China’s Bone Implants Market Rising: A Local Orthopedic Innovator Goes Public
Chinese orthopedic implant providers are challenging foreign players to take back the domestic market.
Sanyou Medical (688085: SH), a Shanghai-based company specializing in providing innovative orthopedic implants, hit the Chinese Star Market on April 9th, bankrolled by CNY 978 million from the public market. On the issuance day, the stock price soared to CNY 36 from CNY 20.96, a 71.76% increase.
This sound first-day performance not only reflects the market’s confidence towards the future potential of Chinese domestic orthopedic instruments, but also shows investors’ expectations around native manufacturers and their innovation capabilities.
Founded in 2005, Sanyou Medical is a tech-driven therapy-oriented innovation company for orthopedic implants, specifically spine and trauma types. Following rich experience at Medtronic, the core R&D team established a world-class laboratory, Tytus Lab, in 2010. The Shanghai-based company received over USD 20 million in a Series A in 2014 from Qiming VC and TF Capital. In September 2017, it bankrolled another equity investment of CNY 100 million from Yingke PE.
In the medical equipment industry, the orthopedic medical instrument segment accounts for the largest share. Orthopedic medical implants are considered the most critical subcategory. The bone prosthetic market increased to CNY 26.2 billion in 2018 from CNY 7.2 billion in 2010, more than threefold over the course of eight years.
Innovative medicine can be priced high because the patent prevents competitors from imitating the molecular structure and amino acid sequences for a certain period, typically 20 years. However, instead of patent protection, the market perceives the value of the medical equipment business as a sophisticated instrument.
The orthopedic implant materials are mostly categorized into Class 3 medical instruments. Compared to general devices, such equipment is much more complicated, and some types are placed into human bodies for a lifetime. Thus it is a strictly supervised business with regulations set at every point, from R&D to production, circulation to sales.
Chinese players are catching up
The spinal implant market reached CNY 7.6 billion to become the largest share of the orthopedic implants industry in 2018, surpassing the trauma implant segment, worth CNY 7.5 billion. Joint implants are the most technically demanding and also the area with the most potential, with an expected market size of CNY 15 billion in 2023.
The technology of 3D printing is one primary growth driver for this business. Many world-class implant companies are leveraging this cutting-edge technique to serve more patients, such as DePuy Synthes (Johnson & Johnson family), Wright Medical, Zimmer Biomet and Smith & Nephew.
In Chinese orthopedics, there has been a stereotype that Chinese companies are learning, imitating technology from overseas. Only in recent years have more Chinese doctors realized the innovative capabilities of native orthopedic equipment and the advantages of the potential cost-effectiveness.
Although foreign manufacturers dominate other two markets, the trauma implants are mainly provided by Chinese companies, prominently by Naton Medical, Shanghai MicroPort (853: HKSE) and WEGO (1066: HKSE).
Some giants can adopt a strategy fast, letting them sprint to success in a new business track. As one of the tier-one medical device manufacturers, Mindray (300760: SZ) acquired DragonBio at a cost of USD 35.5 million in 2012. This deal strategically helped Mindray enter the top 20 companies in the orthopedic market in 2018, with 0.53% of the domestic market.
Orthopedic implants include trauma implants, spine implants and joint implants, with respective shares of 28.63%, 29.01% and 27.86% in 2018.
The development and production standards of orthopedic implants require a solid foundation in material sciences, engineering, biomedical engineering and anthropotomy. Strict supervision and long waitlists are the main barriers stopping companies from rushing into this industry. Most Chinese companies are focusing on trauma implants, with Double Medical (002901: SZ) and WEGO accounting for 5.8% and 5.5% of the domestic market, following Johnson (14.9%) and Stryker (8.4%).
In the arena of spinal implants, the usage is more correlated with medical technology. Besides medication and physical therapy, treatments for spinal illnesses include more sophisticated solutions. The percutaneous vertebroplasty (PVP) operation and percutaneous kyphoplasty (PKP) operations are two commonly known treatments. Now, as medical standards improve, more hospitals are able to provide such high-end clinical treatments. Considering the gap of PKP penetration between China (15%) and the US (40%), it is expected to see an accelerated deployment of Chinese brands in the domestic market. WEGO, Tianjin Zhengtian and Sanyou Medical are among the top six players in this niche market, set to grow at a rate of 20%-30% in the coming years.
As for the market of joint implants, Chinese players are adopting a different strategy. Unlike foreign manufacturers aiming at cooperation with AAA hospitals, Chinese companies are trying to win over the market of the tier-two and tier-three cities by higher cost-effectiveness, pricing at 25%–40% the rate of imported products. Qianzhan data for 2018 shows that the tremendous demand from average hospitals and patients makes up the price gap, by giving 30% revenue growth of domestic joint implants compared to 14% of imported counterparts.
According to Frost & Sullivan, AK Medical (1789: HKSE), a 3D technology-driven joint implant provider, served over 15% of the Chinese market in 2017. In 2018, its A3 total knee system was certified by FDA510 (K), a breakthrough for a high-end medical device made in China.