MicroPort Medical's Coronary Stents Successfully Win Bids with Over 50% Price Reduction Amid National Volume-Based Procurement

Original Title: Centralized Procurement Reaches Cardiac Stents; MicroPort’s Products Successfully Win Bids with Price Cuts Exceeding 50% Source: Gelonghui

According to a report by Cailianshe, on July 31, the Nanjing Healthcare Security Administration conducted intense negotiations with manufacturers of domestic and foreign cardiac stents (coronary stents).Lepu Medical, the bid-winning product prices of companies such as MicroPort have decreased by more than 50%, marking another centralized procurement of high-value consumables following the one in Anhui Province.

Affected by this news, MicroPort (0853.HK) opened 4.22% lower today, then quickly rallied. By the close, the company’s stock price was down 2.71%, closing at HK$6.450 per share.

MicroPort primarily focuses on minimally invasive interventional products for the treatment of vascular diseases and lesions. The company operates eight major business segments. In 2018, its annual revenue reached RMB 4.598 billion, with orthopedic medical devices accounting for 35.3%, cardiovascular interventional products for 30.3%, cardiac rhythm management medical devices for 23.7%, aortic and peripheral vascular interventional products for 5.2%, electrophysiology medical devices for 1.9%, neurointerventional products for 2.8%, and surgical medical devices along with diabetes and endocrinology medical devices for 0.9%, reflecting a diverse product portfolio.

In 2018, the company’s cardiovascular intervention business generated revenue of US$203 million, a year-on-year increase of 24.2%. Revenue from its flagship product, the Firehawk™ stent, rose by 48.5% year-on-year (excluding exchange rate impacts), with sales achieved in 24 countries and regions. Balloon catheter products saw a 60.1% year-on-year growth (excluding exchange rate impacts). Drug-eluting stents were covered in over 1,700 hospitals across China, representing an 18.9% year-on-year increase. In 2018, revenue from the company’s large artery and peripheral vascular intervention products amounted to US$35 million, a year-on-year increase of 41.1%, primarily driven by the rapid growth of the domestic endovascular aortic treatment market and the products’ significant competitive advantages. The neurointerventional products business grew by 36.4% year-on-year, benefiting from the products’ safety and efficacy as well as their leading market position.

The company continued to invest in research and development. In 2018, its R&D expenses amounted to USD 105 million, representing a year-on-year increase of 80.24% and accounting for 15.65% of the annual operating revenue.

Multi-Dimensional Consumables Reform

On July 31, the General Office of the State Council issued the latest reform document related to high-value medical consumables: "Notice of the General Office of the State Council on Issuing the Reform Plan for the Governance of High-Value Medical Consumables" (Guo Ban Fa [2019] No. 37). This is another document primarily targeting the medical device industry, especially consumable products, following the release of the "Administrative Measures for Medical Consumables in Medical Institutions (Trial)" by the National Health Commission in June. From the perspective of the issuing authority, this document has been elevated to the level of the General Office of the State Council; in terms of content, it mainly focuses on the field of high-value medical consumables and provides clear directions for specific implementation as well as deadlines for various division-of-labor tasks.

Given that some medical consumables are non-standard products, managing the vast array of specifications for a single product presents immense challenges. Furthermore, as there is no consistency evaluation for these consumables, this centralized procurement initiative employs a multi-pronged approach to systematically transform the existing market landscape.

(1) Standardized product control involves the classification and coding of high-value consumables on a national scale. This measure is not only a prerequisite for strict regulatory oversight but also an essential means of controlling product prices. In terms of specific products, subsectors such as cardiovascular/peripheral vascular intervention and orthopedic consumables feature the most complex variety of specifications among high-value consumables; consequently, achieving centralized procurement for all specifications nationwide presents significant challenges and may require a prolonged implementation period. In contrast, medical devices with higher degrees of standardization, such as in vitro diagnostics (IVD) and endoscopes, will rapidly achieve nationwide centralized procurement.

(2) Medical Insurance Access: Ensuring the Effective Exercise of Bargaining Power in Volume-Based and Cross-Provincial Procurement. In the past, medical device procurement and insurance reimbursement policies were fragmented across provinces and even cities, resulting in administrative complexities and a lack of unified bargaining power for medical insurance authorities, while imposing cumbersome market entry procedures on enterprises. This situation is expected to change in the future. Following pharmaceuticals, volume-based procurement of high-value medical consumables has been officially placed on the agenda.

(3) Elimination of markups on medical consumables and stringent management of clinical pathways. Several months ago, the 5%-10% markup that hospitals previously added to high-value medical consumables was abolished. Following the implementation of centralized volume-based procurement, sales commissions formerly provided to physicians will also disappear. Coupled with the requirement to “improve clinical diagnosis and treatment standards and guidelines for key departments and major diseases, strictly enforce clinical pathway management, and enhance the standardization of clinical care,” the influence of Diagnosis-Related Groups (DRGs) is evident. High-value medical consumables, like drugs subject to centralized procurement, will become cost items for hospitals. The long-term goal of China’s healthcare reform, known as “swapping the cage for new birds,” aims to offset this loss in revenue by increasing the prices of medical services. Zhejiang Province has already raised prices for certain medical services. As service prices in public hospitals increase, those in private hospitals are rising accordingly, further enhancing the profitability of private hospitals.

(4) Strengthen distribution management and encourage the “Two-Invoice System.” The Two-Invoice System for high-value medical consumables is merely “encouraged” rather than mandatory, reflecting a relatively more moderate policy approach. Nevertheless, given that high-value medical consumables will increasingly be procured through volume-based procurement in the future, the compression of value in the medical device distribution sector is inevitable.

The Impact of Centralized Procurement on MicroPort

According to reports, the winning bid price for Lepu’s stents priced below RMB 10,000 has currently dropped to around RMB 3,000, representing a price reduction of over 50% for Lepu and the company. From the perspective of the company’s gross profit margin, the decline in product prices may further reduce its gross profit margin.

According to Wind, the company’s gross profit margin on product sales exceeded 80% prior to 2013; however, it experienced a sharp collapse in 2014 and has since been unable to return to the 80% level.

However, based on last year’s centralized procurement and the high-value consumables procurement model in Anhui Province, Nanjing’s procurement model for cardiac stents is likely to align with the aforementioned two models, which is expected to reduce the company’s selling expenses. In 2018, the company’s selling expenses amounted to RMB 1.495 billion, while its net profit was only RMB 126 million. Given the small base of the company’s net profit, a significant reduction in selling expenses is expected to substantially boost its profitability.

Furthermore, inclusion in centralized procurement is expected to boost the company’s product sales volume. Despite significant price reductions, the company remains profitable. If this model is expanded nationwide, industry consolidation is likely to increase while competition decreases, which will benefit the long-term development of the company’s business.