Research on the Medical Device and Healthcare Services Industries: High-End Healthcare Is Taking Off, and Domestic Equipment Faces a Turning Point

In 2022, we remain optimistic about three main investment themes: import substitution in the research reagents sector, the inflection point for domestically produced high-end medical devices, and the upgrading of healthcare consumption.

1) Performance Review of Medical Devices and Services for 2020 and Q1–Q3 2021:

According to the SW China Securities pharmaceutical industry classification, the medical devices sector recorded operating revenue of RMB 197.196 billion in 2020, up 67.35% year on year; in Q1–Q3 2021, operating revenue reached RMB 188.362 billion, representing a year-on-year increase of 35.76%, though the growth rate moderated compared with 2020. The healthcare services sector posted operating revenue of RMB 74.463 billion in 2020, up 15.22% year on year; in Q1–Q3 2021, operating revenue totaled RMB 75.205 billion, a year-on-year increase of 46.03%, marking a significant acceleration relative to 2020.

In the medical-device sector, during the COVID-19 pandemic in 2020, diagnostic companies such as Orient Bio, Wanfu Biotech, Sansure Biotech, and BGI Genomics achieved rapid revenue growth thanks to robust domestic and international sales of COVID-19 diagnostic reagents. Equipment manufacturers like Mindray Medical and Yuwell Medical also saw significant revenue increases from sales of ventilators, patient monitors, and other products. However, starting in the second quarter of 2021, as vaccination rates rose and the pandemic eased both domestically and internationally, sales of pandemic-related medical-device products began to slow, leading to a marked deceleration in revenue growth compared with the high base of the same period last year. In addition, some companies that had previously focused on elective diagnostics or surgical procedures were initially impacted by the pandemic but have since gradually recovered as conditions improved. We expect the growth rate of non-pandemic-related medical-device products to rebound over time.

In the healthcare services sector, the outbreak of COVID-19 in 2020 prompted stringent stay-at-home restrictions across most regions of China, leading to the suspension of outpatient services at hospitals and a sharp decline in outpatient volumes. This impact was particularly pronounced in departments offering elective treatments, such as dentistry and ophthalmology. Consequently, healthcare service providers as a whole experienced a slowdown in revenue growth in 2020. However, as the domestic epidemic situation gradually improved, these companies’ performance began to recover in the second half of 2020 and throughout 2021, with Q1–Q3 2021 posting robust growth on the back of a low base in 2020.

2) Industry Overview and Review of Major Policies:

China’s medical-device industry is experiencing rapid market growth and is poised to seize new opportunities in the post-pandemic era. As the world’s second-largest medical-device market, China has been at the forefront of the global response to the COVID-19 pandemic since 2020. During this critical fight against the virus, the medical-device sector promptly supplied a vast array of diagnostic reagents, ventilators, protective gowns, and various types of protective masks, playing an irreplaceable role. Meanwhile, the National Medical Products Administration has continuously deepened reforms of the medical-device review and approval process, streamlining procedures and steadily enhancing efficiency, thereby accelerating the emergence of innovative medical-device products. Looking ahead, China’s medical-device industry remains in a “golden period of development,” with broad prospects for future growth.

National policies strongly support the localization of medical devices and impose restrictions on imports, which bodes well for domestically produced equipment to gain greater access to hospitals. On June 21, 2021, the Guangdong Provincial Drug Administration issued the “Provisional Regulations on the Management of Clinically Urgent Imported Drugs and Medical Devices from Mainland Areas of the Guangdong–Hong Kong–Macao Greater Bay Area (Draft),” which stipulates that, even in cases of clinical urgency, imports may be approved only under three specific circumstances: (1) the product has not been approved for registration in mainland China; (2) there is no registered alternative available; or (3) the product was previously procured by the hospital, is clinically urgently needed, and demonstrates advanced clinical utility. Following the submission of an application, expert review is required, and the approval is valid for only one year; moreover, if the product is recalled overseas, its use must also be immediately discontinued within China. These measures reflect a cautious approach to the use of imported products and strong support for domestic alternatives.

In October 2021, the Ministry of Finance and the Ministry of Industry and Information Technology jointly issued the “Guiding Standards for the Review of Imported Products in Government Procurement” (2021 Edition), which explicitly sets forth the required proportions for government agencies (public institutions) to procure domestically produced medical devices and instruments. Specifically, all 137 types of medical devices must be 100% sourced domestically; 12 types require 75% domestic procurement; 24 types require 50% domestic procurement; and 5 types require 25% domestic procurement. On this basis, the allocation of domestically produced medical equipment is expected to benefit from favorable conditions for adoption in hospitals.

3) Key Investment Strategies and Directions for the Future: We are optimistic about three main investment themes: import substitution in the research reagents sector, the inflection point for domestically produced high-end medical devices, and the upgrading of healthcare consumption. 1) In the research reagents industry, we believe it is one of the few high-quality segments within the broader pharmaceutical sector that boasts significant growth potential, accelerating import substitution, and relative policy resilience. Domestic companies in this sector have steadily matured and now possess product capabilities that can compete with foreign players, making import substitution an inevitable trend. 2) For high-end medical device companies, products such as endoscopes are characterized by high technological barriers and a relatively late domestic start. However, in recent years, a number of domestically based firms—with strong R&D capabilities—have emerged, including Haitai Xinguang, Kaili Medical, and Mindray Medical. Under the backdrop of new infrastructure development in the healthcare sector and the government’s robust support for domestic medical devices, we expect these domestic high-end medical device companies to achieve rapid catch-up and overtaking. 3) As for consumer-oriented healthcare companies, discretionary consumer segments are relatively less constrained by policy, while demographic trends such as population aging and rising per capita disposable income are expected to drive a swift increase in industry demand.