China's IVD raw material industry ushers in a "golden age" of development

In recent years, the upstream raw material industry in the field of in vitro diagnosis (IVD) in China has been rapidly advancing amidst fluctuations. Against the background of normalization of prevention and control of COVID-19, the development weakness of upstream raw material industry in domestic IVD field is prominent. At the same time, driven by the national centralized procurement policy, the process of domestic substitution in the field of IVD raw materials has accelerated, and a large number of upstream IVD raw material enterprises have taken advantage of this situation and gained high attention from the capital market. As a result, the IVD raw material market in China has expanded rapidly. According to the Artery Orange database, in 2021, a total of 12 enterprises in China's IVD raw material field completed 15 financing rounds, with a total financing amount exceeding 3.4 billion yuan, of which 10 financing rounds all exceeded 100 million yuan.

In recent years, China's IVD industry has developed rapidly, and the domestic market capacity has advanced to the level of one hundred billion yuan. According to the prospectus data of Feipeng Biotechnology, the size of China's IVD market has increased from 42.75 billion yuan in 2015 to 80.57 billion yuan in 2019, with a compound annual growth rate of 17.2%; It is expected that by 2030, the size of China's IVD market will reach 288.15 billion yuan, becoming the world's largest consumer of IVD products.

IVD raw materials, namely materials used to prepare IVD products, mainly include antigens and antibodies, enzymes and coenzymes, probes, primers, microspheres, etc. The quality of raw materials has a significant impact on the performance and detection accuracy of IVD products, so upstream links have a strong say in the IVD industry chain.

However, for a long time, the production of IVD raw materials has been a bottleneck in China's IVD industry. The demand for IVD raw material market continues to grow, but the core technology behind it has not made the same progress. Due to the high difficulty in research and development of IVD raw materials, there is still a gap between domestic IVD raw materials and imported raw materials in terms of production process and purity quality. With China's IVD raw material enterprises investing a large amount of funds in basic research and development work, their R&D innovation capabilities and raw material process quality are also constantly improving.

At present, the situation of overseas COVID-19 is still serious, and the import cycle of IVD raw materials has become longer. Domestic IVD manufacturers are gradually realizing the importance of mastering the core industry chain and starting to gradually reserve domestic supplier resources to establish a safer supply chain. In addition, many domestic IVD production enterprises have begun to penetrate the upstream of the industrial chain, such as acquiring or establishing raw material companies, to solve the problem of raw material supply.

In recent years, IVD raw material enterprises have also become the darling of capital. In 2021, Nanotech, Anxu Biotechnology, Novozen, Yiqiao Shenzhou, Pepsis, Uninvision, and others have successively listed on the ChiNext board; Feipeng Biotechnology has raised 2.5 billion yuan in its initial public offering on the ChiNext board. In the primary market, multiple IVD raw material enterprises have also obtained large amounts of financing, such as Hanhai New Enzyme completing nearly 800 million yuan of financing and Aibotech completing 1.2 billion yuan of financing.

It took more than a decade for China's IVD raw material industry to develop from a niche market with little capital to a scale of tens of billions of yuan. According to data released by Huajing Industrial Research Institute, the market size of IVD raw materials in China has increased from 3.3 billion yuan in 2015 to 8.2 billion yuan in 2019, with an annual compound growth rate of 25.8%; It is expected that the market size in this field will reach 20 billion yuan by 2024.

From the perspective of market structure, although imported IVD raw materials still occupy a dominant position in the market, with the improvement of domestic enterprises' technological level and the emphasis on industrial supply chain localization, China's IVD raw material industry is rapidly developing and is expected to gradually achieve import substitution. According to data released by Huajing Industrial Research Institute, from 2015 to 2019, the average annual compound growth rate of the domestic IVD raw material market was 30.6%, higher than the growth rate of imported products.

R&D bottleneck urgently needs to be broken through, and industry competitiveness needs to be improved

The IVD raw material industry in China started relatively late, with a highly dispersed market and low brand trust. There are still many difficulties in achieving domestic substitution. Compared to overseas IVD raw material enterprises, there is still significant room for development in the research and development capabilities and production process level of IVD raw material enterprises in China.

According to the prospectus of Feipeng Biotechnology, due to the numerous technical paths and links involved, it is difficult for small and medium-sized laboratories to build a complete underlying technology platform. In addition, IVD involves multiple diagnostic methodologies, each of which involves multiple diagnostic items, requiring a wide variety of reagents and instruments, and with significant differences in technical systems. Therefore, IVD raw material enterprises need to establish a more comprehensive technical system and a more systematic and rigorous quality control system, strictly control various links such as raw materials, research and development, production, and quality control, and enhance their core competitiveness.

At present, the global IVD raw material market as a whole is characterized by a large number of participants, small individual scale, insufficient industry concentration ratio, etc. Even top companies have a relatively low global market share. The IVD raw material industry involves numerous fields and technology platforms, and it is extremely difficult for a single company to achieve full product line coverage. Therefore, IVD raw material enterprises can establish a complete and rich product matrix through both endogenous development and M&A expansion, covering multiple application scenarios, and better meet the diverse needs of downstream customers.

In addition, the IVD raw material industry has high brand barriers. To ensure product quality, IVD manufacturers usually spend a lot of time and funds in the research and development stage to verify the reliability of raw materials. Therefore, many production enterprises tend to choose core raw material manufacturers with long operating years and high product awareness, resulting in increasing customer stickiness. Therefore, adhering to good word-of-mouth marketing and customer service, gradually shaping a brand image with market influence, is also a way for enterprises to achieve breakthrough development.

In fact, with the continuous investment of domestic enterprises in technology and research and development, some domestic brands have broken through key technical barriers, and their product performance can be comparable to that of imported manufacturers. Not only that, domestic IVD raw material suppliers have more advantages in logistics supply, technical services, etc., such as more controllable production cycles and transportation procedures, shorter supply cycles, and lower communication costs compared to multinational enterprises and demanders. Localization advantages are increasingly prominent.

The industry is in the era of change, and four major trends may appear. The VD raw material industry is in the era of change. There are not only leading enterprises playing a demonstration role, and the market scale is growing rapidly, but also characteristic small and micro enterprises expanding rapidly in the subdivided fields. In addition, financial capital has paid great attention to the industry. The industry has entered a period of rapid development, and gradually presents a variety of trends.

Firstly, forming an overall solution for IVD testing services is a major development direction for the IVD raw material industry. By providing complete solutions from raw materials, semi-finished reagents, to supporting equipment, enterprises can help downstream customers avoid problems such as repeated investment in research and development, which is conducive to promoting the development of related reagents and quickly achieving industrialization.

Secondly, the highly dispersed market pattern provides sufficient growth and integration space for participants, and industrial mergers and integrations will become more frequent. Most domestic IVD raw material manufacturers have a relatively single business direction. Through mergers and acquisitions, especially overseas mergers and acquisitions, they further expand their business scale, build a more comprehensive technical system, continuously enhance their product development and update iteration capabilities, and build a more comprehensive sales network, which will make it easier to stand out in global competition.

Once again, expand downstream of the industrial chain with the advantage of raw materials. Based on strong R&D and production capabilities, many leading IVD raw material companies have developed products such as supporting equipment and reagent kits to enter the downstream market of the industrial chain. By expanding business models and further enhancing market space, we can drive the growth of raw material business.

Finally, enterprises should focus on core technologies in the raw material industry and expand brand influence. The barriers to technology, production, sales, and branding in the raw material industry are relatively high. Enterprises with strong strength will continuously polish their raw material research and development technology and processes through deep research and development, which will be conducive to creating a high-quality brand image.