will bear the additional costs? Currently, according to policies in various regions, some provinces and cities have introduced policies for hospitals to bear this part of the cost.

In the documents related to the implementation of centralized bulk procurement of artificial joints in Tianjin, Fujian, Hainan, and Hunan, it is clearly stated that medical institutions are responsible for the cleaning and disinfection of non-dedicated power tools and related tools, with associated costs included in medical service fees. The price of accompanying services only covers compliant "on-site assistance" services, assistance in assembling tools, necessary tool usage guidance, surgical operation training, etc.

The second major concern is the enthusiasm of manufacturers to conduct clinical education in the future.In China, the training of doctors in the surgical field is basically dominated by manufacturers. It is undeniable that manufacturers provide a large part of specialized education and doctor training services, including exchanges both domestically and overseas, as well as some surgical training.

Every year, the leading orthopedic companies in China invest hundreds of millions of yuan in market education and training. According to the prospectus and annual reports of WEGO ORTHO, sales expenses reached 630 million yuan in 2020 and increased to 740 million yuan in 2021, an increase of 110 million yuan year-on-year. The rise in WEGO ORTHO's sales expenses was due to the expansion of sales channels, the development of secondary hospitals, and increased investment in online and offline medical education and training. Another leading joint company in China, Chunli Medical, reported sales expenses of 340 million yuan in 2021, representing a 41.92% increase over the previous year.

Indeed, the conferences and academic activities organized by orthopedic companies in China, both online and offline, are aimed at enhancing the influence of their products and promoting their products and therapies. On the other hand, these activities also provide systematic support to doctors in China and have become an important part of their education and training. However, after the centralized procurement reduced profits, manufacturers have less incentive to provide market education, and whether related education and training can continue in the future is also a major concern.

Centralized procurement has broken the old rules, and the new order needs to be established through exploration. Amid new developments, the industry landscape is also slowly changing.

The most direct impact brought by the centralized procurement of artificial joints is the compression of market space, leading to a shrinking industry pie. However, as the procurement policy is implemented, the way the industry divides the pie and the companies that receive slices will also change.

Based on the current implementation, centralized procurement might alter the market share of specific segments within the artificial joint market; moreover, among the numerous participants in the artificial joint market, some companies may gradually exit the competition.

In the centralized procurement of artificial joints, hip joints are classified into three types based on the friction interface: ceramic-on-ceramic, ceramic-on-polyethylene, and metal-on-polyethylene. Ceramic is one of the most wear-resistant materials, with minimal wear, thus generating fewer particles. Ceramic-on-ceramic hip replacements significantly reduce wear debris. Ceramic-on-ceramic hip joints are also the most expensive type of artificial hip joint, followed by ceramic-on-polyethylene, while metal-on-polyethylene is the least expensive.

In the past, the market shares of ceramic-on-ceramic, ceramic-on-polyethylene, and metal-on-polyethylene products in the artificial joint market were not significantly different. However, the price and profit changes brought by centralized procurement could potentially alter the usage volume of different artificial hip joints.

An artificial joint manufacturer analyzed: "In the centralized procurement, the prices of all products have dropped. The manufacturers' quotations for ceramic-on-ceramic hip joints are between 8,000 and 9,000 yuan; the manufacturers' quotations for ceramic-on-polyethylene are mostly around 7,000 yuan, with the highest bid reaching 8,000 yuan. However, there is a difference in the cost of these two products. The cost of ceramic-on-ceramic may be six or seven thousand yuan, while the cost of ceramic-on-polyethylene is lower than that of ceramic-on-ceramic products. The price reduction in centralized procurement has changed the gross profit margins of the two products. Manufacturers may not primarily promote ceramic-on-ceramic products in clinical settings but instead focus on promoting ceramic-on-polyethylene products."

In the past, in China's artificial hip joint market, metal-on-polyethylene was the most used product, followed by ceramic-on-polyethylene in second place, and ceramic-on-ceramic in third place. However, the differences in usage among these products were not significant. After the centralized procurement, the gap in usage may widen. The industry generally believes that ceramic-on-polyethylene will become the most used product, a trend that can also be seen from the reported volumes of various winning companies.

In overseas markets, the ceramic-polyethylene articulation is the most used product. On one hand, although its clinical outcomes are not as good as those of the ceramic-ceramic articulation, they are still sufficient to meet clinical needs. On the other hand, the ceramic-polyethylene articulation is more accepted by doctors and is more forgiving of surgical techniques. The centralized procurement may promote the domestic usage to align with overseas trends.

Centralized procurement also has the opportunity to become a catalyst for promoting the development of other niche markets, accelerating the rapid growth of small joint markets such as elbow, ankle, and shoulder joints.

Currently, the market volume of small joints in China is dozens of times smaller than that in the United States, with a gap much larger than the disparity in the hip and knee joint markets.

In 2018, there were over 1.7 million hip and knee replacement surgeries in the United States, while in China, the number of hip and knee surgeries did not reach 1 million. However, in the U.S., the number of shoulder surgeries reached hundreds of thousands, whereas in China, there were only about 10,000 shoulder surgeries. The number of ankle surgeries in the U.S. reached 20,000, while in China, it was only a few hundred. In the small joint market, there is still significant growth potential for the domestic market in China.

The growth rate of the small joint market is also much higher than that of the hip and knee joint markets. Centralized procurement could become an accelerator for the small joint market, leading to rapid development in a more refined small joint market.

As an important细分领域 in orthopedics, changes in the artificial joint market involve the博弈 of multiple forces, and the formation of a new market pattern represents a new平衡 reached through the博弈 of these forces. Beneath this new平衡 lies fierce competition among companies.

Referencing the experience of cardiac stent centralized procurement, the result of winning a bid is not necessarily the final determinant of success or failure. Winning a bid does not mean permanent security, as there are situations where low-price bids lead to losses in both volume and price. In the中标 market for artificial joints, how will domestic companies strategize?

For the artificial joint centralized procurement, it is generally divided into two major camps: imported and domestically produced. However, from the perspective of selection volume, the market for top-tier imported brands remains relatively stable.

An industry insider stated: "If we look at the total volume, nearly 30 domestically produced companies have won bids, there is no doubt that domestically produced products can secure a larger volume. However, the bidding situation for first-tier imported companies is very good, with large volumes and high prices."

For companies in China, competition among domestically produced products is also quite fierce. Although the leading domestic companies have all won bids, there are also companies that won bids with low prices. Some domestic companies, despite winning bids across the board, do not have a significant price advantage compared to imported products.

Overall, front-line enterprises among import companies have more advantages, and domestically produced products will also expand their market share in centralized procurement. Ultimately, whose pie will be divided?

Industry insiders said: "The easiest to be eliminated are second-tier imported brands and domestically produced brands with weak product competitiveness. Because when centralized procurement eliminates the price factors that affect product selection, the market will ultimately choose products, and companies with stronger product competitiveness will have a more obvious advantage."

In the game of artificial joint collection, it is worth mentioning that the non-winning market space for artificial joints cannot be ignored.There is also a certain space for the non-centralized procurement market of orthopedic artificial joints, which is quite different from the stent centralized procurement market.

First, the procurement volume of artificial joints in this round is based on the data from 2020. The compound annual growth rate of China's artificial joint market from 2015 to 2019 was 20.65%. The volume reported for centralized procurement accounted for 90% of the market share in 2020. However, with market growth, the volume of the non-winning market is larger, expected to account for 20% of the market share in 2021.

The space for non-winning markets is mainly influenced by two factors: one is the payment standard set by local medical insurance bureaus for products that did not win bids; the other is the selection criteria for these non-winning products. These two aspects are significantly affected by policies, and currently, there are varying policies issued across different regions.

Across China, the prices of non-winning products in most provinces and cities are capped at the winning price, but Fujian Province has offered a more relaxed policy.

Fujian Province Sets the Medical Insurance Payment Standard for Non-Selected Artificial Joints at 25,000 Yuan/Set

The payment standards and selection criteria for non-winning markets await the introduction of policies from more provinces and cities.

The centralized procurement of artificial joints has also catalyzed the rise in the field of orthopedic digitalization, with orthopedic joint surgical robots becoming a pipeline that domestic companies are increasingly investing in. Domestic companies such as MicroPort and b-ONE have all stepped up their R&D investment in surgical robots.

With the implementation of artificial joints, the "third order" of the national organization's medical consumables centralized procurement — orthopedic spine category — has also entered the specific implementation phase.WEGO ORTHO, a domestic orthopedic consumables manufacturer, previously stated at an investor exchange meeting that compared to standard joint surgeries, spinal surgeries have higher requirements for the surgeons and carry greater risks. The National Healthcare Security Administration will seek advice from experts and may adopt rules that are less stringent than those for joints.

But as the implementation of the artificial joint procurement has shown us, nothing is certain until the end. Procurement is not the final journey for domestic companies. Perhaps no period in the history of orthopedic enterprises has seen a stronger sense of crisis than now, with policies and rules constantly changing. However, the goals of a group of companies in China have not changed.

As one orthopedic artificial joint company told VCBeat: "In the global artificial joint market, which is so large, there is still no influential Chinese brand. Domestic companies still have a long way to go."