Wego's Dialysis Business Seeks Hong Kong IPO in MedTech Boom

Key Takeaways:

• Weigao Blood Purification filed for a Hong Kong IPO soon after bringing in well-known institutional investors
• The company is a domestic leader in China’s blood purification industry across a range of products, including blood filters and dialysis tubing

By Molly Wen

China’s medical technology market is booming and looks set to keep on growing, driven by accelerating demand from an ageing population. With big profits at stake, Chinese medical device companies are seeking to dominate an industry that initially relied on imported products.

The business of blood purification is a case in point. Power has been shifting towards domestic providers of dialysis equipment, spurred on by an expansion of health insurance coverage and by policies to boost domestic production of high-end medical devices

Looking to ride that wave is Shandong Weigao Blood Purification Products Co. Ltd., a leading Chinese medical device maker that has applied tolist onthe Hong Kong Stock Exchange for the first time, with Citigroup, Huatai International and China Renaissance as joint sponsors.

Blood purification, also known as dialysis, is the main therapy for patients with acute or chronic renal failure, when a patient’s kidneys are too damaged to filter waste products from the bloodstream, causing chemical imbalances in the blood. The patients can fall into a coma or develop other life-threatening symptoms.

For patients with end-stage renal disease, dialysis or a kidney transplant are the only two treatment options. However, dialysis is more common in China, as the supply of transplant kidneys is very limited for the 3.6 million patients with the acute condition.

Weigao Blood Purification supplies products for the two major types of dialysis: hemodialysis, in which blood is pumped out of the body through a machine and returned by tubes into the body, and peritoneal dialysis, in which the lining of the abdomen is used as a natural filter using fluids washed in and out of the body.

The company provides medical devices such as hemodialysis machines, blood filters known as dialyzers or “artificial kidneys”, dialysis tubing, peritoneal dialysis fluids and other related products.

Weigao Blood Purification has gained a strong position in the sector in China, helped by early partnerships with Japanese makers of dialysis equipment. In 2021, it accounted for around 32% of dialyzer sales and nearly 33% of dialysis tubing sales, second only to Fresenius Medical Care FMS, the global blood purification giant.

In 2010, Weigao Blood Purification set up a joint venture with Nikkiso Co. Ltd. (6376.JP), a prominent maker of dialysis technology, to develop and produce hemodialysis machines. Through the partnership, it is the sole agent of products made by the joint venture and Nikkiso in China.

Some 22% of hemodialysis machines sold in China in 2021 were produced by Weigao Blood Purification, behind Fresenius with 35% of sales.

The company also linked up with a Japanese partner on peritoneal dialysis technology. In 2012 it set up a joint venture with medical giant Terumo Corporation (4543.JP), with its cumulative sales of peritoneal dialysis fluid exceeding 100 million yuan ($14.9 million) since the product was launched in 2019.

Technical barriers

With a large, ageing population and rising demand for quality medical care, China is likely to be an expanding market for dialysis products.

A report cited in the preliminary prospectus, said the market for hemodialysis medical devices is expected to double over the next few years, from about 13.3 billion yuan in 2021 to about 28 billion yuan in 2026,  a compound annual growth rate of around 16%. The peritoneal dialysis fluid market is expected to jump from about 3.8 billion yuan in 2021 to about 8.8 billion yuan in 2026, a compound annual growth rate of just over 18%.

On the back of buoyant demand, Weigao Blood Purification has turned a healthy profit in run-up to its proposed listing.

In the three years through 2021, the company’s revenues grew at an annual compound rate of nearly 16%. It posted revenues of 2.2 billion yuan in 2019, rising to 2.57 billion yuan in 2020 and 2.95 billion yuan last year.

Net profits were 196 million yuan in 2019, 308 million yuan in 2020, and 269 million yuan last year. Gross margin over the same period was 48.6% in 2019, increasing to 49.3% a year later but dipping to 45.9% in 2021.

In its prospectus, the company said the dip was caused by a lower proportion of revenue from dialyzers, the blood filters that are its core product and generate around 67% of gross margin, against about 20% for its other products.

In 2021, dialyzers brought in 1.57 billion yuan for Weigao Blood Purification, accounting for around 53% of the total revenue, lower than the 63% and 60% in the previous two years. However, the revenues from peritoneal dialysis fluid are rising fast, contributing 3% to the total last year, from only 0.2% in 2019.

The dialyzer business is hard to penetrate, with many technical barriers to development and production. It can take competitors two to three years to establish a stable dialyzer production line. Weigao Blood Purification has an edge, however, as one of the few companies in China to master the core technology of blood purification. Its dialyzers reach global standards for performance and safety in the removal of toxins from the blood.

Fourth listing for the Wego Group

Weigao Blood Purification was founded by medical device company Shandong Wego Medical Polymer (1066.HK) in 2004. But it wasn’t until this year that well-known institutional investors such as ICBC International, ABC International, CCB International, China Renaissance and Sunshine Insurance got involved through equity transfer and capital increase. The company’s post-investment valuation was about 10.73 billion yuan. Currently, the company’s major shareholder is Shandong Wego Group, with around 46% of shares, while Shandong Wego Medical Polymer holds just under 27%.

If the listing is successful, Weigao Blood Purification would become the fourth listed company under the Shandong Wego Group. The other three are Hong Kong-listed Shandong Wego Medical Polymer, Shenzhen-listed Weihai Huadong Automation (002248.SZ), a precision machine tools specialist acquired by Wego Group in 2018, and Shandong Weigao Orthopaedic Device (688161.SH), which joined the Shanghai Stock Exchange’s STAR Market in June 2021, with its stock soaring 193% on the first trading day.

By dividing up its businesses and listing them on various exchanges, the Wego Group can take advantage of multiple platforms to raise capital.

The Shenzhen Stock Exchange hosts the shares of most Chinese blood purification enterprises, such as Jafron Biomedical (300529.SZ), Jiangxi Sanxin MedTec (300453.SZ) and Guangdong Biolight Meditech (300246.SZ), with price-to-earnings (P/E) ratios between 23 and 52 times.

Based on an average ratio of 36 times, Weigao Blood Purification would be valued at about 9.7 billion yuan, slightly lower than the financing valuation before the IPO.

However, investors may be willing to place a higher value on the company, considering its industry position and the stellar market debut last year of its sister company Shandong Weigao Orthopaedic Device.