Term paper part 2: Medical Devices Industry Analysis

ContentsHigh-tech Industry Development in India.............................................................................................2

Medical Devices Industry: India and World...............................................................................................3

A. Medical Devices Definition.............................................................................................................3

B. Medical Devices Industry Structure:...............................................................................................3

C. Medical devices Markets................................................................................................................4

1. Barriers to Entry...............................................................................................................................6

2. Bargaining power of buyers.............................................................................................................8

3. Bargaining Power of Suppliers.......................................................................................................10

4. Threat of Substitutes......................................................................................................................10

5. Rivalry Conduct..............................................................................................................................11

D. Medical Devices Industry in China:...............................................................................................13

E. Indian Medical Device Industry:...................................................................................................17

6. Recommendations:...........................................................................................................................30

References:................................................................................................................................................31

High-tech Industry Development in India

Since last 3 decades, high-tech manufacturing has been growing at a rapid pace and has claimed

increasing share of world GDP. Despite the opportunity, India has been considerably behind the other

Asian giants in this area. In India, the share of High-tech manufacturing in the total manufacturing value

added grew from 4.3 percent in 1985 to 8.6 percent in 2005. In China, during the same period, the share

of high-tech manufacturing in the total manufacturing value added went up from 8.4 percent to 29.4

percent. South East Asian countries of South Korea and Taiwan too have extracted considerable growth

from this sector.

Source: Chandrasekhar, C.P. and Ghosh, Jayati, “India’s hi-tech lag”, The Hindu Business Line, Sep 9, 2008

Electronics industry that forms the major portion of the high-tech manufacturing is estimated to be

more than double the size of industries like oil, petrol, and minerals; chemical and plastics; food,

beverages and tobacco. During the period 1980-2006, global electronics industry achieved a CAGR of 7.5

percent, compared to global GDP growth at 3 percent. Interestingly, the share of electronics industry

worldwide in the world GDP increased to 4.3 percent in 2006 from 1.5 percent in 1978. Analysts put the

global electronics hardware production in 2005-06 at $1,300 billion with China leading the production

graph with a share of 18 percent followed by Germany (14.5 percent) and South Korea (8.7 percent).

Compare this with India which had a negligible share of 0.9 % of global GDP production. Also it is no

surprise that this industry contributes significantly to the respective country's GDP with China at 13.1 %,

Germany at 8.8 %, and South Korea at 15.8 %. The electronic industry accounts for 1.7 % of India's GDP.

BoP impact: The lack of a strong electronic manufacturing in the country also has a detrimental effect on

our balance of payment. India is largely an importer country with a deficit of $12.4 billion ($1.6 billion

exports against $14 billion imports in the year 2004). On the other hand, countries like China ($180

billion export against $148 billion import), Taiwan ($42 billion exports against $34 billion import), and

Japan ($124 billion export against $73 billion import) are enjoying a sizeable surplus. The imports are

rising at an increasing rate every year which means that there will be further pressure on the Current

Account Deficit.

Medical Devices Industry: India and World

A. Medical Devices Definition

Medical devices are defined as any healthcare product that does not achieve its primary

intended purpose by chemical action or by being metabolized. Medical devices include

electro-medical equipment and related software, furniture, supplies and consumables,

orthopedic appliances, prosthetics and diagnostic kits, reagents, and equipment. Medical

devices are generally divided into class I, II and III, based on the level of risk to

users/patients, corresponding to logical risk evaluations conducted by the FDA. Class I

devices are the lowest risk classification and include general controls such as crutches and

band aids, while class II controls are more specialized, such as wheelchairs. Class III devices

require pre-market approval, as they are known to present hazards requiring clinical

demonstration of safety and effectiveness. Devices in this category include heart valves,

catheters, cardiopulmonary resuscitation (CPR) devices and various implants.

B. Medical Devices Industry Structure:

Medical devices are generally divided into class I, II and III, based on the level of risk to

users/patients, corresponding to logical risk evaluations conducted by the FDA. Class I

devices are the lowest risk classification and include general controls such as crutches and

band aids, while class II controls are more specialized, such as wheelchairs. Class III devices

require pre-market approval, as they are known to present hazards requiring clinical

demonstration of safety and effectiveness. Devices in this category include heart valves,

catheters, cardiopulmonary resuscitation (CPR) devices and various implants.

C. Medical devices Markets

The medical devices industry has witnessed a rapid expansion and though the

traditional markets of US, EU and Japan contribute the major chunk of revenues, there has

been a rapid growth in most of the developing markets. The increasing prosperity and

income across the developing countries especially in Asia, easier access to healthcare

coupled with the ageing population, advances in the medical technology and establishment

of public health insurance has resulted in a phenomenal growth in the medical devices

industry. Marked increases in the average age of U.S. and foreign populations has already

influencing the direction of the medical device industry through the changing health needs

of senior citizens and shifts in thinking on how and where they will be treated. As pressures

mount to contain costs, expensive and/or extended stays in healthcare facilities will be

discouraged and healthcare will be increasingly delivered in alternative settings such as

nursing homes, hospices, and, especially, the patient’s own home. Home health-care is one

of the fastest growing segments of the industry, and is branching out into new areas. What

used to be limited to only the lowest technology products is now encompassing a

proliferation of high technology medical devices that are intended to be used by unskilled

health care workers or patients. In addition, demographics and technological advances will

continue to increase demand for advanced medical device products (such as pacemakers

and defibrillators) well into the 21st century.

The biggest market for the medical devices is United States which with a valuation of

100 billion USD constitutes 42% of the global market. United States is not only the major

market but also the dominant supplier in the devices market. There were approximately

5,300 medical device companies in the U.S. in 20071, mostly small and medium-sized

enterprises (SMEs). The dependence of the Medical devices industries , such as

microelectronics and biotechnology has resulted in the concentration in specific regions

like California, Florida, New York, Pennsylvania, Michigan, Massachusetts, Illinois,

Minnesota and Georgia. In 2007, the medical device industry employed more than 365,000

people in the U.S., earning an average annual wage of approximately $60,000. With 16 of

the top 25 firms being US based and considering the large R&D expenditures by each of

these dominant players the US medical devices industry is expected to remain highly

competitive globally. With the expansion of global markets for the medical devices, an

increasing number of these firms are seeking regulatory approval for selling their products

in the global markets. They are using both organic and inorganic growth measures to

expand their reach beyond the regular strongholds of the devices industry.

Japan is the second largest medical device market in the world Its total medical

device market value is estimated at $23 billion for 2008. As its elderly population grows and

the overall contribution to Japan’s national healthcare system decreases as a result of its

shrinking population, the Japanese Government will be forced to take additional measures

to contain healthcare spending. These cost-containing measures coupled with the unique

costs of Japan’s approval system are forecast to cause a contraction in Japan’s medical

device market of approximately 0.9 percent through 2013. However, medical devices used

to treat age-related diseases should see steady growth in demand. These include

equipment to assist bio-functions such as pacemakers, cardiac valve prosthesis, and

orthopedic implants. Because there are very few domestic manufacturers in Japan in these

areas, market opportunities for these products will continue to be promising for U.S. firms

in the foreseeable future.

The U.S., European Union (E.U.), Japan and Canada are extremely large and lucrative

medical device markets; however, they are mature markets with stable but relatively low (3

– 5 percent) annual growth rates. In order to facilitate expansion, medical device companies

recognize that they must look increasingly at developing countries to drive future growth.

For example, demand for medical devices in China and India is growing at double digit

growth rates compared to developed countries, albeit from a low base. For the medical

device industry to fully realize its potential in developing markets, standards and criteria for

regulatory approval, risk management, and quality must be improved and most importantly

harmonized to meet global international best practices based upon Global Harmonization

Task Force (GHTF) guidance documents. To that end, the Global Harmonization Task Force

(GHTF), a voluntary organization comprised of regulators and industry with five Founding

Members (U.S., Canada, Japan, E.U., and Australia) has its core objective of streamlining and

harmonizing regulatory practices.

International joint venture designed to develop health care technologies and

establishing local research and development capabilities have also grown in size and

significance. Asia – notably China and Korea – have been the site of a number of

collaborations with U.S. firms. Some firms are also gravitating toward a launch in Europe

followed by a move to the U.S. or perhaps a move to China or India. It definitely adds a level

of complexity to the development process

A detailed analysis of the medical devices Industry using Porter’s Five forces framework

gives us the following interesting characteristics of the Industry.

1. Barriers to EntryThe Medical Industry typically has high barriers to entry in the form of high research and

development expenditures, regulatory restrictions, and legal obstacles. In addition, smaller

manufacturers have difficulties competing with larger healthcare supply manufacturers due

to various factors such as purchasing power, sales forces, and advertising expense.

Significant R&D expenditures are required for product development and innovation. As

shown in the graph below the average spending on R&D among US manufacturers has been

in the range of around 10% which offers a natural barrier for an established player against

new entrants in the field. Small and Medium Scale Enterprises are generally reliant on

Venture capital funding for their initial R&D expenditure. But the recent economic crisis

took a toll on the valuation of the start-ups in this industry. This coupled with the greater

uncertainty and liquidity dry up led to large scale withdrawal of capital from early stage

investing thus further increasing the barrier to entry.

Diverse and stringent regulatory requirements across the world, varied reimbursement

payment environments and increasing incidences of IPR infringement and counterfeiting are

some other challenges which add to the difficulty of establishing oneself in this highly lucrative

industry. There is a high degree of brand royalty resulting in low levels of acceptability for a new

entrant product. Product tests involve costly animal and human tests which can last for years

and cost millions of dollars. Patent rights and potential litigation also create barriers to new

entrants. The use of patent is a common practice to protect one’s proprietary products.

However, since patent specifications are generally less precise for medical devices and there

have been more than 75,000 medical device patents filed with the US Patent and Trademark

Office over the past 30 years, there is evidence of litigation throughout the industry.

The medical device industry is an industry for which reliability and safety are very critical. For

example, a current leakage of as little as 10µA (10-6 A) on a pacemaker will cause a microshock

to patient, which will eventually bring death to the patient in minutes. Hence, Product liability

and Insurance Reimbursements are major concerns within the industry. The primary end

markets within the industry are hospitals, outpatient centers, and physicians’ offices, which rely

on third-party insurers for payment. Securing reimbursement contracts for a particular device

with insurance agencies is as good as securing the market due to the high costs for liability and

lack of reliability. This involves efforts on the part of device makers to convince insurance

makers of the safety, cost efficiency and marketability of their devices in order to secure.

Therefore, medical device makers have to make great efforts in convincing insurance

companies that their devices are safe, necessary, and cost-efficient in order to secure

reimbursement at lower premiums.

2. Bargaining power of buyers Medical devices Market is primarily a Business to Business market and prices are primarily

driven by buyer-supplier negotiations. Due to the price discrimination there is also lack of

transparency among the market players as far as prices are concerned. This results in a

predominance of the bargaining ability of the buyer in determining the price and the

subsequent profitability for the supplier. This is especially relevant in the European market

where the customers for medical devices are primarily governments running national health

programs. But, there are other factors which also influence the bargaining power of the buyers

Frequency and quantity of purchasing brand

Health related products are not the type of products that are frequently purchased in large

quantity, compared to the the routinely demanded products, such as pharmaceutical products.

In this sense, bargaining power does not work effectively. The number of brands marketed in

the industry is few. The importance attached to quality and reliability due to the critical nature

of the product also leads to lower switching probability. Additionally, these products are not

standardized. Therefore, the cost of switching to other brands is high.

Seller’s market / Buyer’s market

Sellers' market power derives from several sources. First, most of the medical devices though

made for the same function possess a lot of differing features. Second, patents may protect

some of these features, permitting the seller to extract a premium from the buyer. Third, lack of

compartive information due to price discrimination and high switching costs because of long

term relationships with specific manufacturers, generally the result of the preferences of

physicians lead to prevention of standardization and channelizing of purchases to specific

manufacturers. Such relationships retard the ability of group-purchasing organizations to

standardize and channel hospital device purchases to specific manufacturers, thereby

upholding sellers' market power.

Product quality or performance

In most cases, the hospital is not the real buyer of advanced medical devices. Rather, the

decision to buy is heavily influenced by the attending physicians who are the end users for the

device and have a range of preferences of their own. These preferences may be shaped by

patients' preferences but considering, the complexity of these devices and costs associated

with their failure, more likely reflect physicians' familiarity with a particular device model,

personal opinion of the product features and attributes, preferences for specific vendors, and

close ties with vendors' sales representatives.

These preferences are sticky and remain in place for years, often extending back to a surgeon's

residency training.

The hospital's demand for devices is thus the quintessential "derived demand," dependent on

patients' demand for admissions and procedures, patients' preferences for particular physicians

and products, and especially physicians' preferences for the number and type of devices they

are comfortable using.

3. Bargaining Power of SuppliersPowerful suppliers capture more of the value for themselves by charging higher prices, limiting

quality or services, or shifting costs to industry participants. In case of Medical devices, the

supplier group is highly focused on the medical industry and most of times on supplying for a

particular product. Manufacturers tend to cluster in certain locations, depending on

specialization. They include not only the makers of the devices themselves, but the plastic,

metal and electronics that go into them. In the Milwaukee area, for example, GE Healthcare

leads, with X-ray and other imaging and scanning equipment manufacturing. According to

Timothy Sheehy, president of the Metropolitan Milwaukee Association of Commerce, that

supply base is 11,000 companies, most of which are in the greater Milwaukee area. The bulk of

the value of the company’s products is created in the manufacturing process; consequently,

profits are well insulated from price swings of raw materials. Due to low switching probability

and patent protection, the chances of any of the suppliers vertically integrating and being a

competitor are very low.

4. Threat of SubstitutesThe medical device Industry tends to evolve in fits and starts rather than in a slow, gradual

fashion. Thus, a particular device market tends to chug along till it is replaced by a game

changing technology that revolutionizes the market. Hence, there innovation is a constant

driving factor in the medical devices industry with a focus on meeting unmet clinical needs or

improve existing medical methods to gain a competitive advantage. So, in general because of

the lack of gradual and continuous innovation, the threat of substitutes is very low. As we have

already seen in the previous part of the article, the medical devices market is characterized by a

dominance of the end physician’s preferences and as a result results in lower chances of

product switching. Hence, even the presence of slightly better substitutes may not be an

enough incentive for change in the buyer’s preference.

Another factor that results in a lower threat of substitutes is the patenting and licensing

systems. There is a high reliance on patents to exclude competitors and attract investments.

Healthcare products companies as J&J have low to moderate threat of substitute products due

to patenting and licensing. A patent allows a company to keep out other companies from using

the development in their researches. The only way to get desired inventions under your own

name is to acquire the company which has the patent. For many companies, it is almost

impossible to make substitute products in today’s medical devices market due to difficulties to

find basic building materials. Many chemical companies, such as Du Pont and Dow Corning

discontinued selling necessary materials to new medical device companies. Chemical

companies fear the possible lawsuits from patients when new medical devices developed by

new companies that would cause medical problems to patients. This situation has overall

chilling effects on innovations. Many new companies are troubled looking for new materials or

spending money on research and development of new substitute materials for their products.

They are worried that other commonly used materials or newly developed materials may be

restricted, which creates a high degree of uncertainty. Many healthcare products companies

prefer to buy or merge with other successful companies to be able invest and develop new

products and avoid possible lawsuits.

5. Rivalry ConductWithin the industry, which is the healthcare supplies and equipment industry, there are over

300 firms in the industry and competition is moderate to high (Christina, Ram Fund Research).

Some big-name firms include Baxter International Inc. (BAX), Guidant Corp. (GDT), Boston

Scientific Corp. (BX), etc. With high competition in this industry, better strategies for Research

and Development and better products are essential. Although R&D is an extremely costly

process, if a company finds a way to better identify R&D goals and objects and make the

success rate higher in long-term development, the company can gain huge in terms of future

profits. Also, Companies who can craft and develop products that suit consumers’ and patients’

needs are those who can survive. Industry growth is expected to remain strong, product

differentiation exists (with patents providing protection from copying), and sunk costs are

relatively small compared to profits (high ROA). All these factors serve to reduce the intensity of

rivalry.

D. Medical Devices Industry in China:

China with its large population and the new found prosperity has come to occupy the third

position in the Medical Devices market space. It is not only a major market but also a major

supplier with a production that contributes 34.4% of the Asia-Pacific market’s value. With

an estimated worth of USD 10.2 billion in 2008 and expected to grow to USD 23.2 billion in

2011, it has become a major growth driver for the whole industry in general.

Market Structure:

Most of the medical device market in China has been traditionally concentrated

around Shanghai and Beijing. But with rapid development, increasing purchasing power and

high receptiveness and acceptability of technology and foreign products, the demand has

shot up even in Tier 2 cities like Tianjin, Nanjing, Shenzhen, and Chongqing. With a client

base of 19,852 hospitals, 80,500 urban and rural health centers, and 3,585 Centers of

Disease Control, the potential for this sector in the country is immense.

The Chinese medical devices market is mainly a price and quality driven one. With a

rapidly ageing population and increase in exports due to greater efficiency in production,

the contribution of China to the medical devices market is bound to increase at a rapid

pace.

Overall population in China has been growing and substantial growth is expected among the

number of individuals above the age of 60. This will have a direct impact on the medical

equipment market as growing number of senior citizens will lead to major demand for

medical devices such as pacemakers. Care and rehabilitation equipment market in China is

also expected to boom.

Global Comparison of an ageing population

In China, the total number of hospitals stands at 19,852 with a large fraction being state-

owned. Before 1978, all hospitals in China were state-owned. These hospitals were

monopolizing the market. Private hospitals were permitted after reforms; however, people

still prefer state-owned hospitals. The country has seen a substantial rise in hospitals with

an average of 322 new hospitals built each year during 1990 – 2007 and is expected to rise

to 400 annually in the next 10 years. About 30% of total investment in new hospitals is used

for purchasing medical equipment. Governmental entities own and control most of the

hospitals, however, recent healthcare. System reforms have resulted in a trend of greater

operating autonomy at local levels. Hospitals in China rely less on governmental funding and

are generally expected to earn enough revenues on their own to cover 70-90% of their

operating expenses. This has given regional hospital administrators the authority to make

decisions towards equipment purchases in order to achieve higher efficiencies and

improving services.

Over 80% of high-tech medical equipment purchased in China is through imports. In 2008,

large share of imports of medical device were high-end equipment used for meeting the

ever demanding needs of the rapidly prospering populace while domestic manufacturers

produced most mass-market equipment. Imports are growing slower than the overall

market as foreign suppliers are increasingly establishing a local Chinese presence. Going

forward, these foreign suppliers are expected to meet unique challenges: Price caps on

imported products, Process and technology regulations on sales of high-end medical devices

and Healthcare reforms limiting expenditure on foreign-produced devices.

The Chinese medical devices market displays a moderate degree of buyer power. Customers

include hospitals, medical centres and wholesale distributors. Brand identity is of little

importance to buyers, who are more concerned with product quality and price, which

combined with negligible switching costs favours buyer power. The threat of new entrants

with respect to this market is strong. The rapidly growing Chinese economy is driving

parallel increases in living standards and access to healthcare, which in turn is providing

significant opportunities for medical device manufacturers. Competition is fierce in the

medical equipment and supplies market in China. Locally owned production and

development of high-tech medical equipment remains largely small-scale but there is a

small, but growing number of manufacturers that produce high quality, high-tech goods in

China. A large number of multinationals have established manufacturing facilities in China.

However, few have attempted to establish wholly-owned enterprises. Most pursued joint

ventures or technology licensing, but one major company, Medtronic, has created a wholly

owned subsidiary in China. While most companies establish manufacturing facilities in China

as a way of accessing the local market, some firms, in particular Japanese firms (eg. Aloka,

Hitachi), have established operations in China to take advantage of lower production costs

than in their home country. In these cases, production is usually re-exported to the home

country. There are other problems that a medical device manufacturer in China faces. One

of the major problems is the protection of the quality in exported goods. The issue of

import safety came to the fore in 2007, as certain products imported from China, including

some medical devices, raised safety concerns. In December 2007, HHS and China’s State

Food and Drug Administration (SFDA) signed a product-safety Memorandum of Agreement

(MOA) in which China agreed to adopt approaches to import safety based on risk-

management, transparency, and rigorous science-based international standards. The MOA

was renewed in September 2009 with the same fundamental principles and will extend until

December 10, 2011. USFDA officials have been stationed in China since late 2008 to provide

advice and assistance to the Government of China as well as function as an oversight

conduit to the U.S. Government for products under their purview. In addition, the U.S.

Department of Commerce (USDOC) and China have engaged in bilateral discussions since

1996 through the U.S. – China Joint Commission on Commerce on Trade (JCCT)

Pharmaceuticals and Medical Devices Subgroup that facilitates a forum for both regulators

and industry to discuss non-tariff barriers in China.

Another area of concern is the protection of Intellectual Property Rights. Historically, China

has maintained loosely monitored patent laws, as patent infringement and counterfeiting

was a commonplace occurrence. Foreign device manufacturers attending trade exhibitions

would often report of Chinese engineers blatantly "reverse engineering" their product

designs. According to some companies, Chinese engineers would attend trade exhibitions

and attempt to sketch product designs on scrap paper, often right in front of the exhibitors

as the patent infringers knew that no real remedies existed for patent holders. Moreover,

the products could easily be counterfeited and resold at a reduced cost. While still occurring

in some parts of China, this patent problem is less prevalent these days. With the explosion

of the Chinese economy, as well as the population, lawmakers have come to the realization

that authentic and necessary changes were needed to garner the respect of the world

community. An important first step took place in 2001 with China joining the World Trade

Organization. Since then, the government has taken the initiative to crack down on

infringement and counterfeit products. But, despite best effort appearances, the Patent Law

language remains far from clear, allowing for future potential for ambiguous rulings.

Additionally, there also remains continued potential for local protectionist biases within

regions of China, which might result in push back against central legislative efforts.

E. Indian Medical Device Industry:

India today on account of the rapid economic development, increasing trade liberalization,

growing acceptance for advanced, technological products and an expanding healthcare

segment is a lucrative market for medical devices industry. Most of the big players have

established a permanent base in the country either through R&D facilities, manufacturing or

trading offices. As of 2009 the size of Indian Medical Devices market stood at 2777.9

million$ and is expected to reach 6409.9 million$ by 2013, a CAGR of 23.2% over the period.

The Indian Medical Devices Industry can primarily be divided into the following segments. They

are:

Medical Disposables

Surgical Equipment

Diagnostic Equipment

Laboratory Devices and Diagnostics

Dental Equipment

Ophthalmic Equipment

The segmentation of the Indian market across this segments is as follows:

Rapid technological advancement is leading to improved, innovative medical devices, better

therapies and medical solutions. These innovative devices provide enhanced deliverability and

conformability. In the future, such technological advancements will continue to drive further

innovation within the Indian Medical devices market. Following are the other key opportunity

areas for the Indian Medical devices market:

1. Growth in Indian Medical Devices Industry: The Indian Medical devices market is

witnessing increased demand for quality and affordable healthcare. Further, with the

advancement in technologies and increased affordability by patients, the market is

expected to grow potentially in the future. There is a gradual shift from treatment for

chronic illnesses to lifestyle related ailments. Among the various segments,

cardiovascular devices and orthopedic devices are expected to grow in double digits.

Also, the Indian market holds tremendous potential for diagnostic kits (especially blood

glucose monitoring systems), which represents one of the high growth segments.:

2. Advancement in Research and Development: Much of the brainpower was being used

by the Indian government in the R&D institutions (national labs, universities, and

institutes) that it funds. As a result, most of India's technological accomplishments have

come in aerospace, communications, computers, defense, and energy. Government

funding of medical device R&D comes primarily from four agencies: the Department of

Science and Technology, the Department of Biotechnology, the Indian Council for

Medical Research, and the Council for Scientific and Industrial Research. Because

economic reforms have squeezed R&D budgets, government-supported institutions are

now actively seeking industry contracts and placing greater emphasis on product

development and innovation. Similar changes are occurring in the 1300 or so corporate

R&D laboratories in India. Because the companies traditionally have manufactured

goods designed elsewhere, these labs have in the past focused on troubleshooting and

process development. Now, slowly and steadily they are shifting towards development

of new, innovative and affordable products for the Indian masses.

3. India Growing as an Outsourcing Hub for Manufacturing: The need to reduce

operational costs and gain access to the local Indian markets is compelling many US and

European medical companies to outsource their business operations. Further, India is

becoming a hub for manufacturing medical devices. Availability of skilled technologists

and expertise and low manufacturing costs are some of the advantages of outsourcing

processes to India. The different areas of outsourcing include product design,

component manufacturing, research & development, and services such as supply chain

management, product maintenance, regulatory consulting, etc. Also, the emergence of

high-quality Contract Manufacturing Organizations (CMO) has led to the establishment

of a new relationship between a Medical device company and CMO.

Establishing relationships with Indian partners can provide U.S. device

manufacturers with both short-term and long-term competitive advantages. The R&D

groups in both countries can talk to each other using available computer-based

communications and development technologies such as E-mail, computer-aided design,

computer-aided manufacturing, and computer-aided engineering. Because India and the

United States are on opposite sides of the globe, R&D work can proceed around the

clock. India also offers the advantage of lower labor costs, although the wage gap

between the United States and India should narrow considerably over the next decad.

With the recession and the shift towards the emerging markets there has been a gradual

change with the issue shifting from “performance to price” to “price to utility”. To make

this strategy work to international companies need to look at the 'design-to-cost' factor

to make medical devices cheaply. This is where global majors will now have to look at

design and manufacturing hubs in Asia and India, in particular, to tap the quality-cost

advantage which will help improve gross margins. There is need for innovative thinking

and India is now building its capability to be a platform for such prospects.

4. Growth in Healthcare Expenditure: The Indian Medical devices market is witnessing the

demand for quality care and high tech medical devices. This can be attributed to the

rapidly growing Indian economy and middle class population. This, in turn, has led to an

improvement in the living standards of people, resulting in increased access to quality

healthcare. Further, with the increase in healthcare expenditure and affordability of

private services, the demand for medical devices has also increased. Thus, such factors

are creating potential opportunities for the medical device manufacturers.

Source: MGI India Consumer Model V1

5. Growing Medical Tourism in India: With the increasing healthcare costs in developed

countries like the US and the UK, India remains attractive for low-cost medical and

surgical procedures. The emergence of India as a destination for medical tourism

leverages the country’s well educated, English-speaking medical staff, state-of-the art

private hospitals and diagnostic facilities, and relatively low cost to address the spiraling

healthcare costs of the western world. India provides best-in-class treatment, in some

cases at less than one-tenth the cost incurred in the US. Benefits such as cost savings,

medical specialists, and high-quality of care are resulting in increased medical tourism to

India. Indian medical tourism was estimated at $350 million in 2006 and has the

potential to grow into a $2 billion industry by 2012.4 An estimated 180,000 medical

tourists were treated at Indian facilities in 2004 (up from 10,000 just five years earlier),

and the number has been growing at 25-30% annually. India has the potential to attract

one million medical tourists each year, which could contribute $5 billion to the economy

Further, India also offers traditional ayurvedic treatments, which is gaining importance.

Thus, these medical services are offered to the patients at very affordable cost, which

has led to the growth in medical tourism in India.

6. Increasing Privatization in Healthcare Sector: In India, healthcare is delivered through

both the public and private sectors. The total healthcare financing by the public sector is

dwarfed by private sector spending. In 2003, fee-charging private companies accounted

for 82% of India’s $30.5 billion expenditure on healthcare. This is an extremely high

proportion by international standards.3 Private firms are now thought to provide about

60% of all outpatient care in India and as much as 40% of all in-patient care. It is

estimated that nearly 70% of all hospitals and 40% of hospital beds in the country are in

the private sector. Further, the intense competition among private hospitals and the

demand for high standard medical treatments by affluent patient base is increasing the

demand for advanced medical equipment. In turn, this is leading the private healthcare

sector to invest in expensive high end medical devices, thus, improving the healthcare

infrastructure and driving the growth of the Indian Medical devices market.

7. Improving Quality Standards in Healthcare: The growing economy and increase in the

living standards of people has resulted in the demand for quality healthcare by the

patients. This has resulted in the revamping of the medical infrastructure such as

building, etc both at the private and government sectors. Further, with the increased

competition for healthcare delivery, private hospitals are applying for accreditation from

the international bodies. The new export emphasis is awakening a competitive

awareness throughout Indian industry that it previously lacked, which has led to an

increase in the number of companies obtaining ISO 9000 certification, for example. A

nationwide system of technology parks is also being set up, and many of the buildings

within them allow resident companies to communicate globally via satellite hookups

and dedicated high-speed phone and data networks. This is expanding the local demand

for quality healthcare, and is likely to continue to further drive growth in the Indian

Medical devices market.

8. Aging Population and Prevalence of Chronic Illness: The increasing aging population

and the prevalence of chronic & age related illnesses (such as cardiovascular diseases,

cancers, diabetes, etc) are driving the demand for medical devices. As Indians live more

affluent lives and adopt unhealthy western diets that are high in fat and sugar, the

country is experiencing a rise in lifestyle diseases such as hypertension, cancer, and

diabetes, which is reaching epidemic proportions. Over the next 5-10 years, lifestyle

diseases are expected to grow at a faster rate than infectious diseases in India, and to

result in an increase in cost per treatment.

9. Growing Consumer Awareness on Healthcare: Availability of better medical and health

information has increased health awareness in people. Therefore, a majority of

Indians are becoming aware of their health and giving a high priority to preventive care.

Further, regular health checkups and continuous monitoring of health information by

patients are driving the uptake of consumer medical devices. With such increasing

consumer awareness, there exists a potential for tremendous growth in the Indian

Medical devices market.

In order to achieve the optimum utilization of the breadth of opportunities presented by the

medical device industry, it will be necessary for the country to achieve optimum utilization of its

inherent strengths such as:

1. A large, domestic user base: India is the 2nd most populous country in the world. The

population provides a steady and dynamically expanding domestic market for the

medical devices manufacturers. The Indian healthcare market was estimated at US$35

billion in 2007 and is expected to reach over US$70 billion by 2012 and US$145 billion

by 2017. In the mid-1990s, health spending amounted to 6% of GDP, one of the highest

levels among developing nations

However, because of the low penetration, government apathy and enduring

poverty, medical care is available only to a selected few. As per the statistics (2006) bed

per thousand population ratio for India stands at 1.03 as against an average 4.3 of

comparable countries like China, Korea and Thailand (2002 data). Hence in spite of the

phenomenal growth in the healthcare infrastructure, we are likely to reach a bed to

thousand-population ratio of 1.85 and in a best-case scenario, a ratio of 2 by 2012. Beds

in excess of 1 million need to be added to reach a ratio of 1.85 per thousand. This

provides a tremendous base for the medical devices industry to build on.

2. Strength in product Development: India is well placed in the contract design,

development and manufacturing space because of its engineering capabilities in a wide

spectrum of areas. Typically, there are two market opportunities in contract design and

development of medical devices. One is that companies in the US and Europe can

offload a whole range of existing medical device products to India to maximize the cost

advantage. India has been proving to be a reliable and dependable source for this

capability. The second is that global companies can look at India as a hub in the Asian

region to undertake contract design, develop, manufacture and package the medical

devices. The country has a sound record in adherence to IPR which is vital for medical

devices because it follows English law which is also referred to as the contract law of the

Commonwealth countries.

3. Available of Cheap, skilled workforce: India's increasingly skilled workers are one

attraction for the medical devices companies. According to the recent Global

competitiveness Index report, the country ranks an impressive 3rd for the availability of

scientists and engineers. Trained in all technological disciplines, India's approximately 3

million scientists and engineers form the second largest pool of technical personnel in

the world. Many have been educated and employed abroad, are computer literate, and

speak and write English fluently. Many are also underutilized and underpaid. There is

multi-disciplinary R&D efforts and engineering capability in multiple sciences of

electronics, chip design, software mechanical and medical engineering which

supplement the medical device development.

There are still a few areas which are lagging as far as development is concerned and may

potentially derail the advancement of the medical device industry.

1. Low per capita expenditure: India spends just over 5 percent of its $1-trillion-GDP

annually, largely in primary healthcare focusing on basic needs such as immunizations

and common illnesses. The per capita expenditure is less than a third of what China

spends, while the private sector accounts for about 80 percent of total spending in

India's healthcare. Average BRIC per capital medical device expenditure was US$3.1 in

2005. There is a wide variation between countries, however. Brazil’s market equated to

US$16 per capita, while India spent barely US$1. Expenditure in Russia and China is

around US$13 and US$2 respectively. In relation to the G6, these per capita levels are

tiny. The USA spent US$276 per capita in 2005, while Italy, the lowest-spending of the

G6, spent US$77.

BRIC Summary Medical Equipment Market per capita by Country, 2005 (US$)

2. Developing government policies and infrastructure: In India there is essentially very

little regulation of the medical device industry; even less by way of quality-, or benefit-

cost assessment. This is in the area of ensuring some order in the medical device market

- to distinguish fly-by-night operators from more reliable sellers of devices, to ensure

that sellers of equipment provide adequate levels of spare parts and technical training,

to maintaining price lists and the like. Presumably, the effectiveness of this effort may

require working in collaboration with the buyers of such equipment and its sellers. In

particular information on the different sellers and their terms and conditions ought to

be available at this regulatory agency. This could be linked to some compulsory

registration mechanism, again developed in consultation with the sellers of equipment

and purchasers. The medical device industry as discussed is subjected to price

discrimination and the involvement of a regulatory agency will bring some amount of

transparency to the pricing process.

3. Untapped rural markets : In India, healthcare facilities are unevenly distributed with

many rural areas having no access to healthcare provision. The geographic diversity and

low level health awareness can be accounted for low level penetration in these rural

areas. This has resulted in poor or no healthcare infrastructure.

Rural health services infrastructure 2000-2001

Service Existing Required

Primary Health Care

Centers

1 per 20,000-30,000

22,842 24,717

Sub-centers

1 per 3,000-5,000

137,311 148,303

Community health

centers

1 per 100,000

3,043 7,415

According to the NCAER, in nearly 20% of cases rural households travelled more than 10

km for treatment. In Meghalaya, in 54.56% of rural illness cases and in Orissa in 33.47%

of rural illness cases, patients travelled more than 10 km. Even when patients do get to

the health centre there is no guarantee that the staff will be present. According to a

survey by the Jan Swasthya Abhiyan, only 38% of all PHCs have all the critical staff. A

survey by the International Institute of Population Sciences found that only 69% of PHCs

have at least one bed, and only 20% have a telephone.

Penetration of health insurance has been slow and halting, despite the huge

market. The expansion of Health Insurance in India is impacted by reasons like lack of

regulations and control on provider behavior leading to difficulty in proper underwriting

and actuarial premium setting, lack of data sharing leading to risks of moral hazard,

unaffordable premiums and high claim ratios, high administrative costs (over 30%),

delay in reimbursements, acute shortage of supply of services in rural areas and a high

number (22%) of claims for communicable diseases leading to co-variate risks and a

subsequent high insurance premium.

4. Excessive dependency on imports: The domestic production of medical devices largely

consists of low technology devices such as disposables, surgical appliances, etc. Thus,

the Indian Medical devices industry is heavily dependent on imports of high-end devices

from countries like the US, UK, Germany, Japan, etc. Imports constitute over 50% of the

market. Most imported products have high gross margins. Currently, the high value

imported products include cancer diagnostic, medical imaging, ultrasonic scanning,

plastic surgery equipment and polymerase chain reaction technologies. The current

system places a greater duty on imports of finished medical device products than on

imports of medical device parts. This duty concession applies to more than 100 types of

medical devices and thus reduces the competitiveness and potential growth of the local

medical device industry.

Also, high cost of obtaining the required documentation for these regulatory

submissions continues to be a matter of concern for medical devices importers. The

importer has to pay USD 1500 towards the registration of the manufacturer from whom

he is importing. A fee of USD 1000 is paid for registration of a single medical device and

an additional fee of USD 1000 for each additional device. The high fee could become a

burden for smaller manufacturers and also affect the available range of products in India

as the sales per device are usually quite small.

5. Lack of Sufficient operational expertise and funding: Certain advanced medical systems

(such as implantable cardiac devices, digital radiography etc), being complex, require an

understanding of device mechanism and its parts for effective use. Thus, interpretation

of the data obtained from the system may sometimes be difficult without adequate

training. Moreover, this involves assignment of skillful medical professionals for the

appropriate use of these systems. These factors are thereby hampering the growth of

the Indian Medical devices market.

Also, Medical equipments are becoming costlier to procure and maintain. Also,

the maintenance of portable medical devices that follow strict standards and

regulations are becoming expensive. Further, owing to frequent changes in

technologies, these devices poise connectivity and interfacing problems that increase

the set up complexity. Therefore, these factors are becoming barriers for future

acceptance of new system.

6. Recommendations:

Develop institutional support for R & D

Establishment of Incubators and development of R & D clusters

Development of Institutions for training and creating trained professionals.

Variety of testing facilities required –Material & Biological testings and Clinical

evaluation

Single VAT system for medical devices across the states and efforts to bring in more

price transparency especially in imported products.

Special packages for SMEs -access to sector specific infrastructure and facility.

Higher import duties on low end medical products to encourage development within

the country.

Make health Insurance compulsory and incentivise its spread throughput the nation.

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