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Any use of this material without written permission by BGM Associates is strictly prohibited
Strategy and Transaction Advisors For Healthcare and Life Sciences
The Chinese Medical Device Market Opportunities, Challenges, Strategies Prof. Gert Bruche, Managing Partner February 2015
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BGM Associates & my background
Prof. Gert Bruche | Managing Partner
Previous positions include: Managing Director China & Hong Kong, Global Head Diagnostic Marketing for Schering AG, Vice President & Dean of Berlin School of Economics and Law (HWR)
Friedrich Gause | Partner
Previous positions include: Senior Bayer Representative in Korea, Head of Marketing & Sales China, Managing Director Intendis Dermatology GmbH, Interim COO Piramal Imaging
Prof. Hans Maier | Managing Partner
Previous positions include: President of Bayer Diagnostic Imaging, Managing Director for Schering AG in Japan and Korea
Our founders About BGM Associates
Regional Scope
Global with Emphasis on Asia
Industry Focus
Healthcare & Life Sciences
Functional Practices
Strategy Consulting Partnering & Transactions
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Contents
The medical device market 2
Strategic go-to-market challenges 3
Chinese healthcare in transformation 1
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China’s healthcare transformation is driven by China’s historic return on the world economic stage
Source: Angus Maddison (2006), University of Groningen, OECD, IMF
Regional shares of global GDP 1820 – 2010; PPP-adjusted
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in % of total population
20
40
60
80
100
2013 2000 1983
TB DTP HepB Measles Polio
Chinese epidemiology shows spectacular achievements…
Sources: World Bank (2014), WHO (2014)
Life expectancy at birth; in total years
43.5 40
50
60
70
80
1960 1970 1980 1990 2000 2010
75.5
Child mortality rate under 5 years; per 1,000 live births
113.2
0
20
40
60
80
100
120
1970 1980 1990 2000 2010
12.7
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…but also serious challenges ahead
Sources: WHO (2014), World Bank (2014), ESC (2014), IDF (2014)
Cardiovascular diseases
Chinese with cardio-vascular diseases
heart attacks every year
of population with high blood pressure
Diabetes in million patients
Obesity* Chinese male youth
-
50
100
150
2000 2006 2011 2020e 0%
10%
20%
30%
1985 1995 2005 2014 2025e
Causes of death
45%
23%
11%
2% 6%
5% 8% Cardiovasuclar diseases
Cancer
Chronic respiratory diseases
Diabetes
Other non-communicable diseases
Communicable conditions
Injuries
*Overweight: BMI > 25, Obese: BMI > 30; Youth: 0-20 years
Overweight & obese
Obese
230m
2m
30%
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The world’s largest healthcare system is evolving towards an inclusive approach
* = estimates Sources: BGM Research, China National Health and Family Planning Commission
Population with health insurance in 100 millions
55
595
1.230
2000 2014* 2020*
“China’s villages now have more than 880,000 rural doctors, about 110,000 licensed assistant doctors and 50,000 health workers.”
- Kalam / Singh, 2011
Total healthcare expenditure in bn USD
Per capita healthcare expenditure in USD
+17%
43
427
859
Medical workers and rural doctors have dramatically improved access to health care in China’s countryside over the last few decades.
2000 2014* 2020*
+16%
2000
2014*
2020*
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China has a hospital-based healthcare delivery system with an unbalanced structure
* PLA = People’s Liberation Army Source: China Statistical Yearbook 2013 (rounded figures)
§ More than 90% of China’s heal thcare services are delivered via hospitals
§ Top 1,300 hospitals, owned by centra l & prov inc ia l governments and the PLA*, cover more than one third of all in-patients
§ Tier II hospitals, a huge number of township hospitals and small rural community centers are in the focus of the o n g o i n g r e f o r m a n d upgrading efforts
Level # of sites share of all in-patients
Tier III >500 beds
Tier II 100-500 beds
Tier I Small facilities with limited service
36%
64%
1,300
7,000
12,000 other hospitals 40,000 community centers
Key points
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Absurd hospital funding – 45% of revenues from drug and medtech sales
Wrong incentives – kickbacks and ‘red envelopes’
Lack of treatment protocols – for many common diseases
Lack of medical qualification – especially at lower tier levels
Complex regulatory system – fragmented: central, province, city; intransparent
Inefficient distribution – fragmented, intransparent and inefficient
Healthcare reform must overcome myriad challenges…
Source: BGM Research
Members of a police SWAT unit instruct nurses and doctors how to defend themselves against attackers at a hospital in Ningbo, Zhejiang province.
An average of 27 attacks by upset patients per year is recorded in Chinese hospitals
Examples…
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China’s healthcare reform addresses a number of these challenges
Source: BGM Associates
Government Reform House
§ Include 100% of Chinese citizens in basic insurance
§ Reduce out-of- pocket payments
§ Introduce ‘Catastrophic Disease’ coverage
§ Eliminate ’drug dependency’ of hospitals, e.g. through DRGs
§ Develop primary
care at level I (grassroots)
§ Facilitate private hospital investmt.
§ Expand National Essential Drug system
§ Expand tendered purchasing
§ Rationalize distribution
§ Fight monopolistic practices & corruption
§ Promote seven strategic indus-tries (e.g. bio-medical)
§ Develop 8-10 top medtechs, support 40-50 innovative more
§ Go-out policy support
Economic development as base
Cost control Industry policy Funding reform Healthcare delivery
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Reduction of the out-of-pocket funding share is one of the successful reform results
Changing composition of healthcare expenditure as % of total expenditure
0
10
20
30
40
50
60
1990 1995 2000 2005 2010 2015e 2020e
Out-of-pocket
Social
Government
Forecast
Sources: China Statistical Yearbook 2013, BGM Research
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China’s remarkable healthcare achievements over the last 50 years will be under strain from a
massive increase in non-communicable diseases.
While the broadening of access to healthcare through an inclusive strategy shows impressive results, the funding
and operations of the hospital system still need far reaching reforms in order to tackle the upcoming
challenges.
Conclusions on the transformation of the Chinese healthcare system
Source: BGM Associates
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Contents
The medical device market 2
Strategic go-to-market challenges 3
Chinese healthcare in transformation 1
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The Chinese medical device* market has been growing from an ‘also-run’ to a ‘must be’ market
*includes medical devices and IVD Source: BGM Research
United States United States United States
Japan Japan China
Germany Germany Japan
France China Germany
United Kingdom France France
Italy United Kingdom United Kingdom
Russia Italy Brazil
China Canada Italy
Spain Russia Canada
Canada Brazil Russia
China’s medical devices market in comparison by market size
Chinese vs. German medical device market size in bn USD
25 55 6
2000 2014e 2020e 2008 2014e 2020e
29 35 12
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0
2
4
6
8
10
12
14
16
18
2008 2012 2016f 2020f
Consumables Diagnostic imaging Dental products Orthopaedics & prosthetics Patient aids Other medical devices IVD sales
While all segments will keep growing, in-vivo and in-vitro diagnostics maintain the lead
Source: BGM Research
Chinese medical devices market key subsegment sales; in bn USD
8.9
6.0
1.9
15.5
10.0
4.0
Diagnostic imaging
In-vitro diagnostic
Orthopaedics & prosthetics
Projected growth rates of key subsegments CAGR 2013 - 2020
+14%
+12%
+21%
Forecast
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The Chinese medical device market is still dominated by imports, …
Source: BGM Research
Import 73%
37%
19% 11% 5%
28%
USA Germany Japan Switzerland Others
Import share in the Chinese medical devices market 2013; without IVD
Minimally- invasive surgery
Healthcare IT
Market shares of foreign companies in selected segments 2013 estimates
Diagnostic imaging
In-vitro diagnostics
Orthopaedics & prosthetics
Consum- ables
90% 10%
“We want to strongly advocate health ministry organizations to use domestically-made medical devices, especially pushing top level class III hospitals to use domestically made products.”
- National Health and Family Planning Commission (NHFPC)
20 August 2014
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…but key MNCs localize their operations and consolidate the market through M&A, …
Source: CEIBS (2012)
Top MNCs in China – The ‚usual suspects‘
Case Study: Medtronic – Penetrating the Chinese market
1970s
1991
1996
2007
2011
2012
2013
2015
2016
Export entry
First assembly and sales JV (Ningbo)
WOFE for pacemaker assembly (Shanghai)
Acquisition of 15% of Weigao + JV for distribution of orthopaedics (reduced to 11%, and JV dissolved in 2013) Prioritization: Regional HQ for Greater China & large R&D center in Shanghai
Acquisition of Kanghui Medical, China’s leading orthopaedic implant maker for USD 816m
Strategic alliance with LifeTech, Shenzhen (19% shareholding) to co-produce pacemakers for the Chinese market
Acquisition of Covidien; second large R&D center in Shanghai & local manufacturing
First haemodialysis production line in Chengdu (key parts & assembly for global market)
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… while domestic players are ‘trading up’ and competing with foreign companies
* includes hospital business revenues Source: BGM Research
Mindray 1.200
Neusoft 1.100
Shandong Weigao Group Medical 580
Sinocare 550*
Shandong Xinhua Medical Instrument 480
Jiangsu Yuyue Medical Equipment 210
Shanghai Kehua 180
Lepu Medical Group 160
Microport 150
Golden Meditech Holdings Ltd 140
Ten prominent Chinese players by 2012 or 2013 revenues; in m USD
Case of the coronary stent market
Chinese coronary stent market in bn USD
Revenues of local companies in China 2010; by number of stents implemented
29%
23% 22%
22% 4%
Lepu Medical
Other Chinese Companies Foreign companies
JW Medical
MicroPort Scientific
2002 2016 2009 0,0
0,5
1,0
1,5
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China’s medical products market will continue to grow fast and will become the global #2 market by 2020 at the latest. Growth will be
seen across all segments, with particular strong dynamics in orthopedic implants.
The import share varies by segment from as high as 90% to as
low as 10%.The high import share will gradually come down in the next 5-8 years to be replaced by products manufactured in China.
Who will be the eventual winners in this ‘import substitution game’,
foreign megaplayers or Chinese companies, is still an open question.
Conclusions on the state and dynamics of the Chinese medical devices market
Source: BGM Associates
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Contents
The medical device market 2
Strategic go-to-market challenges 3
Chinese healthcare in transformation 1
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To be successful in the changing landscape several strategic issues should be considered
Product-Market Strategy
Premium vs. midmarket
Continental proportions
Market Access Approach
Regulatory development
Tendering, pricing
Hospital procurement
Distribution Partner Choice
The ‘wild east’
Typical strategic issues
IP Protection
Need for protection
Options to act
Strategic issues for foreign exporting SMEs
Reimbursement
Source: BGM Associates
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What geographic focus to achieve in a country with continental proportions?
Sources: Tier structure: Adaptation from Chevalier / Lu (2010); Urban clusters: McKinsey (2010)
Product-Market Strategy
Cluster are grouped by size, based on average 2015 urban GDP as % of national urban GDP (in 2005 CNY)
Tier structure of China’s cities Urban clusters and their hub cities
Beijing, Shanghai,
Guangzhou, Shenzhen
Tier 1: The ‘big four’
Tier 2a: The ‘Climbers’ Chengdu,
Chongqing, Foshan, Hangzhou, Jinan, Nan-
jing, Shantou, Shenyang, Tianjin, Wuhan, Xi‘an
Tier 2b: ‘Niche’ Dongguan,
Ningbo, Wenzhou,
Zhongshan, (+6)
Changsha, Dalian, Fuzhou, Qingdao, Taiyuan, (+ 131)
Tier 3a: ‘New frontier’
Tier 3b: ‘Poor Cousins’
Baotou, Huizhou, Lanzhou, Linyi, Nanchang, Urumchi, Xiangfan,
Xuzhou, Zaozhuang, (+127)
Dongying, Jinhua, Jinzhou, Jixing, Nantong, Quanzhou, Quzhou, Shaoxing, Yueyang, Zhoushan, (+474)
Tier 2c: ‘Mainstream’
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In which vertical segment will our product be positioned?
Source: BGM Research
Product-Market Strategy
2000 2014 Forecast 2020
Premium
Value (20%)
Low-end
Foreign companies
Chinese companies
Chinese medical device market by segments and foreign/local share for illustration only
40%
60%
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Execution of Zheng Xiaoyu, Director of China’s SFDA (‘China’s Thalidomide / Contergan’)
► Increasing regulatory activities ► SFDA people afraid of making
mistakes ► Slow down of processes
First comprehensive Medical Device Regulation (MDR)
Why has market access for medical devices become a major challenge in the last decade?
2000 2007 2014
First major revision of MDR since 2000 ► From 300 to 650 pages ► Some simplification,
generally tightening (e.g. clinical trials)
► All only in Chinese, still opaque and unclear parts
► Flurry of complementary regulations
Source: BGM Research
Selected developments for illustration
Market Access Approach
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§ Which class?
§ Which testing center for conformance testing with standard?
§ Need for clinical trial?
What are the initial strategic registration issues to be solved?
Legal agent Legal responsibility/ liability for devices, adverse events, product recalls
Regulatory agent Coordination of registration process, registration holder
After sales service agent Technical & maintenance support
Which initial partnering configuration? Which regulatory pathway?
Class III
Class II
Class I
Ris
k po
tent
ial
Subject to the strictest controls for safety & efficacy
Require moderate control to ensure safety & efficacy
Require only routine administration for safety & efficacy
Source: BGM Research
Market Access Approach
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Which market access challenges do we have to overcome – now and in the future?
Selected trends Key areas
§ Selective simplification, general tightening § Prioritized review of innovative products Product registration
§ Horizontal expansion: inclusion of more provinces § Vertical expansion: inclusion of growing product range Tendering
§ Roll-out of ‘packaged pricing’ pilots? § Increasing attempts to control ‘channel mark-up’ Pricing
§ Horizontal hospital alliances § Vertical alliances Hospital procurement
§ Basic health insurances will slowly broaden benefits (focus: ‘major disease insurance’)
§ Large differences between regions, cities and counties § Private insurance will take longer time
Reimbursement
Source: BGM Research
Market Access Approach
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Why is Chinese medical device distribution still the ‘wild wild east’?
Medical devices distribution largely independent hospital procurement – fragmented and relationship-driven – regulation in early stage
~120,000 distributors
Mark-ups along the distribution channel illustrative case of an imported consumable
Pharma distribution regulations stipulate tendering at province level – declining channel mark-ups – consolidation in full swing
~28,000 distributors
1€
1.2€
1.8€
9€
+ 22.5% import tax
Main distributor: + 50% Services include import, warehouse, sub- distributor management & training, reporting
Subdistributor: + 400% Often limited customer access, but need to cover basic costs.
Services include tendering, hospital listing, marketing & sales, customer training, financing of long payment durations
Source: BGM Research
Distribution Partner Choice
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What are typical strategic issues in the collaboration with main distributors?
§ Role assignment (import – registration - legal – logistics - sales agent)? § One-partner or multi-geographic partner strategy?
Configuration
§ Geographic reach, established sub-distributor network? § Service capabilities? Scope of services
§ Number, quality & trainability of staff (English cap’s)? § Ethical stance, reputation? Training & Ethics
§ Trustworthiness & reliability? Track record? Licence holder? § Transparency (ownership structure, procedures, staff)? Trust/Credibility
§ Transparency of end-customer prices? § Working capital resources & management Ongoing business
Source: BGM Research
Selected issues Key areas
Distribution Partner Choice
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§ Technical documentation for registration and testing
§ Training of employees, distributors, staff, etc.
§ Theft of data files through hostile IT access
§ Reverse engineering
Do we need to protect our IP?
Source: BGM Research
§ Is our product attractive to imitate?
§ Is it easy or difficult or impossible to imitate?
§ Do we want to prevent imitation (at all)? “If your IP has value, and if it can be copied with
minimal effort, it will be copied and you should be
prepared for this”
- China Law Blog, August 2014
IP Protection
Key questions to any IP holder
Typical pathways for loosing your IP
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What can we do to protect our IP?
Legal options Strategic options
§ Patents
§ Trademarks
§ Copyright protection
§ Trade secrets Work relatively well against large scale infringement, but small infringements difficult to prevent
§ Contracts (e.g. NDAs, licensing agreements, tech transfer agreements) IP protection is local: requires inter alia to be effective: Chinese court, Chinese law, Chinese language (out of China jurisdictions unenforceable)
§ Outpacing Always one-step ahead in innovation
§ Product selectivity Only difficult-to-imitate products
§ Segmentation / modularization Core IP vs. generic parts of technologies
§ Technical controls Mobile phone use, encryption, Chinese walls
§ Employee retention
IP protection
Source: BGM Research
IP Protection
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The times of ‘opportunistic market entry’ and of chasing for lucky windfalls are largely over.
A prerequisite for success in the Chinese medical products
markets of today and tomorrow is a strategic product-market fit.
An in-depth preparation, significant resource commitment and management attention are necessary to work out a market access
and distribution strategy. This includes a geographic coverage approach, a sustainable configuration of partners, and, above all, a workable distribution partnership. Where needed, an IP protection
concept should also be developed.
Conclusions on go-to-market challenges (for relative newcomer SMEs)
Source: BGM Associates
Pictures copyright: p.5: XiXinXing/shutterstock.com p.6: imtmphoto/shutterstock.com p.7: junrong/shutterstock.com p. 9: South China Morning Post p.15: Torwaiphoto/shutterstock.com,
angellodeco/shutterstock.com, goodnewsnetwork.org
p.24: executedtoday.com
Publisher: BGM Associates GmbH Am Großen Wannsee 7 14109 Berlin Germany Managing Partners: Prof. Dr. Gert Bruche, Prof. Dr. Hans Maier Any use of this material without permission by BGM Associates is strictly prohibited.
Literature references: p.7: Kalam/Singh (2011): “Target 3 Billion”, Penguin Books
India, New Delhi p.9: Pinghui (2013): “More doctors and nurses being assaulted
by disgruntled patients and relatives”, South China Morning Post, 28 November 2013
p.16: Jourdan/Driskill (2014): “China calls for greater use of homegrown medical devices”, Reuters, 18 August 2014
p.22: McKinsey (2010): “2010 Annual Chinese Consumer Study” Chevalier/Lu (2010): “Luxury China – Market Opportunities and potential”, John Wiley & Sons (Asia), Singapore
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Contacts
Partners Prof. Dr. Gert Bruche Office +49 (0)30 814 871 26 Mobile +49 (0)151 6111 7526 gert.bruche@bgmassociates.com Prof. Dr. Hans Maier Office +49 (0)30 814 871 26 Mobile +49 (0)151 6111 7505 hans.maier@bgmassociates.com Dipl.-Ing. Friedrich-W. Gause Office +49 (0)30 814 871 26 Mobile +49 (0)151 6111 7334 friedrich.gause@bgmassociates.com
Berlin Office Visitor address: Babelsberger Straße 14-16 D-10715 Berlin Postal address: Postfach 15 02 04 D-10664 Berlin Office +49 (0)30 814 871 26
Asia Liaison Office Dr. Park Kwon | Managing Director Mobile +82 (0)10 3784 0222 park.kwon@bgmassociates.com Address: #703, DaeWoo Elrose County 1467-3, Seocho-3-Dong Seocho-Gu Seoul South Korea
For more information www.bgmassociates.com
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