Core products entering the harvest period, why did SCIENTECH (02291) experience a high increase in performance?

Despite the impressive mid-term performance and the commercialization of new products, it seems that SCIENTECH (02291) has not brought any substantial "benefits". After a brief increase following the release of the performance in late August, SCIENTECH quickly returned to a downward trend. Even on September 9th, SCIENTECH suddenly surged more than 13% during the trading day, but returned to its original state the next day. On September 10, SCIENTECH fell by as much as 13.86% intraday, and eventually closed down by 8.18%. From a market perspective, with both performance and product development flourishing and a clear commercialization prospects, this undoubtedly seemed like the best opportunity for SCIENTECH's stock price to rebound from its previous decline and stagnation. However, the market's response to this financial report was tepid, seemingly indirectly confirming that there may still be underlying challenges in SCIENTECH's cardiovascular intervention device story. The occluder for congenital heart disease contributed half of the revenue, with reduced research and development expenses On August 22, SCIENTECH, a subsidiary of the Lepu Group, released its mid-term performance for 2024. During the period, SCIENTECH achieved a total operating income of 249 million yuan, a year-on-year increase of 49.74%; net profit attributable to the parent company was 140 million yuan, a year-on-year increase of 85.56%; and basic earnings per share were 0.4044 yuan. From a performance perspective, SCIENTECH has undoubtedly entered a period of harvest. As one of the participants in China's structural heart disease intervention medical device industry, SCIENTECH has always focused on the research and development, production, and commercialization of structural heart disease medical interventional devices, and recent years have been a period of intense commercialization of its products. It is understood that structural heart disease is one of the fastest-growing fields in cardiovascular intervention in recent years. Currently, the intervention medical device market for structural heart disease mainly includes three main directions: congenital heart disease, cardioembolic stroke, and valve disease, with valve disease corresponding to heart valve products, and congenital heart disease and cardioembolic stroke mainly corresponding to occluder products. The interim report shows that SCIENTECH currently has a total of 22 marketed occluder and accessory products, four products have obtained NMPA registration certificates, four products are under review and preparation for registration, and there are another 25 occluders, heart valve and surgical accessories, and mechanical circulatory support products in different stages of research and development. Among them, what market is most concerned about is undoubtedly the fact that SCIENTECH adheres to the concept of "intervention without implantation" to drive the development of biodegradable technology, and its launch of the fourth generation of MemoSorb biodegradable atrial septal defect occluder products obtained the medical device registration certificate issued by the National Medical Products Administration on August 14, 2024, and commercialization is about to enter the sprint stage. Additionally, the company's second-generation MemoSorb biodegradable patent foramen ovale occluder was also approved for the market in September 2023, and during the first half of 2024, the biodegradable patent foramen ovale occluder accounted for nearly one-third of the company's total revenue, also a major commercialization achievement for the company's innovative products during the period. Benefiting from the continuous commercialization of its products, as of the first half of 2024, more than half of the group's revenue comes from the sale of congenital heart disease occluder products. Furthermore, sales revenue from congenital heart disease occluder products increased by 2.7% from 125 million yuan in the same period last year to 129 million yuan, accounting for 51.6% of the group's revenue in the same period. In addition, the revenue share of the patent foramen ovale and left atrial appendage occluder products increased to 32%. The company stated that the stable increase in sales revenue of congenital heart disease occluder products is mainly due to the wide market acceptance of the group's MemoCarna III series of oxidation film occluders. These two major occluder products already account for more than 80% of SCIENTECH's revenue. Thus, it is clear that SCIENTECH's most stable revenue still comes from its deep cultivation in the occluder field. However, as the core products begin to gain momentum, the company's development seems to have some "hidden worries". From a financial perspective, SCIENTECH is facing some pressure on its finances. As of June 30, 2024, SCIENTECH's cash balance was about 1.084 billion yuan, a decrease of 10.5% from 1.212 billion yuan in the same period of 2023. At the same time, its asset-liability ratio surged to 12.5% in the first half of 2024, compared to just 3% at the end of 2023. Additionally, from other financial indicators, as the commercialization of products continues to advance, in the first half of 2024, the company's sales expenses reached 31.4858 million yuan, a year-on-year increase of 58.3%, and the total capital expenditure also increased by 4.0% to 31 million yuan. However, the company's research and development expenses slightly decreased from 27.554 million yuan in the same period last year to 21.6719 million yuan. Considering that there are several in-progress products in the pipeline, as well as the need to purchase equipment, intangible assets, and pay for capitalized research and development expenses, SCIENTECH's cash flow seems tight. It is worth mentioning that in the first half of this year, SCIENTECH's accounts receivable also increased significantly by 1.23 times to 73.2163 million yuan, far exceeding the growth rate of operating income in the same period. The proportion of accounts receivable at the end of the reporting period accounted for 29.39% of total revenue. Facing intense market competition, is the market "red ocean" approaching? From the perspective of the track, the sub-track of cardiovascular medical devices where SCIENTECH is located has undoubtedly been a focus of the industry in recent years. According to Guosen Research, the global market size of the cardiovascular field has reached 56 billion US dollars, with the market size of the cardiovascular field in China exceeding 50 billion yuan, ranking second in both the global and domestic medical device market sizes, second only to the field of extracorporeal diagnosis. Moreover, because most cardiovascular devices have high technological barriers, low localization rates, and low penetration rates, there is significant room for localization, leading to advanceBiodegradable technology, with its own commercially available products being the first in the world, SCIENTECH still possesses a significant technological reserve and first-mover advantage.The company is situated in a prime location, but the industry competition is equally fierce. It is understood that in the domestic market for congenital heart disease occluders, SCIENTECH, LIFETECH SCI(01302), and Huayi Shengjie are the top three companies, occupying about 90% of the market share, pulling away significantly from the companies ranked lower. With the high degree of localization and increasingly fierce competition in the occluder market for congenital heart diseases, SCIENTECH, which relies on occluders for over 50% of its revenue, undoubtedly faces pressure from other competitors. Unlike SCIENTECH's deep cultivation in the field of structural heart disease, LIFETECH SCI, which is on par with Medtronic, has established a solid foundation of products in the three core areas of structural heart disease, peripheral vascular disease, and pace electrophysiology. The revenue from peripheral vascular disease has surpassed that of structural heart disease in 2023. Meanwhile, Xianjian has a comprehensive range of atrial septal/ventricular septal/ductal occluder products, with the patent foramen ovale (PFO) product in the research and development stage and plans to enter into the biodegradable market. In contrast, despite having first-mover products, SCIENTECH's revenue structure is relatively singular, still facing significant risks of performance fluctuations. Furthermore, the "price reduction wave" under the pressure of centralized procurement is also a looming threat for SCIENTECH. Previously, in the December 2023 Hainan Province Sanming Alliance 19 medical consumables centralized procurement, the atrial septal defect occluder went from an average of 18,455 yuan to an average of 6,471 yuan, a decrease of 64.9%; and in the March 2024 announcement of the Beijing-Tianjin-Hebei "3+N" Alliance centralized volume-based procurement of medical consumables, the left atrial appendage occluder, with a lower rate of localization than the congenital heart occluder, was also listed. It is easy to see that the current national and provincial-level medical device centralized procurement continues, which helps to further expand product coverage and utilization but also intensifies industry competition. Some manufacturers in specific subfields will accelerate their entry into such fields, driving the core product research and development process and commercialization, further intensifying market competition. In addition, according to public information, the MemoSorb bioabsorbable atrial septal defect occluder is still in the early stage of large-scale promotion after its launch. Its price is several times higher than that of similar non-biodegradable products, and the high pricing may affect patients' choices in certain circumstances. It cannot be ruled out that it may become an important target for centralized procurement price reduction in the future. As other competitive products enter the market, price reductions are inevitable. Once the pricing system changes, if the company cannot accurately grasp industry trends or adapt quickly to changes in market competition, its existing competitive advantage may be weakened, or it may face the risk of declining market share and profitability. Overall, with SCIENTECH introducing new products intensively and in volume this year, there is some assurance for future performance boost. However, it should be noted that the company faces significant market competition, and uncertainties surrounding future centralized procurement price reductions still exist. The sustainability of performance still needs to be considered, and the medical device industry's price-earnings ratio is at historical lows, with no clear turning point, which may also be a reason for investors' cautious approach.