Riding the Wave of Centralized Procurement: How IVD Giants Are Navigating the Storm
In late August, news that Anhui Province would launch centralized procurement of in vitro diagnostic (IVD) reagents further chilled the already cooling domestic IVD industry. At that time, county-level and above hospitals in Anhui Province will include five categories comprising 23 products in centralized procurement, targeting chemiluminescence reagents—the segment with the greatest growth potential in the IVD industry.
In fact, Chinese IVD companies have long been taking measures to cope with the ongoing transformation. On an evening in early August, Sansure Biotech issued a brief announcement officially terminating its acquisition of shares in Kehua Bio-engineering held by Zhuhai Baolian Assets. This move temporarily brought to a close the highly publicized “snake swallowing an elephant” case involving domestic IVD enterprises. As previously agreed, Sansure Biotech was to acquire an 18.63% stake in Kehua Bio-engineering from Gree Real Estate at a premium price of RMB 1.95 billion, and had already paid an initial installment of RMB 585 million on May 28. The company did not elaborate on the specific reasons for terminating the acquisition in its announcement; however, external speculation suggests that it may be related to earlier share subscription issues involving Kehua Bio-engineering and its subsidiary, Tianlong Technology.
The unexpected conclusion to what was once hailed as a classic industrial M&A deal is lamentable. Yet behind this lies the dawn of a new era of large-scale mergers and acquisitions in China’s IVD industry.
In May, Mindray Medical announced the acquisition of HyTest for €545 million (approximately RMB 4.26 billion), thereby bringing aboard the global IVD industry’s most critical raw material supplier, with whom it had collaborated for a decade.
In June, Sansure Biotech announced its plan to acquire a 14.77% equity stake in Zhenmai Bio for a total consideration of RMB 255 million, thereby strengthening its upstream layout in key technologies such as fluorescence detection, nucleic acid modification, dye synthesis, enzyme mutagenesis, and surface chemistry processes.
In July, ZJ Bio stated during an institutional investor survey that it would simultaneously extend its operations upstream and downstream in molecular diagnostics, including projects such as the development of key raw materials for reagents and equipment. The company is considering either building its own platforms or pursuing acquisitions, and revealed that it is currently evaluating potential targets both domestically and internationally.
In August, Orient Gene successfully acquired Beijing Shouyi Clinical Medical Technology Co., Ltd., expanding its presence in the Chinese market.
With this move, the “Big Four” of COVID-19 testing—ranked by their 2020 relevant revenues—have all embarked on industrial M&A, BGI Genomics being the exception only in name as it too has joined the trend. Coupled with Mindray Bio-Medical’s high-profile €545 million acquisition of Hytest in May, it is evident that the long-dormant wave of domestic IVD mergers and acquisitions has been reignited. So, how does this current M&A surge differ from previous ones? And how will this round of industrial consolidation reshape the competitive landscape of China’s IVD sector?
Historically, the commercial penetration of molecular diagnostics grew slowly due to lower clinical recognition compared to traditional biochemical and immunological diagnostics. Most molecular diagnostic companies struggled to enter hospitals, resulting in slow revenue growth and tight cash flow. However, based on 2020 operating revenues, two molecular diagnostic firms—Daan Gene and Sansure Biotech—displaced Meikang Bio (specializing in biochemical diagnostics) and Autobio Diagnostics (specializing in immunodiagnostics), respectively, to break into the top 10. Meanwhile, Orient Gene replaced Wondfo Biotech to become the only POCT company on the list. Notably, Daan Gene’s revenue surged to RMB 5.341 billion, ranking sixth in the 2020 IVD revenue rankings. Sansure Biotech recorded a staggering RMB 4.763 billion in revenue, equivalent to the sum of its revenues over several previous years, ranking just behind Daan Gene. With total revenues of RMB 3.265 billion, Orient Gene outperformed Wondfo Biotech, which operates in a highly similar market segment.
In other words, the blockbuster product of COVID-19 testing has turned molecular diagnostic companies, which previously lacked some operational momentum, into cash flow giants. Taking Sansure Biotech as an example, at the end of 2019, the company’s cash and cash equivalents on hand were less than RMB 100 million, but this figure grew to RMB 2.591 billion in the following year, while accounts receivable increased from over RMB 60 million to RMB 1.601 billion. Oriental Biotech also experienced similar changes, with its cash and cash equivalents and accounts receivable growing from RMB 85 million and RMB 83 million, respectively, at the end of 2019, to RMB 2.039 billion and RMB 626 million.
This sudden surge in liquidity is being deployed in several ways: a portion is used for lavish dividends, such as Bioswamp’s distribution of RMB 55 per 10 shares; another portion is allocated to wealth management products, as seen with Da An Gene’s plan to use up to RMB 1.5 billion of its idle proprietary funds to purchase bank structured deposits and principal-guaranteed financial products; however, the majority of the capital is directed toward industrial mergers and acquisitions (M&A), driving profound transformations within the industry. This implies that IVD companies that previously had no M&A intentions or temporarily lacked the capacity for such deals will initiate acquisition activities in the near term, leading to shifts in the landscape of M&A targets.
An investor with years of experience in M&A within the IVD industry confirmed to VCBeat that since 2021, the domestic IVD M&A market has seen a significant surge in activity. This trend is driven equally by companies’ strategic development plans and the long-term impacts of the COVID-19 pandemic.
During an era when the clinical adoption of molecular diagnostics faced significant challenges, the in vitro diagnostics (IVD) industry was dominated by biochemical and immunodiagnostic products. The market was highly fragmented across various niche segments, characterized by rapid technological advancements and diverse clinical application scenarios. Within a total market valued at less than RMB 200 billion, more than 6,000 IVD companies were operating, even though the largest segment, immunodiagnostics, had a market size just exceeding RMB 10 billion. This phenomenon can be attributed to the relatively low technical and capital barriers in the IVD industry, coupled with a mature upstream and downstream ecosystem. As a result, many distributors were able to transition into manufacturers, establishing IVD enterprises with annual profits exceeding RMB 10 million.
Against this backdrop, characterized by a wide variety of products and complex, rapidly emerging micro-innovations in niche technologies, the underlying logic of growth in the IVD industry relies on strengthening products and distribution channels to capture as many products as possible and cover as many scenarios as possible. For instance, Mindray acquired Suzhou Huisun, Changsha Tiandiren, Beijing Pulisheng, and Shanghai Changdao in July 2011, December 2011, 2012, and 2014, respectively. By sequentially incorporating urinalysis, microbiological testing, and coagulation analysis into its industrial portfolio, Mindray completed its lineup of eight major clinical diagnostic product lines, thereby securing a long-term leading position amid the intense domestic competition in the IVD sector. Furthermore, Maccura Biotechnology entered the hematology and flow cytometry fields through acquisitions; Autobio Diagnostics expanded into the clinical chemistry segment via mergers and acquisitions; and Zyhui Medical entered the clinical mass spectrometry market through similar strategies. For traditional IVD enterprises, the significance of industrial M&A for growth lies primarily in complementing their product pipelines.
However, as the IVD industry enters a new era of M&A dominated by molecular diagnostics companies, suppliers of products with higher technical barriers and greater difficulty in scenario substitution are strengthening their control over the upstream and downstream segments of the industrial chain. This enables them to build brands and comprehensive service capabilities within vertical niches, thereby transforming homogeneous competition into differentiated competition.
Building an IVD brand requires timing, but even more so, determination.
Despite early developmental challenges, Sansure Biotech remains a staunch advocate of molecular diagnostics. Dai Lizhong, Chairman of Sansure Biotech, previously stated that over the past year, nucleic acid testing capabilities across medical institutions at all levels have improved significantly. He anticipates a substantial increase in the number of nucleic acid testing projects launched in the future, with usage volumes poised for rapid growth. Therefore, Sansure Biotech’s strategic moves to acquire Kehua Bio-engineering and Genetron Health to intensively strengthen its upstream capabilities in molecular diagnostics are easily understandable.
Kehua Bio-engineering was the first domestically listed in vitro diagnostics (IVD) company in China, holding a market share in blood screening second only to Roche and Daan Gene. However, prior to Sansure Biotech’s decision to acquire it, Kehua Bio-engineering experienced frequent changes in ownership and suffered from relatively chaotic internal management following rapid mergers and acquisitions. Its market capitalization and revenue levels fell far short of those of contemporaries such as BGI Genomics and Autobio Diagnostics, placing considerable pressure on Sansure Biotech.
However, Kehua Bioengineering has a subsidiary named Tianlong Technology, which specializes in the independent R&D and sales of nucleic acid extractors, PCR instruments, and supporting reagents. It is one of the few high-quality domestic enterprises in China engaged in the R&D of molecular diagnostic instruments. Data shows that in 2020, Tianlong Technology’s real-time fluorescent quantitative PCR instruments ranked among the top three in domestic sales for the first time, while its nucleic acid extractors surpassed imported brands in market share, establishing it as the leader in this niche sector in China. By acquiring Kehua Bioengineering, Sansure Biotech stands to gain core capabilities in nucleic acid testing instrumentation from Tianlong Technology, thereby mitigating the potential risk of heavy reliance on external procurement of PCR instruments and nucleic acid extractors. For Sansure Biotech, which is committed to building its brand in the field of molecular diagnostics, upstream instrumentation should be an indispensable component of its product portfolio.
Founded in 2012, Genetron Bio focuses on the research, development, and manufacturing of upstream equipment and reagents for the gene sequencing industry. The company holds more than 200 domestic and international intellectual property rights in several critical technologies previously subject to bottlenecks, including fluorescence detection and nucleic acid modification. The gene sequencing platform is widely regarded as the “crown jewel” of the genetic testing field. Its high degree of multidisciplinary integration and complexity have allowed overseas giants to maintain a long-standing monopoly over the supply side, spanning from first-generation to third-generation sequencing technologies.
GenoCare, the single-molecule gene sequencing system developed by GenoCare Bio, is specifically designed for clinical settings. It is the first domestically produced single-molecule sequencer to obtain EU CE certification and is expected to receive market approval from the National Medical Products Administration (NMPA) in the second half of 2021. GenoCare has been installed and put into use at more than ten institutions, including sequencing companies, research institutes, hospital laboratories, and centers for disease control and prevention. In addition, GenoLab, the high-throughput sequencing platform independently developed by GenoCare Bio, features a novel design and holds significant application potential in the fields of reproductive health, cancer detection, and microbial metagenomics. Upon completion of the transaction, Sansure Biotech will become the second-largest shareholder of GenoCare Bio and one of the few enterprises in China with in-house sequencing capabilities.
Meanwhile, other molecular diagnostics companies, such as DAAN Gene, BGI Genomics, and Zhijiang Biology, have been enriching their ecosystems through equity investments. Unlike private equity investment, which emphasizes financial returns, corporate venture capital aims to nurture startups into becoming stronger players, ultimately bringing them into the corporate fold. In recent years, innovation and entrepreneurship in the molecular diagnostics sector have ignited multiple tracks, including digital PCR, non-invasive prenatal testing (NIPT), tumor next-generation sequencing (NGS), metagenomic next-generation sequencing (mNGS), and early cancer screening, making it the field that attracts the most venture capital funding each year. VCBeat has learned that whether to accept investment from corporate capital has become a key consideration for many startup teams in molecular diagnostics.
In China, the IVD industry actually has no giants; instead, it has long been squeezed between the upstream and downstream segments of the industrial chain.
IVD companies have very weak bargaining power against upstream suppliers. On one hand, they are highly dependent on upstream raw materials; a significant portion of IVD product costs is allocated to raw material procurement, and the quality of these materials directly impacts the quality of reagent products. On the other hand, their demand for specific types of raw materials is very small. The upstream sector represents nearly a seller’s market in relation to IVD companies.
Specifically, the bulk of procurement costs for IVD companies consists of structural components and electronic parts used in instrument manufacturing. With annual installation volumes amounting to only a few thousand units, IVD companies are essentially retail customers compared to automotive and smartphone manufacturers that procure similar materials but ship hundreds of thousands to millions of units. The same holds true in the specialized antibody procurement market. In 2019, leading IVD companies such as Mindray Medical, YHLO Biotech, and Wondfo had purchase amounts from Fapon Biotech all below RMB 20 million. Calculated at an antibody price of RMB 40 per milligram, Fapon Biotech could fulfill the annual order of a single IVD company with just one reaction run in a 500-liter fermentation tank.
IVD companies have long harbored ambitions to replace their upstream suppliers. According to industry insiders, Mindray Medical’s interest in acquiring HyTest emerged as early as three years ago. Prior to the acquisition, HyTest had already been supplying Mindray Medical for over a decade consecutively.
Secondly, upstream players pose a threat to the market space of IVD companies. As we have already witnessed new investment hotspots in the capital markets, the COVID-19 pandemic has also fueled the rapid growth of upstream biological reagent manufacturers that supply core raw materials. Since the value added from producing and selling raw materials is significantly lower than that of finished reagent products, many domestic manufacturers that started with IVD raw materials tend to extend their product lines downstream after completing their initial capital accumulation. With the successive listings of upstream core raw material suppliers such as Sino Biological, Vazyme, and Fibio, the increasingly powerful upstream sector is squeezing the market space from above, which undoubtedly poses a threat to IVD enterprises. In addition to the core raw material companies that have already gone public or are preparing for IPOs, this bottleneck segment has become a popular target for investment over the past two years, giving rise to a host of outstanding enterprises such as Hanhai New Enzyme, Apis, Biopss, and Yinjia Biology.
The primary threat from upstream lies with leading IVD companies. This is the deeper reason why Mindray Medical chose to acquire HyTest rather than building its own raw material R&D and production capabilities. As one of the world’s most important biological reagent manufacturers, HyTest boasts strong R&D capabilities, and its cardiac troponin I (cTnI) has become the gold-standard biomarker for diagnosing myocardial infarction. For Mindray Medical, deep integration with HyTest’s technical team—ranging from rapidly enhancing know-how in raw material development to establishing high-performance R&D capabilities for new biomarkers—will undoubtedly strengthen its ability to counter new challenges posed by industry entrants.
In fact, even as we enter a new era of large-scale mergers and acquisitions, domestic IVD companies still have many shortcomings before they can emerge as industry giants.
First, the level of automation remains insufficient. Based on differences in technological pathways and application scenarios, IVD products can be categorized into two major groups: routine testing items and specialized testing items. Low levels of automation primarily affect routine testing items, which are predominantly conducted in the clinical laboratories of healthcare institutions. According to the "Catalogue of Clinical Laboratory Tests for Healthcare Institutions," there are over one thousand types of routine testing items, covering areas such as hematology and body fluids, clinical chemistry, and immunodiagnostics.
For clinical laboratories, the continuously growing sample volume has overwhelmed daily operations, thereby generating strong demand for centralized, automated, and intelligent solutions. In recent years, high-throughput automation lines have become a prominent mainstream trend across biochemical diagnostics, immunodiagnostics, and molecular diagnostics. Taking biochemical and immunological diagnostics as an example, cascaded biochemical-immunological automation lines are being rapidly adopted worldwide, with the global installed base of Roche’s cobas 8000 and Siemens’ Atellica systems growing swiftly. However, Chinese-made in vitro diagnostic (IVD) equipment rarely appears on the stage of high-throughput automation lines; they often participate only by offering reagents at more competitive prices, remaining relatively marginalized.
Second, operational convenience remains insufficient. At present, the more than 6,000 IVD companies in China are almost all concentrated on hospital-based clinical testing, resulting in limited capacity to meet the demands of emergency and primary care testing. On one hand, as various national authorities have successively issued guidelines for the construction and management of the “Five Major Centers”—namely Chest Pain Centers, Stroke Centers, Trauma Centers, Centers for Critically Ill Pregnant Women and Maternal Care, and Centers for Critically Ill Children and Neonates—these five types of emergency centers have been rapidly established across the country, generating substantial demand for rapid emergency diagnostics. On the other hand, diagnostic capabilities at primary healthcare institutions in China remain weak; many areas do not even offer routine laboratory tests, which hinders the implementation of tiered diagnosis and treatment and underscores the need for more convenient and faster testing tools. For IVD companies, the long-standing inability to adequately meet the needs of emergency and primary care testing represents both a weakness and an opportunity.
Third, the level of specialization in specialized testing projects remains insufficient. Currently, although specialized testing is primarily concentrated in third-party laboratories, the continuous spillover of in-hospital testing demands has increasingly elevated the importance of these specialized tests. However, the underlying business logic for IVD companies providing routine testing differs significantly from that for specialized testing. The latter requires extensive academic research and education, necessitating deep cultivation within specific medical specialties. This imposes higher demands on the professional capabilities of IVD companies, which is precisely the area where IVD enterprises, accustomed to intense competition in the routine testing market, are most deficient. After all, historical experience shows that in specialized testing segments characterized by a "winner-takes-all" dynamic, those achieving leading positions almost invariably have founding teams with strong technical or medical backgrounds. For instance, companies such as Berry Genomics, BGI, and Kindstar Global, which excel in molecular diagnostics and hematology-specific testing, were founded by teams originating from leading technology platforms, top-tier research groups, or clinical settings. The professional barriers established by such founders are difficult for IVD companies, whose strengths lie primarily in channel expansion, to overcome.
We believe that under the volume-based procurement (VBP) policy, the market will inevitably give rise to several IVD giants with sufficiently high barriers in technology, market presence, and product offerings. However, the path of mergers and acquisitions (M&A) is far from smooth. The complexity of M&A can be glimpsed from the high-profile but ultimately failed acquisition of Kehua Bio-Engineering by Sansure Biotech. Therefore, it is difficult to predict which company will ultimately emerge as a leading IVD giant.