Interpretation of New China Medical Device Reimbursement Policy: High-end Recovery and Accelerated Domestic Substitution

Overview

This minute summarizes Morgan Stanley's investor conference call held on May 8, 2026, focusing on the latest developments in China's medical technology reimbursement policy and its impact on European and Chinese medical device enterprises. The core conclusion is: China's medical device market is undergoing a structural adjustment period. Although overall hospital capital expenditure and equipment tenders face short-term pressure, demand in high-end areas remains strong, and the policy environment is relatively stable within the year, with the industry expected to recover in the second half of 2026. Meanwhile, centralized procurement (VBP) and test price unification policies are profoundly changing pricing logic and competitive landscapes. Domestic manufacturers are accelerating substitution in high-end consumables and equipment fields, while some European companies face ongoing challenges in niche markets such as dialysis, hearing diagnostics, and blood monitoring in their China operations.

Core views

China market shows significant structural differentiation. According to third-party data, recent hospital capital expenditure and equipment tenders experienced a low double-digit decline year-on-year, but this was mainly due to the high base effect where tender volumes surged by approximately 65% in Q1 2025. Weakness was concentrated in low average selling price (ASP) categories such as ultrasound, monitors, and life support systems, with channel inventory being the main drag. In contrast, high-end imaging and radiotherapy equipment continued to grow healthily. Based on hospital research feedback, institutions believe the policy environment will remain generally stable throughout the year and hold a cautiously optimistic attitude towards the deferred recovery of China's medical device industry in the second half of 2026. Centralized procurement and price reforms enter deep waters with varying impacts on different segments. Medical device centralized procurement has entered its sixth year; recent rounds have seen gentler price reductions of about 50-60%, narrowing significantly compared to the previous 80-90%. In the diagnostics field, immunoassay reagents are the current focus, with hematology potentially becoming a future target; equipment procurement spreads more towards competitive mid-to-low-end categories. For European enterprises, the estimated cumulative pricing reduction in the industry caused by China's centralized procurement over the past two years is between 30-40%. Additionally, the draft for unified test price unification reform issued by the Chinese government in March proposes integrating clinical tests into over 500 categories and reducing inter-provincial price differences, which could lead to further price declines in nationwide routine testing and reagents. Currently, European diagnostic companies have not included this in guidance, with China testing revenue exposure for BioMerieux, DiaSorin, Qiagen, and SHL accounting for approximately 7%, 3-4%, 3%, and 1% respectively. Competitive landscape in specific tracks is being reshaped. In the high-value consumables sector, recent renegotiation rules are more favorable to domestic manufacturers with gentle price cuts and lack of strict volume constraints, creating space for domestic substitution, particularly in areas like electrophysiology (EP) where localization rate is under 10%. Companies like APT Medical are expected to benefit. Competition in radiotherapy is changing drastically, with United Imaging's market share rising from under 10% five years ago to over 30% in 2025, posing greater exposure risks to Elekta which has a large existing stock in China. In dentistry, invisible aligner trends in Q1 were better than expected, with Angelalign achieving double-digit growth; VBP 2.0 is expected to be announced in June and implemented two months later; Straumann's channel destocking is basically complete, patient traffic improving but still below historical levels. In contrast, European enterprises still face pressures from tender exclusions or sustained weak demand in fields such as dialysis, hearing diagnostics, and cochlear implants. Overseas expansion and technology catch-up become new highlights. Although Chinese enterprises have a low overseas base, internationalization revenue growth is accelerating, with Mindray and United Imaging reporting overseas revenue growth of 16% and 27% respectively in Q1 2026. However, penetration rates of Chinese products in Western markets remain low, and European enterprises have not yet felt substantial share loss. Long-term structural share transfer requires years of observation. On the technical level, feedback from the CMEP exhibition indicates that the gap in the high-end market is narrowing for Chinese enterprises, especially in AI functionality integration and workflow optimization where they can quickly respond to doctor feedback, becoming a key differentiating advantage for their product upgrades.

Analysis framework

The institution adopted multi-dimensional cross-validation methods to assess policy impacts and market trends. First, combining third-party tendering data (Joinchain) with frontline enterprise feedback (such as Mindray and United Imaging), it distinguished total fluctuations caused by base effects from genuine structural demand changes, avoiding misjudgment from single data sources. Second, by reviewing historical rounds of centralized procurement and latest policy drafts (such as test price unification), it quantitatively analyzed marginal changes in price reduction rates and differentiated transmission paths for different product lines (diagnostics, equipment, consumables). Third, utilizing channel research and industry exhibition information, it dynamically tracked the evolution of competitive landscapes, specifically the technical iteration speed of domestic manufacturers in high-end fields and overseas penetration, thereby judging the potential for long-term share transfer. Finally, for European enterprises, it specifically calculated revenue exposure of each business segment to the Chinese market to assess sensitivity to potential policy risks.

Methodology notes

• Industry/Industrial Analysis FrameworkPrice-Volume Breakdown

  Distinguish between total tender volume decline and structural growth

  When analyzing the medical device market, one cannot only look at the YoY change in total tender amounts. The report discovered through decomposition that the total decline mainly stems from destocking in low-end categories and high base effects, while high-end categories actually show volume increase. This breakdown helps identify underlying real momentum that might otherwise be obscured.

• Industry/Industrial Analysis FrameworkPenetration S-curve

  Stage differences of domestic substitution in different sub-sectors

  The report points out that domestic manufacturers are in an early rapid penetration phase in electrophysiology (EP) with shares <10%, while in radiotherapy they are in an accelerated growth phase with shares exceeding 30%. Understanding the penetration position of different products is key to judging the space and speed of domestic substitution.

• Event Game Theory and Behavioral FinanceExpectation Gap/Expectation Management

  Whether policy risks are already priced in by the market

  The report specifically mentions that European diagnostic companies have not yet incorporated the 'Unified Test Price' draft into earnings guidance. When major policy changes are not reflected in management's forward-looking guidance, it often implies a risk of expectation gaps and subsequent earnings downward revisions.

• Competition and Strategy FrameworkMoat / competitive advantage

  AI and Workflow Integration as new differentiation barriers

  Against the backdrop of converging traditional hardware parameters, Chinese manufacturers have built a new soft power moat by rapidly integrating doctors' feedback on AI functions to optimize product workflows. This indicates that competition dimensions in medical devices are shifting from pure hardware performance to a comprehensive experience of 'Hardware + Algorithms + Services'.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• United Imaging

  Beneficiary: Leader in high-end imaging and radiotherapy domestic substitution

  Strengths

  Full release of high-end ultrasound platforms, fast response in AI and workflow integration, radiotherapy share rose from <10% to 30%+ within five years

  Comparison

  Faster domestic market share expansion compared to Elekta; More significant breakthroughs in high-end imaging compared to Mindray

  Risks

  Overseas expansion below expectations, intensifying high-end market competition

• Mindray

  Watchlist Target: Low-end category destocking creates pressure, but overseas growth remains steady

  Strengths

  Overseas revenue grew 16% in 26Q1, extensive channel coverage

  Weaknesses

  Facing channel inventory challenges in low-end categories such as ultrasound and monitors

  Comparison

  Slightly inferior to United Imaging in high-end imaging breakthroughs, but solid foundation in vital information and support sectors

  Risks

  Expansion of centralized procurement for low-end equipment, domestic recovery slower than expected

• APT Medical

  Beneficiary: Window period for high-value consumables domestic substitution

  Strengths

  Localization rate in electrophysiology (EP) <10%; Renegotiated price cuts are gentle with no strict volume reporting limits

  Comparison

  More favorable pricing and access conditions obtained in new round of renegotiations compared to foreign competitors

  Risks

  Tightening of subsequent centralized procurement rules, technology iteration below expectations

• BioMerieux

  Downside Risk: Largest exposure to China testing price unification policy

  Strengths

  Global diagnostics leader, rich product line

  Weaknesses

  China testing revenue ratio approx 7%, highest among European diagnostic companies, and did not incorporate new regulations into guidance

  Comparison

  Higher exposure to China testing price decline risk compared to DiaSorin (3-4%), Qiagen (3%), SHL (1%)

  Risks

  Substantial reagent price drops due to unified testing prices, earnings guidance downgrades

• Elekta

  Downside Risk: China radiotherapy market share squeezed by domestic players

  Strengths

  Traditional radiotherapy giant, large existing stock in China

  Weaknesses

  Easier to be impacted by market share seizure from domestic manufacturers like United Imaging precisely because of large existing stock

  Comparison

  Higher risk of market share loss in China market compared to Varian

  Risks

  Accelerated domestic substitution, bidding policies tilting towards domestic brands

• Angelalign

  Beneficiary: Dental invisible aligner trends are positive

  Strengths

  Double-digit sales growth in China region in 26Q1, industry trend stabilizing

  Weaknesses

  Waiting for VBP 2.0 implementation, policy uncertainty remains

  Comparison

  More resilient in local invisible orthodontic market compared to Straumann

  Risks

  VBP 2.0 price cuts exceed expectations, weak consumption recovery

Key data

• China Medical Equipment Tender Growth RateLow Double-Digit Year-Over-Year DeclineMainly impacted by high base in 2025Q1 (+65%) and destocking of low-end categories
• Recent Centralized Procurement Price Reduction Rate50-60%Significantly slower than previous 80-90% decline
• European Medical Device Pricing Decline in ChinaApproximately 30-40%Estimated cumulative decline over the past two years due to centralized procurement
• United Imaging Radiotherapy Market Share>30% (2025)Less than 10% five years ago, significant share increase
• Mindray/United Imaging Overseas Revenue Growth (26Q1)16% / 27%Acceleration of internationalization, but base remains low
• BioMerieux China Testing Revenue RatioApproximately 7%Highest exposure among European diagnostic companies for China testing revenue

Impact & implications

The report believes that the investment logic for China's medical device industry is shifting from 'inclusive growth' to 'structural opportunities'. For local enterprises, those with capabilities for high-end technological breakthroughs, able to quickly respond to clinical AI needs, and layout in sub-sectors with low penetration rates will continue to benefit from domestic substitution dividends. For European enterprises, caution is needed regarding downside risks brought by unified diagnostic reagent prices, expansion of centralized procurement to low-end equipment, and tender exclusions in specific areas; the stability of their China operations will depend more on high-end differentiation and product mix diversification. In the long term, although the overseas expansion process of Chinese enterprises is in the early stage, the narrowing technology gap and agile iteration ability suggest that the global competitive landscape may undergo structural changes within a few years.

Risks

• Formal implementation of China test price unification reform leads to diagnostic reagent price declines exceeding expectations
• Medical device centralized procurement scope further expands to high-end equipment or more consumable categories
• Hospital capital expenditure recovery is slow, H2 2026 recovery falls below expectations
• European enterprises face persistent tender exclusions or weak demand in specific areas (e.g., dialysis, hearing)
• China medical device overseas expansion受阻，地缘政治 or trade barriers intensify

What to watch

• Official announcement for dental VBP 2.0 (expected around June) and subsequent detailed implementation rules
• Final version and execution timeline of the test price unification reform draft
• Quarter-over-quarter improvement status of China hospital equipment tender data in H2 2026
• Update of earnings guidance by European diagnostic companies on test price unification policy
• Access and share changes of Chinese medical device enterprises in European and American high-end markets