A hard tech hidden champion appears

The hard technology equipment manufacturing industry has entered a new upward cycle, the leaders of various subdivisions have soared, and there is an important track, and the hidden champion has finally surfaced.

Xintai Medical, a leader in the field of structural heart disease in China, will land in the Hong Kong market tomorrow.

Industry beta, 25 times in 10 years. According to Frost & Sullivan, the domestic interventional device market for structural heart disease is expected to increase from 2 billion yuan in 2021 to 10.4 billion yuan in 2025, with a compound annual growth rate of 51.0%, and will reach 49.1 billion yuan in 2030, which is enough to support the birth of large market capitalization companies.

Xintai Medical is the leader of this high-growth track, with the most complete production line layout, covering all structural heart disease application products, is the largest manufacturer of congenital heart disease occlusion devices in China, and has the most comprehensive product portfolio of heart valves under research in China.

In the past, the company was a leader in domestic substitution in the field of congenital heart disease, and the occlusion device has achieved 4 iterations, and now comprehensively promotes degradable upgrades and multi-pipeline layouts to provide product guarantee for growth in the next 10 years (new products are launched every year).

01

Product portfolio

The interventional medical device market for structural heart disease is divided into three major application areas, the corresponding products in the field of congenital heart disease are cardiac occlusion, valvular disease is prosthetic valves, and cardiogenic stroke field is patent foramen ovale occlusion device and left atrial appendage occlusion. Xintai Medical is the only manufacturer in China whose product portfolio covers all three fields.

Xintai Medical is a pioneer in promoting the localization of high-end devices.

In the field of congenital heart disease, Xintai Medical launched the first domestic ventricular septal occlusion device in 2003, shouldering the important task of breaking the import monopoly and winning the second prize of the National Science and Technology Progress Award. In 2022, the world's first commercial fully degradable closure device will be launched. From the first generation of double rivet, the second generation of single riveting (CE certification), the third generation of oxide film single rivet, to the fourth generation of fully degradable, Xintai Medical has led the closure device industry into the era of "no intervention, no implantation, no residue of implantation". The field of congenital heart disease occlusion devices has basically achieved domestic substitution, and Xintai Medical has ranked first in market share for many consecutive years, reaching 38.0%.

The field of cardiogenic stroke is still dominated by foreign investment. IN 2017, A TOTAL OF 2214 CASES OF LEFT ATRIAL APPENDAGE OCCLUSION WERE COMPLETED IN MAINLAND CHINA, OF WHICH BOSTON SCIENTIFIC WATCHMAN OCCLUSION DEVICE ACCOUNTED FOR ABOUT 77% AND ABBOTT (ST. JUDE) LEFT ATRIAL APPENDAGE OCCLUSION DEVICE ACCOUNTED FOR 20%. The first generation of left atrial appendage occlusion device was commercialized in 2020, the success rate of surgery reached 100%, the left atrial appendage closure rate reached 97.6% after 12 months of surgery, there was no chance of ischemic stroke after surgery, and the second generation of products upgraded to apply degradable technology. The first generation of patent foramen ovale occlusion device was commercialized in 2012, and the second generation of products currently under development will become one of the first biodegradable open foramen ovale occlusion devices in China, which is expected to be launched by the end of next year.

The competition in the domestic heart valve intervention track is undecided. Aortic valve intervention is still in the immature commercialization stage, and mitral valve, tricuspid valve and pulmonary valve intervention are more difficult to develop, which is a blue ocean to be explored. Xintai Medical's product pipeline covers aortic valve, mitral valve, tricuspid valve and pulmonary valve, of which the transcatheter implantable aortic valve system is expected to be 100% deployable, recyclable and repositionable before separation from the delivery system, while any transcatheter implantable aortic valve system currently commercialized in China does not have this feature. The only mitral valve intervention product listed in China is Abbott MitraClip (2020), and Xintai Medical is one of the few pioneers to initiate the research and development of mitral valve disease products, and its transapical mitral valve clamp repair (TMVr-A) system is one of the few domestic products in the clinical trial stage.

At present, Xintai Medical has 20 marketed occlusion device products, 9 occlusion device products under research and 21 major heart valve products. The matrix combination is more resistant to risks. At the same time, the application of biodegradable technology and the leading layout in the field of heart valves also provide a new driving force for the company's long-term sustainable development.

02

Degradable technology

From 2019 to the first half of 2022, Xintai Medical's R&D expenditure (including R&D expenses and internal development costs capitalized into intangible assets) was approximately RMB38 million, RMB51.4 million, RMB116 million and RMB47.7 million respectively, and the cumulative R&D investment since 2019 has exceeded RMB250 million. Long-term investment brings technological accumulation and constantly achieves new breakthroughs.

Xintai Medical strives to achieve PFO (patent foramen ovale occlusion) and various types of occlusion devices to comprehensively upgrade biodegradable technology in the next 2 years. The importance of applying biodegradable technology to promote product upgrading and iteration is that the technical level directly crosses into the international frontier and almost completely eliminates the risk of centralized procurement.

Traditional metal closure devices can lead to new risks of complications due to their inability to degrade, while biodegradable closures are designed to degrade into carbon dioxide and water over time, but because of their extremely high technical barriers, such as degradation cycle controlled release and mechanical support performance, international research and development once fell into trouble.

In February 2018, Xintai Medical completed the world's first fully biodegradable VSD (ventricular septal defect) interventional treatment, marking a breakthrough in the field of fully biodegradable closure devices in the world. In February this year, the MemoSorb chamber occlusion device IV generation was launched, the world's first fully degradable occlusion.

It took up to 9 years from R&D to market, and the MemoSorb fully degradable closure device system is prepared with medical polymer materials, which has good biocompatibility and meets the basic performance of degradable closure device support and flow blocking, and controllable degradation cycle. Its innovative, patented mold lock design ensures stable molding after release, anti-peeling and endothelialization. 1-6 months after surgery, the closure device structure is complete, no residual shunt, to ensure the ideal sealing effect, after 6 months, the closure device begins to degrade, 12 months is basically completely degraded, the ventricular septal defect is also covered by autologous tissue repair, and the function is restored, effectively avoiding the risk of long-term complications existing in traditional metal closure devices.

The fastest biodegradable foramen ovale occlusion device among the biodegradable products under development is preparing to be registered with the NMPA, in addition to MemoSorb atrial missing occlusion device IV and left atrial appendage occlusion device II generation, the former is expected to be approved by the FDA in the second quarter of 2024.

Degradable technology can not only bring clinical benefits, but also significantly raise the commercialization ceiling of concentric occlusion, and the unit price of degradable technology products can be increased by 3 to 5 times compared with traditional products, thereby promoting the market capacity from about 1.5 billion yuan in the past to nearly 5 billion yuan. At present, the terminal price of ordinary metal closure device (first and second generation) on the market is about 10,000 yuan, the oxide film closure device (third generation) is about 30,000 yuan, and the price of degradable closure device (fourth generation) exceeds 100,000 yuan.

Xintai Medical's degradable technology, ultrasonic technology, and radiofrequency puncture technology continue to land on its innovative devices, and most of them are first or exclusive, and there is no possibility of collective procurement, and the protection of innovative products by medical insurance policies provides space for the market development of these products.

In addition, Lepu Medical, the parent company of Xintai Medical, has successful experience in dealing with collective procurement and has a deep understanding of the market and policies. At this year's China Report Exchange Conference, Lepu Medical said that the negative impact of centralized procurement of all products has been basically eliminated, and the traditional medical device business has been baptized by centralized procurement, and will re-enter the road of long-term stable growth through innovative products. Innovative medical devices require a long introduction period, some even as long as 5-7 years, and the education of doctors and patients requires a precipitation process, so in the context of only a few enterprises participating in the market during the introduction period, collective procurement is difficult to achieve. Policies related to innovative medical devices are more inclined to limit prices, and prices are mainly determined by supply and demand. Xintai Medical's occlusion device products have been widely recognized by the market in terms of efficacy and safety, and the application of innovative patents such as degradable technology means that its new products have higher bargaining power in the face of market pricing.

03

Growth and space

Most of the Hong Kong-listed equipment companies have a small market capitalization, and the market is worried about the low ceiling of the subdivision track. The number of patients eligible for interventional treatment of structural heart disease in China is expected to reach about 6 million in 2025. Based on the huge patient base in China, with the improvement of treatment technology and payment environment, domestic substitution, market penetration and product overseas, it is enough to create growth space for leaders in the field of structural heart disease.

In the concentric occlusion device market, the domestic production rate has reached 91%, but the surgical volume still maintains an annual growth of more than 20%, the underlying logic is that low penetration rate creates an incremental market, and the growth of Xintai Medical's business performance also verifies this. The company's revenue from concentric occlusion device increased from 86.72 million yuan in 2019 to 132 million yuan in 2021, with a compound annual growth rate of 23.4%, and the gross profit margin has remained at a high level of more than 90% in the past two years.

The left atrial appendage occlusion device market is still in the early stage of growth, and the first left atrial appendage occlusion device was only launched in China in 2014. In 2021, the penetration rate of left atrial appendage occlusion devices in China is about 5.9%, compared with 44.9% in the United States and 14.6% in Europe, and 95% of the domestic market share is still occupied by foreign capital. The market for patent foramen ovale occlusion devices is also in an emerging stage, with only 4 players in China. It is precisely because there is still a lot of room for domestic substitution and penetration rate improvement, and the domestic cardiogenic stroke occlusion device market is expected to rush from 600 million yuan in 2021 to 7.8 billion yuan in 2030.

The revenue of patent foramen ovale and left atrial appendage occlusion device products increased from 4.74 million yuan in 2019 to 48.5 million yuan in 2021, and the gross profit margin increased from 57.6% to 83.9%, even in the first half of 2022 under the environment affected by the epidemic, it remained at 82.7%, without obvious fluctuations, verifying the logic of high prosperity.

In terms of products going overseas, Xintai Medical has commercialized 11 products overseas. It is worth noting that, as mentioned earlier, Xintai Medical applies the latest degradable technology to the pace of product iteration of closure devices, and is at the forefront of the world, which is expected to achieve corner overtaking to seize a larger international market.

In the field of structural heart disease, cardiac valve interventional devices are the fastest growing segment, with the domestic market size increasing from 1 billion to 7.9 billion from 2021 to 2025, with a compound annual growth rate of nearly 70%. Currently there are very limited commercial products on the market, and in the next 5-10 years, heart valves will become a must for market players. There are already 4 listed companies in Hong Kong for heart valve intervention, and whether Xintai Medical can be the last to come first has attracted much attention.

Xintai Medical is the most comprehensive medical device enterprise in the field of heart valves in China, of which the transcatheter implantable aortic valve (TAVR) system is currently undergoing clinical trials and is expected to submit an application to the Food and Drug Administration in the fourth quarter of next year. On September 23 this year, Xintai Medical ScienCrown valve system (also known as TAVR system) successfully completed transcatheter aortic valve replacement (TAVR) surgery for a patient with severe aortic stenosis, and completed all the enrollment of multi-center clinical trials across the country.

Wu Yongjian, director of Fuwai Hospital of the Chinese Academy of Medical Sciences, who participated in this operation, commented that ScienCrown valve is an epochal product in line with the trend of rejuvenation of TAVR indications, leading a new era direction, compared with any previous aortic valve, ScienCrown valve system is a qualitative leap in technology.

Mainland TAVR indications from the elderly high-risk patients gradually broadened to the young low-risk patients, to meet the clinical needs of patients is the future of TAVR field to solve the urgent problem, doctors in the relatively young patients when choosing a valve must focus on valve durability and coronary re-intervention possibilities, ScienCrown valve system low valve design, 100% fully recyclable technology and decoupling technology application, in order to ensure good passability while taking into account stability, more suitable for young patients with aortic valve disease. Wu Yongjian believes that ScienCrown valves can challenge almost all complex aortic valve lesions, and believes that the launch of ScienCrown valves in one year will not only bring new choices for clinicians and patients with aortic valve disease, but also mark a new era in the field of TAVR in mainland China!

From Director Wu Yongjian's evaluation, it can be seen that the industry has high expectations for Xintai Medical's TAVR system. When a year later, the ScienCrown valve system is launched with the advantages of latecomer differentiation technology, how will it stir up the already chaotic TAVR rivers and lakes?

The current market for heart valve intervention is not available because the time is not ripe. TAVR surgery has high requirements for hospital facilities and doctors, concentrated in first- and second-tier cities and tertiary hospitals, most of which are still in the initial stage of 0 to 1, and the core of development is doctor training. The cultivation of market capacity requires time and capital investment, and from the perspective of technology application and popularization, 2024-2025 is the best time period for heart valves to be listed.

Of all valvular diseases, mitral regurgitation (MR) is the most common, occurring several times more often than aortic stenosis. The estimated need for intervention in mainland China is estimated to be 7.5 million patients with MR and about 5.5 million patients with severe MR, and the treatment rate is only 0.5%. From 2021 to 2025, the penetration rate of transcatheter mitral valve replacement (TMVr) surgery in China will increase from 0.002% to 0.08%, which will release a larger market space in the industry after the domestic mitral valve interventional treatment products are launched. Xintai Medical's mitral valve products include the Transapical Mitral Valve Repair System (Tendon Corcord) (TMVCRS), the Transapical Mitral Valve Repair (TMVr-A) System and the Transfemoral Mitral Valve Clamp Repair (TMVr-F) System, which fully cover mitral valve regurgitation therapy. From the perspective of R&D process, the above three products of Xintai Medical are expected to submit registration applications to the State Food and Drug Administration in the next two years. Once approved, it will open up more room for growth for the company.

From the perspective of financial performance, Xintai Medical has seen steady growth in revenue and gross profit from 2019 to the first half of 2022. Although net profit declined in 2021 and the first half of 2022, it was mainly due to the increase in one-time expenses related to the IPO, including listing fees, interest expense related to pre-listing redemption liabilities and exchange losses. Excluding the impact of the above expenses, the company's adjusted net profit in the first half of 2022 was approximately 56 million yuan, which is still an increase compared with the same period last year. After the IPO is completed, these factors affecting net profit will be eliminated, and net profit will return to the right track. It can also be seen from the company's cash flow performance that the company's business growth trend has not changed, with net operating cash flow of 54.48 million, 59.1 million and 105 million from 2019 to 2021, respectively, and cash and cash equivalents reaching 713 million at the end of 2021. After the IPO is completed, the company's financial position will be further strengthened to support investment in R&D, production and commercialization.

The parent company, Lepu Medical, will remain the controlling shareholder after the IPO. As one of the earliest enterprises engaged in the research and development of cardiovascular devices in China, Lepu Medical has stepped out of the influence of centralized procurement and successfully transformed into an innovative device platform, with industry experience, commercial brands and channel advantages in the cardiovascular field, which can bring synergy effects to Xintai Medical and promote the rapid transformation of new products.

As one of the few innovative device leaders in the Hong Kong market with both hematopoietic ability and sustainable development ability, the company has a comprehensive product layout in the field of structural heart disease, especially in the field of heart valves, which is still in its infancy, coupled with the world's leading biodegradable technology innovation and application, the market is looking forward to the successive iteration and launch of innovative products, which also provides growth space for its valuation. In the context of the era of independent and controllable hard technology equipment manufacturing (high-end medical devices), there are huge development opportunities.