October 22, 2017

Changes in China's Governmental Policies and the Impact on the Country's Medtech Sector

"China's medical technology (medtech) market is still an alluring prospect for companies, as it is expected to continue its double-digit annual growth rate over the next five years," says a report, Medtech in China: Growth amid policy uncertainty, published by The Economist Intelligence Unit (The EIU). The report analyzes the major policies affecting the medtech sector, looks at how they will play out in medtech's various segments and highlights areas in which the right strategy can help medtech companies to capture new opportunities in the market.

"The medtech market reached Rmb370bn (US$53.6bn) in 2016, marking a 20% increase compared with 2015," The EIU notes. "However, a series of policies rolled out by the government in recent years to reform medical services in China are having an enormous impact on the country's medtech market landscape, leaving some multinational companies uncertain about how to interpret these policies and navigate new dynamics across the medtech market."

The report correctly notes that "China is a large country with an agglomeration of cities with disparate healthcare infrastructures and market characteristics." Moreover, "As life expectancy increases and the proportion of elderly people in the population grows, demand for healthcare in China is likely to rise, as the elderly are more likely to consume health services and demand higher-quality services to cater to more complex medical needs."

New Realities in Domestic Innovation-Based Medtech Competition

"Recently announced policies demonstrate the Chinese government's commitment to encouraging innovation in medical device development and adoption of innovative medical devices," the report . "However, this commitment favors domestic companies, meaning that the competition faced by multinationals in China will intensify, especially in certain segments."
  • The special approval procedure for innovative medical devices: In 2014 the China Food and Drug Administration (CFDA) announced that it would fast-track regulatory approvals for innovative medical devices that meet certain requirements. To qualify for this special approval pathway, the device’s working mechanism must not be present in any other device available in China, and its technology must be of an internationally leading standard and must be patented in China. Significant advances in the device’s performance and safety relative to other devices in the same category, and significant clinical benefits offered by the device, are other necessary conditions to qualify for expedited approval.
  • Made in China 2025: In 2015 the State Council (China's cabinet) announced the Made in China 2025 initiative, which aims to boost local development of high-performance medical devices. Imaging instruments, medical robots, high-value medical consumables (for example, degradable vascular stents) and remote medical products (such as wearables and remote diagnosis and treatment devices) were listed as areas of focus.
The report importantly points out:
The policies have so far played out in favor of Chinese companies. Since 2014, the number of medical devices approved under the fast-track scheme has totaled 117; of these, domestic brands have accounted for over 90%, while leading medtech multinationals have accounted for fewer than 10%. Moreover, of the devices that have benefited under the fast-track scheme, domestic products have entered the market earlier than foreign ones: approval of the first foreign product under the scheme lagged behind the first fast-tracked approval for a domestic product by about a year. 
Given the success of the policy in supporting domestic innovation—particularly in coastal provinces of eastern China, Beijing, Shanghai, Guangdong, Jiangsu and Zhejiang, which are home to companies behind 80% of all fast-tracked local medical devices—multinationals will face tougher competition from domestic companies, which are expected to drive high growth in the market for innovative devices.
Competition is expected to intensify across all segments of China's medtech market. Innovative medical devices that have been approved under the fast-track program cover the spectrum from low- to high-value devices in a number of different market segments including (among others) in-vitro diagnostics (IVD), medical imaging and interventional cardiology.
Multinational corporations (MNCs) can win market share in China in three ways:
  1. Acquire an emerging Chinese company: Domestic companies usually have a narrower scope of business, with strong customer pools in lower-tier cities and lower classes of hospitals. By acquiring the right companies, MNCs can expand their product portfolios and strengthen their product distribution networks;
  2. Collaborate with local companies: To take advantage of policies designed to boost domestic innovation, MNCs can develop new products in collaboration with local companies and apply for product licences through the fast-track approval pathway. This reduces the levels of investment needed for product development and shortens time to market; and
  3. Gain exclusive marketing authority for Chinese brands: This is one of the strategies employed by Abbott to increase its market presence in the clinical chemistry market. Abbott gained exclusive marketing authority for a clinical chemistry reagent kit made by a prominent local clinical chemistry reagent manufacturer, BSBE, and also for a clinical chemistry reagent kit from Leadman – a Chinese IVD company, to expand its product portfolio, providing more comprehensive test panels to customers.
The Two-Invoice Policy Restructures the Distribution System

The report provides an overview of how China's two-invoice policy restructures the distribution system: "Following pharmaceutical companies operating in China, medtech companies will soon have to prepare themselves for the implementation of the two-invoice policy. Under the policy, no more than two invoices can be issued between supplier and hospital. This means that only one distributor can be involved in the procurement process: one invoice is issued by the manufacturer to the distributor, and the second is issued by the distributor to the hospital.

MNCs can win market share under the two-invoice policy via:
  1. Channel management: Tailor distribution models to regional differences in the two-invoice system in order to increase control over distribution channels;
  2. Focused client management: Companies can develop targeted promotion strategies to engage different customer groups. For example, using hospital sales data, hospital customers can be ranked by level of purchases. Building a tiered system based on customer revenue, the top 20% of customers can be categorized as key accounts for a company, the next 60% as "regular" accounts and the remaining 20% as weak accounts. Three different sales and promotion strategies—one for each customer tier—can then be developed. For key accounts, companies can use their internal sales force to track user behavior and try to develop new products to address unmet needs. Distributors will be deployed for regular accounts to expand product penetration rates and increase sales volumes to existing clients. For weak accounts, companies can consider outsourcing sales-related work—such as pre- and post-sales support and technical support—to contractors in order to ensure stable income; and
  3. Pricing strategy: Companies need to ensure tighter control of ex-manufacturer prices in different regions. After collecting data on hospital purchase prices across China, companies can identify the price mark-up in regions applying the two-invoice policy in order to set new ex-manufacturer prices in these regions.
Pursuing Growth Amid Uncertainty: What Medtech Companies Need to Know

The report concludes with a list of questions on what medtech companies should be asking to enable better decision-making amid uncertainty:
  • Environmental analysis: What macro-, socio-economic, regulatory, reimbursement, technological, healthcare and industry trends are shaping the medtech market? How will these changes play out in the market, and how will this impact your business?
  • Market intelligence analysis: What is the competitive landscape in the market? What is the outlook for market potential and dynamics in the future?
  • Market and customer segmentation: How can your business target the right markets and customer segments to gain greater market share?
  • Developing distribution models to expand access: How can your business build an effective distribution network to reach the grass-roots market and also maintain premium market penetration?
  • Regional-level user and customer insights for differentiated market strategies: Companies' ability to increase market share and maintain high growth requires an understanding of factors in the highly heterogeneous Chinese market that influence the penetration of medical devices:
    • How does use of medical devices differ between provinces?
    • How do consumption and purchasing patterns vary between hospitals?
    • How do physicians prescribe diagnoses and procedures; how do surgeons conduct surgical procedures and use related products?
    • What do patient pathways to obtain diagnosis look like, and how will they evolve?
Do you agree with the findings of the report?

Aaron Rose is an advisor to talented entrepreneurs and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

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