LEK - China Medical Device Market

8/2/2019 LEK - China Medical Device Market

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The China Medical Device Market:Opportunities & Challenges

The materials contained in this document are intended to supplementa discussion with L.E.K. Consulting. These perspectives areconfidential and will only be meaningful to those in attendance.

January 14, 2010

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China Medical Device Market Overview.

CONFIDENTIAL

1

L.E.K. Consulting is a leading global strategy firm with a strong focus on life

sciencesGlobal Capability

Experience & Expertise

History: Founded in 1983 as The L.E.K. Partnership in London

Professionals: 1,000 consulting professionals drawn from top schools and

leading corporations; 90+ partners

Leadership: Highly differentiated from peer strategy consultancies in

(1) analytically driven decision-making, (2) operational support

Life Sciences: Dedicated business professionals, Ph.D.s, and M.D.s

supporting a strong global Life Sciences practice

China medical device market overview

Presence:


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CONFIDENTIAL

2

Like nearly all markets in China, medical devices have seen explosive

growth over the past decade; this trajectory is expected to continue

CAGR%(2001-08)

26.5

Note: * At price to dealers, including both equipment and consumablesSource: Goldman Sachs, UBS, L.E.K. analysis

8.8

7.1

5.4

4.1

2.9

2.42.01.7

0

2

4

6

8

10

03022001 0806 070504

China medical device marketHistorical market value*(2001-08)

Billions of US dollars


CAGR%(2008-12F)

100

150

200

250

China medical device marketProjected market value*(2008-12F)

Index to 100 = $8.8B (2008)

12F11F10F09F2008

Case #1 25%

Case #3 20%

Case #2 24%

Analyst reports


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CONFIDENTIAL

3

The diagnostic imaging segment remains the largest, with strong growth

coming from implantable devices

Source: Espicom Business Intelligence, DeviceLink.com


Other

39%

20%

13%

2%

27%

Chinas medical device market,by product segmentation(2009)

Percent

80

70

60

50

90

40

30

20

10

100

0

Diagnostic imaging

Consumables

Orthopedic andimplantable products

Dental products

Cardiovascular

- ECG

- Heart lung machines

Pulmonary

- Incubators- Ventilators

Dental implants

Pacemakers

Stents

Catheters

Syringes

X-ray machines

MRI


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CONFIDENTIAL

4

DriverImpact on

growthCommentary

Changingpatient population

The patient base is expanding due to:

- an aging population, as the population aged 50+ is expected toincrease from 21% in 2005 to 32% in 2020

- increasing incidence / prevalence rates brought by changinglifestyles, e.g., prevalence rate of cancer in urban China increasedfrom 25% to 33% since 2003

Accessto care

Access to care in China is fueled by:

- expanded insurance coverage

- public & private healthcare investment

- urban population growth

Economic growth

China is one of the worlds fastest growing major economies

- China has achieved GDP growth of ~9% p.a. for the past 20+ years

Source: L.E.K. analysis


Underlying market growth is attributable to an aging population, increasing

rates of disease incidence and prevalence, and rapid increases in wealth


6/20China Medical Device Market Overview.

CONFIDENTIAL

5

Many of the worlds largest companies are building a substantial presence;

there are also some up and coming Chinese players

Rank Company2008 revenue(Worldwide)

2008 revenue(China)

Year of Chinaentry

1 J&J Medical $23.1B $500M 1994

2 GE Healthcare $17.4B $700M 1991

5 Medtronic $13.5B $300M 1989

6 Baxter International $12.3B $200M 1988

7 Philips Healthcare $10.7B $1.1B** Unclear^

8 Covidien $8.9B $65M*Unclear^

10 Abbott Laboratories $7.2B Unclear 1995

Rank Company2008 revenue

(US$M)Employees Launch Year

1 Mindray Medical 547 5,500 1991

2 Shandong Weigao 200 9,800 1988

3 Microport 61* 650 1998

4 Yueyue Medical 59 1200 1999

5 Lepu Medical 58 500 1999

Note: *2007 revenue; **Includes other key emerging markets; ^Unreported entrance date / revenue from ChinaSource: Medical Product Outsourcing, LEK interviews and analysis

Sampleofforeign&

domesticplayers




CONFIDENTIAL

6

High-end equipment is mostly imported to

China, while domestic manufacturersproduce most mass-market equipment

Imports are growing slower than the overallmarket as foreign suppliers are increasinglyestablishing a local Chinese presence

Going forward, these foreign suppliers areexpected to meet unique challenges:

- Price caps on imported products- Process and technology regulations on

sales of high-end medical devices

- Healthcare reforms limiting expenditureon foreign-produced devices

However, the market is expected to seegrowing demands for high-end technology

- Top quality technologies to deal withdeveloped nation diseases like

diabetes and heart disease

Source: General Administration of Customs, China Now: Medical Products, LEK analysis


Higher value devices have historically been dominated by foreign imports,

although now that is changing due to both market and non-market forces

4.33.83.7

3.1

2.5

4.3

0

1

2

3

4

5

6

0.20.6

China medical devices trade (2003-2008)Billions of US dollars

5.3

Medical technology

Dental supplies

Healthcare products

Medical dressing

Consumables

Exports

8.4

6.9

5.3

4.1

3.2

3.6

1.9

0

2

4

6

8

10

12

05 06

0.2

2.3

08

11.1

3.1

07042003

Imports

Chinese medicaldevice imports aremostly high-value

medical technology

Chinese medicaldevice exports aremostly low-value

disposable products



CONFIDENTIAL

7

However, against countries with mature markets, Chinas medical device

market is still undeveloped considering its population

Source: Espicom, Global Data, DeviceLink, L.E.K. analysis


8

23

4567

889

1820

Medical device markets*, by country(2009)Billions of US dollars

5

20

15

100

10

0

ChinaMexicoIndiaSwitz-erland

SpainCanadaBrazilItalyUKFranceGermanyJapanU.S.

100

Population 304M 127M 82M 62M 61M 60M 192M 33M 46M 8M 1.1B 106M 1.3B

Per capita,Market size

$329 $157 $223 $139 $138 $138 $34 $173 $107 $513 $3 $18 $6



CONFIDENTIAL

8

China has just announced major new reforms designed to dramatically

expand healthcare access

Source: State Council, The Economic Observer Online, L.E.K. analysis

By 2011, China is expected to cover 90% of the rural and urbanpopulation with basic insurance coverage through increased subsidies,driving demand for lower-end medical services

China plans to create a system to drive demand for medicines included inthe Essential Drug List, to be purchased through open tender and unifieddistribution channels

China aims to increase investment in lower level medical infrastructure toupgrade ~13K medical institutions by 2011, expanding basic care for thewider population

Efforts are expected to increase rural area public health services to equalexisting level of service in urban areas; expansion of basic programs andmajor projects will be driven by change in grassroots medical institutions

Reforms to the administration, operation and supervision of publichospitals are expected, which will including transforming some publichospitals into privately-owned institutions

Increase medicalinsurance coverage

Build a basicmedicine system

Upgrade grassrootsmedical institutions

Equalize services inrural & urban areas

Public hospital

reform programs




CONFIDENTIAL

9

This major infrastructure expansion will drive significant growth in the

medical device market

Current system:

Patients treated incrowded top hospitals

Companies focus effortsselling to top hospitals

2008 2020

Future system:

Initial treatment inrural or community level

Utilization of differentlevels of medical services

Repositioning of medical institutionsKey Implications

Top hospitals will continue to handleadvanced procedures; remain a maincustomer of advanced devices

Initial demand for basic medicaldevices from development of a largerbase of lower tier hospitals

Ongoing demand for consumabledevices at country level institutionsdue to increasing patient base

However, future regulations andgovernment funding support may haveadverse impact on foreign suppliers

Source: State Council, UBS, L.E.K. analysis

Communityhealth centers

Mid-scalehospitals

Top

hospitals

Rural healthcare system

Grassrootsmedical

institutions

Lower level

hospitals

Tophospitals




CONFIDENTIAL

10

Huge socioeconomic diversity of Chinas population & healthcare infrastructure

Wide variations in awareness and adoption rates

Wide variations in insurance coverage and ability to pay

To be successful in the Chinese medical device market, companies need to

be mindful of the following points


Intellectual property protection: active management is required

Changing procurement, pricing, and regulatory policies

Complexity of market

Operational challenges

1

2

3

4

5



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Overall, existing resources are highly concentrated in the more developed

cities, which has implications for suppliers sales and marketing efforts

Tier 3 citiesTier 2 cities

Tier 1 cities

0

10

20

30

40

50

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

Number of 3A hospitals vs. Urban resident disposable Income,by City(2008)

Annual urban resident per capita disposable income(2007, US$)

Lanzhou

Xian

Chengdu

Chongqing

Dongguan

Shenzhen

Guangzhou

Wuhan

Jinan

Wenzhou

HangzhouNanjing

Shanghai

Harbin

Shenyang

Tianjin

Beijing

Source: China Healthcare Yearbook 2009, China Statistics Yearbook, L.E.K. analysis

1 China medical device market overviewSocioeconomic diversity

Tier 1

Tier 2

Tier 3



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Future growth will also be highly impacted by a variance in socioeconomic

development, which creates significant discrepancies in disease awareness

Source: China Healthcare Yearbook 2009, China Statistics Yearbook, L.E.K. analysis

Suppliers educational efforts, especially for physicians, has been and continues to be vital inexpanding disease awareness and thus the addressable markets

0

20

100

YYY diagnosis rates,by city tier(2009E)Percent

Average ofTier 3 cities



60

40

80

0Average ofTier 3 cities



6

8

XXX diagnosis rates,by city tier(2009E)Percent

4

2

10

2 China medical device market overviewAwareness & adoption rates



CONFIDENTIAL

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Differences in physician and patient education drives varying adoption rates

of medical devices across product categories and city tiers

Development stages,select medical devices

Source: L.E.K. interviews and analysis

Introductionstage

Expansionstage

Maturestage

Device development stage

Deviceadoption

in China

0

10

20

30

40

Tier 3City

Tier 2City

Tier 1City

Device penetration rates,by city tierPercent

Introduction-Expansionstage products

Mature stage products

Professional medical education by suppliers could accelerate adoption curves for newer products

2 China medical device market overviewAwareness & adoption rates

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Mature productsinclude various

catheters,needles, etc.

Newer productsinclude various

stents, ports, etc.

fiirpqo^qfsb



CONFIDENTIAL

14

Imbalanced income levels and a complex medical insurance system have

also created varying degrees of affordability, constraining marketdevelopment of some high value medical devices

Drug reimbursement rate of Basic MedicalInsurance* for outpatients

(2008)

Percent

80604020 1000

Nantong

Jinhua

Jinan

Suzhou

Hangzhou

Beijing

ShanghaiTier 1cities

Note: * The main insurance program in China covering urban employeesSource: China Healthcare Yearbook 2009, L.E.K. case experiences

Tier 2cities

Tier 3

cities

Not reimbursed

Not reimbursed

Not reimbursed

Annual per capita medical spending,urban residents by province(2007)

Per capita annualmedical spending

>US$150US$100-150

US$70-100



CONFIDENTIAL

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IP protection in China remains an issue compared to some more developed

countries, who offer IP protection comparable to the West

3.9

5.45.8

6.26.3

0

1

2

3

4

5

6

7

ChinaHongKong

AustraliaSingapore NewZealand

Strength of IP protection, by country*(2008-2009)Country score

Note: *Scores based on responses from executive survey. Executives from 130 countries were asked to rate IPenvironment in their country on a scale from 1 (weak / not enforced) to 7 (strong / enforced)Source: World Economic Forum Global Competitiveness Report 2008 - 09

4 China medical device market overviewIP protection & trade secrets

Trade secrets are protected by ChinasUnfair Competition Law (1993),prohibiting all who engage in

commercial operations from falselyobtaining technology

Technology owners also have rightsunder various IP laws and the CivilLaw, whereas technology contracts are

required to contain confidentialityprovisions

The New Employment Contract Law(2008) also allows confidentialityprovisions for trade secrets andintellectual property

China has made improvements, particularly in urban areas, although enforcement can still be aconcern, especially in developing countries



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Chinas Patent Law was revised through the Third Amendment (October

2009), impacting how companies will compete for patents

Ongoing challenges

Historically, China maintained loosely monitoredpatent laws, as patent infringement and

counterfeiting was a commonplace occurrence

In 2001, when China joined the World TradeOrganization, it appeared to be an initial steptowards correcting the structure supportingintellectual property rights to spur additionalinvestment in high value products

However, despite best effort appearances, thePatent Law language remains far from clear,allowing for future potential for ambiguous rulings

Additionally, there also remains continuedpotential for local protectionist biases within

regions of China, which might result in push backagainst central legislative efforts

Note: *Patent applications are reviewed by the State Intellectual Property Office (SIPO)Source: China Business Review, Jones Day Commentary, Medical Device Network, L.E.K. analysis

China medical device market overview4 Patent Law specifics

Despite recent changes to Chinas Patent Law, foreign-based suppliers should use proper

caution and diligence in developing strategies based on patent protection

Patent invalidation will be tougher to prove, asthe law will allow for public use evidence outside

of China to be applicable (i.e., absolute novelty)

Patent litigation will be tougher to enforce asinternational exhaustion clauses will allow forlegal importation of products outside of China,regardless of any remaining domestic patents

Going forward, the laws language will also allowfor the government to force compulsory licenses(e.g., during public health crises)

Finally, revised rules on the patent application*process (i.e., order of domestic vs. foreign patentapplication submissions) will force companies

with local R&D centers to ensure their strategydoes not invalidate their patent applications

Key changes in Chinas Patent Law



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Market entry strategies must be driven by careful planning, due diligence,

and contracting, plus ongoing operational monitoring

4 China medical device market overviewIP protection & trade secrets

Ongoingmonitoring

Separate functions withinlocal operation so that nosingle person has all thetechnology

Conduct background checks

on key personnel, Chinesepartners, and reputation oflocal area

Evaluate the property or

assets being included ascontributions by localChinese partners

Planning &due diligence

Contracting

Specify payment orperformance terms, scopeof grant, and provisions foraudits

Ensure proper legal closure

steps when contract issigned

Include non-competecovenants for partner and

key personnel, completewith specific compensationfor covenants

Ensure proper securityprotocols in place for labwork, data, and tradesecrets

Consider installation of

firewalls, surveillanceequipment, or onsiterepresentatives

Conduct training on

professional ethics,confidentiality, and securitymeasures



CONFIDENTIAL

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Finally, the industry faces additional hurdles in tendering, pricing,

technological restrictions, and other regulatory challenges

In 2007, the Ministry of Health (MOH) createda mandate to strengthen central control of

medical device sourcing for state-owned non-profit hospitals

MOH is planning to establish a formalevaluation and selection system for medicaldevices, by applying qualification standards

Central tendering Price controls

NDRC* is reviewing regulations to furtherreduce the mark-up caps on implantable

devices, forcing prices below the competitiveprice rates required for foreign suppliers

This would result in suppliers of importshaving less flexibility to achieve adequatemargins to cover the cost of distribution

Regulatory challenges

NDRC is looking to expand a policy requiringdirect sales for all medical devices in China

The introduction of this policy would heightencompetitive barriers for foreign suppliers, whowould be forced to make significantinvestments in domestic direct sales networks

Note: * NDRC: National Development and Reform CommissionSource: China Business Review, Ministry of Health, SFDA, Goldman Sachs, L.E.K. interviews and analysis

China medical device market overview5 Regulations & policies

The MOH also requires approval from thegovernment before hospitals can purchasehigh-value medical devices

This process can result in biases towardsestablished or favored medical devices, andcan deter physicians from proactivelyeducating themselves on new equipment

Technological restrictions


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CONFIDENTIAL

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LEK - China Medical Device Market