2009 john gregg-monitor-china-medical devices-risks & rewards
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Copyright © 2009 by Monitor Company Group, L.P.
No part of this publication may be reproduced— without the permission of Monitor Company Group, L.P.
This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion. COMPANY CONFIDENTIAL
SAN FRANCISCO SÃO PAULO SEOUL SINGAPORE TOKYO TORONTO ZURICHSHANGHAI
BEIJING CHICAGO HONG KONGCAMBRIDGE DELHI DUBAI JOHANNESBURG
PARISLOS ANGELES MADRID MUMBAI MUNICH NEW YORKMOSCOWLONDON
The China Medical Device Market:Risks & RewardsNovember 4th, 2009,Boston, Massachusetts
John Gregg,Associate Principal Greater Chna & Head Monitor Emerging Markets GroupMonitor Company Group
2
CAGR%(2002-09)
26.5
Note: * At price to dealers, including both equipment and consumablesSource: Goldman Sachs, UBS, Monitor analysis
8.8
7.1
5.4
4.1
2.92.4
1.7 2.0
6
4
2
0
8
042002 03 0907 080605
China medical device market Historical market value*(2002-09)Billions of US dollars
10
China medical device market overview
200
150
100
China medical device marketProjected market value*(2006-11F)Index to 100 = $8.8B (2006)
250
11F10F09F082007
Case #3 20%
Case #1 25%
Case #2 24%
CAGR%(2006-11F)
Analyst reports
Like nearly all markets in China, medical devices have seenexplosive growth over the past decade; this trajectory isexpected to continue
3
Source: Espicom Business Intelligence, DeviceLink.com
Other
2%
13%
20%
39%
27%
China medical device market overview
90
80
China’s medical device market, by product segmentation
(2008)Percent
100
70
60
50
40
30
20
10
0
Dental products
Orthopedic and
implantable products
Consumables
Diagnostic imaging
• Cardiovascular
--
ECG
Heart lung machines
• Pulmonary
--
Incubators
Ventilators
• Dental implants
• Pacemakers
• Stents
• Catheters
• Syringes
• X-ray machines
• MRI
The diagnostic imaging segment remains the largest, withstrong growth coming from implantable devices
4
Impact ongrowthDriver
Changingpatient population
Accessto care
Economic growth
Commentary
• The patient base is expanding due to:- an aging population, as the population aged 50+ is expected to
increase from 21% in 2005 to 32% in 2020
- increasing incidence / prevalence rates brought by changing
lifestyles, e.g., prevalence rate of cancer in urban China increased
from 25% to 33% since 2003
• Access to care in China is fueled by:- expanded insurance coverage
- public & private healthcare investment
- urban population growth
• China is one of the world’s fastest growing major economies- China has achieved GDP growth of ~9% p.a. for the past 20+ years
Source: Monitor Analysis
China medical device market overview
Underlying market growth is attributable to an aging population, increasingrates of disease incidence and prevalence, and rapid increases in wealth
5
Rank Company2009 revenue (Worldwide)
2009 revenue (China)
Year of Chinaentry
1 J&JMedical $23.1B $500M 1994
2 GEHealthcare $17.4B $700M 1991
5 Medtronic $13.5B $300M 1989
6 BaxterInternational $12.3B $200M 1988
7 PhilipsHealthcare $10.7B $1.1B** Unclear^
8 Covidien $8.9B $65M* Unclear^
10 AbbottLaboratories $7.2B Unclear^ 1995
Rank Company2008 revenue
(US$M)Employees LaunchYear
1 MindrayMedical 547 5,500 1991
2 ShandongWeigao 200 9,800 1988
3 Microport 61* 650 1998
4 YueyueMedical 59 1200 1999
5 LepuMedical 58 500 1999
Note: *2008/09 revenue; **Includes other key emerging markets; ^Unreported entrance date / revenue from China Source: Medical Product Outsourcing, Monitor interviews and analysis
China medical device market overview
Many of the world’s largest companies are building a substantialpresence; there are also some up and coming Chinese players
6
High-end equipment is mostly imported toChina, 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 onsales 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 with
“developed nation diseases” likediabetes and heart disease
Source: General Administration of Customs, China Now: Medical Products, Monitor analysis
3.8
2.5
1
6
5
4
3
2
China medical device market overview
China medical devices trade (2001-2008) Billions of US dollars
5.3
0.64.3 0.2
4.3
Consumables
Medical dressing
Exports
8.4
6.9
5.34.1
3.2
0
6
4
2
0
12
10
8
05 06
2.30.2
3.6
08
11.1
1.9
3.1
072003 04
Imports
3.73.1
Chinese medicaldevice imports aremostly high-value
medical technology
Healthcare products
Dental supplies
Medical technology
Chinese medicaldevice exports aremostly low-value
disposable products
Higher value devices have historically been dominated by foreign imports although now that is changing due to both market and non-market forces
7
Source: Espicom, Global Data, DeviceLink, Monitor analysis
10
234567
889
1820
China medical device market overview
Medical device markets*, by country (2008)Billions of US dollars
15
100
20
10
5
0Mexico ChinaIndiaSwitz-
erlandBrazil Canada SpainItalyUKJapan GermanyFranceU.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
However, against countries with mature markets, China’smedical device market is still undeveloped considering itspopulation
8
Source: State Council, The Economic Observer Online, Monitor. analysis
By 2013, China is expected to cover 90% of the rural and urban population 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 in
the Essential Drug List, to be purchased through open tender and unifieddistribution channels
China aims to increase investment in lower level medical infrastructure to
upgrade ~13K medical institutions by 2011, expanding basic care for thewider population
Efforts are expected to increase rural area public health services to equal
existing 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 public
hospitals 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 hospitalreform programs
China medical device market overview
China has just announced major new reforms designed todramatically expand healthcare access
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Key Implications
Top hospitals will continue to handleadvanced procedures; remain a maincustomer of advanced devices
Initial demand for basic medical
devices from development of a largerbase of lower tier hospitals
Ongoing demand for consumable
devices at country level institutionsdue to increasing patient base
However, future regulations and
government funding support may haveadverse impact on foreign suppliers
Source: State Council, UBS, Monitor. analysis
Repositioning of medical institutions
This major infrastructure expansion will drive signifycant growth in the medical device market
Companies focus effortsselling to top hospitals
Utilization of different
levels of medical services
2020
Top
hospitals
Mid-scale
hospitals
Communityhealth centers
Rural healthcare system
Future system:
Initial treatment inrural or community level
2008
Tophospitals
Lower levelhospitals
Grassrootsmedical
institutions
Current system:
Patients treated incrowded top hospitals
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China medical device market overview
Complexity of market
Huge socioeconomic diversity of China’s population & healthcare infrastructure
Wide variations in awareness and adoption rates
Wide variations in insurance coverage and ability to pay
Operational challenges
Intellectual property protection: active management is required
Changing procurement, pricing, and regulatory policies
1
2
3
4
5
To be successful in the Chinese medical device market, companiesneed to be mindful of the following points
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Tier 1 cities
Tier 2 cities
Tier 3 cities
0
10
20
50
40
30
1000 2,000 2,500 3,000 3,500 4,000 5,500 7,000
Overall, existing resources are highly concentrated in the more developed cities, which has implications for suppliers’ sales and marketing efforts
Number of 3A hospitals vs. Urban resident disposable Income, by City(2008)
Lanzhou
Chongqing
Chengdu
Guangzhou
JinanShenzhen
DongguanWenzhou
HangzhouNanjing
Harbin
Xi’anShenyang
Tianjin
Wuhan
Beijing
Shanghai
Annual urban resident per capita disposable income(2008, US$)
Source: China Healthcare Yearbook 2009, China Statistics Yearbook, Monitor 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 socioeconomicdevelopment, which creates significant discrepancies in disease awareness
Source: China Healthcare Yearbook 2009, China Statistics Yearbook, Monitor analysis
Suppliers’ educational efforts, especially for physicians, has been and continues to be vital inexpanding disease awareness and thus the addressable markets
Average ofTier 3 cities
Average ofTier 2 cities
Average ofTier 1 cities
YYY diagnosis rates, by city tier(2009E)Percent
100
80
60
40
20
0
Average ofTier 3 cities
Average ofTier 2 cities
Average ofTier 1 cities
XXX diagnosis rates, by city tier(2009E)Percent
10
8
6
4
2
0
2 China medical device market overviewAwareness & adoption rates
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Differences in physician and patient education drives varying adoption ratesof medical devices across product categories and city tiers
Development stages,select medical devices
Source: Monitor Interviews and analysis
Introductionstage
Expansionstage
Maturestage
Deviceadoptionin China
0
10
20
30
Tier 3City
Tier 2City
Tier 1City
Device penetration rates,by city tierPercent
40
Introduction-Expansionstage products
Mature stage products
Device development stage
Professional medical education by suppliers could accelerate adoption curves for newer products
2 China medical device market overviewAwareness & adoption rates
Mature productsinclude various
catheters,needles, etc.
Newer productsinclude various
stents, ports, etc.
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Imbalanced income levels and a complex medical insurance system havealso created varying degrees of affordability, constraining marketdevelopment of some high value medical devices
Drug reimbursement rate of Basic Medical Insurance* for outpatients(2008)
Percent
80604020 1000
Jinhua
Nantong
Jinan
Shanghai
Beijing
Hangzhou
Suzhou
Tier 1cities
Tier 2cities
Tier 3cities
Not reimbursed
Not reimbursed
Not reimbursed
Annual per capita medical spending, urban residents by province(2008)
Per capita annual
medical spending
>US$550
US$300-450
US$200-300
<US$150
City-specific insurance programs differ widely in device coverage and reimbursement rates, aswell as annual reimbursement caps
Note: * The main insurance program in China covering urban employees
3 Insurance coverage & ability to pay3 China medical device market overview
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IP protection in China remains an issue compared to some more developedcountries, who offer IP protection comparable to the West
3.2
5.45.8
6.26.3
0
5
4
3
2
1
6
ChinaHongKong
Singapore Australia NewZealand
Strength of IP protection, by country*(2008-2009) Country score 7
4China medical device market overview
IP protection & trade secrets
Trade secrets are protected by China’sUnfair 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 arerequired to contain confidentialityprovisions
The New Employment Contract Law (2008) also allows confidentiality provisions for trade secrets and intellectual property
China has made improvements, particularly in urban areas, although enforcement can still be aconcern, especially in developing countries
Note: *Scores based on responses from executive survey. Executives from 130 countries were asked to rate IP
environment in their country on a scale from 1 (weak / not enforced) to 7 (strong / enforced)
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China’s Patent Law was revised through the Third Amendment (October2006), impacting how companies will compete for patents
Ongoing challenges
Historically, China maintained loosely monitoredpatent laws, as patent infringement andcounterfeiting 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 withinregions of China, which might result in push backagainst central legislative efforts
Source: China Business Review, Jones Day Commentary, Medical Device Network, Monitor analysis
China medical device market overview4 Patent Law specifics
Despite recent changes to China’s Patent Law, foreign-based suppliers should use propercaution and diligence in developing strategies based on patent protection
Key changes in China’s Patent Law
Patent invalidation will be tougher to prove, asthe law will allow for public use evidence outsideof China to be applicable (i.e., “absolute novelty”)
Patent litigation will be tougher to enforce as“international exhaustion” clauses will allow forlegal importation of products outside of China,regardless of any remaining domestic patents
Going forward, the law’s 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 companieswith local R&D centers to ensure their strategydoes not invalidate their patent applications
17
Market entry strategies must be driven by careful planning, due diligence,and contracting, plus ongoing operational monitoring
4China medical device market overview
IP protection & trade secrets
on key personnel, Chinesepartners, and reputation oflocal area
• Evaluate the property or
assets being included ascontributions by localChinese partners
Planning &due diligence
• Separate functions within
local operation so that nosingle person has all thetechnology
Contracting
• Specify payment or
performance terms, scopeof grant, and provisions foraudits
• Conduct background checks • Include non-compete
covenants for partner and
key personnel, complete
with specific compensation
for covenants
Ongoingmonitoring
• Ensure proper security
protocols in place for labwork, data, and tradesecrets
• Consider installation offirewalls, surveillanceequipment, or onsiterepresentatives
• Conduct training on
professional ethics,confidentiality, and securitymeasures
18
Finally, the industry faces additional hurdles in tendering, pricing,technological restrictions, and other regulatory challenges
Price controls
NDRC* is reviewing regulations to furtherreduce the mark-up caps on implantabledevices, forcing prices below the competitiveprice rates required for foreign suppliers
This would result in suppliers of imports
having 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
China medical device market overview
5 Regulations & policies
high-value medical devices
This process can result in biases towardsestablished or favored medical devices, andcan deter physicians from proactively
educating themselves on new equipment
Central tendering
In 2006, the Ministry of Health (MOH) createda mandate to strengthen central control ofmedical device sourcing for state-owned non-profit hospitals
MOH is planning to establish a formal
evaluation and selection system for medicaldevices, by applying qualification standards
Technological restrictions
The MOH also requires approval from thegovernment before hospitals can purchase
Note: * NDRC: National Development and Reform Commission
Source: China Business Review, Ministry of Health, SFDA, Goldman Sachs, Monitor. interviews and analysis
Thank You
Questions?
John Gregg
Director & Head Monitor Emerging Markets Group
Monitor Company Group Shanghai
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