INDUSTRY OVERVIEW SOURCE OF INFORMATION

Transcription

1 The information presented in this section, including certain facts, statistics and data, is derived from various official government publications and other publications and from the market research report prepared by Frost & Sullivan, which was commissioned by us, unless otherwise indicated. We believe that these sources are appropriate for such information and we have taken reasonable care in extracting and reproducing such information. Therefore, we have no reason to believe that such information is false or misleading in any material respect or that any fact has been omitted that would render such information false or misleading in any material respect. However, the information has not been independently verified by our Company, the Sole Sponsor, the [REDACTED], the [REDACTED], the [REDACTED], the [REDACTED], any of our or their respective directors, officers or representatives or any other person involved in the [REDACTED] and no representation is given as to its accuracy. The information and statistics may not be consistent with other information and statistics compiled within or outside of China. SOURCE OF INFORMATION In connection with the [REDACTED], we have commissioned Frost & Sullivan, an independent third party, to conduct an analysis of, and to report on, China s medical device and orthopedic implant market. The report we commissioned, or the, has been prepared by Frost & Sullivan independent of our influence. The fee payable to Frost & Sullivan for preparing the is RMB1,070,000, which we consider reflects market rates for similar services. Frost & Sullivan is an independent global market research and consulting company which was founded in 1961 and is based in the United States. Services provided by Frost & Sullivan include market assessments, competitive benchmarking, and strategic and market planning for a variety of industries. We have included certain information from the Frost & Sullivan Report in this document because we believe this information facilitates an understanding of this market for [REDACTED]. Frost & Sullivan has been covering the Chinese market from its offices in China since the 1990 s. The that we commissioned includes information on China s medical device and orthopedic implant markets, and certain segments and other market and economic data, which have been quoted in this document. Frost & Sullivan s independent research was undertaken through both primary and secondary research obtained from various sources within China. Primary research involved interviews with leading industry participants and distributors in the Chinese orthopedic implant market, China Association for Medical Devices Industry, other research agencies affiliated with the Chinese government, and other experts related to the business of our Company. Secondary research involved reviewing company reports, independent research reports and data based on Frost & Sullivan s own research database and government database. In compiling and preparing the, Frost & Sullivan has adopted the following assumptions: (1) China s economy is likely to grow at a steady rate in the next decade; (2) China s social, economic and political environment is likely to remain stable in the forecast period, which ensures the stable and healthy development of the medical device and orthopedic implant industries; and (3) there will be no wars or large scale disasters during the forecast period. Except as otherwise noted, all the data and forecast in this section are derived from the Frost & Sullivan Report. Our Directors confirm that, after taking reasonable care, there is no adverse change in the market information that would qualify, contradict or have a material impact on such information since the date of the. 76

2 THE HEALTHCARE SERVICES MARKET IN CHINA China s total healthcare expenditure grew to RMB4,097.5 billion, or 6.1% of its GDP, in 2015 from RMB2,434.6 billion, or 5.0% of its GDP, in 2011, representing a CAGR of 13.9%. Frost & Sullivan projects that China s total healthcare expenditure will reach RMB6,281.8 billion, or 6.9% of its GDP, in 2020, representing a CAGR of 8.9% from 2015 to The following chart sets forth China s total historical and projected healthcare expenditure for the periods indicated: RMB (Billion) 8,000 7,000 6,000 5,000 4,000 3, % 2, ,811.9 % of GDP 8.0% 6.4% 6.6% 6.7% 6.8% 6.9% 6.1% 7.0% 5, % 5.4% 5.6% 5, , % 5, , , % 3, , % 3.0% 2,000 1, % 1.0% 0 0.0% E 2017E 2018E 2019E 2020E National Healthcare Expenditure National Healthcare Expenditure as a Percentage of GDP China s total healthcare expenditure from 2011 to 2015 grew the fastest among the 12 countries with the largest GDP in the world in terms of both total healthcare expenditure and per capita healthcare expenditure. However, on a per capita healthcare expenditure basis, China s healthcare industry is still underdeveloped compared to that of developed countries. China had a per capita total healthcare expenditure of only RMB2,980.8 in Furthermore, according to Frost & Sullivan, fueled by a rapidly aging population, the Chinese healthcare industry is experiencing a customer demographic shift that could provide immense opportunities for healthcare service providers. THE GENERAL ORTHOPEDIC IMPLANT MARKET IN CHINA The general orthopedic implant market consists of three major segments: trauma implants, spine replacement implants and orthopedic joint implants. The orthopedic joint implant market was the second largest segment of China s general orthopedic implant market in 2016 by both surgery volume and revenue. It is second only to the trauma implant market. Moreover, the orthopedic joint implant market grew the fastest among the three segments at a CAGR of 14.5% in terms of surgery volume and 13.9% in terms of revenue from 2012 to The spine replacement implant market also outgrew the industry average, representing a CAGR of 14.0% in terms of surgery volume and 13.6% in terms of revenue from 2012 to The surgery volume for orthopedic implants in China grew from approximately 1.7 million in 2012 to 2.9 million in 2016, representing a CAGR of 13.8%, and is expected to grow to 4.7 million by 2021, representing a CAGR of 10.2% between 2016 and The following chart sets forth a breakdown of the historical and projected surgery volume and CAGR of China s general orthopedic implant market divided into the three major market sectors. 77

3 CAGR 5,000,000 4,719, ,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 1,727, , ,172 1,147, ,508,290 3,190, ,268 2,899, ,703 2,614, , ,211 2,305, , ,646 1,995, , , , , , ,000 2,276,810 1,911,086 2, ,320,000 1,508,760 1,712,443 3,888, , ,585 2,493,107 4,292, , , , ,945 2,717,487 2,956, E 2018E 2019E 2020E 2021E 13.8% 14.5% 14.0% 13.6% 10.2% 13.8% 10.5% 9.1% Trauma Spine Joint Between 2012 and 2016, the general orthopedic implant market in China grew from approximately RMB7.4 billion to RMB12.3 billion in terms of revenue, representing a CAGR of 13.5%, and is expected to grow to RMB20.3 billion in 2021, representing a CAGR of 10.6% between 2016 and 2021, according to Frost & Sullivan. Specifically, the market of orthopedic joint implants for the treatment of bone tumor is expected to grow from RMB143.5 million in 2016 to RMB325.7 million in 2021 at a CAGR of 17.8%, with the spine replacement implant market in China expected to grow from RMB3.2 billion in 2016 to RMB5.1 billion in 2021 at a CAGR of 9.5% and trauma implant market expected to grow from RMB5.0 billion in 2016 to RMB7.5 billion in 2021 at a CAGR of 8.5%. Additionally, the dental prosthetics market is expected to grow from RMB8.6 billion in 2016 to RMB18.8 billion in 2021, representing a CAGR of 17.0%. THE ORTHOPEDIC JOINT IMPLANT MARKET IN CHINA Market Size and Growth The orthopedic joint implant market mainly consists of the hip and knee replacement implant sectors. China s orthopedic joint implant market grew from approximately RMB2.4 billion in 2012 to RMB4.1 billion in 2016, representing a CAGR of 13.9%, and is projected to further grow to RMB7.8 billion in 2021, representing a CAGR of 13.7% between 2016 and The following chart sets forth the historical and projected orthopedic joint implant market size in China by sector: CAGR RMB (Million) , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , % 21.7% 8.8% 13.7% 18.7% 8.4% E 2018E 2019E 2020E 2021E Hip Joint Knee Joint 78

4 The following chart sets forth the historical and projected orthopedic joint implant surgery volume in China by sector: CAGR ,200, % 13.8% 1,000, , , , , , , ,334 85, , , , , , , , , , , , , , , , , , , , , , , , , , , % 9.8% 20.8% 8.1% E 2018E 2019E 2020E 2021E Hip Joint Knee Joint Primary and Revision Surgeries A primary surgery replaces a patient s natural joint with an implant. Patients who have undergone primary surgeries may need to go through revision surgeries to replace or repair an implant or repair defective bone parts. According to Frost & Sullivan, the primary barriers to entry in the revision surgeries market include: the relatively higher technological requirements as compared to those of the primary surgery market, the requirement for more precision in the design and development of the orthopedic joint implants, and user adhesiveness to surgical instruments and existing established brands. As the bone and tissue structures of patients who need to have revision surgeries have already been reduced due to their primary surgeries, and can therefore provide less guidance in positioning and support, the design and development of orthopedic joint implants for revision surgeries require more precision and the production of these implants requires materials with better compatibility with bones, better durability, and the use of more advanced bone interface technologies. As a result, patients and surgeons are particularly keen on choosing reliable and established brands for revision surgeries. This further incentivizes surgeons to use the most commonly used brands of orthopedic joint implants and surgical instruments with which they are familiar. As such, revision surgeries generally result in a higher profit margin for orthopedic joint implant companies than primary surgeries. Frost & Sullivan projected that joint revision surgeries for total knee and total hip replacement implants as a percentage of total orthopedic joint implant surgeries will increase from 5.6% in 2016 to 11.2% in This growth is partially driven by the first batch of primary joint surgery patients in China who are starting to require revision surgeries. As revision surgeries require a higher degree of precision, 3D-printing, which allows for a greater level of precision than other more traditional products, is expected to serve as one of the main technologies for revision surgeries moving forward. See Overview of 3D Printing and Its Application in China s Orthopedic Implant Market. 79

5 The volume of primary orthopedic joint implant surgeries in China grew from 283,293 in 2012 to 486,088 in 2016, representing a CAGR of 14.5%, and is expected to grow to 872,960 by 2021, representing a CAGR of 12.4% between 2016 and The volume of revision surgeries grew from 16,041 in 2012 to 28,836 in 2016, representing a CAGR of 15.8%, and is expected to grow to 110,064 by 2021, representing a CAGR of 30.7% between 2016 and The following chart sets forth the historical and projected orthopedic joint implant surgery volume in China, divided into primary and revision surgeries: CAGR ,200, % 13.8% 1,000, , , , , ,334 16, , ,221 19, , ,957 22, , ,000 25, , ,924 28, , ,703 33, , ,268 42, , ,891 56, , ,284 78, , , , , % 14.5% 30.7% 12.4% E 2018E 2019E 2020E 2021E Primary Surgeries Revision Surgeries Average Ex-factory Price of Orthopedic Joint Implants According to Frost & Sullivan, the average ex-factory price of both imported and domestically produced orthopedic joint implants generally remained stable from 2012 to During the same period, imported orthopedic joint implants had a higher average ex-factory price than domestically produced products. The following chart sets forth the historical average ex-factory price of hip replacement implants and knee replacement implants, respectively, in China, divided into domestically produced implants and imported implants: RMB/set 14,000 12,000 10,000 8,000 11, , , , ,460.0 RMB/set 14,000 12, , , ,000 11, , ,000 8,000 6,000 6,000 4, , , , , ,000 2, , , , , ,000 2,000 2, Average ex-factory price for domestically produced hip replacement implants Average ex-factory price for domestically produced knee replacement implants Average ex-factory price for imported hip replacement implants Average ex-factory price for imported knee replacement implants 80

6 Key Drivers of the Orthopedic Joint Implant Market in China According to Frost & Sullivan, the orthopedic joint implant market in China is expected to continue to grow rapidly in the next few years. Future growth of the orthopedic joint implant market in China is expected to be primarily driven by (1) a growing number of patients, (2) greater access to orthopedic joint implant surgery, (3) improved affordability of orthopedic joint implant surgery and (4) product innovation. Growing number of patients: An aging population and lifestyle changes in China have led to a rapid increase in the incidence of joint disorders, requiring orthopedic joint implants and lifelong maintenance. According to the National Bureau of Statistics of China, approximately million people were 65 years old or above in 2016, representing 10.9% of the total population in China, and Frost & Sullivan projected this number to grow to million by 2021, representing 13.8% of the population at the time. In addition, changes in lifestyle have contributed to increased obesity rates, which, along with lack of regular exercise, are factors in developing joint disorders. Greater access to orthopedic joint implant surgery: According to the latest policy issued by the Ministry of Health of China, qualified county-level hospitals are permitted to conduct orthopedic joint implant surgeries. According to the Opinions on Implementation of Comprehensively Promoting the Full-Scale Reform of County-Level Public Hospitals ( ) issued by the General Office of State Council in 2015, the government intends to significantly improve the clinical competency of county-level hospitals on treating complicated cases, so that more patients could receive treatment in local medical institutions by In addition, the number of qualified orthopedists in hospitals in China increased from 36,053 in 2011 to 49,376 in As a result of these policies and trends, orthopedic joint implant surgeries have become more accessible to patients. Improved affordability of orthopedic joint implant surgery: In light of China s continued economic growth, the average income level in China has increased substantially in recent years. At the same time, the Chinese government has expanded public medical insurance coverage and increased reimbursement rates for orthopedic joint implants, especially for domestically produced products. As a result, orthopedic joint implant surgeries have become more affordable. Product innovation. Innovations in advanced materials, fixation technologies and product designs increase the efficiency of implantation and address unmet clinical demands, which would drive market demand. In addition, innovative orthopedic joint implants command higher prices, which also drive growth of the market. 81

7 Entry Barriers in the Orthopedic Joint Implant Market in China According to Frost & Sullivan, there are primarily four entry barriers in China s orthopedic joint implant market: R&D capability: Since orthopedic joint implants are Class III medical devices subject to stringent regulatory standards on safety and effectiveness, and involve multidisciplinary knowledge and technologies, strong R&D capabilities are necessary to develop the products. Existing players continuously invest in improving their products, which are difficult for new entrants to match. Regulatory environment: Orthopedic joint implants are heavily regulated by the Chinese government, requiring significant time and effort to obtain approvals or comply with various regulations. See Regulation for details. Distribution channel: According to Frost & Sullivan, players in the orthopedic joint implant market rely significantly on the distributorship sales model. To distribute orthopedic joint implants, distributors must obtain approval from regulatory authorities and provide specialized after-sales services to hospitals. As a result, new entrants need a significant amount of time to establish relationships with an effective network of distributors, hampering their ability to access the market. Brand recognition: Surgeons are more willing to use orthopedic joint implants from familiar brands that have been proven safe and effective. A well-known brand with a reliable reputation may take years of effort and investment to build. Competitive Landscape According to Frost & Sullivan, our brand AK Medical ( ) is the bestselling brand of orthopedic joint implants in China by sales volume in 2016 and the bestselling domestic orthopedic joint implant brand in China by revenue in The following table sets forth the top brands in China s orthopedic joint implant market in terms of sales volume in 2016: Rank Brand Sales volume (1) Market Share (%) Type of brand 1... AKMedical 73, Domestic 2... Brand A 56, International 3... Brand B 55, International 4... Brand C 53, International 5... Brand D 52, Domestic 6... Brand E 47, International 7... Brand F 26, International 8... Brand G 22, Domestic (1) Representing the total number of sets of off-the-shelf joint implants and pieces of 3D-printed joint implants sold in China. 82

8 The following table sets forth the top brands in China s orthopedic joint implant market in terms of revenue in 2016: Rank Brand Revenue (1) (RMB million) Market Share (%) Type of brand 1... Brand A International 2... Brand B International 3... Brand C International 4... Brand D International 5... Brand E International 6... AKMedical Domestic 7... Brand F International 8... Brand G Domestic (1) Representing the revenue derived from sales in China. The primary reason that we had a larger market share in terms of sales volume than revenue is because products of international brands generally have higher ex-factory prices than those of domestic brands. In 2016, our AK Medical ( ) was the bestselling brand of orthopedic joint implants in China by sales volume. In the same year, AK Medical ( ) was also the bestselling domestic orthopedic joint implant brand and ranked sixth overall in China by revenue. The top five brands in China by revenue in 2016 were all international brands. OVERVIEW OF 3D-PRINTING AND ITS APPLICATION IN CHINA S ORTHOPEDIC IMPLANT MARKET 3D-printing refers to the computer-controlled process of joining, fusing or depositing materials, such as plastic, metal, ceramics, powders, and liquids. Traditional manufacturing technology is limited in its ability to fit products to individual needs. The application of 3D-printing technologies in the orthopedic implant market makes producing customized and complex products possible. An example of the limitation of off-the-shelf products can be found in the treatment for bone tumors, which afflicts nearly 28,000 new patients each year in China. As the areas of disease of the patients often have unique sizes and shapes, the current treatment methods for bone tumors have their limitations. Traditional implants are of limited sizes and shapes, which would generally require extensive bone and tissue removal. Implants with replaceable ready-made components offer more choices in sizes and shapes than traditional products but still would not fit the patients areas of disease precisely. Customized implants produced with non-3d-printed methods ensure proper fit but the production cost is relatively high. 3D-printing technologies address such deficiencies as it could produce complex and customized implants using a computer controlled production process based on the 3D model of each patient s pathological area, ensuring perfect fit and reducing production cost. 3D-printed products also have an advantage in the revision surgery market. As the patients receiving revision surgeries already have their bone and tissue structures reduced from the primary surgery, their residuals can provide less guidance in positioning and support in the revision surgery. Therefore, traditional methods of treatment often fall short of delivering an orthopedic product that could meet the surgeons and the patients need for precision. 83

9 Our Position in the Market There are four different and interconnecting services relating to surgical solutions involving 3D-printing technologies, namely (1) 3D-imaging and 3D-modeling, (2) formation of 3D-printed models and patient-specific surgical plans, (3) production of 3D-printed surgical instruments, such as surgical guides and (4) production of 3D-printed orthopedic implants. According to Frost & Sullivan, we are the only company that provides one-stop orthopedic surgical solutions integrating all four services in China. See Our Business Our Product Portfolio and Services 3D ACT Solutions. The following table sets forth a brief overview of the scope of services provided by certain orthopedic implant companies in relation to surgical solutions involving 3D-printing technologies globally: 3D-imaging and 3D-modeling Providing 3Dprinted models and developing patient-specific surgical plans Producing 3Dprinted surgical instruments Producing 3D-printed joint replacement implants AK Medical.... Auto desk, Inc.... Stratasys, Ltd..... Materialise NV... ConforMIS, Inc..... Stryker Corporation... Favorable Government Policies on 3D-Printing The Chinese government has promulgated a series of policies to encourage the development of 3D-printing technologies and their potential application in medical devices in China. In 2013, the 3D-printing industry was designated as a focus industry for development by the Ministry of Science and Technology of China. Although 3D-printed products used for medical purposes are subject to the CFDA approval, the Notice on Special Examination and Approval Procedures for Innovative Medical Devices (Trial) ( ( ) ) issued in February 2014 has streamlined and simplified the registration process for 3D-printed products. Made in China 2025 initiative ( 2025), the Chinese government s initiative to comprehensively upgrade Chinese industry also highlighted 3D-printing as a priority sector. Under the 13th Five-Year National Science and Technology Innovation Plan, domestic enterprises are encouraged to develop medical devices like biomedical materials including 3D printing materials and medical implants. Additionally, the 13th Five-Year National Strategic Emerging Industry Development Plan maps out a combination of steps involving the development of innovative medical devices and construction of mobile healthcare and telehealth systems as well as reformation of industry regulation to promote the development of the Chinese Smart Healthcare Industry. Moreover, the Chinese government promulgated the Health China 2030, which initiated further reform with a focus on accelerating the approval process for innovative or urgently-needed medical devices, and published an implementation plan to further develop 3D-printing technologies and applications in

10 IMPORT SUBSTITUTION WITH DOMESTIC PRODUCTS Imported products have a larger market share than domestically produced products in the orthopedic joint and spine replacement implant market in China. According to Frost & Sullivan, by volume, the market share of domestically produced orthopedic joint implants and spine replacement implants in 2016 was 46.7% and 56.8%, respectively. In particular, imported products had a much larger market share of 68.8% in the knee replacement implant sector, compared to that of 43.0% in the hip replacement implant sector, in China in This is mainly because the design and production of knee replacement implants have a higher technological entry barrier than hip replacement implants and international orthopedic implant companies generally have stronger R&D capabilities and longer product track records and therefore enjoy a technological advantage over China-based orthopedic implant companies in the design and production of knee replacement implants. In addition, compared to China-based orthopedic implant companies, international companies generally have more integrated and effective marketing plans. The Chinese government has instituted policies to encourage the use of medical devices produced in China over imported products. According to Frost & Sullivan, capped reimbursements (such as in Beijing, Luoyang and Shanghai) and variable-rate deductibles (such as in Ningbo and Wuhan) are two medical insurance policies commonly adopted by local governments, and in both cases, patients using orthopedic implants produced in China enjoy a higher reimbursement rate (which differs from city to city) than those using imported products. In addition, in many regions in China the New Rural Medical Insurance System in which rural residents in China are eligible to participate only reimburses patients using orthopedic implants produced in China. Medical insurance reimbursements are paid directly to the relevant medical institutions. Therefore, the higher the reimbursement rate, the less the patients have to pay for the medical treatment they receive. The following table sets forth the current reimbursement percentages for domestic products and imported products in certain cities in China: City Reimbursement as percentage of total costs (1) Domestic Imported Beijing % 25-30% Shanghai % 65-70% Ningbo % 60-65% Luoyang % 45-50% Wuhan % 40-45% (1) Reimbursement rates are calculated for employees covered by Urban Employee Basic Insurance System. According to Frost & Sullivan, domestically produced trauma implants and coronary stents accounted for market share of 85.2% and 72.6% in 2016, respectively, implying a large room for other domestically produced products to capture. In both the hip and knee replacement implant sectors, domestically produced products are gaining market share against imported products. The market share of domestically produced orthopedic joint implants increased from 44.1% in 2012 to 46.7% in The market share of domestically produced hip replacement implants increased from 50.6% in 2012 to 57.0% in 2016 and is projected to continue to increase to 62.2% in 2021 by surgery volume, according to Frost & Sullivan. The market share of domestically produced knee replacement implants increased from 27.9% in 2012 to 31.2% in 2016 and is projected to continue to increase to 37.5% in 2021 by surgery volume. 85

11 HISTORICAL PRICES OF MAJOR RAW MATERIALS Major raw materials used in orthopedic implants include titanium alloy, cobalt-chromiummolybdenum alloy and ultra-high molecular weight polyethylene materials. Fluctuations in prices of raw materials affect the cost structure, product pricing and profitability of orthopedic implant companies. According to Frost & Sullivan, the historical prices of titanium alloy, cobalt-chromiummolybdenum alloy and ultra-high molecular weight polyethylene have generally increased in China in recent years, as a result of the increasing demand for orthopedic implants. Due to the sufficient supply of raw materials in China market, their prices have not increased considerably in the past few years. A slow-growing trend will continue for the next few years. The price of titanium alloy fluctuated slightly between RMB1,069 per kilogram and RMB1,124 per kilogram during 2012 and The following chart sets forth the historical prices of titanium alloy for the years indicated: RMB/kilogram 1, , , , , , , , The price of cobalt-chromium-molybdenum alloy fluctuated between RMB937 per kilogram to RMB1,059 per kilogram during 2012 and The following chart sets forth the historical prices of cobalt-chromium-molybdenum alloy for the years indicated: RMB/kilogram 1, , , , , ,

12 The price of ultra-high molecular weight polyethylene materials increased from RMB1,643 per kilogram in 2012 to RMB2,035 per kilogram in The following chart sets forth the historical prices of ultra-high molecular weight polyethylene materials for the years indicated: RMB/kilogram 2, , , , , , , ,