SonoScape Medical Turns Profitable in 2021 Driven by Dual Engines of Marketing Reform and R&D Output, Entering Its Best Growth Phase

On the evening of April 26, 2022, a listed medical device companySonoScape (Stock Code: 300633) released its 2021 annual report and Q1 2022 quarterly report. The data showed that in 2021, SonoScape's operating revenue reached RMB 1.445 billion, a year-on-year increase of 24.20%; net profit attributable to shareholders of the parent company was RMB 247 million, representing a year-on-year surge of 634.43%, marking a turnaround from loss to profit.In the first quarter of 2022, SonoScape reported operating revenue of RMB 371 million and net profit attributable to shareholders of RMB 51.08 million, representing year-on-year increases of 31.53% and 41.36%, respectively.

During the reporting period, SonoScape continued to make substantial investments in research and development (R&D). In 2021, its R&D expenditure amounted to RMB 263 million, accounting for 18.21% of its operating revenue. Notably, in 2021, SonoScape successfully implemented a private placement of shares, raising RMB 769 million, with a significant portion of the proceeds allocated to enhancing the company’s R&D capabilities and technological proficiency.

SonoScape’s two actual controllers have technical backgrounds, and the company has long been known for its technological prowess. Since its listing, there have been frequent voices in the industry describing SonoScape as “strong in R&D but weak in sales.” Particularly after the capital operation turmoil in 2020, SonoScape’s performance was significantly affected, turning from profit to loss. To some extent, its strength in R&D and technology has become one of the risk assessment factors considered by the market regarding SonoScape.

However, as the saying goes, “after the darkest clouds comes the brightest dawn.” In 2021, SonoScape achieved its annual business targets, turned losses into profits, and delivered impressive performance. So, what did SonoScape do right? What was the key to its turnaround? Can it achieve the long-term growth projected in its outlook?

By analyzing SonoScape’s annual report, VCBeat believes that the company’s turnaround from loss to profit was mainly due to the following three aspects:

As a domestic enterprise engaged in the independent research and development, manufacturing, and sales of medical diagnostic and therapeutic equipment, SonoScape’s main products include medical ultrasound diagnostic systems, medical electronic endoscopy systems, and related consumables. Ultrasound and endoscopy, as its core business segments, account for 65.47% and 29.61% of SonoScape’s total revenue, respectively, collectively representing over 95%.

China’s medical device industry started relatively late, and the localization rate remains low in sectors such as ultrasound and endoscopy. However, with significant advancements in technology, industrial capabilities, supply chains, and talent, domestic medical device technologies have achieved notable breakthroughs. In the ultrasound sector, Chinese companies have made substantial technical progress, with leading enterprises beginning to venture into the high-end color Doppler ultrasound market. In the endoscopy field, a new wave of innovation is emerging, with hybrid endoscopes becoming one of the key pathways for overtaking competitors on the curve.

According to Frost & Sullivan’s “2021 Research Report on China’s Medical Ultrasound Equipment Industry,” domestically produced ultrasound equipment accounts for 65% of the market, but is concentrated in the mid-to-low-end segment. As one of the leading companies in the domestic ultrasound field, SonoScape holds a 10% share of the domestic market for its ultrasound products. According to SonoScape’s annual report, its revenue from color Doppler ultrasound products in 2021 was approximately RMB 946 million, representing a year-on-year increase of 20.61%.

A review of the annual report reveals that SonoScapeOne of the key factors driving the robust growth of the ultrasound business lies in the continuous expansion of its mid-to-high-end product portfolio.. The high-end market represents the next step in the domestic substitution of ultrasound systems. In recent years, SonoScape has successively launched the S60 and P60 series of high-end color Doppler ultrasound systems, and has derived multiple product lines from its high-end product platform, making sustained inroads into the high-end market. From the perspective of its product portfolio, its more than 20 ultrasound models have formed a comprehensive lineup spanning high-, mid-, and low-end segments, covering diverse application scenarios.

Notably, in 2021, SonoScape launched its new obstetrics and gynecology ultrasound product, “Fengying” (P60 Series), which is China’s first intelligent ultrasound system based on dynamic image automatic detection technology. The color Doppler ultrasound X5 is the first domestically produced medical imaging equipment to be deployed in the Tianhe core module.

Overall, in 2021, SonoScape’s high-end color Doppler ultrasound systems continued to make breakthroughs in obstetrics and gynecology as well as general imaging applications, leading to an increased installation base in domestic Grade A tertiary hospitals. In overseas markets, the company achieved robust sales growth by leveraging a flexible product portfolio, thereby accumulating a channel network and user base for its mid-to-high-end products.

Meanwhile, as the leading domestic manufacturer of flexible endoscopes, SonoScape entered the endoscopy field in 2013. Its product portfolio currently covers gastroenterology, otolaryngology, respiratory medicine, and surgery, along with corresponding diagnostic and therapeutic consumables. In 2021, SonoScape’s revenue from endoscopes and endoscopic therapeutic instruments reached RMB 428 million, a year-on-year increase of 39.03%. Behind this figureMainly due to the expansion of its market channels and the continuously enriched endoscopy product portfolio.。

SonoScape’s overseas marketing network has accumulated significant strength over the years, with a continuous expansion of specialized distribution channels for its endoscopy products. Meanwhile, amid the pandemic, the company’s persistent market investment and commitment to ensuring product shipments further maintained and expanded its sales volume and installed base in overseas markets. Additionally, by successively launching new products such as high-definition bronchoscopes, high-definition rigid endoscopy systems, and endoscopic ultrasound devices, SonoScape has broadened its target markets and secured access to more specialized distribution channels.

Particularly in the field of endoscopic ultrasound, SonoScape’s successive approvals for its radial and linear array echoendoscopes have made it the fourth manufacturer globally and the only one in China capable of providing endoscopic ultrasound systems (EUS) that represent the industry’s most advanced level. This achievement further solidifies its industry position and brand influence in the endoscopy sector, laying a strong foundation for its entry into the high-end market.

In 2006, SonoScape’s ultrasound products entered the international market and rapidly expanded to multiple countries. Its 2021 annual report shows that, by region, revenue from overseas markets reached RMB 666 million, accounting for 46.07% of total revenue, representing a year-on-year increase of 34.24% compared with 2020. We have compiled data on its domestic and overseas revenues and their respective proportions since the company’s listing; historically, the shares of the two markets have remained close, as shown below:

Source: SonoScape's Annual Reports Over the Years

Data reveals the significance of overseas markets to SonoScape. Despite the impact of the pandemic, the company has remained committed to investing in its international operations. In its 2021 annual report, SonoScape repeatedly highlighted the progress achieved in overseas markets across both its ultrasound and endoscopy businesses.

In 2021, SonoScape’s overseas marketing system continuously expanded into new market spaces. By promoting new products such as portable color Doppler ultrasound systems and high-definition electronic bronchoscopes, as well as mid-to-high-end offerings, the company gradually established overseas distribution channels for point-of-care ultrasound and respiratory care. Building on its prior foundation, SonoScape continued to expand the number and coverage of its distribution channels in the mid-to-high-end markets for its two core business segments.

From the perspective of its overseas marketing team structure, SonoScape has established overseas subsidiaries and local teams stationed abroad in multiple regions worldwide. In 2021, it gradually expanded its professional marketing force targeting the surgical market, thereby accelerating the acquisition of specialized overseas channels for rigid endoscopy products and their installation at end-user hospitals. Meanwhile, it added corresponding service institutions in Romania, ASEAN countries, North America, and other regions, laying the groundwork for further expansion and deep penetration in overseas markets, particularly those with high growth potential.

In terms of marketing strategies, taking into account the impact of the pandemic, its team flexibly implemented integrated online and offline academic promotion exchanges and after-sales support service plans, initially establishing an overseas-oriented academic promotion model suited to the post-pandemic era. This has not only accumulated experience for future promotions but also significantly enhanced the team’s responsiveness and operational capabilities.

SonoScape’s overseas marketing system, having withstood the test of time through years of accumulation and the challenges posed by the pandemic, is becoming increasingly mature and has achieved remarkable results. However, when it comes to SonoScape’s overall marketing landscape, the label of “strong R&D, weak sales” has long persisted within the industry. In response, SonoScape initiated reforms in its domestic marketing strategy starting in 2019.

There are two key focuses of the reform,First, restructure the organizational framework of the domestic marketing system to deepen management, integrate resources, and enhance execution capabilities.. From the data, SonoScape's selling expenses from 2019 to 2021 were RMB 407 million, RMB 324 million, and RMB 367 million, respectively.

In terms of reform direction, a matrix organizational structure featuring “one vertical and one horizontal” integration of comprehensive macro-regions and product lines was established in 2019. In 2020, dedicated business units for the ultrasound and endoscopy product lines were formed, along with a newly established comprehensive product line unit, each responsible for serving customers at different tiers, thereby establishing a multi-faceted, multi-tiered domestic marketing organizational framework.

Building on the experience gained in 2021, we further advanced the development of a refined marketing system. Improvements were made across multiple dimensions, including per-capita team efficiency, market strategy formulation, product information collection, and customer experience. For instance, we gradually established a spare parts inventory and continuously optimized outlet maintenance centers to provide more effective and faster services. Additionally, we increased investment in information systems and streamlined marketing processes to enhance the work efficiency of marketing personnel and the company’s comprehensive service capabilities.

Second, build a core team of distributors to achieve more efficient and comprehensive market coverage and opportunity acquisition, with more precise targeting of key customers.. Data shows that from 2019 to 2021, SonoScape leveraged its brand and the leading effect of high-end window hospitals to continuously attract, cultivate, and integrate distributor resources, achieving a significant increase in the number of core distributors and a notable expansion of its secondary channel scale.

Amid the pandemic backdrop, SonoScape’s ongoing transformation of its domestic marketing system demonstrated greater value in 2021. In 2021, the company maintained robust growth in routine orders while securing substantial demand from new infrastructure projects, expansion and renovation initiatives, and emergency pandemic reserves. During the reporting period, the market share of its Ultrasound 60 Series and Endoscopy HD-550 Series products in tertiary hospitals reached a historic high. Meanwhile, these products achieved solid development and exhibited significant competitive advantages in secondary hospitals, the private healthcare sector, and primary care markets.

In 2020, SonoScape experienced a decline in performance, with revenue reaching RMB 1.163 billion, a year-on-year decrease of 7.24%. The primary reason was the goodwill impairment associated with its previous acquisitions of Shanghai Wilson and Shanghai Heyi Medical. As Wilson and Heyi Medical failed to meet their performance commitments, goodwill impairments of RMB 20 million and RMB 200 million were recorded in 2019 and 2020, respectively, significantly dragging down SonoScape’s financial performance.

The risk of goodwill impairment for SonoScape was gradually cleared in 2021. The company has also fully taken over Wilson Endoscopy, promoting a synergistic strategy combining flexible endoscopes and consumables. In 2021, Wilson Endoscopy reported operating revenue of RMB 67.27 million, representing a year-on-year increase of 32.66%.

During the reporting period, SonoScape successfully implemented its private placement of shares to specific investors, raising net proceeds of RMB 769 million. The financing plan was first publicly disclosed in September 2020, and the company received approval from the China Securities Regulatory Commission (CSRC) for the private placement in March 2021. In October 2021, SonoScape convened a shareholders’ meeting to extend the validity period of the private placement. Nevertheless, the financing plan was ultimately completed successfully in 2021.

SonoScape’s annual report indicates that this refinancing initiative marks a new starting point for the company’s development. The construction of funded projects—including R&D initiatives for color Doppler ultrasound systems and endoscopes, the headquarters base project, and the Songshan Lake SonoScape Medical Device R&D and Production Project—will help enhance the company’s R&D capabilities, establish new R&D and production bases, and lay a solid foundation for its long-term growth.

Furthermore, SonoScape was penalized in a 2019 bidding process and was barred from participating in military procurement activities for three years. It is estimated that the company suffered order losses of approximately RMB 40 million from military hospitals. With the penalty period now concluded, SonoScape is poised to regain opportunities in these relevant channels.

SonoScape has resumed revenue growth, further confirming that the performance decline in 2020 was “incidental” rather than indicative of a crisis in its core business operations. Does this return to growth signal sustained momentum? Is SonoScape truly, as Chairman Chen Zhiqiang stated, “at its best now”?

With economic development and an aging population, the scale of China’s medical market continues to expand. In the field of medical devices, policies encouraging independent innovation and supporting the procurement of domestically produced equipment have created a historical opportunity for “import substitution” for Chinese medical device manufacturers. Furthermore, as domestic pandemic prevention and control measures become normalized and overseas restrictions are gradually lifted, market operations are trending toward normalcy and stability.

In 2021, the development of SonoScape’s various business segments aligned with its annual plan: the ultrasound business achieved steady growth, while the endoscopy business maintained a high growth rate. Marketing reforms were successfully advanced, and overseas marketing and promotion yielded outstanding results. Underpinning all these achievements is SonoScape’s product portfolio and R&D system.

R&D is the core competency that determines the strength of a company’s business. SonoScape places great emphasis on R&D. Its R&D expenditures from 2018 to 2021 were RMB 223 million, RMB 254 million, RMB 237 million, and RMB 263 million, accounting for 19.03%, 20.33%, 20.41%, and 18.21% of its operating revenue, respectively. As of the end of 2021, SonoScape and its subsidiaries held a total of 617 granted patents, representing a year-on-year increase of 20.74%.

During the reporting period, it completed the registration of 11 new products.In the ultrasound sector, SonoScape launched the P50 Plus, P40 Plus, P50 Elite, and P40 Elite series of mid-to-high-end ultrasound systems, while the P60, an AI-powered color Doppler ultrasound system specialized in obstetrics and gynecology, rapidly gained market traction. In the endoscopy sector, the company introduced high-end digestive radial array echoendoscopes and second-generation bronchoscopes for respiratory care, gradually incorporating advanced features such as optical magnification, and launched 4K-30 rigid endoscopes, marking its formal entry into the minimally invasive surgery field.

The launch of multiple new products is the fruit of years of intensive R&D investment. According to SonoScape’s annual report,2022 was a year of “concentrated output” for its R&D efforts. Early in the year, it had already obtained domestic registration certificates for products such as optical magnification endoscopes, stiffness-adjustable endoscopes, and slim endoscopes. In the second half of the year, convex-array ultrasound endoscopes and intravascular ultrasound systems were expected to receive certification as well, while the new-generation ultrasound platform and the new-generation endoscopic system were also scheduled to obtain registration approval in 2022.。

Overall, as its products mature, SonoScape is advancing into the high-end market. Under its multi-product-line strategy, SonoScape is poised to sustain rapid new growth. On one hand, there is still room for further market penetration of new products launched in recent years; on the other, continuous technological advancements are driving a steady stream of new offerings, helping SonoScape expand its business reach in terms of both market depth and breadth.

The Q1 2022 quarterly report shows that its revenue reached RMB 371 million, a year-on-year increase of 31.53%; net profit attributable to shareholders of the parent company increased by 41.36% year on year. SonoScape, gradually emerging from the predicament of “high input, low output,” is beginning to expand its revenue scale under the trend of domestic substitution, leveraging its rich product portfolio and breakthrough high-end products, with further expansion of profit margins expected.