China Medical Technology and Medical Devices Industry Investment White Paper 2017: Growth Far Outpaces Global Peers with Immense Market Potential

Industry Trends

From 2011 to 2016, the compound annual growth rate (CAGR) of revenue in China’s medical technology and medical device industry reached as high as 20.7%, significantly exceeding the global CAGR of approximately 3%. In 2016, the market size of China’s medical technology and medical device sector was approximately RMB 370 billion, an increase of RMB 62 billion from RMB 308 billion in 2015, representing a year-on-year growth rate of about 20.1%. The market size is projected to reach approximately RMB 600 billion by 2019. Among these, imaging equipment, in vitro diagnostics (IVD), and high-value consumables constitute the top three sub-segments of the medical technology and medical device market, accounting for 19%, 16%, and 13% of the total market size, respectively. In terms of the pharmaceutical-to-device ratio, the current scale ratio of China’s medical device market to its pharmaceutical market is only about 1:7, far below the global average of 1:3. Regarding per capita expenditure on medical technology and devices, China’s current per capita spending is merely USD 6, whereas developed countries exceed USD 100 per capita; the United States reaches USD 329 per person, and Switzerland even reaches USD 513 per person. Therefore, whether measured by diagnostic and therapeutic methodologies or by consumption levels, China’s medical technology and device market possesses substantial room for growth.

We have observed that national policies play a significant guiding role in shaping the future trends of the medical technology and medical device markets. The Announcement on Priority Review Procedures for Medical Devices, issued in October 2016, clarified the priority review procedures for six major categories of medical devices, including those for rare diseases and malignant tumors. This policy has further supported the rapid development of the domestically produced medical device market, building upon recent years’ efforts to promote the localization of medical devices. Meanwhile, following the official implementation of the “Two-Invoice System” for pharmaceuticals, the Key Tasks for Deepening Healthcare System Reform in 2016, released in April 2016, proposed advancing centralized procurement and online public trading of high-value medical consumables, signaling the impending introduction of a “Two-Invoice System” for medical devices.

Beyond policy factors, the gradual aging of the population and the increase in patient visits have further driven up per capita healthcare expenditures. The proportion of China’s population aged 65 and above has risen year by year, reaching 10.5% of the total population in 2015, marking the country’s entry into an aged society. In the same year, the total number of medical consultations nationwide reached 7.7 billion, representing an approximately 30% increase from the 5.8 billion recorded in 2010, with an average of six medical visits per person annually. Consequently, the growing demand for healthcare consumption will sustain strong growth momentum in the medical device industry.

Overall, China's medical technology and medical device market will exhibit the following key development trends in 2017:

1. The Full Implementation of the Two-Invoice System Drives Channel Transformation

In 2017, the Two-Invoice System will move from last year’s pilot programs to full-scale implementation. Large enterprises will deepen their channel penetration, while small and medium-sized distributors will face elimination, consolidation, or transformation. Against this backdrop, three major trend-driven transformations will emerge within the industry: horizontal acquisitions, vertical integration, and business transformation.

In terms of horizontal acquisitions, large commercial companies with ample capital, strong capabilities, and extensive distribution networks will continuously merge with and integrate regional channels, transforming them into providers of supply chain integration solutions, thereby ushering in a surge in performance.

Vertical integration can be further categorized into three types: First, downstream channelization by manufacturing enterprises, where large manufacturers acquire distributors, such as Medcon acquiring Yitian Biology and Autobio acquiring Shengshi Junhui. Second, upstream in-house production by distribution enterprises, where distributors acquire upstream technologies, exemplified by Runda Medical, which originated as a distributor, merging with high-barrier POCT product lines. Third, downstream servitization by distribution enterprises, where distributors extend their reach to end-user services, such as Dian Diagnostics continuing to actively expand its network of third-party terminal laboratories. Vertical integration grants companies greater bargaining power across the supply chain, thereby enhancing profit margins through synergies.

Transformation refers to the shift in business models between medical device manufacturers and channel companies. For instance, some medical device distributors have transformed into Contract Sales Organizations (CSOs) against the backdrop of the Two-Invoice System, the replacement of business tax with value-added tax (VAT), and comprehensive industry rectification. Similarly, some agency-based medical device commercial enterprises may transition into distribution-focused commercial entities under these same circumstances.

In summary, mergers and acquisitions, expansion, and transformation among distributors will gradually lead to consolidation in the distribution sector, representing the future path for channel integration under the trend of the Two-Invoice System.

2. Tiered Diagnosis and Treatment Brings Opportunities for Domestically Produced Equipment

In 2017, the reform of tiered diagnosis and treatment will continue to deepen and be rolled out comprehensively across China. Although patient perceptions will not change rapidly, as the saying goes, “the duck knows first when the spring river warms,” tiered diagnosis and treatment will drive the allocation of medical resources down to the primary care level. Unlike the high-end medical equipment market in China, which is monopolized by foreign companies, the vast primary healthcare market has long been a stronghold for domestic brands. From a policy perspective, the state also encourages and supports primary healthcare institutions in adopting high-quality domestically produced medical devices and equipment. We anticipate that, with policy incentives and increased funding focus, outstanding domestic device brands—whether established players with strong distribution channels and product portfolios or emerging innovators with unique technological advantages—will experience explosive growth in the primary care sector.

This presents opportunities on two fronts: one for upgrading and replacing existing equipment at the primary care level, and the other for devices that can meet the growing demand for primary healthcare while being easy to operate. We will focus on primary care equipment sectors, including diagnostic testing devices (especially POCT and rapid testing equipment), home-use devices related to chronic disease management, medical rehabilitation equipment, physician follow-up and monitoring devices, and safe and user-friendly imaging equipment such as ultrasound.

3. Device-Based Third-Party Services Are Emerging

As healthcare reforms deepen and various emerging models are continuously explored, we believe that an increasing number of institutions and companies will recognize that a “mutually beneficial model,” which serves hospitals and achieves win-win outcomes with them, is better suited to the current healthcare business environment than a “disruptive model” that seeks to overturn hospitals or capture their business. In this context, third-party service providers based on medical devices will have significant opportunities for growth, and various “Internet Plus” mindsets and models will be integrated into these services.

In October 2016, the National Health and Family Planning Commission (NHFPC) issued the *Notice on the Basic Standards and Management Specifications for Medical Laboratory Centers (Trial)*, clarifying that medical laboratory centers are independently established medical institutions, constitute independent legal entities, bear corresponding legal liabilities independently, and are subject to establishment approval by provincial-level health and family planning administrative departments. Subsequently, in January 2017, the NHFPC promulgated the *Interpretation of the Basic Standards and Management Specifications for Independently Established Medical Institutions such as Medical Imaging Diagnostic Centers*, which explicitly affirmed that it is imperative for medical imaging, laboratory testing, blood purification, and pathology centers to operate as independent medical institutions.

It is evident from the National Health and Family Planning Commission’s supportive policies regarding third-party diagnostics, imaging, and pathology, as well as the strategic investments and mergers and acquisitions by major healthcare enterprises, that emerging intensive service models—such as third-party diagnostics, imaging, pathology, logistics, sterilization, maintenance, and equipment bundling based on medical devices and equipment—will significantly drive the development of the healthcare industry. Given that these sectors are also capital-intensive, a substantial volume of investment and M&A activities is anticipated.

In the third-party clinical laboratory sector, industry leader KingMed Diagnostics is preparing for its initial public offering, while emerging players such as Qianmai Medical and Beijing Hehe are rapidly expanding with continued capital support. In the third-party medical imaging sector, Yimai Yangguang secured Series A financing from Goldman Sachs, and companies like Ping An Good Doctor and the listed Guangyu Group are actively establishing their presence in this field. In the sterilization sector, Laoken Medical and Sinopharm Holdings are actively developing third-party sterilization supply chains. Meanwhile, third-party medical equipment maintenance providers such as Kunya Medical and Keduo Medical have listed on the National Equities Exchange and Quotations (NEEQ) and secured capital investment, respectively.

We have also observed that third-party diagnostic service providers, such as independent clinical laboratories and independent imaging centers, can not only serve hospitals but also tap into the vast consumer market. By effectively integrating early screening and health check-up products and services, they can break free from the constraints of the hospital-centric model and create a healthcare market worth trillions. Furthermore, if these services are combined with “Internet Plus” technologies like big data and artificial intelligence, or integrated with new drug development, they will hold immense explosive potential.

4. New Technologies Penetrate the Medical Device Sector

Early screening technologies, artificial intelligence, 3D printing, and medical robots will bring about a disruptive revolution in diagnosis and treatment.

Early screening can currently be divided into two major categories: early screening for genetic disorders and early cancer screening. Early screening for genetic disorders typically refers to prenatal screening and the calculation of disease risk through genetic testing. Early cancer screening involves the early detection of tumors before clinical symptoms appear, using methods such as liquid biopsy and gene sequencing. Both approaches are of significant importance for improving population health quality and enhancing cancer survival rates. Recently, Grail, a company specializing in early cancer screening, secured $900 million in Series B financing, reigniting strong investor interest. The importance of early screening is self-evident, and its integration with technologies such as AI-assisted diagnosis is expected to create a trillion-dollar blue-ocean market in the future.

In the realm of AI-assisted diagnosis, the integration of artificial intelligence with medical imaging has recently become a focal point of intense interest. Last year, the volume of medical images in China and the United States grew by 30% and 63%, respectively, while the number of radiologists increased by only 4.1% and 2.2%. This disparity has created a substantial gap between the supply and demand for imaging diagnostics. The emerging trend of AI-based image interpretation is poised to revolutionize future diagnostic radiology, addressing the limitations of manual diagnosis in both volume and accuracy. Currently, an AI system developed by scientists from Google Brain and Verily has achieved an accuracy rate of 88.5% in breast cancer diagnosis, significantly outperforming the 73.3% accuracy rate of renowned human pathologists. Future breakthroughs in expanding the range of diseases diagnosed by AI and improving diagnostic accuracy will align perfectly with the rapid growth of the third-party medical imaging industry, positioning cloud-based imaging diagnostic platforms as the ultimate solution for image interpretation.

3D-printed medical devices represent another emerging field. In recent years, 3D printing in the orthopedic device sector has seen initial clinical adoption, exemplified by Stryker’s 3D-printed knee replacements, AK Medical’s 3D-printed hip joints, and Ketai Medi’s 3D-printed critical bone structures. Dentistry constitutes another major application area for 3D printing; global industry leaders such as BEGO and Planmeca have actively developed 3D printing equipment tailored for dental applications, while systems from companies like 3D Systems and EOS have also begun to be introduced into Chinese hospitals. Technological iteration will remain a definitive trend driving the development of the medical device market.

In 2016, the global medical robotics industry generated approximately $8.5 billion in revenue. Conservative estimates project a compound annual growth rate (CAGR) of 15% over the next five years, with the market expected to exceed $15 billion by 2020. Surgical robots will account for 60% of this market, while rehabilitation robots will comprise 20%. Among surgical robots, the da Vinci Surgical System has successfully performed over one million complex procedures since its approval. Rehabilitation robots are also increasingly entering the market amid gradual technological breakthroughs. According to projections by the University of Michigan’s Rehabilitation Robotics Association, the CAGR for rehabilitation robots will reach 37% over the next five years, significantly higher than that of other medical robots. In this field, exoskeleton robots from foreign companies such as ReWalk, Cyberdyne, Hocoma, and Woodway have begun to emerge. Meanwhile, domestically produced medical robots from Chinese rehabilitation medical device companies—including Diehe Technology, Fourier Intelligence, and Anyang Shenfang—are gradually being put into clinical use.

Companies developing these emerging technologies in the medical device sector are still in their early stages, with financing primarily concentrated at the Pre-A and A rounds. We anticipate a surge in both new startups and investment activities in these fields this year, with leading players beginning to emerge. It remains to be seen who will stand out in the competition between technology platform companies versus vertical-focused firms, and between corporate innovation departments versus small startups. We believe that technology platform companies should be evaluated on their ability to facilitate technology transfer and implementation; vertical-focused companies on their channel promotion capabilities; corporate innovation departments on their synergy and resource interaction capabilities; and small startups on their ability to achieve breakthroughs in specific technological areas.

5. Precision Medicine Is Gradually Maturing from Concept to Practice

In January 2015, then-U.S. President Barack Obama proposed the “Precision Medicine Initiative.” The term “precision medicine” gradually became a buzzword in the healthcare sector, and with the continuous maturation of technologies such as next-generation sequencing (NGS), gene editing, DNA capture, and bioinformatics, precision medicine has also evolved from a conceptual framework into a mature field. From the perspective of the diagnosis and treatment workflow, precision medicine can be categorized into early screening, disease diagnosis, and prognosis follow-up.

In the field of genetic early screening, leading enterprises have basically taken shape. Berry Genomics is about to enter the capital market, Novogene has secured substantial financing from SDIC Innovation, and Annoroad’s NextSeq 550AR gene sequencer, along with its non-invasive prenatal testing (NIPT) kit for fetal chromosomal aneuploidy, has received medical device registration approval from the China Food and Drug Administration (CFDA). In the realm of cancer early screening, Grail recently raised $900 million in Series B financing, reigniting investor enthusiasm. The importance of early screening is self-evident; in the future, integration with technologies such as AI-assisted diagnosis will give rise to a trillion-dollar blue-ocean market. Professor Zhang Kun, one of the founders of Genetron Health, and his team published their latest groundbreaking work in Nature Genetics, pioneering a new high-throughput, non-invasive methylation detection technology that can be used for non-invasive early cancer screening and source tracing. In China, Borui Cheng’s introduced colorectal cancer methylated gene early screening product has also obtained CFDA medical device certification. These achievements are set to stir up industry excitement, and it is expected that a batch of startups will emerge in this domestic sector. Technologically, the development of early screening mainly relies on advances in liquid biopsy, DNA capture and amplification, and the discovery of methylation and other biomarkers. Meanwhile, sufficient clinical data must be accumulated, and clear clinical indications established, for these methods to gradually become the gold standard for early screening.

In disease diagnosis, the most prevalent application of precision medicine is currently in precise medication and follow-up for cancer. Through molecular pathological testing of tumors—utilizing technologies such as next-generation sequencing (NGS), Sanger sequencing, polymerase chain reaction (PCR), fluorescence in situ hybridization (FISH), circulating tumor cell (CTC) analysis, and single-cell sequencing—the patient’s individualized condition is elucidated at the molecular level. This enables the formulation of precise treatment plans and prognostic assessments in clinical practice, thereby achieving precise and personalized therapy through the integration of targeted drugs, cell therapy, and other modalities.

Currently, the domestic NGS and ctDNA sectors are witnessing intense competition, with numerous enterprises vying for market share. Following a period of rapid expansion over the past two years, the industry is poised for consolidation and even fiercer rivalry. We anticipate that in the short term, success will hinge on business development and commercialization capabilities; in the medium term, on service quality, product R&D and regulatory approval capabilities, and customer stickiness; and in the long term, on the accumulation and application of big data, the construction of commercial ecosystems, and the development and commercialization of new technologies. Among companies, scale leaders such as Geneseeq and Burning Rock Biotech continue to attract significant capital attention, while emerging players represented by Yuanma Gene, MyGenostics, GenePlus, and Zhenhe Technology are rapidly catching up through their respective unique entry points.

6. Overseas Investment and M&A Momentum Remains Strong

Since the end of 2016, investment institutions and large enterprises in the market have prioritized stability in their investments in medical devices, focusing on stable opportunities with sales profits and mature distribution channels. They have also begun to actively seek overseas technology-driven companies for investment to facilitate product introduction and leverage complementary domestic channel advantages. Given that the commercialization cycle for medical devices is generally faster than that for new drugs, we anticipate that investment institutions this year, particularly USD-denominated funds, will continue this trend by further increasing investments in, or even acquiring, overseas technology-focused medical device companies. Meanwhile, A-share listed companies will continue to acquire overseas medical device firms. Cross-border M&A has become an effective approach for domestic companies to introduce foreign technologies and for overseas enterprises to establish their commercial presence in China.

From 2016 to the present, Andon Health acquired eDevice for €93.88 million to strengthen its position in medical monitoring devices; Zixin Pharmaceutical acquired Nabsys 2.0 to enter the genetic testing sector; BOE invested $50 million in Cnoga, an Israeli non-invasive medical device company; and Sinocare acquired US-based PTS Diagnostics for $200 million, entering the POCT segment of the IVD industry. In vitro diagnostics, gene sequencing, and innovative medical devices—high-barrier, high-growth hotspots—have become key battlegrounds for acquisitions by industry leaders. 2017 is set to be another year in which leading Chinese companies race to expand their overseas presence.

In 2017, the following sectors will receive significant attention from investors.

· Mergers, Acquisitions, and Integration in Mature Industries (Especially the Acquisition of Listed Companies)

· Platform-Based and Vertical-Specific Channel Partners

· Third-Party Service Agencies Based on Medical Devices and Equipment

· New Technology Sector

· Investment in Overseas Technology-Driven Enterprises

Major A-Share Players in the Medical Device Sector

· Platform-based medical device company:Mindray Medical, Yuwell Medical, Xinhua Medical, China Resources Wandong, Shandong Weigao

· Specialized Medical Device Company:Lepu Medical, MicroPort Scientific, Daan Gene, Kehua Bio-Engineering, Sinocare, Kailitai

· Third-party service companies:Dian Diagnostics, KingMed Diagnostics

· Traditional Medicine Companies:Salubris, Haisco Pharmaceutical, Hainan Haiyao, Beilu Pharmaceutical

· Non-Medical Companies:Hongda High-Tech, Jingwei Textile Machinery, TCL, Sanpower Group

Source: China Renaissance Capital

Authors: Li Gang, Cai Hua, Zhu Yunpeng, Hu Minjie, Xu Dingliang, Zhang Xiao, Liu Zeyuan, Xu Lichen, Wei Wei