Enormous Market Prospects for Medical Device Enterprises

Yu Mingde, President of the China Pharmaceutical Enterprise Management Association, stated to reporters that medical reform in the next few years will focus on supporting primary medical care capabilities, aiming to reverse the current "inverted pyramid" medical pattern where both major and minor illnesses converge in tertiary hospitals, thereby alleviating the problem of difficult medical treatment. This is the fundamental connotation of "strengthening grassroots-level" in the 12th Five-Year Plan for medical reform. With the release of primary medical care demand, listed companies engaged in primary medical devices, hospital information services, nursing, and traditional Chinese medicine (TCM) health products are expected to benefit.

1. High Growth Expected in Primary Medical Care Market

A relevant person from IMS, a global pharmaceutical consulting firm, told reporters on March 1 that with the deepening of domestic medical reform, the mid-to-low-end medical market is expected to grow the fastest in the next few years, with an optimistic growth rate of about 30%. Among them, medical demand in Grade 1 hospitals, county-level hospitals, and township health centers will see rapid growth, while the medical treatment pressure on tertiary hospitals is expected to ease.

Yu Mingde commented that an important goal of medical reform is the rational allocation of medical resources. Currently, the excessive pressure on tertiary hospitals stems from the weak capacity of primary medical care. When primary hospitals are gradually equipped with complete medical equipment and can timely treat common and chronic diseases, the phenomenon of patients flocking to tertiary hospitals is expected to ease.

Statistics from the Ministry of Health show that from January to November 2011, the bed utilization rate of tertiary hospitals in China was 105%, while that of Grade 2 and Grade 1 hospitals was 90.7% and 60.1% respectively. The bed utilization rate of community health service centers and township health centers was only 54.3% and 57.8%. Analysts from Galaxy Securities' pharmaceutical industry pointed out that this reflects the coexistence of insufficient and excessive supply of medical resources, one of the reasons being that Grade 1 medical institutions have insufficiently emphasized functions such as basic community medical care, preventive health care, and rehabilitation in the past.

This situation is expected to reverse with the deepening of medical reform. Currently, there are more than 50,000 government-run township health centers and community health service institutions nationwide. The National Development and Reform Commission emphasized that grassroots medical reform has prompted governments at all levels to invest more financial and material resources in grassroots levels, and the primary medical and health service system should play a leading role in health management, diagnosis and treatment of common and frequently-occurring diseases.

Data from the Ministry of Health shows that the number of outpatient visits to community health service centers reached 440 million from January to November 2011, a year-on-year increase of 27.2%, the fastest growth rate. Insiders said that the direction of grassroots medical reform is to return to public welfare and focus on ensuring basic medical care. With the expansion of medical insurance coverage and the increase in reimbursement ratios for medical treatment at grassroots levels, the market space of primary medical institutions will usher in explosive growth.

2. Medical Device Enterprises to Benefit First

Reporters learned that local enterprises top the list in the current procurement of domestic mid-to-low-end medical equipment. This is because the government prioritizes the procurement of domestic medical devices in the primary medical care market, and the 8-12 year renewal cycle of medical equipment also ensures the steady growth of medical device enterprises.

According to sources from the Ministry of Health, the central government will expand support for primary medical institutions to equip with basic equipment starting this year, promote the improvement of rural emergency medical systems, and the number of ambulances and necessary emergency equipment will gradually increase.

Yu Mingde believes that "strengthening grassroots-level" will first expand the equipment allocation capacity of primary medical institutions, enabling them to independently test or treat some common diseases.

The "12th Five-Year Plan for Medical Device Science and Technology" also pointed out that priority will be given to developing popular, advanced and practical products urgently needed for the construction of the primary health system, as well as mid-to-high-end medical devices that are essential for clinical diagnosis and treatment and heavily dependent on imports. Efforts will be focused on developing a number of basic medical device products with independent intellectual property rights, high performance, high quality, low cost and mainly dependent on imports to meet the needs of primary medical and health system construction and routine clinical diagnosis and treatment.

The steady growth of performance in the medical device sector has confirmed this advantage. Data from Tonghuashun shows that among the 13 listed medical device companies that have released performance forecasts so far, 12 have achieved year-on-year performance growth, overall outperforming the biopharmaceutical industry. Xinhua Medical and Yuyue Medical, which have a large proportion of grassroots products, have achieved rapid performance growth for many consecutive years. The average growth rate of China's medical device industry is about 25%, far higher than the average growth level of the national economy in the same period, while the average growth rate of the global medical device industry is about 7% in the same period.

3. TCM Health Products Ride the Wave

Ling Jun, an analyst at Ping An Securities, said that the continuous increase in the number of TCM medical service items and TCM varieties included in medical insurance payment scope is a major trend. Primary TCM services will become an important supplement to the TCM medical service system, further expanding the usage of proprietary Chinese medicines.

With the expansion of the coverage of the New Rural Cooperative Medical Scheme and the increase in medical insurance payment ratios, the scale of TCM products in the primary medical care market is expanding day by day. Insiders believe that TCM enterprises are the most competitive in the pharmaceutical industry because TCM products are less affected by national price reduction policies, can avoid competition with foreign enterprises, and have more characteristics than Western medicine products.

The arrival of an aging society will drive the demand for TCM products and TCM health products for various chronic diseases. A person from the Beijing Biotechnology and New Medicine Industry Promotion Center told reporters from China Securities Journal that TCM products and TCM health products with high growth and long cycles are constantly emerging. It is reported that in the past 10 years, the consumption growth of the US health industry has surged from 200 billion US dollars to 1 trillion US dollars. With the deepening of China's new medical reform and the rise of primary medical care, national health awareness and health care consumption capacity will continue to grow, which will promote the development of the TCM industry.

A person from the State Administration of Traditional Chinese Medicine believes that on the basis of ensuring basic medical needs and rational resource allocation, the new medical reform will promote the public's attention to "preventive treatment of diseases". Community medical institutions are the best places for nursing care and follow-up treatment, and TCM products are expected to gain increasing market space.

4. Medical Informatization "Accelerates and Shifts Gears"

With the deepening of medical reform, the process of primary medical informatization is expected to accelerate. Insiders said that the improvement of the three-level medical system will promote community medical care and home treatment to become the center of follow-up treatment, creating enormous space for the promotion of medical information equipment.

The key points of health work in 2012 issued by the Ministry of Health pointed out that it will accelerate the construction of health informatization, form a basic health informatization architecture covering major business areas such as public health, medical services, New Rural Cooperative Medical Scheme, drug supply and comprehensive health management, realize interconnection and information sharing across institutions and regions within the pilot scope, and accelerate the construction of residents' electronic health records and electronic medical records.

In addition, dynamic nursing for chronic diseases such as cardiovascular and cerebrovascular diseases, remote ECG monitoring and blood glucose monitoring will promote the expansion of community mobile medical pilots. A chief physician at Fuwai Cardiovascular Hospital told reporters from China Securities Journal that carrying out mobile medical services in communities is of great significance for the prevention and treatment of cardiovascular diseases in China. Guodu Securities research shows that the scale of China's medical IT consumer market will reach 29.02 billion yuan in 2015, with a compound annual growth rate of 20.5%, and relevant medical information service providers will benefit from it.

Guo Fanli pointed out that compared with China, the development level and hierarchy of intelligent medical care abroad are higher. For example, in terms of electronic systems, electronic prescriptions can effectively save costs and improve efficiency; in terms of medical security, the United States provides higher medical insurance bonuses; in terms of electronic equipment configuration, the United States provides free digital handheld devices for patients to use; in terms of intelligent electronic medical systems, patients can query previous relevant medical records by entering their ID cards, all of which are worthy of learning and reference in China.

Guo Fanli also said that related service industries such as logistics and e-commerce will further promote the development of intelligent medical care towards electronic informatization and artificial intelligence. At present, the domestic intelligent medical care market is developing rapidly. In terms of intelligent medical care and medical informatization, in addition to investment from the new medical reform, hospitals' own capital, VC and PE will all promote the rapid development of intelligent medical care. The growth rate of the medical informatization industry will be at least double-digit in the future.