monitor china market entry med devices

8/18/2019 Monitor China Market Entry Med Devices

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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 Group

Monitor Company Group


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2

CAGR%(2002-09)

26.5

Note: * At price to dealers, including both equipment and consumables

Source: Goldman Sachs, UBS, Monitor analysis

8.8

7.1

5.4

4.1

2.9

2.41.7 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


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3

Source: Espicom Business Intelligence, DeviceLink.com

Other

2%

13%

20%

39%

27%


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, with

strong growth coming from implantable devices


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4

Impact on

growthDriver

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


Underlying market growth is attributable to an aging population, increasingrates of disease incidence and prevalence, and rapid increases in wealth


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5

Rank Company 2009 revenue

(Worldwide)

2009 revenue

(China)

Year of China

entry1 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 Company 2008 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


Many of the world’s largest companies are building a substantial

presence; there are also some up and coming Chinese players


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6

High-end equipment is mostly imported toChina, while domestic manufacturers

produce most mass-market equipment

Imports are growing slower than the overallmarket as foreign suppliers are increasingly

establishing 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” like

diabetes 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 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

3.7

3.1

Chinese medicaldevice imports are

mostly high-value

medical technology

Healthcare products

Dental supplies

Medical technology

Chinese medical

device exports aremostly low-value

disposable products

Higher value devices have historically been dominated by foreign importsalthough now that is changing due to both market and non-market forces


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Source: Espicom, Global Data, DeviceLink, Monitor analysis

10

23

456

7889

1820


Medical device markets*, by country (2008)Billions of US dollars

15

100

20

10

5

0

Mexico ChinaIndiaSwitz-erland

Brazil 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


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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 basic

medicine system

Upgrade grassroots

medical institutions

Equalize services in

rural & urban areas

Public hospital

reform programs


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 signify

cant growth in the medical device market

Companies focus efforts

selling to top hospitalsUtilization 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

Top

hospitals

Lower levelhospitals

Grassroots

medical

institutions

Current system:

Patients treated incrowded top hospitals


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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’an

Shenyang

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 in

expanding disease awareness and thus the addressable markets

Average of Tier 3 cities



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

100

80

60

40

20

0Average of Tier 3 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-Expansion

stage 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 products

include various

stents, ports, etc.


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Imbalanced income levels and a complex medical insurance system havealso created varying degrees of affordability, constraining market

development 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 2

cities

Tier 3

cities

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


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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

ChinaHong

Kong

Singapore Australia New

Zealand

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’s

Unfair Competition Law (1993),prohibiting all who engage in

commercial operations from falselyobtaining technology

Technology owners also have rights

under 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)


16/1916

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 and

counterfeiting was a commonplace occurrence

In 2001, when China joined the World TradeOrganization, it appeared to be an initial step

towards correcting the structure supporting

intellectual 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 continued

potential for local protectionist biases withinregions of China, which might result in push back

against 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 outside

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

Patent litigation will be tougher to enforce as“international exhaustion” clauses will allow for

legal importation of products outside of China,

regardless of any remaining domestic patents

Going forward, the law’s language will also allow

for 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 patent

application submissions) will force companies

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


17/1917

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 of local area

• Evaluate the property or

assets being included as

contributions 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 of

firewalls, surveillanceequipment, or onsiterepresentatives

• Conduct training on

professional ethics,

confidentiality, and securitymeasures


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Finally, the industry faces additional hurdles in tendering, pricing,technological restrictions, and other regulatory challenges

Price controls

NDRC* is reviewing regulations to further

reduce the mark-up caps on implantable

devices, forcing prices below the competitive

price 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 heighten

competitive barriers for foreign suppliers, whowould be forced to make significant

investments in domestic direct sales networks


5 Regulations & policies

high-value medical devices

This process can result in biases towardsestablished or favored medical devices, and

can deter physicians from proactively

educating themselves on new equipment

Central tendering

In 2006, 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 formal

evaluation and selection system for medicaldevices, by applying qualification standards

Technological restrictions

The MOH also requires approval from the

government 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


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Thank You

Questions?

John Gregg

Director & Head Monitor Emerging Markets Group

Monitor Company Group

Shanghai

[email protected]

33

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