HONG KONG, Feb 5, 2021 - (ACN Newswire) - On February 1, China Medical System (0867.HK) announced that its subsidiary had acquired Luqa Ventures Co., Limited ("Luqa"), a dermatology specialty company. This acquisition expanded its product portfolio to include Luqa's dermatology products and marked the first foray into the medical aesthetic industry for China Medical System.

Why medical aesthetics? What is the significance of this acquisition?

1. Consolidating the Skin Management Business and Entering the Medical Aesthetic Market: Acquiring Luqa to Explore a New Growth Engine

According to its official website, established in 2010, Luqa is an innovative enterprise with skin treatment and medical aesthetic solutions as its core business.

Its founder, Mr. Luo Benwei, is experienced in medicine and was involved in Asia's skin management and medical aesthetic industry before establishing Luqa. In 2005, as Almirall's youngest international business development manager, Mr. Luo successfully drove the company's products into markets in Africa, the Middle East, West Asia and East Asia.

China Medical System recognized Luqa's many advantages, including: its abundant overseas resources of medical aesthetic solutions, insights and experiences in introducing quality medical aesthetic solutions to new markets; its network of domestic medial aesthetic service providers; and its unique portfolio, especially the innovative products and solutions in the dermatology and medical aesthetic field.

Luqa's current product lineup covers prescription drugs, medical devices, and medical aesthetic solutions and skin care products. Regarding its prescription drugs and medical devices, Luqa currently provides the cleansing sclerosant Aethoxysklerol, which is used for the treatment of the sclerotherapy of small to large varicose veins, varicose of central veins of spider veins and reticular veins, the self-drying silicone scar therapy gels Stratamark/Strataderm, which is indicated for prevention and improvement of hypertrophic scar, the imidazole topical antifungal drug Zalain, and other blockbuster products.

In terms of medical aesthetic solutions and skin care, Luqa features high-end products from authoritative European brands. Mesoestetic, the leading medical aesthetic brand from Spain, is a major supplier of its medical aesthetic solutions, including the various skin booster series mesohyal and anti-ageing solution mesoeclat. Luqa also features products from Neauvia, a famous hyaluronic acid filler manufacturer from Switzerland. Luqa's medical skin care line offers products from Mesoestetic and two personal care brands of Ferrer, a well-known Spanish pharmaceutical company.

As most of these products have already launched in their domestic markets, they constantly create value while still having considerable market potential. With this acquisition, Luqa's financial results will be consolidated into China Medical System, which are expected to be a new growth engine for China Medical System.

Data speculations can be made based on potential market opportunities available for these products.

Aethoxysklerol, for example, is a cleansing sclerosant that can act locally on the vascular endothelium for the treatment of the sclerotherapy of small to large varicose veins, varicose of central veins of spider veins and reticular veins. As a high-incidence disease of common concern, there are approximately 100 million patients with varicose veins in the lower extremities in China according to a 2018 survey. Assuming a consultation rate of 30% and an active treatment rate of 40%, it can be concluded that there are approximately 12 million patients under treatment. Further assuming 25% of those patients can be treated with Aethoxysklerol leaves about 3 million target patients. Based on the average price of about RMB 480 for a single unit and 2 units consumed per capita, the cost per capita reaches about RMB 1000. The product's market potential is thus expected to reach RMB 3 billion.

Stratamark/Strataderm, for example, Stratamark is widely used in Europe and the United States to prevent and treat stretch marks caused by pregnancy, weight gain or loss and adolescent growth spurts, etc. with a clinically proven safety and efficacy. In two randomized clinical trials conducted in Europe and Australia which enrolled a total of 577 subjects, Stratamark is proven to be safe and effective in the prevention and treatment of stretch marks and related skin itching and discomfort. It has been shown that once daily application leads to 70.2% stretch mark prevention and 80% improved in existing stretch marks. Currently, there is no clinically proven effective alternative in China.

Looking more closely at pregnancy related stretch marks clearly demonstrates the expected market potential of Stratamark. According to Statistical Bulletin on the Development of Health Care in China in 2019, the number of births in 2019 was 14.65 million, and the corresponding pregnant women are about 14.65 million. Although epidemiological studies have shown the incidence of stretch marks is 50-90%, for the following explanation we will use the median estimate of 70%. Following, we can further assume that about 25% of pregnant women are willing to try Stratamark. The treatment starts four months after pregnancy and lasts at least 3 months, that is, each person consumes 3 units and each unit is worth RMB 1000. The market potential of Statamark is therefore expected to reach RMB 7.7 billion in China.

There are also considerable demands for Statamark for people who evidence stretch marks due to adolescent growth spurts. Relevant research shows that the prevalence of pubertal (10-19 years old) stretch marks is 72%-77% for females and 6%-86% for males. In 2019, China's population amounted to 1.4 billion, of which pubertal females accounted for 5.1% (71.32 million) and pubertal males accounted for 5.9% (82.51 million). According to the average incidence of stretch marks due to adolescent growth spurts (74.5% for females and 46% for males), the total number of teens with stretch marks is about 90 million. Since detailed statistics about the current treatment of adolescent growth spurt stretch marks in the Chinese market does not exist, we will assume that 1% of the affected population will choose the product, i.e. 900,000 people. The recommended dose is 3 units per course, and each unit is worth RMB 1000. Thus, the market potential of the product for treatment of adolescent growth spurt stretch marks is expected to reach RMB 2.7 billion.

With the conservative estimate of overall market potential exceeding RMB 10 billion, Stratamark has a very promising market outlook.

In sum, this acquisition is of great significance to China Medical System. Firstly, Luqa's dermatology portfolio will synergize with China Medical System's current dermatology line, thereby facilitating the latter's further expansion in the dermatology field. Secondly, Luqa's presence is expected to bring strong growth momentum to the financial performance of China Medical System.. Thirdly, Luqa has an excellent team, strong product portfolios and extensive partnerships, which will integrate with China Medical System.'s resources and help further broaden the market and boost the comprehensive competitiveness of both sides.

2. Entering the Hundred-billion-dollar Sized Market, What China Medical System. Has to Offer

Because today people value beauty, the medical aesthetic industry is not only rapidly growing but also has great potential. According to Frost & Sullivan, China's medical aesthetic market size was RMB 176.9 billion in 2019, with a CAGR of 22.5% from 2014 to 2019. This makes the Chinese market for medical aesthetic solutions the fastest growing in the world, and it is expected to maintain a high growth rate of more than 20% in the coming years. In fact, China is also expected to overtake the United States to become the world's largest medical aesthetic market in 2021.

We can also be optimistic about the overall market penetration rate. According to Zhao Yue, an industry analyst from Sealand Securities, compared with the United States and South Korea, China's per capita consumption and treatment penetration rate of every 1000 people in the medical aesthetic market still has space to more than quadruple. As such, the market size in China is expected to reach RMB 360 billion in the next 3 years and RMB 2 trillion in the long run.

Therefore, this acquisition is undoubtedly an attempt to capitalize on the resources of China Medical System and Luqa to seize the huge and historic market opportunity.

China Medical System' product lines include the cardio-cerebrovascular line, digestive line, ophthalmic line, dermatology line, etc. Among these, the product layout of the dermatology line has the natural advantage when considering an entrance into the medical aesthetic field. Currently, China Medical System has both marketed products and innovative candidates that are expected to market in short-, medium- and long-term, including Hirudoid (mucopolysaccharide polysulfate cream), which has already been marketed in China, and the innovative biologic Tildrakizumab, which is in domestic registrational clinical trials. The market potential of each of these products is also considerable.

Hirudoid is mainly used for the treatment of blunt traumata with or without hematomas, and superficial phlebitis that cannot be treated by compression. The product was classified in the national reimbursement drug list in January 2020. Its sales in Japan amount to RMB 3 billion. Considering that the population of China is several times larger than that of Japan, the domestic market potential is expected to exceed RMB 4 billion.

Tildrakizumab has been approved for marketing in the United States, Europe, Australia and Japan for the treatment of adult patients with moderate to severe plaque psoriasis. In China, the substance and formulation patents for Tildrakizumab have been approved. In December 2020, China Medical System announced the completion of the first patient dosing in the registrational clinical trial in China. It is expected that the product will be officially launched in China in 2022. China Medical System defines it as a novel monoclonal antibody targeting IL-23 with the best cost-effectiveness. Its peak market potential may reach RMB 6 billion.

Therefore the Luqa acquisition further deepened China Medical System's deployment of the dermatology product line, creating unique product portfolios and strengths, which will also empower the company to form differentiated competitiveness and allow the company to develop at a blistering pace in the race.

Compared with mature markets, such as those in Europe and the United States, China's medical aesthetic industry started late, so related products and medical devices are mainly imported from abroad. Currently, among the upstream medical aesthetic drugs and medical devices, Botox, hyaluronic acid and laser equipment are the most used. Brands from the United States, Germany, the United Kingdom and South Korea lead the Botox market. In the domestic hyaluronic acid market, imported products still occupy the main market share. According to data from CHYXX, in 2018, brands from South Korea, the United States, and Sweden occupied more than 70% of the market share. In addition, the market of medical aesthetic devices is also dominated by foreign brands, including products from Germany, the United States, Israel and other countries. Therefore, it is clear that China Medical System's acquisition of Luqa marks its entrance into the medical aesthetic market and foreshadows how the company will introduce relevant leading overseas technologies and products into the Chinese market.

China Medical System, through past development, has accumulated rich resources and market development experience in the introduction of overseas pharmaceutical products. The company has a sustainable and stable business backed by strong financial support, and its product layout in dermatology could synergize with the medical aesthetic solutions. This acquisition integrates these strengths with Luqa's resources in the European medical aesthetic market, which will help China Medical System to introduce leading overseas resources and technologies into the domestic market, offer comprehensive medical aesthetic solutions for Chinese patients, and expand its competitiveness in the Chinese market through its globalized supply network.

In addition, the acquisition will also help to further broaden the downstream market and maximize both companies' advantages. On the one hand, China Medical System has been cultivating the domestic pharmaceutical market for more than 20 years and has accumulated rich experience and resources in both traditional channels (such as hospitals, medical institutions, pharmacies) and e-commerce channels. According to the company's 2020 interim report, China Medical System' promotional network covered 57,000 hospitals and medical institutions nationwide, including all provincial cities and most prefecture-level cities in China. On the other hand, as a leading brand in the domestic dermatology and medical aesthetic market, Luqa has established in-depth ties with hospitals, medical aesthetic institutions and retailers in various regions, and has a nationwide distribution network. The integration will not only help to further place products into new markets, but also expand the cooperation with existing channels in multiple product categories, which will enhance the company's added value and unleash stronger growth momentum. At the same time, the cooperation will also help to unleash the strengths of both company's resources and the effectiveness of their teams, further enhancing their market influence through brand synergy. Ultimately this cooperation will form a positive cycle that will continue to consolidate their core competitive advantages.

This complementary combination will be a force to be reckoned with in China's rapidly-growing medical aesthetic market.

3. How does China Medical System's Internal Competitiveness Benefit from the Acquisition?

With this acquisition, the huge synergy between the two parties, with regards to skin management and medical aesthetic solutions, will help China Medical System's business development and business models to stand out among the many market players. We believe China Medical System will build a high-end, differentiated medical aesthetic brand and product cluster with a promising future.

Due to the industry's high profitability and growth, medical aesthetic companies tend to be valued higher. Bloomage Biotech has a dynamic PE of 146 times and a total market value of RMB 89.3 billion, while Imeik has a dynamic PE of over 300 times and a total market value of RMB 95.3 billion.

In comparison, the current dynamic PE of China Medical System is only about 12 times, with a total market value of HK$27.5 billion (RMB 22.9 billion). With the incorporation of quality assets and the boost brought by future performance and the transformation of business structure, the revaluation and valuation improvement of China Medical System is expected to begin. Earlier, a Botox made in Korea and approved for the Chinese market caused the share price of its exclusive agent, Sihuan Pharm, to skyrocket by 160% in four trading days. China Medical System thus has every reason to have even greater expectations.

The medical aesthetic industry is a segment worthy of long-term attention, which is prone to produce big winners. After the acquisition of Luqa, China Medical System has formed a stronger sustainable development capacity and core competitive strengths, and is expected to take the lead in China's medical aesthetic industry. With huge long-term growth potential, its development and value creation is accelerating.

Gelonghui Statement: The views in this article reflect those of the original author and do not represent the views and position of Gelonghui. As a special reminder, investment decisions need to be based on independent thinking. The content of this article should be used for reference only and not as actual operational advice. Trade at your own risk.

Copyright 2021 ACN Newswire. All rights reserved. www.acnnewswire.com