Key Takeaways:
- Betters Medical has launched a Hong Kong listing, relying on high-margin microwave ablation needles as its major revenue contributor
- The company could face liability of tens of millions of yuan for failing to meet terms of an agreement with one of the investors in its Series C funding
By Molly Wen
Can a single product type support a company’s long-term growth? That may be one of several big concerns for potential investors in Betters Medical Investment Holdings Ltd. (6678.HK), a maker of microwave ablation medical devices that carry fat margins. Those devices are the company’s big breadwinner, bringing in 189 million yuan ($26.8 million) in revenue last year as Betters Medical has become one of the few Hong Kong-listed medical device makers operating profitably.
After making a first IPO filing a year ago that failed, Betters Medical tried again in April and finally passed its hearing with the Hong Kong Stock Exchange last Thursday. The company kicked off its public offering a week later, planning to offer 248 million shares with a target price range of HK$1.40 to HK$1.72 to raise up to HK$427 million ($54.7 million).
Betters Medical’s microwave ablation devices are used to treat benign and malignant tumors, including thyroid nodules, liver and lung cancers and breast lumps. The treatment is minimally invasive and uses extremely high heat generated by microwaves to change the nature of tumor cell proteins and cause them to coagulate, inhibiting benign tumors from developing into malignant ones. Betters Medical’s products include actual microwave ablation devices, as well as microwave ablation needles used with those devices.
According to third-party data in its prospectus, the microwave ablation market in China is expected to roughly triple from 3 billion yuan this year to 9.2 billion yuan in 2026, representing compound annual growth of 32.5%. The company is China’s third largest microwave ablation medical device supplier, based on national sales figures for the industry last year.
As a leader in its segment, Betters Medical revenue has more than doubled from 85 million yuan in 2019 to last year’s 189 million yuan. The growth has slowed this year, reaching 63.76 million yuan in the first five months of 2022, up by a modest 7% year-on-year. The company became profitable in 2020, and its net profit jumped 60.3% last year to 74.86 million yuan.
Pricing downside
Three of Betters Medical’s eight products have been approved for sale, namely, a microwave ablation device and needle for the treatment of liver cancer and thyroid nodules; a long microwave ablation needle; and a fine microwave ablation needle. Among those, microwave ablation needles are the company’s biggest revenue contributor, accounting for 75% to 85% of its revenue in the past three years.
High gross margins for microwave ablation needles, which have been more than 93% in the past three years, have helped lift Betters Medical’s overall gross margin to more than 80%. However, over-reliance on a single type of product also means the company’s revenue and gross margin could take a serious hit if and when competition intensifies, or its technology becomes outdated.
Betters Medical’s products are sold directly to hospitals. In the first five months of this year, 259 of those in China purchased the company’s products, including 150 grade-A tertiary hospitals, the top five of which contributed about 40% of revenue. Such a stable sales pipeline guarantees steady performance, but also puts the company at risk of policy changes since nearly all major hospitals are government owned.
This July, the Chinese government announced a third group of high-value medical equipment types subject to collective procurement, covering heart stents, artificial joints and orthopedic supplies. While bringing greater business for suppliers in terms of unit sales, such bulk buying has had a far more detrimental effect by driving heart stent prices down by more than 90%, and artificial hip and knee joint prices down by an average of 82%.
The expanding scope of such collective government procurement will cover drug balloons, dental implants and other products soon. That means time is ticking down for medical supplies with high gross margins, such as microwave ablation needle. If and when its products become subject to such bulk purchasing agreements, Betters Medical could also face similar massive price reductions, slashing its profits. Bulk purchasing programs aside, the company’s prospectus also suggests that its products are likely to be gradually squeezed out of the market as hospitals recommend alternative treatment methods.
As a leading medical device maker, R&D should be one of Betters Medical’s strong suits. But the company’s R&D investment is well below its peers. The prospectus shows the company only had 14 R&D staff at the end of May, and spent meager sums between 5 million yuan and 10 million yuan on product development over the past three years. Such miserly spending significantly lags its spending on sales, and is also far behind R&D spending of its rivals as a percentage of revenue.
Falling short of profit targets
Betters Medical may be financially sound with positive cash flow, but the company faces a relatively large financial risk tied to an agreement it signed in June 2021 during its Series C financing. At that time the company guaranteed to BOC International Investment that its profits for 2021 and 2022 would be at least 91.7 million yuan and 126 million yuan, respectively. If the targets went unmet, the company would be required to compensate BOC International Investment based on a set formula.
Betters Medical already failed to meet the target last year, falling 18.3% short of the amount. That could leave it on the hook for 12 million yuan if BOC International enforces the agreement. The company’s meager 21.15 million yuan profit in the first five months of 2022 means it will have to produce another 105 million yuan in profits during the remaining seven months of the year, which also looks like a mission impossible.
Using the midpoint of its IPO price range gives Betters Medical a market capitalization of about HK$2.5 billion, with a price-to-earnings (P/E) ratio of 33 times based on last year’s profit. Among similar listed medical device companies, Shandong Weigao Group Medical Polymer Co. Ltd. (1066.HK) and LifeTech Scientific Corp. (1302.HK) have ratios of 16.9 times and 36.5 times, respectively, implying Betters Medical will be valued at the upper end among its peers. But the company will need to ease any investor concerns about its over-reliance on a single product, potential compensation to BOC International, and also the likelihood that its products will ultimately be subject to bulk buying programs to win the high valuation it’s aiming for.
