How Lepu Medical Achieved Resilient Growth Amidst China's Volume-Based Procurement Cycle

On April 25, Lepu Medical released its first-quarter report for 2022. The data showed that Lepu Medical's revenue in the first quarter of 2022 was approximately RMB 2.549 billion. As of March 31, 2022, Lepu Medical's total assets reached RMB 21.391 billion, an increase from the end of 20213.35%。

In the first quarter of 2021, affected by the COVID-19 pandemic, Lepu Medical’s revenue from related diagnostic reagent products reached nearly RMB 610 million. In the first quarter of 2022, as the overall situation of the COVID-19 pandemic eased, revenue from these related diagnostic reagent products amounted to approximately RMB 130 million. Excluding the impact of COVID-19-related diagnostic reagent products, the year-on-year growth rate of Lepu Medical’s core business revenue in Q1 2022 was 15.17%.

Lepu Medical, as a platform-based enterprise covering the research and development, production, and sales of pan-cardiovascular products, has its main business involving three major sectors: medical devices, pharmaceuticals, and healthcare services & health management.

In December 2018, the state-organized centralized drug procurement was launched; in December 2019, the COVID-19 pandemic successively broke out; in November 2020, national centralized procurement of coronary metal stents was implemented. Affected by factors such as the pandemic and centralized procurement, many healthcare companies have experienced a significant decline in revenue in recent years.

However, Lepu Medical’s revenues during the three-year centralized procurement cycle from 2019 to 2021 were RMB 7.796 billion, RMB 8.039 billion, and RMB 10.66 billion, respectively, achieving sustained and stable revenue growth. This was despite the inclusion of its three major products—clopidogrel, atorvastatin, and coronary metal stents—in the centralized procurement program, which led to price reductions of approximately 60%, 90%, and 90%, respectively.

Amid the advancement of centralized procurement policies, the application of new technologies, and the promotion of new products, the medical device market has become increasingly volatile. During this period of market transformation, how has Lepu Medical maintained stable revenue growth? What exactly is the secret behind its counter-trend revenue growth?

By analyzing Lepu Medical's annual report and Q1 2022 quarterly report, we believe that its stable revenue growth is mainly attributed to the following five aspects:

In November 2020, coronary metal stents were included in the national centralized procurement program, resulting in a 90% reduction in market prices. Prior to this, coronary metal stents were one of Lepu Medical’s core products. Following the implementation of centralized procurement, Lepu Medical’s sales revenue from stent products related to the program amounted to RMB 845 million, representing a year-on-year decrease of 38.5%.

In response to the negative impact of centralized procurement on market prices, Lepu Medical has further increased its R&D investment in innovative medical device products. In 2019, 2020, and 2021, Lepu Medical’s R&D expenditures reached RMB 631 million, RMB 806 million, and RMB 1.111 billion, respectively.

Driven by a near-doubling of R&D investment, Lepu Medical’s innovative interventional products—including bioresorbable stents, drug-coated balloons, cutting balloons, left atrial appendage occluders, and fully bioresorbable occluders—were successively approved for market launch between 2019 and 2021.

Compared with coronary metal stents, the newly launched bioresorbable scaffold by Lepu Medical is made of bioresorbable materials and degrades within 2–3 years after implantation, allowing patients to discontinue lifelong antiplatelet therapy and providing more options for subsequent treatments. Compared with coronary metal stents, the newly launched drug-coated balloon by Lepu Medical leaves no metallic mesh residue and involves no intravascular implant, thereby offering long-term benefits to patients.

Driven by the clinical superiority of its interventional innovative products and Lepu Medical’s marketing efforts, the company’s revenue has achieved substantial growth. In 2021, the operating revenue from Lepu Medical’s portfolio of interventional innovative products increased by 827.36% year-on-year; in the first quarter of 2022, revenue from this portfolio rose by 118.14% compared to the same period of the previous year.

Lepu Medical’s Q1 report shows that the robust and rapid development of its innovative interventional product portfolio not only offset the decline in revenue from coronary metal stents, but also drove overall growth in its medical device segment.

From the current perspective, the volume-based procurement policy in the generic drug sector will become a normalized measure. With the aging population trend and the successive expiration of patents for innovative drugs, the generic drug market is expected to maintain low-speed growth in the future.

In response to the normalized volume-based procurement (VBP), Lepu Medical aims to exchange volume for price. To date, its clopidogrel and atorvastatin have both successfully won bids in the VBP. Following the procurement, the selling price of clopidogrel dropped by over 50%, while that of atorvastatin fell by more than 90%. In terms of sales volume, Lepu Medical’s flagship product, atorvastatin calcium, saw its annual sales rise from approximately 90 million boxes before the VBP to 320 million boxes in 2020.

According to the Q1 2022 financial report, Lepu Medical’s pharmaceutical segment revenue decreased by 9.40% year-on-year compared with that in Q1 2021. Lepu Medical projects that its full-year pharmaceutical revenue will remain flat relative to 2021, providing the company with a long-term, stable cash flow.

Leveraging products that won bids in centralized volume-based procurement (VBP), Lepu Medical has accelerated the hospital entry and sales of its non-winning drug products, driving rapid revenue growth for other pharmaceuticals. Additionally, Lepu Medical’s cardiovascular drugs generate synergies with medical device sales, ensuring the sustainable and stable development of its pharmaceutical business. Meanwhile, Lepu Medical has strengthened its layout in the diabetes sector, accelerating the market launch of products such as insulin glargine, thereby creating new revenue streams.

Cardiovascular diseases are primarily age-related conditions, with a high prevalence among the elderly population. According to data from the Seventh National Population Census conducted by the National Bureau of Statistics, as of November 1, 2020, the number of people aged 60 and above in mainland China reached 264 million, accounting for 18.7% of the total population, and this figure is projected to continue its upward trend in the future.It is foreseeable that the incidence of cardiovascular diseases will continue to rise in the future.

Driven by a vast patient population and growing health needs, it is reasonable to infer that the unmet demand for cardiovascular treatments remains substantial, ensuring continued robust growth in the cardiovascular industry. Consequently, Lepu Medical’s pharmaceutical business is poised for steady expansion.

Lepu Medical’s medical services and health management segment primarily comprises three major business areas: AI-based vital signs monitoring, home-use medical devices, and medical services (including cardiovascular specialty hospitals, internet hospitals, third-party testing and inspection centers, and health examination centers).

Leveraging its AI-ECG artificial intelligence platform, Lepu Medical integrates hardware and software products to monitor various vital signs (such as ECG, sleep, and respiration) in both home and clinical settings, enabling real-time, long-term AI-powered ECG monitoring and assisted diagnosis. To date, the company has established revenue streams across medical devices, consumables, software systems, and data analytics.

The AI-ECG artificial intelligence platform is primarily associated with arrhythmic disorders. Arrhythmias can range from mild symptoms such as palpitations and dizziness to severe outcomes including syncope and sudden cardiac death. These conditions are characterized by their sudden onset, short duration, and unpredictable occurrence. Currently, clinical diagnosis of arrhythmias relies mainly on conventional resting electrocardiograms (ECGs) or ambulatory ECG monitoring. However, conventional ECGs often fail to capture paroxysmal arrhythmias, while ambulatory ECG monitoring presents challenges due to the large volume of data and the complexity of analysis.

The AI-ECG artificial intelligence platform not only leverages AI technology to provide intelligent assistance in ECG interpretation but also integrates with Lepu Medical’s smart home ECG devices to enable real-time, long-term monitoring and auxiliary diagnosis. Meanwhile, Lepu Medical has launched digital electrocardiographs for use by medical institutions; when paired with the AI-ECG platform, these devices enhance the efficiency and accuracy of ECG interpretation at primary healthcare facilities, thereby strengthening their overall medical capabilities.

AI-ECG: An Innovative Solution Addressing Current Industry Pain Points, with Broad Market Potential. As of December 31, 2021, Lepu Medical's AI-ECG Heart Center had been deployed in over 9,100 institutions, with a cumulative volume of more than 160 million real-time ECG services.

Lepu Medical stated, “Under this business model, artificial intelligence can simultaneously achieve medical applications and commercial monetization in both clinical and home settings. In the first quarter of 2022, the routine operations of the medical services and health management segment, excluding products related to the COVID-19 pandemic, saw a year-on-year revenue increase of 43.15%.”

Nowadays, the normalization of centralized procurement policies and the expansion of product categories included have led to a complex landscape in the medical device market.

To mitigate policy-related and market risks within a single sector, Lepu Medical has adopted a diversified business strategy.

For example, in the medical device sector, Lepu Medical has leveraged its platform-based technological advantages to establish a presence in specialized fields including coronary implantation and intervention, peripheral implantation and intervention, cardiac rhythm management, electrophysiology, structural heart disease, in vitro diagnostics, surgery, anesthesiology, and dentistry, while building comprehensive product portfolios within each of these segments.

Specifically, in the field of coronary intervention, Lepu Medical’s main products include traditional metal stent systems, bioresorbable stents, drug-coated balloons, cutting balloons, and vascular access products.

In the field of structural heart disease, its main products include atrial septal defect occluders, ventricular septal defect occluders, patent ductus arteriosus occluders, fully bioresorbable occluders, left atrial appendage occluders, patent foramen ovale occluders, transcatheter implantable aortic valve systems, and transapical mitral valve repair systems;

In the field of in vitro diagnostics, its product portfolio includes biochemical, immunological, molecular, hematology, and coagulation diagnostic tests, covering segmented platform technologies such as POCT colloidal gold, fluorescence, enzyme immunoassay, chemiluminescence, and quantitative fluorescent PCR. In the field of surgical anesthesia, its products mainly include various staplers, ultrasonic scalpels, digestive and respiratory tract interventional stents, minimally invasive surgery auxiliary products, and anesthesia consumables.

Lepu Medical’s 2021 annual report shows that as of the end of 2021, Lepu Medical had cumulatively applied for 1,385 patents, launched more than 600 products domestically and internationally, and obtained 513 Class II and Class III medical device registration certificates approved by the NMPA.

Notably, these diversified sectors are becoming new engines for Lepu Medical’s revenue growth. Its 2021 annual report stated that products in niche segments such as in vitro diagnostics and surgical anesthesia have also become new drivers of performance growth.。

To address the significant market price reductions caused by centralized procurement policies and the unpredictable domestic market, Lepu Medical has launched an internationalization strategy in addition to the aforementioned measures. The company is continuously strengthening the research and development of medical devices for global markets and accelerating the clinical adoption and commercialization of its innovative products overseas.

After years of accumulation, Lepu Medical has obtained 33 U.S. FDA approvals and 171 EU CE certifications for its products. Driven by the market access and sales of various innovative products overseas, Lepu Medical’s overseas revenue reached RMB 554 million, RMB 1.542 billion, and RMB 3.76 billion in 2019, 2020, and 2021, respectively. Among these figures, the proportion of overseas revenue to total revenue increased from 7.11% in 2019 to 35.27% in 2021.

Having navigated the centralized procurement cycle and emerged from the trough in revenue growth, Lepu Medical now stands at a new starting point.

Looking Ahead,Lepu Medical will, on the one hand, build upon its previous successful experiences by continuing to increase R&D investment and intensify efforts to cultivate new businesses; on the other hand, Lepu Medical will embark on new explorations:

First,Plan based onProductThe dual advantages in the market have driven rapid revenue growth.In terms of products, Lepu Medical will promote the "biodegradability" of implantable and interventional devices to enhance their clinical advantages. In the market, Lepu Medical will strengthen the marketing and promotion of innovative devices such as biodegradable occluders, drug-coated central venous catheters, and ultrasonic scalpels, thereby helping to increase the product penetration rate of its innovative devices.

Second,Pharmaceutical Segment Transforms into CDMO, it began the research and development of intermediates for various COVID-19 specific drugs in the fourth quarter of 2021, and implemented technological improvements to its corresponding production capacity. Currently, Lepu Medical has established the manufacturing capability for various Paxlovid intermediates and possesses a certain level of production capacity.

Previously, VCBeat observed that as patents for several blockbuster drugs gradually expire, originator pharmaceutical companies are increasingly seeking CDMO partners to optimize manufacturing processes and reduce costs. The active pharmaceutical ingredient (API) industry is progressively shifting toward emerging countries such as China and India, with China’s position in the global API supply chain rapidly strengthening due to its cost advantages. Meanwhile, Western pharmaceutical companies are increasingly outsourcing their CDMO operations to emerging markets like China, which offer significant cost benefits.

Benefiting from the aforementioned factors, Everbright Securities Research Institute believes that the market size of China’s CDMO industry is expected to reach RMB 52.6 billion in 2024. Driven by the rapid development of China’s CDMO sector, the CDMO businesses of industry players such as Lepu Medical are also poised for steady growth.

Third,Explore consumer healthcare businesses.For example, the 2021 annual report indicated that, in response to the increasingly diverse healthcare needs of the general public, Lepu Medical would further explore the consumer medical device sector by developing devices targeted at individual consumers, thereby continuously increasing the proportion of consumer-oriented products in its total revenue. Meanwhile, Lepu Medical has notedOphthalmology, Dentistry, DermatologyThe rapid growth in demand for improvement-oriented solutions in these fields has prompted a plan to explore entry into this sector, thereby achieving multi-engine business growth.

No.IV, plans to accelerate its expansion into overseas markets.For example,In March 2022, Lepu Medical decided to issue Global Depositary Receipts (GDRs) overseas and list on the SIX Swiss Exchange. Through this approach, Lepu Medical aims to meet its overseas funding needs, enhance its visibility in the international market, and further expand into overseas markets.

Lepu Medical stated, “In the future, the Company will continuously advance overseas clinical trials and product registrations for innovative products in the fields of coronary implantable interventions, peripheral implantable interventions, structural heart disease, and electrophysiology devices.”

In addition, Lepu Medical plans to establish production bases in overseas countries or regions to shorten its production radius, reduce manufacturing costs, better access local and global markets, and increase the proportion of overseas sales. Meanwhile, Lepu Medical also intends to further increase its investment in developing countries.

Following established precedents is not about sticking to old ways, but rather about adopting past successful experiences and scaling them up. Lepu Medical achieved steady counter-trend growth during the volume-based procurement cycle. By continuing to implement its proven strategies, the company is more likely to sustain rapid and steady revenue growth in the future.