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Signify Premium Insight: Neusoft Medical to Float on United Imaging’s Rising Tide

This Insight is part of your subscription to Signify Premium Insights – Medical ImagingThis content is only available to individuals with an active account for this paid-for service and is the copyright of Signify Research. Content cannot be shared or distributed to non-subscribers or other third parties without express written consent from Signify ResearchTo view other recent Premium Insights that are part of the service please click here.

Chinese medical imaging modality vendor Neusoft Medical has revealed its continuing ambitions to list publicly, and has announced that, for the fourth time, it plans to launch an IPO.

The vendor, which has three times failed to float, once in Shanghai and twice in Hong Kong, hopes that this time will be different. The move is being sponsored by investment banks CICC and Goldman Sachs, with the vendor hoping the fundraising will enable it to continue growing, both domestically and abroad.

The Signify View

With three previous attempts at listing publicly made already, Neusoft Medical has made it clear that raising funds through a public offering is central to its growth ambitions. Becoming a leading medical imaging vendor is, after all, an expensive business. This could be particularly true for Neusoft Medical given its modality portfolio.

At the heart of Neusoft Medical’s growth to date is its range of CT systems. Of the vendor’s total revenues, which for the first six months of 2022 accounted for RMB1.5b (~$210m), 56 percent were derived from sales of CT systems. This is far ahead of any other business line, with equipment service and training, GXR (General X-ray) and MDaaS (Medical Device as a Service), the next largest segments, accounting for 14.5%, 8.9% and 6.2% respectively.

Such a reliance on CT system sales would have been a significant asset during the peaks of the coronavirus pandemic. This is especially true given the vendor’s dependence on its domestic market. In 2021, the company derived more than 83 percent of its revenues from China. China was the first country to  feel the impacts of Covid 19. CT was used as the primary diagnostic imaging modality in the country, so those vendors that were able to quickly deliver CT systems to Chinese hospitals were able to capitalise on the rapid increase in demand. This is reflected in Neusoft Medical’s results, with CT system revenues almost doubling from around $114m in 2019 to almost $221m in 2021.

This recent Covid-catalysed rally is one of the reasons why Neusoft Medical is eager to list publicly as soon as possible. The demand in the country quickly accelerated the vendor’s growth, provided a flattering portrait to show potential investors. The reality may however be somewhat more sedate. The exceptionally high growth in China in recent years will mean that many providers’ CT system needs have recently been met, potentially tempering the opportunities for the vendor in coming years.

Certain Strengths

Despite this, there are some reasons to be optimistic. Neusoft Medical will benefit from government policy which promotes Chinese medical imaging vendors potentially giving it an advantage in some situations over international competitors such as GE HealthCare, Philips and Siemens Healthineers.

There are also other opportunities for Neusoft Medical to secure growth. Its cloud-based MDaaS (Medical Data and Devices as a Service) for instance differentiates the product from its domestic competitors, giving providers a reason to choose a system from Neusoft Medical, rather than one of the many other CT system vendors in China. The offering also helps to secure sticky recurring revenues, that are less susceptible to fluctuations in markets, and changes in demand.

Moreover, by offering some cloud capability, Neusoft Medical can hope to open up new markets. Away from major urban centres in China, as well as in other emerging markets that Neusoft Medical may look to target, there is often a shortage of radiographers and radiologists, which renders the procurement of additional CT capacity unnecessary, given that providers will be unable to utilise it. If cloud and AI tools reduce the requirement for expertise at these sites, and allow doctors to collaborate with experts remotely, then Neusoft Medical may be able to sell additional systems to providers that would otherwise have been unable to utilise them due to a lack of resource.

These opportunities could become more significant with the added capital afforded by listing publicly. The vendor’s research and development spending is relatively low, for example, and could benefit from the added capital. The vendor spent 14.4% of its revenue on research and development in the first six months of 2021. As a percentage this is in line with some of its competitors, but in absolute terms it is a small figure. At $10.4m it is dwarfed by that of United Imaging, which in the first six months of 2021 spent $60.7m on R&D, let alone that of major international competitors such as GE HealthCare, Philips and Siemens Healthineers, which spend many times that amount each year.

Finding a Niche

Investing in research and development makes sense for the vendor. While it is unlikely to challenge the top-end of the CT imaging market, by investing in technologies such as cloud and AI it can still hope to differentiate itself from other competitors and establish itself as a competitive vendor offering some advanced capability in an affordable package. While this is unlikely to worry top vendors in established markets, Neusoft Medical could still carve out a niche for itself in second and third tier hospitals in China, as well as in some emerging markets across the world.

This latter ambition will, however, remain a challenge. Providers in emerging markets, as with providers in developed markets, tend to prefer products from large, reliable international brands with good support networks and post-sale service. This is true even if it means forgoing some extraneous features. Such preference does, however, also highlight another area where Neusoft Medical may choose to invest the money from its IPO: its sales and support operations.

Currently the Chinese vendor relies heavily on distribution partnerships. While this is an efficient way to be able to offer products across a wide range of markets, a vendor is not always able to guarantee the neutrality and knowledgeability of the distributor, nor the ability and dependability of its after-sales support and service. Further, by sharing sales revenues with a distributor, Neusoft Medical will have to accept lower margins. This might be worth the trade-off if it allows Neusoft Medical to facilitate sales further across the world, and potentially compete in more volatile markets in which it would be unwise to overly invest, but in most cases, over the longer term, it will become a hindrance. Sales made through distributors have also been a source of accusations of bribery and improper conduct, allegations which, whether true or not, could impact Neusoft Medical’s reputation by association.

Opportunity Knocks

This will become particularly acute as Neusoft Medical strives, as it must, to scale. To continue to grow, the vendor must establish itself as an alternative to the many other vendors offering increasingly affordable CT systems. To do this it needs to scale to be able to continue to invest in the product to differentiate itself, and to be able to leverage the economies of scale to be able to improve its returns. Improving margins will be of particular importance given that a sizeable proportion of its profits weren’t a result of product sales or service contracts, but were in fact derived from other sources, such as government grants and foreign exchange gains. In 2021, for example, of the vendor’s $48m net profit before tax, $40.5m is a result of ‘other income’.

Such strategic focuses and such spending priorities could, over time help Neusoft Medical continue to establish itself as an attractive vendor in the Chinese and some other emerging markets, which offers reasonable technical prowess at affordable prices. What is ultimately having a more direct impact on Neusoft Medical’s prospects, however, is something the vendor has no control over.

Earlier this year United Imaging, China’s biggest domestic medical imaging vendor, listed publicly on Shanghai’s STAR index. While that vendor has a different focus to Neusoft Medical and aspires to target medical imaging’s most technically advanced segment and secure sales in developed markets, it bears some similarities to Neusoft Medical. Significantly, its listing, which netted more than $1.6bn for the vendor, was oversubscribed more than 3,500 times. This means that Neusoft Medical will benefit from the excitement that United Imaging’s listing will have raised and capitalise on the strong prospects for the Chinese medical imaging market that the public company touts. Moreover, it will also offer an opportunity for those investors that were unable to put their money into United Imaging to bet on a similar alternative, which competes in many of the same markets, and will benefit from similar market conditions as United Imaging.

Given this rising tide, despite the severity of some of the challenges facing Neusoft Medical, it could still capitalise. As demonstrated by its repeated attempts to go public, listing does appear to be the only way forward for the Chinese vendor, and now, when the conditions are in its favour, represents the firm’s best opportunity yet to realise its ambition.

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This Insight is part of your subscription to Signify Premium Insights – Medical Imaging. This content is only available to individuals with an active account for this paid-for service and is the copyright of Signify Research. Content cannot be shared or distributed to non-subscribers or other third parties without express written consent from Signify ResearchTo view other recent Premium Insights that are part of the service please click here