China's Medical Device Industry Enters a Golden Era of Growth and Innovation

Recently, Sinopharm-Reed Exhibitions released for the first time the “Annual Report on Investment and Financing in China’s Medical Device Industry 2015,” which provides a comprehensive review of macro-policy interpretations, domestic and international investment and financing analyses, as well as technological development trends and roadmaps within China’s medical device industry from the third quarter of 2014 to the third quarter of 2015. VCBeat has edited the key contents of the report for sharing with our readers.

Undoubtedly, the medical device industry is poised to enter a golden age.

First, a series of favorable policies have been frequently released.

High-end medical devices were explicitly included in the 13th Five-Year Plan; the fundamental law governing the medical device industry, the Regulations on the Supervision and Administration of Medical Devices, was officially revised; the state promoted the development and application of domestically produced medical devices, guided priority procurement of domestic equipment, and accelerated the achievement of greater import substitution; the Technology Roadmap for Key Areas of Made in China 2025 encouraged innovation and industrialization in the medical device sector.

Secondly, market demand will continue to expand.

As China’s aging trend intensifies, the incidence of various chronic diseases, degenerative disorders, and malignant tumors is rising, leading to a rapid increase in demand for corresponding medical devices. From 1991 to 2013, the annual average growth rate of per capita healthcare expenditure in China was 17.49%, significantly higher than the growth rate of China’s per capita GDP in recent years. This has been one of the key drivers behind the rapid development of the domestic medical device market.

From 2010 to 2014, the scale of China’s medical device market more than doubled, with the total market size growing from over RMB 120 billion in 2010 to RMB 255.6 billion in 2014, representing a compound annual growth rate (CAGR) of 20.8%. Thereafter, the Chinese medical device market is expected to maintain this rapid growth momentum, reaching a market size of RMB 600 billion by 2019, with a projected CAGR of approximately 19%.

From the perspectives of industry research and market positioning, the medical device market can be divided into six major categories: medical equipment, high-value medical consumables and implants, low-value consumables, in vitro diagnostics (IVD) and testing, medical informatics equipment, and other devices. Among these market segments, medical imaging equipment, in vitro diagnostics and testing products, and high-value medical consumables and implants constitute the main components of China’s medical device market. In 2014, these three categories accounted for 19%, 16%, and 13% of total market sales, respectively.

When categorized by clinical department, the Laboratory Medicine Department (in vitro diagnostic equipment and consumables), Cardiology Department, Imaging Department, Orthopedics Department, Ophthalmology Department, as well as infusion and puncture devices among other equipment categories, are all sub-sectors that hold a significant share of the overall market.

Policy: Encouraging Innovation, Strengthening Quality and Safety

Overall, the policy direction is to gradually enhance regulatory efficiency, encourage innovation—particularly critical domestic innovations—and strengthen quality and safety.

Enhancing regulatory efficiency is primarily reflected in the tiered and categorized supervision of manufacturers. The shift from registration to filing for Class I devices, and from pre-market approval to post-market accountability, has not lowered quality requirements for Class I devices. Instead, it allows regulatory authorities to allocate more resources to overseeing higher-risk Class II and Class III devices. This represents a significant shift in regulatory philosophy and also facilitates faster approval processes for Class II and Class III devices.

Encouraging innovation is primarily reflected in the issuance of several regulations and normative documents. First, the Measures for the Administration of Medical Device Registration no longer require medical device manufacturers to establish production facilities prior to registration. This reduces operating costs for early-stage startups, allowing them to allocate more resources to the research and development of key technologies. Additionally, the establishment of the Special Examination and Approval Procedure for Innovative Medical Devices, commonly known as the “Green Channel,” has accelerated the approval process for major innovations, thereby incentivizing more enterprises to engage in critical innovative activities.

Strengthening quality and safety is primarily reflected in the establishment of quality specifications and standards. Notable achievements include the issuance of Good Manufacturing Practice (GMP) and Good Supply Practice (GSP) for medical devices, the updating of medical device classification standards, and the release of over 100 new industry standards for medical devices. These initiatives have established quality benchmarks for the sector. Although certain standards within these regulations still lag behind those of developed countries, they represent a solid step forward and lay a strong foundation for future improvements and optimizations.

The expedited approval policy for innovative medical devices stipulated in the Special Approval Procedures for Innovative Medical Devices (Trial) has emerged as a key highlight. Enterprises entering the green approval channel can receive early intervention from the drug regulatory authority, with dedicated personnel from local bureaus responsible for communicating with companies on R&D, clinical trials, and registration matters. During the registration process, including review, there is no need to wait in line, and small and micro enterprises are even exempt from the initial product registration fee.

However, the criteria for reviewing innovative medical devices are relatively stringent. In summary, the product applying for review must legally hold an invention patent for its core technology, be a first-of-its-kind in China while leading internationally, demonstrate significant clinical application value, and have reached a basically finalized design. Data shows that since the regulations came into effect in 2014, the overall ratio of applications to approvals has been approximately 5:1. In terms of geographic distribution of applicants, Beijing, Jiangsu, Guangdong, and Shanghai are the provinces and municipalities with the highest number of submissions, which is directly attributable to their robust industrial foundations and vibrant entrepreneurial ecosystems.

On October 3 this year, the advanced manufacturing areas in the medical field listed in the "Technology Roadmap for Key Areas of Made in China 2025" include two directions: biopharmaceuticals and high-performance medical devices. For this sector, the national plan is to “enhance the innovation capability and industrialization level of medical devices, with a focus on developing high-performance diagnostic and therapeutic equipment such as imaging systems and surgical robots, high-value consumables like fully bioresorbable vascular stents, and mobile health products including wearable devices and remote diagnosis/treatment solutions. Breakthroughs and applications in emerging technologies such as biological 3D printing and induced pluripotent stem cells are also targeted.”

Market Status: Imported brands dominate the high-end market, while domestic enterprises are numerous but lack strong technical capabilities.

Currently, domestic medical device enterprises in China are characterized by their large number and generally weak technological capabilities. In terms of business scope, it is evident that Class I manufacturers include a substantial number of companies producing bandages, gauze, and disposable medical textiles, while Class II manufacturers encompass numerous dental laboratories specializing in custom-made dentures and other dental materials. Most of these enterprises have relatively low annual revenues, primarily serving regional sales demands, and there remains significant room for improvement in product quality.

If the total medical device sales revenue of RMB 255.6 billion in 2014 is divided by the 15,698 manufacturing enterprises, the average sales revenue per enterprise amounts to RMB 16.28 million, clearly indicating a relatively fragmented market. Of particular note is that, after years of development, many foreign companies have established factories in China, with their products supplied not only for domestic sales but also for export. These enterprises are included in the statistics as domestic medical device companies and contribute a substantial portion of the sales revenue; therefore, the average sales revenue of purely domestic enterprises is evidently lower.

Currently, the high-end segment of China’s medical device market remains dominated by imported brands. This premium market is primarily concentrated in tertiary hospitals and select secondary hospitals in affluent regions, focusing on products with higher technological content. These include fully automated immunoassay systems in clinical laboratories, cardiac interventional products, high-end medical imaging equipment, spinal and joint implants in orthopedics, soft intraocular lenses and optical coherence tomography (OCT) devices in ophthalmology, dental implants and orthodontic devices, flexible endoscopes and related consumables (such as staplers) in gastroenterology, endoscopic, energy-based, and powered surgical equipment in other surgical specialties, hemodialysis and continuous renal replacement therapy (CRRT) systems in nephrology, deep brain stimulators, intracranial electrodes, and neurosurgical microscopes in neurosurgery, cochlear implants and high-end hearing aids in otology, anesthesia and ventilation systems and extracorporeal circulation equipment in operating rooms, as well as radiotherapy equipment, precision infusion pumps, and other advanced devices.

In recent years, domestic manufacturers have been increasing their R&D investment in the high-end sector, aiming to challenge imported brands in the future. Meanwhile, imported brands are penetrating the grassroots market through strategies such as establishing local manufacturing facilities and acquiring domestic enterprises. As a result, the future competitive landscape is expected to become more complex and intense.Strategies such as increasing R&D investment, expanding scale through mergers and acquisitions, and expanding overseas are likely to occur more frequently.

From the perspective of the development of laboratory equipment, the pace of growth in companion diagnostics is accelerating. In 2014, the FDA issued guidance on companion diagnostics, stipulating that the approval or withdrawal of therapeutic drugs and their corresponding companion diagnostic products should occur simultaneously. This initiative has significantly driven the growth of companion diagnostics. Meanwhile, in the United States, the rapid launch of various molecular targeted therapies in recent years has further expanded the market for companion diagnostics. However, in China, there are currently no established legal frameworks defining the correlation between companion diagnostics and molecular targeted therapies. Therefore, while companion diagnostics represent an attractive market in China, its rapid growth will depend on the speed of domestic drug research and development, regulatory approval and market launch, as well as the implementation of supporting policies.

From the perspective of the development of cardiovascular diagnostic and therapeutic equipment, various less invasive and more precise treatment modalities are gradually becoming the mainstream of the future. Currently, these include innovative therapeutic approaches such as bioresorbable stents, transcatheter aortic valve replacement (TAVR), and interventional or minimally invasive treatments for mitral and tricuspid regurgitation, as well as more objective methods for assessing cardiovascular function, such as single-photon emission computed tomography (SPECT) for evaluating the severity and location of myocardial ischemia.It is anticipated that cross-disciplinary collaboration among cardiology, radiology, and nuclear medicine will deepen further in the future.

In terms of the development of orthopedic equipment, highly promising directions include robot-assisted precise minimally invasive orthopedic surgery, less invasive arthroscopy and transforaminal endoscopy, minimally invasive treatment for vertebral compression fractures, and the application of 3D printing technology—a field currently gaining significant traction across many other sectors—to orthopedics. Overall, orthopedics is rapidly advancing toward more precise matching and faster recovery.

In recent years, the development of ophthalmic devices has also progressed rapidly. The application of femtosecond lasers in cataract surgery has significantly improved surgical precision; new ultrasonic phacoemulsification equipment has enhanced the efficiency of nuclear fragmentation; novel optical coherence tomography (OCT) imaging devices may improve clinicians’ understanding of fundus photography; and the latest applications of corneal collagen cross-linking in refractive surgery are all examples of how emerging technologies are driving technological advancements in the field of ophthalmology.

In the field of neuroscience, neuromodulation technologies are demonstrating immense potential for development. Beyond traditional deep brain stimulation for Parkinson’s disease, applications such as spinal cord stimulation for pain management, sacral nerve stimulation for incontinence and irritable bowel syndrome, and vagus nerve stimulation for epilepsy, along with emerging brain-computer interface technologies under investigation, are fueling boundless imagination for the future of this field.

In the field of obstetrics and gynecology, various devices for precise diagnosis and minimally invasive treatment of breast cancer are flourishing. The emerging trends focus on early detection, accurate diagnosis, precise localization, minimizing incisions, and maximizing breast conservation. To address these needs, novel technologies such as targeted tumor localization systems, targeted lymphatic mapping systems, and high-precision dissection devices are rapidly advancing.

In terms of information technology infrastructure, novel big data-based clinical decision-making and analytics systems are rapidly evolving. The rapid transmission and sharing of medical imaging data, along with preoperative surgical site models based on precise image reconstruction, are gaining increasing popularity. Overall, the direction of development in this field is toward faster and more convenient data sharing, analysis, and utilization to guide precise diagnosis and treatment.

Trend: Mergers and Acquisitions Will Continue to Increase

According to disclosures from the U.S. NVCA and the Thomson Reuters database, venture capital investment in the medical device sector showed an upward trend in 2014, with more than 200 recorded financing deals. This positive momentum continued into the first half of 2015. On average, the amount per financing deal ranged between $8 million and $9 million. Investment in the medical device industry accounted for approximately 30% of the total healthcare sector’s financing volume. The growth in financing within the medical device industry was primarily driven by increased investment in medical diagnostic equipment and advanced therapeutic devices. Historical return data indicate that minimally invasive therapeutic devices in the cardiac and neurological fields are significantly transforming existing treatment protocols while delivering substantial returns to venture capital firms.

Another characteristic is that exit channels for investment and financing in the overseas medical device sector are highly diversified. Among these, acquisition by listed companies to become a new product line under their portfolio is a particularly important exit route. Most companies lack the resources to independently develop markets, and being acquired by listed companies also shortens the investment exit cycle, sending a positive signal that stimulates industry investment. It is expected that domestic listed companies will increasingly engage in similar acquisitions and investments in the future.

Medical device companies, which tend to be smaller in scale compared to pharmaceutical firms, generally have lower overall valuations. However, their strong profitability—with many players in the sector boasting high profit margins—makes them ideal targets for acquisitions by listed companies. M&A activity is robust not only within the industry, as large medical device groups acquire smaller counterparts, but also from outside the sector, with pharmaceutical companies and even non-healthcare enterprises showing keen interest in acquiring medical device businesses.

In the future, mergers and acquisitions targeting medical device companies will continue to increase. Medical device companies with unique technologies and strong advantages in certain niche segments will become popular acquisition targets. Meanwhile, as the overall level of domestic healthcare startups still lags behind their overseas counterparts, while valuations in China’s capital markets remain relatively high,Therefore, it will be another hot trend for Chinese companies to acquire distinctive medical device startups and manufacturing enterprises overseas.

In contrast to the dramatic volatility of the domestic stock market, investment in the medical device sector has maintained steady growth over the recent period. The product portfolios of investee companies have become increasingly diverse, with emerging investment themes such as smart hardware, surgical robots, and sequencing products continuously gaining traction. The market has gradually recognized that targeting niche, specialized, and premium segments—with exit strategies centered on acquisitions by larger corporations—is a viable approach. Consequently, investment targets are no longer concentrated solely in certain large-scale sub-segments of the medical device market.

In addition to the domestic substitution of imported products, incremental innovations and new technologies are increasingly gaining favor in the healthcare sector, reflecting a gradual alignment of China’s healthcare practices and market investment philosophies with those of developed countries.

For the full report, please contact Shi Yue Cao of the Research Department at Reed Sinopharm: shiyue.cao@reedsinopharm.com.