As the fourth batch of high-value consumables collected last year directly targeted artificial lenses and high-value orthopedic sports medicine consumables, almost all high-value consumables in the orthopedic field have already been collected. Even if this collection is “mild” compared to the previous three rounds of overall price cuts, it will inevitably have a negative impact on the performance of leading domestic companies in the short term, and there is a certain relationship with the imbalance in the companies' “price for volume” game.

Judging from the 2023 financial reports disclosed by many industry companies, the traditional logic of “price for volume” collection has not been fully demonstrated. It is not that the more companies that win bids, the better their performance growth. On the contrary, the increase in sales brought about by collection does not seem to offset the loss of profit due to lower unit prices of products.

The picture of all living beings under “price for quantity”

The Zhitong Finance App learned that on November 30 of last year, the fourth batch of centralized procurement of medical consumables organized by the state was opened in Tianjin. Among them, the average price reduction for sports medicine consumables was 74%. So far, the three major high-value orthopedic consumables tracks of joints, spine, and sports medicine have all been included in the collection category. The industry pain caused by the collection of all categories is also reflected in the annual reports of some leading companies.

Judging from the business layout of comparable companies above, since Weigao Co., Ltd. (01066) has a deeper layout of traumatic devices than Elken Medical (01789) and Chunli Medical (01858), and the increase and decrease in multi-business revenue complements each other to a certain extent, Weigao Co., Ltd. only experienced a slight decline in overall revenue, but if Weigao Orthopedics (688161), its core subsidiary of orthopedic consumables is taken out alone, it is easy for investors to see that the execution of volume purchases caused a drop in the factory price of products and the supply gap in channel inventory The price discount had a negative impact on it.

Judging from the distribution of business revenue, in 2023, the three major product lines for spine, trauma, and joints contributed more than 74% to Weigao Orthopedics. Under the influence of factors such as price reduction in collection and channel inventory compensation, Weigao's current spine products achieved revenue of 472 million yuan, a year-on-year decrease of 48.49%; traumatic products achieved revenue of 195 million yuan, a year-on-year decrease of 53.89%; and joint products achieved revenue of 289 million yuan, a year-on-year decrease of 35.29%.

In the face of an overall decline in revenue from the core business line, Weigao Orthopedic's current revenue 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 Weigao Orthopedics, Chunli Medical and Elken Medical achieved stable revenue in 2023.

Take Chunli Medical as an example. Its products currently cover key areas such as joint prostheses and spinal implants, and judging from the share of revenue, the hip joint is its core revenue source. As can also be seen from the company's overall revenue growth rate, under the influence of medical compliance policies in the second half of 2023, the company's hip sales volume in 2023 was basically the same as in 2022. In other words, the company has yet to recover from the impact of domestic procurement of joint prostheses in September 2021.

The Zhitong Finance App learned that 2022 will be the first full year to collect artificial joints. Therefore, investors can analyze the impact of collection on various companies in the 2022 annual report data. Judging from Elken Medical's financial report for the same period, the company's revenue for joint products in 2022 was 921 million yuan, up 44.7% year on year, and net profit surged 121.1% year on year, successfully achieving quantitative price compensation.

For Chunli Medical, the company's revenue in 2022 was 1.02 billion yuan, up 8.43% year on year; net profit was 308 million yuan, down 4.54% year on year. Meanwhile, in 2022, the company sold 1.096,000 joint prosthetic products, up 63.06% year on year.

As can be seen from the volume and price comparison, the profit impact of the decline in product prices brought about by artificial joint collection on Chunli Medical has not been made up for by its expanded sales volume in the short term. As mentioned earlier, joint prostheses have always been Chunli Medical's core product, which also shows that joint collection has eroded the company's profit margins and profitability to a certain extent.

Meanwhile, in the 2023 semi-annual report, Chunli Medical indicated that the impact of national procurement was 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 continued until the second half of 2023.

Go overseas and explore “safe havens” for development

Judging from performance performance, Elken Healthcare's performance is similar to Chunli Medical's.

In the first half of last year, Elken Healthcare achieved revenue of about RMB 649 million (same unit), an increase of 22.1% over the previous year; the company's equity shareholders should account for profit of about 133 million yuan, an increase of 5.2% over the previous year. However, in the end, the company still showed an increase in revenue and no increase in profit in the 2023 annual report.

The main reason why the company achieved a double increase in revenue and profit in the first half of 2023 was a significant increase in the number of patients seeking medical treatment in the first half of 2023, and the number of orthopedic surgeries at hospitals peaked in the second quarter. However, by the second half of the year, especially the centralized remediation work in the national pharmaceutical sector carried out in the third quarter of last year, 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 effects of collection, Elken Medical chose to enter overseas markets, and this is also the common choice of leading domestic orthopedic device companies.

Looking at the subregion, Elken Healthcare achieved domestic revenue of 867 million yuan in 2023, a year-on-year decrease of 2.2%; however, it achieved overseas revenue of 227 million yuan, a sharp increase of 37.1% over the previous year. The company's current overseas revenue accounts for nearly 20%. Elken Medical's joint business has been further expanded to Vietnam, Uzbekistan and other countries during the reporting period, with the Southeast Asian market growing by more than 50%.

Similar to Elken Medical, Chunli Medical has also accelerated its layout in overseas markets. According to data, in 2023, Chunli Medical's overseas market achieved revenue of 198 million yuan, a year-on-year increase of 81.7%, and the share of overseas revenue in the company's revenue increased to 16.41%. In contrast, Weigao Orthopedics currently accounts for only 5% of overseas revenue. The progress of going overseas is slower than the above 2 companies, but with a major change in the management of Weigao Orthopedics, the market is expected to go overseas or become one of its important development strategies.

At present, imported brands have strong market competitiveness and occupy a large market share in China. Among the TOP20 brands, imported brands together account for about 40% of the market share of orthopedic implantable medical devices in China. Among them, three imported brands, including Johnson & Johnson, Xerohui, and Jiemai Bangmei, rank in the top three. 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 global orthopedic market is currently growing steadily, with joint products accounting for the largest share. According to Statista statistics, the global orthopedic device market is 40.9 billion US dollars in 2021. The CAGR is expected to be 6% from 2022 to 2027, and is expected to reach 60 billion US dollars in 2027. Furthermore, judging from 2019 data, there is still a gap of about 10 times between the penetration rate of joint surgery in South America and developed regions in Europe and the US, and there is great potential for future growth.

However, from the perspective of market competition, since orthopedic surgery is relatively mature compared to other high-end clinical procedures, and the orthopedic business growth rate of leading foreign companies has continued to grow in single digits for many years, it is currently not its core business segment. On the other hand, after years of market development, leading domestic enterprises have developed strong R&D, production, supply chain integrity capabilities and excellent brand influence, and are expected to continue to narrow the gap with foreign companies in competition for high value-added products. Therefore, domestic companies are expected to use the cost performance advantage of products to achieve overseas sales in regions with low penetration rates.