Earnings Call: H1 2020

Aug 28, 2020

Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to the conference call. Our chairperson today is Mr. Christopher Lui, Chris, and I stand by for the Q&A. Thank you. Thank you, operator. Good morning and good evening, ladies and gentlemen. A warm welcome to investors and analysts on the line. My name is Christopher Lui, healthcare analyst here at Jefferies. I am delighted to present the management team of MicroPort to go over the results of first half 2020. We are honored to have from MicroPort, Mr. Martin Sun, chief financial officer, Dr. Qiyi Luo, chief technology officer, Mr. Jonathan Chen, chief international business officer, and last but not least, Ms. Yan Li, board secretary and vice president of MicroPort. Thank you. May I turn the call to management. Jonathan, please. Thank you, Chris. Welcome everyone to the 2020 interim results conference call for MicroPort. During the next hour, Martin and I will provide comments on the interim results of our fiscal year 2020, which ended June 30, 2020. After our prepared remarks, we will be happy to take your questions. First, on standard language, unless we say otherwise, reference to the 2020 interim results increasing or decreasing are in comparison to our corresponding period of the year 2019, and all year-over-year revenue growth ranges are given on a constant currency basis, which adjusted for the impact of foreign currency translations. The growth rate details before constant currency adjustment are available in our interim result announcement, which was published on our website yesterday. First, I will give the highlight of our 2020 interim results. In the first half of 2020, facing the raging COVID-19 pandemic worldwide, the group optimized the allocation of group resources and took safe, efficient, and innovative measures to maintain orderly production, operation, and marketing activities. Global business began to stabilize and rebound in the second quarter, and during the reporting period, the group recorded revenue of $306.9 million, down by 19% year-on-year. The gross profit margin reached 78.9%. The period loss attributed to the group equity holders was $65.6 million. Besides, the group and its associate companies completed a series of capital market financings and raised a total of RMB 4.07 billion, which generated sufficient cash to maintain a strong and healthy balance sheet and will further fuel the business expansion and long-term development of various segments. Second, I will now give a brief overview on the R&D achievements in first half of 2020. As a growing global company that focuses on innovative high-end medical devices, the company has always been committed to R&D clinical affairs. The overall R&D expenses accounted for more than 15% of revenue in the past 2 years. This provides a solid foundation for the company's sustainable development. This year so far, 4 Class 3 medical device products have obtained NMPA approval in China, with many products receiving clearance in the overseas market. First, I'll review our cardiovascular device business R&D. Our FireKingfisher rapamycin-eluting coronary cobalt chromium stent system, which was upgraded on the basis of our Firebird 2 stent, obtained NMPA approval in July this year. In addition, the group has a number of upgraded products under development to enrich our product line and better meet market demand. New products such as our paclitaxel drug-coated balloon, rapamycin drug-coated balloon, and rotational atherectomy catheters are also in the pipeline. In our overseas market, the company's existing products in this segment obtained 17 first registration approvals in 8 countries or regions to expand our global market sales. In our orthopedic business, for our China market, the made-in-China Goral total hip replacement system obtained NMPA approval. The system can be used in combination with the company's unique SuperPath total hip arthroplasty system and showed excellent clinical results and completed the first case during the reporting period. The company's tibial resection alignment system won the Red Dot Award in 2020 and Best of the Best in July 2020. This system helps doctors perform tibial resection and alignment more quickly and accurately to obtain better postoperative clinical effect. In the field of spine and trauma, our Pisces 2 interbody fusion system and Taken 2 cannulated spine minimally invasive system were launched. In the field of sports medicine, the new generation of minimally invasive shoulder rotator cuff repair device called OmniCuff obtained NMPA approval in July 2020. In our overseas market, the Gladiator cementless monolithic femoral hip system received FDA clearance. The COFA-TOP acetabular cup system received CE clearance, and the new generation of Evolution NitrX knee for patients allergic to some metal ions has also obtained CE clearance. The multi-hole version of the shell, along with the Constrained Liner, the Prime acetabular cup system, has been submitted for FDA approval. Other hip product developments include the CE clearance for additional femoral heads and expanded release to the Profemur TL2 femoral system, and these further expanded the company's orthopedic product portfolio globally. For our CRM business in the China market, the company has submitted NMPA registration for the KORA 100, an out-of-chest MRI-compatible pacemaker. In our overseas market, the company released results of our preclinical study on the Axone innovative ultra-thin lead. A scientific poster on the Axone preclinical results was published on the Heart Rhythm Society 2020 e-catalog in May, showing good results in terms of stability, electrical performance, and biotolerance. INVICTA defibrillation lead has started the preclinical study. The new family of pacemakers called Alizea, Borea, and CELEA, featuring our Bluetooth technology and wireless remote monitoring, have been submitted for application for CE mark. In our endovascular business, the Reewarm PTA balloon dilation catheter obtained NMPA approval. Our Hercules low-profile thoracic stent graft system also attained its CE mark. In our heart valve business, our VitaFlow attained registration approval in Argentina in July, which helped to gradually expand the global presence for the company's TAVI products. In our neurovascular business, our TigerTriever clot retriever, a Rapid Medical invested by MicroPort NeuroTech, just a subsidiary group, has entered the Green Path channel. There is no similar clot retriever product currently in the China market, and MicroPort NeuroTech will be entitled to exclusive distributor rights for the TigerTriever in Greater China. Our MicroPort NeuroTech's self-developed clot retrievers also at the clinical stage. In the future, MicroPort NeuroTech will implement a dual product combination strategy. The more comprehensive product specifications and a wider range of lesion indications, it will provide doctors and patients with more choices and create an integrated neurovascular solution. For our surgical robot business, our DFVision 3D electronic laparoscope and the Toumai laparoscopic surgical robot were both granted Green Paths and initiated clinical trials in late 2019. The company made steady clinical progress during the reporting period. The Skywalker orthopedic surgery navigation and positioning system entered the green channel and completed its first robot-assisted total knee replacement surgery, marking the initiation of the first-in-man clinical trial for Skywalker. During the reporting period, the company also made significant progress in clinical trials. During the PCR e-Course hosted by the organizers of EuroPCR in 2020, the company released the latest 3-year follow-up data for the TARGET AC clinical trial and 2-year data for the DAPT subgroup for its Firehawk stent. The results prove that Firehawk can achieve identical clinical efficacy and safety with first-in-class drug-eluting stent with proven large body of medical evidence in the world. The over 1 year target lesion, the vascular failure rate, TLF rates, were lower and similar in both groups. The very late stent thrombosis rates in this real-world population study were lower in the Firehawk group. The 2-year data for the DAPT subgroup of the TARGET AC study showed that the TLF rate in the DAPT interrupted treatment group in the Firehawk group showed a lower trend than the control group. The 3-year follow-up data of the TARGET AC clinical trial was published online in an international medical journal called EuroIntervention. The company also released the 3-year clinical results of VitaFlow applied to patients with severe aortic valve calcification in China. The results show that the all-cause mortality rate was 10.9%, and rates of stroke and major stroke were 11.8% and 1.8% respectively. Compared with the clinical data of other products worldwide, the all-cause mortality rate is significantly lower, and the incidence of severe stroke and severe vascular complications is also lower. The 3-year clinical results confirm the safety and effectiveness of the VitaFlow in the treatment of patients with severe aortic valve calcification. After briefing the big picture, I will now give more details on the progress of each business segment in the first half of 2020 and beginning with our cardiovascular business. As the world's largest PCI country, China has continuously improved PCI capabilities. The number of hospitals that can perform PCI surgeries has increased year by year. In particular, the county hospitals are playing an increasingly important role in the treatment of coronary heart disease. However, compared to developed countries, there is still a huge gap in terms of the number of PCI cases per million population. The company has built a multi-layered and diversified product portfolio and currently with four stents and four balloons, and has maintained its leading market share position in China. While continuing to launch upgraded products to achieve long-term sustainable development and enhance the competitiveness in the global market, the revenue of our cardiovascular business reached $88.4 million, down by 29.1% year-on-year. In China, as affected by the COVID-19 pandemic, the revenue from the drug-eluting stents touched bottom in February, but it increased on a monthly basis since March. During the period, the group continued to explore new markets. As of June 30, 2020, the group's DES covered more than 2,000 hospitals nationwide, among which Firehawk covered 1,063 hospitals, and Firebird 2 covered 1,981 hospitals. In the county level market, the group has cooperated with well-known medical device company to develop a made-in-China medical angiography X-ray machines. This will help to increase coverage in the county areas. In the first half, the group newly penetrated 117 new county hospitals. As of June 30, the group has covered 664 county hospitals nationwide in 26 provinces. In terms of GPO, Firehawk and Firebird 2 successfully won GPO bids in Jiangsu and Shaanxi provinces, which drove sales growth and enhanced the group's leading position in the market and further optimize the product mix. Revenue of Firehawk as a percentage in total DES sales increased from 40% in first half of 2019 to 50% in first half of 2020. While the sales volume increased from 26% to 34%. The group also further upgraded existing products. The FireCondor stent, which improved delivery system, was widely praised by doctors since the launch. While the upgraded FireKingfisher stent just attained NMPA approval in July. The group is also developing a variety of accessory products to create a multilevel product portfolio. This will enhance the overall capacities of the group's PCI interventional products. In our overseas market, the first quarter recorded favorable performance, yet the second quarter was affected by COVID-19. Therefore, the revenue from the international drug-eluting stent business decreased by 12% for the first half. Unfortunately, sales growth was still achieved in countries and regions where the COVID-19 pandemic was properly managed, and the overall revenue from Firebird 2 recorded double-digit growth. During the reporting period, the group actively pursued market access in various regions globally. As of June 30, the DES has been sold in over 30 countries or regions. The global revenue for balloon products was basically flat. In China market, Firefighter balloon catheter received extensive positive feedback after its launch and newly penetrated nearly 40 hospitals in the first half. Also, our Pioneer balloon catheter won the bids of GPO in Jiangsu Province, which will promote its clinical application in that region. In the overseas countries, our balloon products obtained eight registration approvals in six countries and is now being sold in 17 overseas countries. For our orthopedic business, our revenue of orthopedics reached $86.6 million, on a year-on-year decrease of 22.8%. In response to the COVID-19 impact, the group actively coordinated the global orthopedics R&D team and resources and enriched the existing product portfolio and instrument layout and strengthened our brand building and product concept promotion through online marketing and accelerated the process of domestic production. Revenue of our international non-China orthopedics business decreased by 24.2% year-on-year. In January and February, almost all overseas regions showed strong momentum. However, the overall performance has been affected by COVID-19 due to the fact that the elective surgeries were postponed since the end of March. Then we saw signs of recovery in May, and North America achieved year-on-year revenue growth in June. The group actively invested in R&D and completed the design and development and registration of a number of new products during the reporting period and further improved and upgraded the product portfolio. The revenue of our China orthopedics business fell 12% year-on-year, which is mainly attributed to those postponed elective surgeries. The group continued to expand its market coverage, and during the reporting period, joint products newly penetrated nearly 600 hospitals and are now being sold in nearly 1,000 hospitals across the country. Among them, two domestically made knee joints were launched in 2019, and the sales showed strong momentum in the first half of 2020. The Made in China Boral total hip replacement system obtained NMPA approval and was launched in April. In June, our monthly cases exceeded 100. As a whole, the Made in China product line has been completed and will accelerate the process of domestic production. Through the combination of both Made in China and imported products, the group will greatly enhance its overall competitiveness in China. The revenue of the spine and trauma businesses achieved steady growth, mainly due to the newly launched Pisces 2 injectable artificial bone fusion device, and the Tekon 2 hollow spine minimally invasive spine system. Our orthopedic instruments further helped to reduce costs, and the trial produced the hybrid ICE knee joint instruments for the overseas business and developed sports medicine tools. The GSC reduces instrument costs through effective allocation of our global resources. Now I move to our CRM business, which recorded revenue of $82.7 million, down by 20.2% year-on-year, and mainly as a result of the COVID-19 impact. Despite that, the R&D team at home and abroad have worked together to actively proceed with our R&D projects. Domestic pacemakers maintained strong growth momentum and further promoted the process of domestic production. The international non-China CRM business recorded revenue of $79.9 million. In January, February, the performance was stable and positive. From mid-March, the COVID-19 imposed severe challenges, and as a result, revenue of the international non-China business decreased by 20.3% year-on-year. Although the overall sales was affected, the group made solid achievements in the R&D projects, including continued progress of the pre-clinical activities for our INVICTA ICD lead and the CE mark submission of our new line of pacemakers with Bluetooth connectivity, as mentioned earlier. The CRM business for China realized revenue of $2.8 million, which is down by 16% year-on-year. Although the implantations during the first quarter were affected by the postponement of elective surgeries, they recovered in Q2 with steady month-on-month implants and implantation increase. This was mainly attributable to continuing fast growth of the Made in China pacemakers since its launch and its market leader position amongst domestic players. Overall, the domestic pacemaker volume experienced 43% year-on-year growth during the first half of 2020. Clinical applications of the BEFLEX active pacing lead increased, which contributed additional revenue for this segment. For our endovascular business, the business recorded revenue of $30.5 million, which was a steady year-on-year growth of 25%. Our TAA products maintained relatively rapid revenue as the thoracic aortic surgeries were mainly emergency ones and were mildly impacted by COVID-19. AAA products recorded declined revenue due to COVID-19, as the abdominal aortic surgeries were mainly elective surgeries. The Castor single branch thoracic aortic stent, which is the world's first thoracic branch stent, maintained rapid growth and has been applied by 400 hospitals in China. The Minos AAA system steadily accelerated the process of bidding and entering hospitals since its launch. In the peripheral field, the ReWarm PTX drug-balloon dilation catheter obtained NMPA approval and will bring extra revenue contribution. In the overseas market, after Minos obtained CE mark in 2019, in first half of 2020, we completed the first implantations in several European countries. Our Hercules low-profile thoracic stent system obtained CE mark during the reporting period, which further expanded the segment's international product line. For our neurovascular business, we recorded revenue of $10.9 million, which was down by 9% year-on-year. This was mainly due to the fact that the common outpatient operations decreased sharply due to the COVID-19 outbreak, and sales of the APOLLO™ declined due to such impact. Our Tubridge™ vascular reconstruction device continued to expand its market coverage and is currently used by approximately 130 hospitals. Our Fastrack® microcatheter system attained NMPA approval in 2019 and was subsequently launched in several provinces and cities in the first half of 2020. There is also several new products under development, such as the coil occlusion system, the vertebral artery rapamycin target eluting stent system, our intracranial support catheter, our clot retriever, which all further enrich the neurovascular product line for the future. For our heart valve business, the business recorded revenue of $5.2 million. The group continued to execute targeted sales plans and marketing strategies to promote the launch of VitaFlow in the various provinces and cities, and facilitate its business development in new hospitals, especially medium and large hospitals. At the end of June 30, 2020, we have entered 72 hospitals and have covered four of the eight core catheter centers. In certain hospitals, the development so far have only adopted our company's products, which highlighted our competitive advantage and the wide recognitions by industry experts and adopters for our VitaFlow. For our surgical robots business in the field of surgery with conventional endoscopy, our DFVision® 3D electric laparoscope entered Green Path and initiated clinical trials in 2019. In the first half, the group started the preparation for the registration information. In the field of surgery with laparoscopic robots, we have the Toumai® laparoscopic surgical robot that entered into Green Path and launched clinical trials in late 2019. The clinical trial was progressing steadily during the first half of this year. For joint replacement, we have our Skywalker orthopedic surgery navigation and positioning system, and this entered into Green Path and completed a robot-assisted total knee replacement surgery in the first half of 2020, and this marked the initiation of the first-in-man trial. As to the natural cavity surgery, the group has completed the first robot-assisted bronchoscopy alveolar lavage for the diagnosis and treatment of COVID-19 pandemic, and this will help to reduce the risk of medical staff infection. Additionally, the group further expanded its robotics business territory through overseas investment. In the field of vascular interventional surgery, the group invested in Robocath, a vascular interventional robot company with which we will establish a joint venture in China. The group also invested in NDR Medical, a percutaneous navigation robot company, to further accelerate the group's presence in the field of respiratory and urinary intervention. Through the above-mentioned products and investment, the group will gradually build a multi-field robot business group with a global presence. That is all for the operation performance for the first half of 2020. I will now turn it over to our CFO, Martin Sun, to provide you with further financial details for the 2020 interim results. Martin? Hi. Hello. Thank you, Jonathan. Good morning, and good evening, everyone. This is Martin Sun, the CFO of the MicroPort Group. I will now take you through our interim performance as well as the guidance for the second half year. First of all, for the revenue, during the first half year, we generated total revenue of $306 million, down approximately 20% year-on-year at constant currency basis due to the COVID-19 disruption. As Jonathan already gave a detailed introduction earlier on each segment, I will not repeat here again. For the gross profit, as a result of the sales decline, our gross profit also decreased by 22%, whereas the gross margin was relatively stable at 70% as compared to 71% last year. For our operating expenses, distribution cost decreased by 11% in the first half year, driven by the decrease in marketing activities and the sales commission as a result of the COVID-19 impact. For the R&D cost, increased by 7% of $4.8 million as we continued to make progress in the R&D pipeline, primarily of the CRM and R&D activities and DES and orthopedics. Our administrative expenses increased by 65%, mainly attributable to the impact of the incentive shares granted to certain employees in accordance with the share award scheme of the group. For our other net income, the group also recorded other net income of $30.8 million in the first half year as compared to the $8.6 million last year. The significant increase was mainly attributed to two parts. The first one is the increase in the government grants, which is primarily linked to our continued heavy investment in the R&D parts. The second reason is the refund from our attribution over the purchase price consideration for the acquisition of CRM business from LivaNova in 2018. In March 2020, the arbitrators appointed by the group and LivaNova determined that LivaNova should refund a total of $16.4 million as the adjustment to the group. The amount has been fully received by the group in the first half year. Our net loss bottom-wise in 2020, the interim results closed at a net loss of $68.8 million, a loss attributable to the ordinary shareholders of $65.6 million. Now let us turn to the balance sheet analysis. Other than the P&L movement during the first half year, there have been a number of significant events that helped improve our capital structure and the cash flow liquidity. The first one is in February 2020, all our outstanding convertible bonds of the group, which amounted to $84.4 million, were fully converted ordinary shares of the company, which helped our capital structures. The second one is we also completed a series of equity financing transactions as mentioned by Jonathan Chen earlier. Just to name a few, the orthopedics business raised RMB 580 million, and then our CardioFlow business raised $130 million in first half year. Therefore, our gearing ratio decreased from 61% last year to 46% in the first half year this year. The cash balance increased actually from $280 million opening balance to $471 million at the end of June. Subsequent to the interim closing, we further completed several transactions. One is we completed a new share placing by the disco company for net proceeds of 197 million. That is around 200 million equity financing. Another equity financing comes from the CRM business. We raised $105 million for CRM business expansion. There was some quick highlight of the financial performance for the first half year. I will now provide the guidance for the second half year and the full year outlook. For 2020 and full year, the first one, let us say the revenue. The outbreak of COVID-19 virus since the beginning of 2020 is a very challenging situation faced by society, both in China and globally. The management has been closely monitoring its development and evaluating the impact on the operating results of the group. In Q1, we saw our sales were seriously affected as procedures volume slumped in China. However, in Q2, we have seen a notable ramp-up in group revenue, and such a recovery trend strengthened in July and August. Based on our current information available, we anticipate that group revenue will continue to improve into Q3 and Q4, and that the full-year revenue will be largely in line with the last year. While the segments operating in the China market will achieve sales growth at a single rate, the international business, for example the orthopedics and the CRM segments, may undergo a decline in revenue due to the uncertainty of the COVID-19 development in the U.S. and EU market. I will share more details on each key segment. The first one, the cardiovascular business. It experienced a significant revenue decline by 29% in first half year. However, given the strong recovery of Firehawk and the Firebird2 witnessed in the China market since middle March, we expect its full-year revenue to grow by single digit year-on-year, which is consistent with our previous guidance. As for the orthopedic segment, we estimate the global revenue of 2020 to decline by a high single digits. Within this, for the international orthopedics business, we have seen the greatest hit of COVID-19 to the U.S. and the EU market in April, with first half year, the revenue down by 24% year-on-year. However, since May, there has been continued sequentially increase in surgery volumes, showing a gradual recovery in those markets. Based on current information available, we anticipated a recovery trend to continue into the rest of the year, and the full-year revenue of international orthopedics business is expected to decline by approximately 10%. For the China Orthopedics business, which was affected by COVID-19 first half year, the revenue declined by 12%. In the second half year, we expected it will show continued strong recovery. This will be driven by two factors. First one, the existing import joint business will continue double-digit growth through rapid market penetration. The second, the launch of Made in China hips and knees is becoming a new growth driving factor. As a result, we anticipate the revenue of China Orthopedics to grow 10% around year-on-year for 2020. Regarding the CRM business, we estimated the global revenue to experience a decline by single digit year-on-year. Break it down to international and China. The international CRM business operates primarily in the EU market, where COVID-19 is bringing many uncertainty to the business. The first half year, we saw its revenue decline by 20%, while volume started to recover in Spain and continue to strengthen through July. Based on current information available, we believe such recovery will be better than our March guidance, and now expect the full-year revenue to decline by around 5%-10% year-on-year for the international CRM business. For China CRM business, we expect to grow single digit year-on-year in revenue, supported by the newly launched Made in China products. For example, the Rega pacemaker. The remaining key segments we also expected to achieve growth. The growth should be underpinned by the excellent market recognition of our existing products, as well as the take-off on new product sales. For example, our TAVR business realized the first sales in 2019 Q4, and recorded just only $3 million revenue within four months. This business achieved $5.2 million in first half this year, despite the COVID-19 disruption. Given the excellent market recognition, we anticipated the revenue for TAVR business will quickly ramp up in second half year. Let's move to the gross margin. In terms of the estimation for gross margin, we expect it to be flat year-on-year at around 70%-71%. For our operating expenses, with regard to the operating expenses, the management will take appropriate measures to adapt our cost, operations, and resources to better match the revenue. We expect no significant changes in the distribution cost and R&D expenses. The distribution cost will remain approximately 34% of the revenue, and R&D still keep around 20%. For the main expenses, for the first half year, we saw notable increases due to the one-time recognition of cost of incentive share grant. If we'll exclude this, we think that the remaining of the main expenses will be relatively flat in percent of the revenue compared to last year. That's all for our updated guidance for 2020. We will continue to monitor the development of COVID-19 issue in the global market and assess the impact to the group. Thank you for listening, and I will now hand over to Christopher Lui for Q&A section. Thank you. Operator, would you give us some instructions on raising questions? Sure. Ladies and gentlemen, we will now open for questions. If you would like to register for question, please press star one on your telephone. Thank you. Thank you, operator. Thank you, Jonathan, Martin, Qi and Yan Li for a good presentation. While we are polling for the questions, please, if you may, allow me to ask a question on two. First on COVID-19 and second on BVP. First on COVID-19, I want to ask about the impact. We would expect China would get hit harder than China in general. Can you give us some color on why China was hit harder in cardiovascular and also saw reversed actions? That will be on the impact. I also want to ask on recovery. COVID-19 has hit pretty much everybody first quarter, and you mentioned we are seeing improvement late second quarter. Now we are in August. Can you give us some color on the recovery on by business segments in different regions, if possible? When may we see 80% or full recovery in China, at least, if there is any visibility? I will stop here for the COVID. I will now ask another one on BVP. Hello, this is Martin, and let me try to answer your first question about COVID-19. We already mentioned this before. For China market, we hit by the COVID-19 in Q1, especially in February. The China market was first hit. Everyone see the China governments have a strong powerfully control this issue. I think in Q2, we already witnessed that this impact became smaller and smaller. The hospitals and recovery, the procedure volumes increased, recovers from not only one segment, it is from all segments. It is PCI procedures, orthopedics operations. That is why we say this is Q1, Q2, we see the strongly recover. For Q3 and Q4, take example for the cardiovascular, we see that grows and strongly, let us say, ramp up. That is double digits more than even compared to last year. I think the main driven factor is the unmet demand. That is because a lot of patients in Q1, let us say in the first half year, they are forbidden to go to the hospitals, and also the hospital cannot provide sufficient service to them. But right now, in Q, we see the July and August, that is the PCI numbers recover very strongly increased. I think we see the trends, that is why the management believe there is the second half year, we even see a strong growth, and that is why whole year, like cardiovascular, this is almost even whole year is turned from the decrease into the growth. Understood. Thank you. If I may, I have a question on BPP. What would our strategy for BPP, in particular regarding our cardiovascular franchise and the orthopedics franchise, at least for the short and mid term? What would your base case turn out, and would it be as competitive as drugs? This is Martin. Excuse me, can you just give me, what is the BPP? Sorry. It is the national purchase? Yeah, that is the procurement, yeah. Oh, you mean B means stand for the- Bulk bulk purchase. Okay. You mean it is the national wise and the province wise? That is correct. Provincial and the national wise. Provincial and the national. I think the provincial wise, you mean for the first half year, we see, of course, not only the cardiovascular segment, but also orthopedics and even some pacemaker. Several province level, they started some provincial GPO. We usually call it GPO, the group purchase offer. But we think as for cardiovascular, as we are the market leaders, we win all these tenders. Although the price cut usually is about 40%-50%, but still, because we are the winner, and we don't see our revenue has a negative impact by this BPP, provincial BPP. Although the retail price, let's say the tender price cut, but we don't, how to say, cut a lot our ex-factory price. We just have a, let's say, a slight decrease or slight cut on our Firebird 2 and Firehawk. For example, our Jiangsu province, our Firebird 2 is cut within 10%, and Firehawk even is within 5%. So we see, but we don't have a big impact on the price cut. However, as we are winner for the provincial level, our volume growth for these stents, we increased by over 30%. So definitely, we benefited from this BPP. But if you talk about the national wise BPP, right now, we only attend some group discussion with central government. What we heard right now is that national wise BPP may well start in second half year, probably in September or October. But right now, there is no further detailed information about this BPP. Again, I think no matter how details and what's the game rule for this BPP, again, because MicroPort is the market leader for this stents business, we don't worry about that. I think that's BPP. I think from the government's intention, doesn't just want to destroy this industry, and they just wanted to give us a more consolidation chance, I think which will help us, I think, in future. So that's the company's view. Sounds good. Thank you very much. Operator, can we go to the questions? Sure. Our first question comes from Stanley with Pickers Capital in Hong Kong. Thank you. Thank you, management, for taking my questions. I have two questions on corporate structures and potential spin-offs. This year we have seen some of the subsidiaries introduce different strategic investors such as Hillhouse. But at the same time, the company interest in those subsidiaries has fallen to just over 50%. So after the spin-off, the company may probably lose control over the subsidiaries. So my first question is, would the management also consider other methods of financing to raise capital? That is my first question. My second question is, we have seen the company made an announcement earlier in the year for a possible spin-off of one of the subsidiaries. Are there any updates on that? So that is my two questions. Thank you, management. Okay. Thank you for your question. This is Martin. Let me try answer this. Again, overall, let me give you the company strategy. Right now for MicroPort, we have, let us call it one plus ten business strategy. One means we have only one MicroPort. We call the ecosystem. All our subsidiaries or let us say the segments will control or consolidate by the MicroPort. That we call the one MicroPort. Also, let us say the ten segments or one plus ten, the ten representing these ten segments, including the cardiovascular, orthopedics, CRM business, et cetera. All these, we welcome the external finance investors to invest in those segments. We are open to let us say spin-off or just let those segments to enter into a different capital market to raise the capital and to support that business further expansion. If that capital valuation is better than the group level raise the capital to further support each segment. So that is the MicroPort Group strategy. Go back to your question. Currently, we already have one segment called the endovascular listed in Chinese last year. The valuation, which is quite big and very nice, is over RMB 20 billion. And raised almost $100 million for their business expansion. Currently, for the beginning of this year, the company already announced we have the intention to spin off our TAVI business. We call it MicroPort CardioFlow subsidiaries. We already raised over $100 million at a valuation is $1.2 billion. Further, we think it could be listed in Hong Kong sooner or later. In the near future, you see we already brought some new investors in our orthopedics and the CRM. We think we are open to let this business to further raise the fund and enter into the capital market in future. But right now for these two segments, we do not have a detailed concrete plan. We will be compliant with the Hong Kong listing rule. If we have this intention, we will announce that information to the public. Thank you. Sure. Thank you, management. Thank you once again, ladies and gentlemen. There is now one for questions. Hi, it is Chris again. May I ask another question on just a follow-up on the TAVI franchise that you have? Can you remind me what percentage of stakes you own on the TAVI? Also, another strategy question on that is, China is a huge market for TAVI in terms of technology proving globally, and in China, we are just seeing this to gain traction. May you know your strategy on how to gain market share while growing the pie together? What might be the bottleneck before we see exponential growth? What might be a long-term volume share splits between domestic players and foreign players in this space? Okay. This is Qi, and let me answer your question about the TAVI. I think since we get the approval, we have been gradually getting into entering the hospitals. Because of COVID-19, all the hospital was shut down for almost a quarter, so gradually opened, so we can re-enter the hospital. So far, we have been doing very good, very smoothly to get into the major hospital center, which can perform TAVR procedure independently. Mainly the big eight centers. We already get into six. We still have two more centers to get in. So by the time we complete with major centers, we will be at a very solid position to compete with others. So after the COVID-19, we have been growing month by month, week by week with our implantation. We see it is very nicely grown. The total volume in China was much lower than previously anticipated because a lot of hospital, the case volume was reduced a lot because of this disease problem. So far, we believe, I think we are going to see the major competitor, Hangzhou Qiming, come out with the report today or tomorrow, I do not know. We will see what is our market share. We just see ourself. We grow very well, and we still believe we are going to reach our target, which is the last quarter of this year, we are going to pass the Venus Medtech Company, become the number one market share in China, because that is the major competitors. Another J-Valve is a transapical, so we do not really worry about it because anything you need to be successful have to be transseptal or transfemoral, whatever we call it. Also, we have a product advantage. We already said that quite a few times because we have a ProVent, we have a ProSense, and we have skirts that do not have. We also have electrical handles. All those things make our device have, by the nature of product, have a more competitive edge. So we just need the time to get into all the hospital, which is already in, and then we will be at a much stronger position to overcome them. As it is today, we probably still have some volume different compared with Venus. Regarding the international, we know the Edwards Lifesciences already planning to China, and they also need to get into a hospital, which you need to get a hospital approved to enter the hospital. I heard, and it affects the pricing. It is over RMB 300,000. So it is like if you want to finish a procedure with the valve, it is close to RMB 400,000. I think it is not suitable for China's condition. We will see what happen. I believe still some people are going to try to use it, but I do not really think they are going to dominate like what they did in the U.S. It is a totally different market and a totally different conditions in China. I believe, but probably other domestic company also believe, I think the domestic companies are going to have a more market share than imports. Medtronic and Boston Scientific are also going to pursue China market. They are launching a clinical trial, but it is a couple more years. Peijia Medical is another Suzhou company, a domestic company, I think they are going to submit the approval to the SFDA. So I believe they will probably get the approval sometime next year. So I think we are at a good position, and we have a lot of synergy with MicroPort's other product in the hospital, and that give us the confidence. We're going to be a number one market share by the fourth quarter of this year. From that time, we have confidence to become market leaders. I think, let me put it that way. See if you have more questions on there. Thank you very much. Thank you, Qiyi. Operator? Thank you. Once again, ladies and gentlemen, if I may register for question, please press star one on your telephone. Thank you. Our next question comes from Vivian Zheng with Oakwise Capital in Hong Kong. Thank you. Good day, management. Thank you for taking my questions. I just want to have a follow-up question on TAVR, since you mentioned that we are aiming to become the market leader by the fourth quarter this year. I was wondering, do we have a general guidance on the targeted volume that we achieve this year? Hello? Sorry. You talk about the portfolio on the TAVI or the whole valve disease? No, just on the TAVR. Sure. We have our first generation on the market. Actually, our first VitaFlow, I would think equivalent almost to other people's second generation. For example, for Venus valve, the second generation, which is recapturable, they still do not have a skirt, which is very effective to prevent the paravalvular leak. But we already have, in terms of implant, we are almost at a second generation. Our second leg VitaFlow® II will be with retrievable delivery system. Of course, the implant, nobody change it from the first generation to second. We are planning to submit for the approval by the end of this year. We should get approval sometimes next year, for the second generation. Of course, we are working on R&D stage for third generation, or improved generation, whatever we call it. That will be the next one. TAVR, I think we have this, like a pipeline for the aortic valve. We also do three different programs for our mitral valve, which we believe is much big market, compared with aortic valve. We already planned, we have our pipelines for that. We also think about other things, other possibility. For example, we are thinking about we should do something maybe as a bridge to do the surgical valve and some other mitral valve repair, while still try to enhance our portfolio to get them fully solutions for the valve disease. Whatever kind of a patient at a different age group, we also have a treatment to choose available as a solution for those patients. That is our goal to do this kind of pipeline as a strategically and long-term for CardioFlow. Hopefully I answered your question. Yes. That helps a lot. I also want to ask on the mitral valve, is this product about a replacement or repairment? We do both. We have replacement, we have repair. We also have the one, it is not a repair, neither a replacement. We have something, in the creative, you cannot category as repair or replacement. It is completely innovative kind of solution for the mitral valve. Great. Thanks. I also have one last question. In terms of TAVR, what is our target hospital coverage for this year? So- How many number of hospitals you are planning to cover? We planning to get into over 100 hospital, 100 to 150. I have a target, but we are right now in about 60 plus hospitals. Okay. Because the problem is not how many hospital you get in, because some hospital, if they do not have independent ability to do the procedure independently, then they get a proctor there, they do one case, then they may never do a case for another few months because they do not have their own team. That is a problem. I think the more critical is how many hospital can do it independently. I think that is the key to have a volume increase. Of course, need a lot of trainings, physician trainings, education from all the different companies. That is why together, I think everybody will have to work hard to grow this market in China, and need some time as a learning curve for all those surgeons or cardiologists. Thank you. I remember listening to other companies saying that there is only around 200 hospitals in China right now can operate TAVR independently. I was wondering like- No. Not independently. It is like about 200 hospital can do the TAVR, but most of them will have proctors. Okay, got it. Has this number been growing this year? Oh, yeah. It is growing, especially I think more and more hospital can do it independently. I have a wild guess, probably now is like 30 to 40 hospital try to do it independently. As a company and at this stage of the training for the physician, we have to be very precautious to do the selection because you want to keep patient safety and the successful procedure as your number one. We have to think about this as a number one, very caution and to select which hospital can do it independently or which hospital we do have to provide the proctors. It is a tough call sometimes. Got it. Thanks a lot. That is all my questions. Thank you. No problem. Thank you. Our next question comes from Priscilla Chan with Capital Hong Kong. Thank you. Hi, management. Can you hear me? Yes, we can hear you. Yeah. Okay, great. Thank you. Yeah, just a follow-up question. In the TAVR market share, given that we want to be the number one and the leader of this sector, I am pretty sure the investors like, how would be the profitability going forward for TAVR segment? Thank you. The- The question, sorry. The question is the profitability or your market share? Oh, because we want to be the leader. Your voice is cutting out. Sorry, we cannot hear you that well. Yeah. So just in case, if we want to be the leader of the sector, I'm just wondering if it will affect the profitability of the segment, of TAVR. Oh, profitability, we just started to do the volume manufacture, so our gross margin right now is still pretty low. But we see it improve month by month, week by week. And we believe that maybe somehow next year when we have some volume and manufacture production get more smooth, we will be reached to pretty much standard in the industry, which is about 70. Okay. Also, another question is what is the target? I mean, is that market share that we are looking for TAVR, like going forward? Well, the market share, I think I just said earlier, by the end of this year, we will be at a position as the number one market share. So in terms of percentage, like- Percentage, it would be over 30% because it would be like four companies. Okay. I see. So we're targeting over 30%. Yeah. All right. This is short term, right? For longer term, can we get more? I mean, it's like more than 30% or even like Of course, we're going to pursue for higher market share, but it especially depends on how fast we get into this hospital, and as well, how fast do we get operator to train over this learning curve so they have more people can perform independently. Only you get this volume increase, you can get more people to use your device when you train them. So it's like everybody is fighting for educational training. I think that is a strength or advantage for MicroPort we have, because we have so many years physician training for our stents or other interventional device. I would believe we do this, we have advantage over other domestic competitors. Right. Can I understand if we got like a 30% market share and then our gross profit margins will be around like 7%? If we get more than 30% or something, then our gross profit margin will be normalized at this level, or it will continue to increase, given the volume will continue to increase? Yeah, I would think next 2 years, we're going to continually increase our gross margin because as what I said, one is the volume. You get a volume purchase, so you get a much lower those ball valve from Australia. We have a lot of material going to much lower purchase price, and you have more production yield rate. Of course, your overall gross margin will be improved month by month. This is what we've been seeing for past those months, and we'll keep improve this, I would think, for next 2 years. Okay. My last question. Given that the volume continue to increase and that we may need to give more education to the physicians or doctors and so on, then in terms of the operating margin, how would it be likely going forward, say maybe by end of this year and also like in 3 to 5 years time? Yeah, of course. I mean, for current, because as what you said, we do a lot of training to a physician. Yeah, we have a lot of sales marketing cost. At this stage, I think our main purpose is to get the market share and to get more people can do this procedure independently. So I think at the short term, we probably will sacrifice some operating margin because of this cost. We have to keep it to grow the business. So maybe in a year, either 1 or 2 years later, we will look at those, kind of saving those costs to get a better operating margin. But I think at present, this is the time we need to spend money to grow the market, to get more people trained. Only you have a big China market, and you can really finally can get a really high, whenever gross margin or operating margin. I think this is something we have to go through, and we have to spend at the early stage. I see. Thank you. That's all. Thank you. Thank you. Seeing there is no questions on the line, thank you so much, management for your time. May I know if you have any closing remarks before we wrap up the call? Yeah, thank you, Chris. This is Jonathan. Thank you everyone for participating in the first half 2020 MicroPort earnings call, and we look forward to speaking with all investors in the coming days and coming weeks. Thank you very much. Thank you. We may end the call now. Thanks again, guys. Thank you. Bye-bye. Thank you. Bye-bye. Thank you. Thank you for participation. This concludes the call.