China's Myriad Small Medtech Firms Stuck at Tens of Millions in Annual Revenue — M&A Is the Only Way Forward

Editor’s Note: This article is republished from Health News at 8, authored by Tan Zhuozhao. VCBeat has been authorized to republish it.

In 2002, Zhang Yi returned to China after working in the United States for many years and was appointed President of MicroPort through an external hire. At that time, the domestic medical device market was completely dominated by foreign companies such as Johnson & Johnson and Medtronic. In recent years, benefiting from policies such as tiered diagnosis and treatment and accelerated review and approval of drugs and medical devices, China’s domestically produced medical device industry has entered a golden period of development. However, the industry’s fragmented landscape, characterized by numerous, small, and scattered enterprises, has not significantly improved. Moreover, most domestically produced medical devices in China are still concentrated in the mid-to-low-end segments.

After leaving MicroPort, Zhang Yi founded Peijia Medical. To this day, he and many investors are still seeking an answer to the question: “Why has China not produced a medical device giant on par with Medtronic?”

At the recently held “3rd Healthcare Investment Excellence Summit,” Liu Hao, Founder and CEO of Haoyue Capital, highlighted the prevailing challenges: “Domestic medical device companies are facing two major challenges. First, the overall entry barrier for the industry is relatively low. Second, the market potential of most companies’ flagship products is limited, with a low ceiling for single-product revenue.”

For leading medical device companies, he offered a path to breakthrough—mergers and acquisitions.

Compared with the pharmaceutical industry, the medical device industry started later and is smaller in scale.

Data from the "Blue Book of Chinese Medical Devices" shows that in 2018, the market size of China's medical device industry was approximately RMB 530.4 billion, a year-on-year increase of 19.86%. However, during the same period, the market size of China's pharmaceutical industry reached RMB 1.71 trillion. Industry data indicates that by the end of 2017, there were 16,000 medical device manufacturing enterprises in China. Although the number of medical device companies is large, the vast majority are small in scale and weak in competitiveness.

According to Yuan Ji, Chief Research Officer at Guangzheng Hengsheng, domestic medical device companies can be divided into three tiers. The first tier comprises industry leaders in specific segments, such as Mindray Medical and Xinhua Medical, which collectively hold a 10% market share, with each company generating annual revenues of approximately RMB 10 billion. The second tier includes companies like Lepu Medical and Yuwell Medical, which have recently emerged as leaders in single-product categories; these firms each report annual revenues of around RMB 2 billion and account for roughly 60% of the market share. The third tier consists of a large number of companies competing fiercely for the remaining 30% market share, with an average scale of around RMB 10 million.

As of now, there are a total of 52 listed medical device companies in China’s A-share market. Mindray Medical (300760.SZ), the leader in the first tier, released its annual performance flash report, showing that the company achieved a total operating revenue of RMB 13.753 billion in 2018. Meanwhile, Medtronic’s 2018 financial report indicated that its operating revenue was USD 29.953 billion.

This means that in the Chinese market, there is still an opportunity for medical device giants of Medtronic’s scale to emerge. A review of the growth histories of multinational medical device giants reveals that mergers and acquisitions are an indispensable keyword.

Data from Guangzheng Hengsheng shows that over the past two decades, global industry giants Medtronic and Roche completed mergers and acquisitions worth $58.3 billion and $25.6 billion, respectively. Correspondingly, their medical device sales revenues increased from $4.5 billion and CHF 6.3 billion in 2000 to $30 billion and CHF 12.1 billion in 2017, respectively.

In the domestic market, M&A activity in the medical device sector continues to heat up.

Data shows that the number and value of mergers and acquisitions in the healthcare and medical device industry rose from 125 deals totaling $2.82 billion in 2014 to 185 deals totaling $4.9 billion in 2017.

2018 was also a peak year for mergers and acquisitions (M&A). In that year, two M&A deals in China’s medical device industry each exceeded RMB 5 billion: Blue Sail Medical’s acquisition of Biosensors International for RMB 5.9 billion, and Weigao Group’s acquisition of U.S.-based Argon Medical Devices for RMB 5.6 billion. These transactions ranked eighth and ninth, respectively, among all global M&A deals in 2018 by value. According to Lu Qinchao, founder of Danlu Capital, “Investment in the domestic medical device sector is accelerating, with very active M&A activity among companies.”

“Consolidation through M&A is a major trend in the medical device industry.” This consensus was shared by multiple companies at the conference. Liu Hao stated that Weigao (01066.HK) serves as an excellent case study of continuously “leveling up and overcoming challenges” to “break through fierce competition.” Established in Shandong Province in 2000, Weigao initially focused on low-value consumables. After its listing on the Hong Kong Stock Exchange, Weigao acquired Shandong Jiwei and later formed a joint venture with Medtronic—Weigao Orthopaedics—to enter the high-value consumables sector. It also partnered with Japanese firms to expand into the hemodialysis field. Following its acquisition of U.S.-based Argon last year, Weigao secured a core platform for its international markets. In 2004, the first year of its public listing, Weigao’s market capitalization stood at only RMB 600 million; today, it has soared to RMB 36 billion.

For enterprises, mergers and acquisitions (M&A) not only enable scale expansion but also rapidly diversify product portfolios and enhance competitiveness.

Yuan Ji noted that the medical device industry comprises more than 30 subsectors. Certain segments have become highly concentrated, particularly in in vitro diagnostics (IVD), cardiovascular devices, spinal and orthopedic devices, and medical imaging. In these areas, the CR10 (the percentage of total industry output accounted for by the ten largest companies) exceeds 75%, with major players largely having reached their performance ceilings. Meanwhile, due to characteristics such as rapid technological maturation, short product iteration cycles, significant functional homogenization, and market-based pricing, medical device companies are vulnerable to external competitive threats.

Zhang Yi cited an example, noting that Peijia Medical’s strength lies in heart valve technology. If it were to integrate with a company specializing in neuro-related devices, it could create a larger platform capable of addressing the two health concerns most prominent among the Chinese population: cardiac and cerebral health. “We aim to become a more platform-oriented medical device company, so that we can engage with international companies on equal footing and draw their attention to the importance of the Chinese market.”

For some small enterprises, mergers and acquisitions (M&A) serve as an exit strategy. Qian Tingzhi, President of Jingxu Venture Capital, pointed out, “While the current entrepreneurial environment does have its positive aspects, we must also recognize that a large number of companies find themselves at a loss after obtaining their registration certificates; even after two years, their products remain unsold.”

In response, Yang Zhenjun, Vice President of Haoyue Capital, cited a statistic: 2017 saw the highest number of listed healthcare companies, with only 12 medical device companies conducting initial public offerings (IPOs). “A large number of companies are unable to pursue an IPO exit and instead need to exit through mergers and acquisitions.”

Regarding the selection of targets for mergers and acquisitions (M&A), Yuan Ji offered rational recommendations. For first-tier enterprises, the strategic focus lies in cross-sector M&A to break through industry ceilings. For second-tier enterprises, M&A efforts should prioritize capturing market share within their existing sector and maintaining technological relevance. For third-tier enterprises, the priority is to build competitiveness in niche segments; thus, M&A activities should not be rushed.

If mergers and acquisitions (M&A) are executed too rapidly, improper integration can become a significant burden on the enterprise. Starting in 2012, Xinhua Medical expanded its footprint through M&A, acquiring a 75% equity stake in Changchun Boxun for RMB 314 million and purchasing a 60% shareholding in Westard Medical Co., Ltd. for RMB 394 million. However, following the high-premium acquisition of Yingde Biology, the company’s performance failed to meet targets for several consecutive years, significantly impacting Xinhua Medical’s development. Its market capitalization plummeted from a peak of RMB 23.386 billion in 2015 to a low of RMB 5.146 billion.

Johnson & Johnson in the United States has also experienced failed M&A cases in the field of cardiac stents. However, J&J adheres to two principles for acquisitions: first, it only acquires companies that are ranked first or second in their industry; second, if an acquired company falls to third place, J&J will divest it.

Shi Yonghui, Managing Director of Medtronic China Fund, believes that “in the case of cross-sector mergers, not only technology but also the company’s operational system and specialty capabilities are taken into consideration; however, such companies are rare and hard to come by.”

“Over the next 20 years, China is highly likely to become the largest market for medical devices globally.” According to Qian Tingzhi, President of Jingxu Venture Capital, the Chinese medical device industry possesses significantly stronger growth momentum compared to both its U.S. counterpart and China’s own pharmaceutical industry.

Compared with the number of listed pharmaceutical companies, medical device manufacturers are clearly at a disadvantage. However, the growth rate of the medical device market exceeds that of the pharmaceutical market, being approximately twice as high. In terms of market size, the ratio of medical devices to pharmaceuticals in developed countries is basically 1:1, the global average is about 0.7:1, while China’s ratio is only 0.25:1. This indicates that the medical device market has substantial room for future growth.

Hua Yi, Director of the New Business Development Department at Johnson & Johnson Medical, believes that China possesses strong innovation capabilities. For instance, in the field of coronary stents, Chinese companies started from scratch to compete with foreign enterprises and are now on par with them in terms of technology and products. “The overall scale of China’s medical device industry, as well as all its subsectors, has been underestimated. Future development trends should be built upon China’s manufacturing capabilities, and the domestic medical device market is poised to surpass the pharmaceutical industry in size.”

Regarding future investment directions, Liu Hao believes that the first area is minimally invasive interventional devices, particularly those targeting structural heart disease. Chinese valve companies, both large and small, will undergo at least two more rounds of financing. With the listing of Venus Medtech, investors will continue to increase their commitments to this sector. The second area is surgical robots. “There is no clear industry leader in this field domestically yet. Although the technical barriers are high, overseas giants have defined their strategic directions. Over the past year or so, venture capital firms have completed investments in the top ten companies in this industry. Investment in this sector is expected to continue growing in the future.”