Russian Medical Devices Market: Investment Opportunities, Growth Forecasts by Care Areas and Local Competitive Landscape 2015-2018

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SAMPLE REPORT

2015-2018

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CHAPTER 2: EXECUTIVE SUMMARY

•The Russian government has made significant progress in creating a favorable business environment for foreign investors in the recent years even as the Ukraine crisis led to various trade restrictions

•With the country looking to become a technology oriented economy from an oil and raw materials one, several steps including tax and custom concessions, IP protection and creation of industrial parks and special economic zones. While improving investor confidence, it helped FDI in Russia to grow by 83% in 2013

•Following the Ukraine crisis, there has been a negative perception within various industries towards doing business in Russia. Capital flight and restrictions imposed by international community have dampened economic growth

•EMeRG predicts a moderate decline in the economic growth of Russia in short term (2015-2016). Restriction on imported medical device companies from participating in public tenders will have a negative impact on the market growth in short term. However, with the Russian government looking to increase productivity, creating high-tech production facilities and taking steps to improve investors’ confidence, the economic environment for doing business is likely to improve in long term

Business Environment in Russia

Russian Healthcare and Hospital Industry in 2014-2015

•With over 61% of the healthcare expenditure being accounted for by the government, the Russian healthcare system is primarily driven by the public sector. However, it is faced with major challenges including inaccessible healthcare in rural areas, inadequate primary care services, limited number of specialists as well as overworked specialists

•There has been a significant reduction in the number of rural healthcare facilities from 8249 in 2005 to 2085 in 2013

•The Russian private healthcare market is growing at about 12% per year. However only about 7% of all hospitals and about 10% of the clinics in Russia are private owned 2

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•The private healthcare providers market is being impeded by moderately high market entry barriers including high capital investments, need for brand reputation etc.

•Recent healthcare reforms have been aimed at transitioning Russia into a health-insurance based system with focus on improved primary care, high-end technologies, establishment of tertiary care specialized facilities including cardiology centers, reduction of hospital capacity etc.

•The emphasis has shifted from inpatient to outpatient services as financial viability is being sought. Day-care centers for outpatient diagnosis, surgery and rehabilitation are being set up

•It is anticipated that the growth of single-specialty clinics will increase across a majority of Russian cities. Multispecialty / multidisciplinary clinics are anticipated to increase only in the large cities with a population of over 1Mn including Moscow, Saint Petersburg and Novosibirsk etc.

•There are limited number of pathology labs with immunohistochemistry analysis capabilities for accurate cancer diagnosis. Most of these labs are confined to Moscow and St. Petersburg where waiting lists may extend up to 2 months leading to delayed diagnosis

•High localization of specialist cancer care facilities in major cities is one of the factors hindering early detection. Only 30% of cancer patients receive radiation due to lack of equipment, training and financial resources

•Growing at a CAGR of 1.9% from 2015 to 2018, the Russian medical device market is expected to be valued at $7.26Bn in 2018

•Owing to the economic slowdown, the medical devices market was negatively impacted in 2014 as the market grew only by 0.8% over 2013. In 2015 too, the Russian medical device market is anticipated to shrink as the government looks to prohibit imported items into public tenders. While the current socio-economic factors may negatively impact market growth in immediate future, medical device sales are expected to increase post 2016

Medical Device Market in Russia: 2014-2018

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•Russia has one of the strongest domestic markets for medical devices primarily for low-end and mid-range devices. However, the products manufactured within the country do not match the quality standards of western companies

•It is expected that in future, foreign companies may enter into special investment contracts with the government while localizing its manufacturing facilities in Russia and creating job opportunities

•With the increasing cardiac disorders and arrhythmia prevalence, there has been a rise in pacemaker implantation in Russia over the past 5 years. The Russian pacemaker market is expected to grow at a CAGR of 2.7% from 2015 to 2018

•Lack of funds have severely hampered the growth of medical technologies in the country. A large majority of the diagnostic imaging equipment including CT scanners, MRI and digital radiography systems are not covered under any form of service contract. The overall diagnostic radiology imaging equipment and accessories market in Russia is expected to be valued at $1354.2Mn in 2018

•There exists a moderately negative perception among senior radiologists towards usage of contrast agents for radiological procedures. Many radiologists believe that they can visualize the anatomy effectively without the contrast agents

•With an increasing number of local manufacturers entering the market, the affordability of various critical care equipment including patient monitors as well as NICU devices has improved. However with dwindling exchange rates, the overall critical care devices market is expected to grow at a CAGR of 0.9% from 2015 to 2018 in Russia

•The high cost of liquid Helium is one of the key hindrances towards adoption of MRI. The liquid Helium costs about $25per liter, thus adding about $75,000-$100,000 to the initial price tag.

•The key to successful sales of medical imaging accessories is to bundle a majority of the items along with the capital equipment at point of sale, typically as specified in the tender

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•There have been moderate changes to the medical device registration process and various nomenclature associated. Average cost for the entire process towards registration may include various overheads including commissions charged by consultants and other costs. On an average, registration of medical suppliers / consumables may cost about $3000-$5000 while that of high-end equipment may cost over $10,000

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Competitive Landscape

•With a robust service and sales network, B.Braun has been successful in Russia especially with its range of infusion pumps. However, the company’s overall growth rate in Russia in 2014 was negatively impacted by the Ukraine crisis and the dwindling investor confidence. B.Braun has also been impacted by the increasing pro-local manufacturer outlook in public tender evaluations

•In April 2015, Johnson & Johnson announced the signing of a memorandum of cooperation with Russian pharmaceutical manufacturer –Pharmstandard. The agreement will help the companies improve local production of self-monitoring blood glucose systems in Russia

•In 2014, Philips ventured into performance management consultancy services for Russian hospitals. As part of the strategic partnership with MEDSI – one of the largest private clinics networks in Russia, Philips will lend its expertise in hospital management to facilities involved. This will include optimization of infrastructure management, patient flows and processes, as well as continuous training for the medical staff

•In 2014, Fresenius Kabi (the division dealing with drugs and technologies for infusion, transfusion and clinical nutrition) entered into a joint venture with Sistema JSFC and Zenitco Finance Management LLC to improve its domestic manufacturing capabilities in Russia. Fresenius was impacted by the Ukraine crisis in Russia leading to delays in various projects. This led to an organic sales growth of 0% for the company in the same year

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Policy to phase out foreign manufacturers from public

tenders

EMeRG rates Russia’s business attractiveness in 2015 (immediate future) to be low as its current political unrest and negative perception within global markets overshadows the economic momentum gained in the past 3-4 years

•With imported goods consisting of over 77% of the Russian medical devices market, there has been a sustained effort by the government to encourage domestic companies for all public purchases •With ruble’s recent 50% fall as compared to the US Dollar, reliance on imports is expected to cause further pressure on the Russian healthcare system. As a result, strict policies are being made to reverse the import-export order •As per a order published on the government’s website in February 2015, applications to tenders made by foreign companies would be denied if two or more entries are made by companies from Russia, Armenia, Belarus and Kazakhstan •This would include over 40 items including medical consumables and clothing, hearing aids as well as blood transfusion equipment

3.2 Russia: Business Environment in 2014-2015

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3.2.1 Business Environment in Russia: Overview

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5762 Registered hospitals

9.1 Hospital beds per 1000 population

6.6% Percentage GDP spent on healthcare

61-39 Public-private split of healthcare expenditure

370 No. of private hospitals

Dissatisfactory healthcare delivery

Steady depopulation

Rapidly aging population; low birth rates; higher death rates; low fertility rates. If current trend continues, Russia’s population may be reduced to 107Mn by 2050

Ineffective health insurance

Primarily driven through obligatory medical insurance, there is a lack of market conditions and competition within payers and / or providers to deliver good quality and cost effective healthcare

5.2 Public physicians per 1000 population

Figure 4: Russian Hospital and Healthcare Demographics, 2014

4.1 Russia: Health Demographics

Source: EMeRG Analysis

CHAPTER 4: RUSSIAN HEALTHCARE AND HOSPITAL INDUSTRY IN 2014-2015

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Poor funds for public hospitals; bureaucracy; low wages for doctors; inadequate infrastructure and medical equipment leading to overall dissatisfaction 7

Improving Primary Care

Various pilots and efforts are being undertaken to improve primary care delivery across various municipal levels in Russia. Apart from improving the infrastructure and medical equipment, there are efforts to improve involvement of GPs ahead of terapevty; improved coordination between GPs and specialists.

Growth of Day-care Surgeries

There has been a strategic shift in the focus area for healthcare reforms. Emphasis on shifting from inpatient to outpatient services for financial viability is being sought. Day-care centers for outpatient diagnosis, surgery and rehabilitation are being set up. It is expected that gradual investments will be made towards procuring arthroscopic devices, laparoscopic equipment and anesthesia machines for outpatient surgeries.

Opportunities in Health

Information Systems

Gradual investments have been made on health information systems to improve flow of financial and clinical information across regions. While broadband connections are being utilize to improve connectivity, there is an anticipated increase in adoption of electronic medical records across regional level hospitals. It is also expected that telemedicine networks will be increasingly utilized to improve medical consultations, second opinions, and medical training. There are over 300 different applications of medical information systems and a majority being developed by local companies. Key opportunities exist in healthcare business process automation, medical records, lab diagnostics and reporting, as well as medication and workload management.

4.4 Why Invest in Russian Healthcare

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Opportunities in Radiology and Medical

Imaging Equipment

(1/2)

While the current market for medical imaging equipment in Russia indicates late-stage growth, there are significant opportunities to be tapped in the coming years. The current installed base of radiology equipment needs replacement even as servicing and maintenance may continue to dominate revenue growth.

Table 1: Installed Base Estimates of CT Scanners in Russia, 2014

CT Scanner Type % of Installed Base

Non MDCT 24%

<16 Slice CT 22%

16 Slice CT 29%

32-64 Slice CT 21%

>64 Slice CT 4%

Total 100%

Source: EMeRG Analysis

EMeRG estimates the number of CT scanner installations in Russia to be around 1310. A majority of them are non MDCT as well as lower than 16 slice CT. This renders them less suitable for cardiac CT scans. In addition, there has been a significant resistance in usage of contrast media / contrast agents within Russian radiologists. However, with the increase in cardiovascular diseases, the need for accurate diagnosis, patient safety and satisfaction is expected to drive the demand for high-end CT scanners in the coming years.

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Table 3: Cancer Demographics, Russia, 2014

Parameter Value

Age standardized incidence of cancer* 204.3

Risk of getting cancer before age 75 (%) 21.50%

Age standardized mortality rate from cancer 122.6

Risk of dying from cancer before age 75 (%) 13.70%

Mortality to incidence ratio 0.6

5 year cancer prevalence (thousands) 1087.9

Number of clinical trails in progress for cancer 445

Financial burden per patient with cancer ($) 3784

* *Defined as the age-standardized incidence or mortality per 100 000 people per year

Source: EMeRG Analysis

•There are limited number of pathology labs with immunohistochemistry analysis capabilities for accurate cancer diagnosis. Most of these labs are confined to Moscow and St. Petersburg where waiting lists may extend up to 2 months leading to delayed diagnosis •While radiation oncology is a designated medical specialty in the country, there exist no established training programme or licensure procedure for radiation oncologists •Opportunities are anticipated in early diagnosis (especially mammography and other diagnostic and pathology services) through partnerships with the government to create chain of diagnostic centers and high-end pathology labs with immunohistochemistry and cytological analysis. Opportunities are also anticipated in radiation therapy equipment across tertiary care centers in Russia

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Figure X represents a few key facts about private healthcare in Russia

Figure 9: Key Facts and Statistics, Private Health Centers in Russia, 2014

1% Number of Private in-patient hospitals

80% Number of Russians who use Private dentistry

<10% Number of Private health clinics in Russia

~5% Market share for Private Healthcare Institutes (% patients visiting)

•The onset of the private sector in Russian healthcare system was marked by the introduction of voluntary medical insurance and private clinics. Moscow and St. Petersburg had the first multifunctional private clinics followed by other major cities in 1999 •Currently, only about 7% of all hospitals in Russia are privately owned •The largest representation of the private sector is observed in dental care where a large majority of the dental clinics are private owned •There has been moderate growth in the private sector in the recent years. Some of it is attributed to the fact that patient’s expectations may not have been sufficiently met in these facilities for the prices being charged. Private healthcare providers also believe that there is unfair competition with public hospitals where paid services may be offered at much lower rates. Public hospitals may only charge for direct cost of staff and medication / supply. However no charges may apply for medical equipment or facility services used

4.6.1 Understanding Private Healthcare Facilities

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Source: EMeRG Analysis

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N=$7.41Bn

Figure 11: Revenue Splits, Russian Medical Device Market, 2014 (%)

Source: EMeRG Analysis

5.1.2 Revenue Forecasts: 2015-2018

Figure 12: Revenue Forecasts, Russian Medical Device Market, 2014-2018 ($Mn)

2014 2015E 2016E 2017E 2018E

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Cardiology Devices Market

Critical Care Devices Market

Dental Devices

Diagnostic Radiology Equipment Market

Dialysis Machines Market

Medical Consumables Market

Operating Room Devices Market

Orthopedic Devices Market

Other Medical Devices Market

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Source: EMeRG Analysis

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•With over 1.2Mn deaths per year due to cardiovascular diseases, the health and socioeconomic burden of CVD is high in Russia

•Standardized mortality rate due to CVD in Russia is about two to three times higher than developed nations

•Coronary heart disease and cerebrovascular disease are the key reasons of mortality. A majority of CVD related deaths occur in the working age groups in Russia

CARDIOLOGY DEVICES MARKET

5.2 Understanding the Russian Cardiology Devices Market

5.2.1 Need Gaps in the Russian Cardiology Devices Market

Pacemaker

ECG

Blood Pressure Monitor

Interventional Cardiology Devices

Other Cardiology Devices Market

Figure 17: Revenue Splits, Russian Cardiology Devices Market by Product Categories, 2014

Source: EMeRG Analysis

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Pacemaker Market

Market Value in 2014: $30.1Mn Forecasted Market Size in 2018: $34.9Mn CAGR, 2015-2018: 4.0% Market Age: Late growth Adequacy of installed base: n/a Key Differentiators: Light weight, small form factor, durability and battery life

CARDIOLOGY DEVICES MARKET

5.2.3 Cardiovascular Devices Market in Russia: Key Opportunities

Figure 18: Pacemaker Market in Russia – Market Metrics, 2014

Source: EMeRG Analysis

With the increasing cardiac disorders and arrhythmia prevalence, there has been a rise in pacemaker implantation in Russia over the past 5 years. Pacemakers are now implanted across 100 clinics in the country. It is estimated that the annual need of pacemaker implants is about 70,000 in the country. With the need for telemetry to keep a track of the patient as well as the device performance, there have been various technological upgrades in the new generation of pacemakers in Russia. While still being dominated by foreign manufacturers, there has been an increasing reliance on domestic pacemaker brands. Pacemakers sold under the Baikal brand have strong penetration. In addition, a large majority of the pacing leads implanted are manufactured by the Russian firm Elestim- 14

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Private clinics to open general practitioner’s offices in St. Petersburg: Private clinics are anticipated to open offices of general practitioners in St Petersburg by 2015. This will increase the number of such general practitioner offices to 25. These will be created through public private partnerships to improve access to healthcare and provide medical assistance in residential areas and to decrease the rates of hospitalization. These general practitioners will perform their primary healthcare duties such as diagnosis and prescribing while conducting some research or patient referrals to the city healthcare centres.

CHAPTER 7: HOSPITAL AND MEDICAL DEVICE NEWS IN RUSSIA, 2014 7.1 Hospital News: New Launches, M&As and Deals

JP Morgan Russia’s buys stocks of MD Medical : JP Morgan Chase & Co purchased stocks of MD Medical Group Investments Plc – one of the largest maternity center chains in Russia. This helped MD Medical recover from its losses and increase its market value which was around $620Mn.

600 Bed Hospital to treat Infectious diseases to be opened: As per an announcement made in December, 2014; a new 600 bed hospital will be shortly opened in St. Petersburg. It will treat infectious diseases as well as general illnesses in separate wings, and will be one of the largest hospitals in the area. The hospital will be installed with high-end equipment; most of which have already been purchased.

Cancer Diagnostic centre opened for women in Moscow: A new cancer diagnostic centre - White Rose was opened in March 2015 by the Foundation Social and Cultural Initiative. It is expected to offer services free of cost while accommodating about 100 women per day and about 30,000 patients per year.

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