With the centralized procurement of the fourth batch of high-value consumables last year, the high-value consumables in the field of orthopedics have basically been fully purchased. Even if the overall price reduction of this centralized procurement is more "moderate" than the previous three rounds, it will inevitably have a negative impact on the performance of domestic leading enterprises in the short term, and there is a certain relationship with the imbalance of the "price for volume" game of enterprises.
Judging from the 2023 financial reports disclosed by a number of companies in the industry, the traditional logic of "exchanging price for volume" in centralized procurement has not been fully demonstrated, and it is not that the more enterprises that win bids in centralized procurement, the better the performance growth, on the contrary, the sales growth brought by centralized procurement does not seem to offset the profit loss caused by the reduction of product unit price.
The appearance of all beings under the "price for quantity".
Zhitong Financial APP learned that on November 30 last year, the fourth batch of state-organized centralized procurement of medical consumables was opened in Tianjin. Among them, the average price of sports medicine consumables has been reduced by 74%. So far, the three major orthopedic high-value consumables tracks, joints, spine and sports medicine, have been included in the scope of centralized procurement, and the industry pain caused by the centralized procurement of all categories is also reflected in the annual report performance of some leading enterprises.
Judging from the business layout of the above comparable companies, because Weigao shares (01066) are more in-depth than iKang Medical (01789) and Chunli Medical (01858) in the layout of trauma devices, and the increase and decrease of multi-business income to achieve a certain complement to a certain extent, Weigao shares only showed a slight decline in overall revenue, but if its core subsidiary of orthopedic consumables, Weigao Orthopedics (688161) It is not difficult for investors to see the negative impact of the decline in the ex-factory price of products caused by the implementation of volume procurement and the discount on the purchase price given by the channel inventory gap.
From the perspective of business revenue distribution, in 2023, the three major product lines of spine, trauma, and joints will contribute more than 74% to Wego Orthopedics. Under the influence of factors such as centralized procurement price reduction and channel inventory replenishment, Weigao Co., Ltd.'s current spine products achieved revenue of 472 million yuan, a year-on-year decrease of 48.49%; The revenue of trauma products was 195 million yuan, a year-on-year decrease of 53.89%; The revenue of joint products was 289 million yuan, a year-on-year decrease of 35.29%.
In the case of an overall decline in the revenue of the core business line, the current revenue of Weigao Orthopedics fell sharply by 37.67% year-on-year to 1.284 billion yuan; Net profit fell sharply by 81.3% to 112 million yuan.
However, unlike Wego Orthopedics, Chunli Medical and AK Medical will achieve stable revenue in 2023.
Taking Chunli Medical as an example, its products currently cover key areas such as joint prostheses and spinal implants, and in terms of revenue proportion, the hip joint is its core source of income. It can also be seen from the company's overall revenue growth rate that under the influence of medical compliance policies in the second half of 2023, the company's hip sales in 2023 will be basically the same as in 2022. In other words, the company has not yet come out of the impact of the national procurement of joint prostheses in September 2021.
Zhitong Financial APP learned that 2022 is the first full year for the implementation of centralized procurement of artificial joints. Therefore, investors can analyze the impact of centralized procurement on each company in the 2022 annual report data. Judging from the financial report of iKang Medical in the same period, the company's joint product revenue in 2022 will be 921 million yuan, a year-on-year increase of 44.7%, and the net profit will increase by 121.1% year-on-year.
For Chunli Medical, the company's revenue in 2022 will be 1.202 billion yuan, a year-on-year increase of 8.43%; net profit was 308 million yuan, down 4.54% year-on-year. At the same time, in 2022, the company's sales of joint prosthetic products will be 1.096 million, a year-on-year increase of 63.06%.
The comparison of volume and price shows that the profit impact of the decline in product prices brought about by the centralized procurement of artificial joints on Chunli Medical has not been compensated for by its expanded sales volume in the short term. As mentioned earlier, joint prostheses have always been the core products of Chunli Medical, which also shows that joint procurement has eroded the company's profit margins and profitability to a certain extent.
In the 2023 semi-annual report, Chunli Medical said that the impact of national procurement is one of the reasons for the decline in the company's profitability. Judging from the results of the annual report, it is clear that this impact has extended into the second half of 2023.
Entering overseas and excavating and developing "safe havens"
From the perspective of performance, the performance of AK Medical and Chunli Medical is similar.
In the first half of last year, AK Medical achieved revenue of approximately RMB649 million (the same as below), a year-on-year increase of 22.1%; Profit attributable to equity shareholders of the Company was approximately RMB133 million, representing a year-on-year increase of 5.2%. However, in the end, the company still showed an increase in revenue but no increase in profit in the 2023 annual report.
The main reason for the company's double increase in revenue and profit in the first half of the year is that the number of patients seeking medical treatment has increased significantly in the first half of 2023, and the number of orthopedic surgeries in hospitals has reached a peak in the second quarter. However, in the second half of the year, especially in the third quarter of last year, the centralized rectification work in the national pharmaceutical field has affected the number of surgeries in public hospitals and the promotion and application of innovative high value-added products in hospitals to a certain extent in the short term.
In order to avoid the short-term negative impact of centralized procurement, AK Medical chose to enter the overseas market, which is also the common choice of domestic orthopedic device head companies.
In terms of sub-regions, iKang Medical's domestic revenue in 2023 will be 867 million yuan, a year-on-year decrease of 2.2%; However, its overseas revenue was 227 million, a year-on-year increase of 37.1%. The company's overseas revenue accounted for nearly 20% in the current period. During the reporting period, AK Medical's joint business has further expanded to Vietnam, Uzbekistan and other countries, of which the Southeast Asian market has grown by more than 50%.
Similar to AK Medical, Chunli Medical has also accelerated its layout in overseas markets. According to the data, in 2023, Chunli Medical's overseas market revenue will be 198 million yuan, a year-on-year increase of 81.7%, and the proportion of overseas revenue in the company's revenue will increase to 16.41%. In contrast, the current overseas revenue of Weigao Orthopedics accounts for only 5%, and the progress of going overseas is slower than that of the above two companies, but with the change of management of Weigao Orthopedics, the market is expected to go overseas or become one of its important development strategies.
At present, imported brands are highly competitive in the market and occupy a large market share in the mainland. Among the TOP20 brands, imported brands account for about 40% of the market share of China's orthopedic implantable medical device market, of which three imported brands, including Johnson & Johnson, Xerohui and Jiemai Bangmei, rank among the top three in terms of market share. However, in overseas markets, due to the larger market capacity, the market left for domestic enterprises should not be underestimated.
From a market perspective, the current global orthopedic market is in a steady growth, and joint products account for the largest proportion. According to Statista statistics, the global orthopedic device market size was $40.9 billion in 2021 and is expected to grow at a CAGR of 6% from 2022 to 2027 and is expected to reach $60 billion in 2027. In addition, judging from the data of 2019, the penetration rate of joint surgery in South America and other regions is still about 10 times compared with developed regions in Europe and the United States, and there is great potential for growth in the future.
From the perspective of market competition, orthopedic surgery is no longer its core business segment because it has developed relatively mature compared with other high-end clinical procedures, and the growth rate of orthopedic business of leading foreign-funded enterprises has continued to grow by single digits for many years. On the other hand, after years of market development, domestic leading enterprises have formed strong R&D, production, supply chain integrity capabilities and excellent brand influence, and are expected to continue to narrow the gap with foreign-funded enterprises in the competition of high value-added products. Therefore, domestic enterprises are expected to rely on the cost-effective advantages of products to achieve overseas expansion in areas with low penetration.