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The China Medical Device Market:


Risks & Rewards
November 4th, 2009,
Boston, Massachusetts

John Gregg,
Associate Principal Greater Chna & Head Monitor Emerging Markets Group
Monitor Company Group
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

Like nearly all markets in China, medical devices have seen


explosive growth over the past decade; this trajectory is
China medical device market overview
expected to continue

China medical device market


Historical market value*
(2002-09)

CAGR%
(2002-09)

Billions of US dollars
10
8.8
8

China medical device market


Projected market value*
(2006-11F)

CAGR%
(2006-11F)

Index to 100 = $8.8B (2006)


250

Analyst reports
Case #1 25%
Case #2 24%

26.5

Case #3 20%

7.1
200
6

5.4
4.1

4
2.4
2

2.9

150

1.7 2.0

0
2002 03

04

05

06

07

08

09

100
2007

08

09F

10F

11F

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


Source: Goldman Sachs, UBS, Monitor analysis
2

The diagnostic imaging segment remains the largest, with


strong growth coming from implantable devices

China medical device market overview

Chinas medical device market,


by product segmentation
(2008)

Cardiovascular

Percent
100
90

Pulmonary
Incubators
Ventilators

Other

2%
13%

Dental products
Orthopedic and
implantable products

Dental implants

20%

Consumables

Pacemakers
Stents

60
50

27%

80
70

ECG
Heart lung machines

40
Catheters

30
20

39%

Diagnostic imaging

10
0

Syringes
X-ray machines
MRI

Source: Espicom Business Intelligence, DeviceLink.com


3

Underlying market growth is attributable to an aging population, increasing


rates of disease incidence and prevalence, and rapid increases in wealth
China medical device market overview

Driver

Impact on
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
-

Changing
patient population

Access
to care

Economic growth

Access to care in China is fueled by:


expanded insurance coverage
- public & private healthcare investment
- urban population growth
-

China is one of the worlds fastest growing major economies


-

China has achieved GDP growth of ~9% p.a. for the past 20+ years

Source: Monitor Analysis

Many of the worlds largest companies are building a substantial


presence; there are also some up and coming Chinese players
China medical device market overview

Rank

Company

2009 revenue
(Worldwide)

2009 revenue
(China)

Year of China
entry

J&JMedical

$23.1B

$500M

1994

GEHealthcare

$17.4B

$700M

1991

Medtronic

$13.5B

$300M

1989

BaxterInternational

$12.3B

$200M

1988

PhilipsHealthcare

$10.7B

$1.1B**

Unclear^

Covidien

$8.9B

$65M*

Unclear^

10

AbbottLaboratories

$7.2B

Unclear^

1995

Rank

Company

2008 revenue
(US$M)

Employees

LaunchYear

MindrayMedical

547

5,500

1991

ShandongWeigao

200

9,800

1988

Microport

61*

650

1998

YueyueMedical

59

1200

1999

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

Higher value devices have historically been dominated by foreign imports


although now that is changing due to both market and non-market forces
China medical device market overview

China medical devices trade (2001-2008)


Billions of US dollars
6

Imports

5
3.7

3.8

4.3

5.3
0.6
0.2

3.1
2.5
4.3

Consumables
Medical dressing

1
0
12

11.1
1.9

Exports

10

Healthcare products
Dental supplies
Medical technology

8.4

6.9

3.1

3.2

2.3
0.2

4.1

Chinese medical
device exports are
mostly low-value
disposable products

3.6

2
0
2003 04

05

06

07

High-end equipment is mostly imported to


China, while domestic manufacturers
produce 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:

5.3

6
4

Chinese medical
device imports are
mostly high-value
medical technology

Price caps on imported products


Process and technology regulations on
sales of high-end medical devices
Healthcare reforms limiting expenditure
on foreign-produced devices

However, the market is expected to see


growing demands for high-end technology

Top quality technologies to deal with


developed nation diseases like
diabetes and heart disease

08

Source: General Administration of Customs, China Now: Medical Products, Monitor analysis

However, against countries with mature markets, Chinas


medical device market is still undeveloped considering its
China medical device market overview
population
Medical device markets*, by
country (2008)
Billions of US dollars
100
20

100
20

18

15
9

10

10
7

0
U.S.

Japan GermanyFrance

UK

Italy

Brazil Canada Spain

Switzerland

India

Mexico China

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

Source: Espicom, Global Data, DeviceLink, Monitor analysis

China has just announced major new reforms designed to


dramatically expand healthcare access
China medical device market overview

Increase medical
insurance coverage

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

Build a basic
medicine system

China plans to create a system to drive demand for medicines included in


the Essential Drug List, to be purchased through open tender and unified
distribution channels

Upgrade grassroots
medical institutions

China aims to increase investment in lower level medical infrastructure to


upgrade ~13K medical institutions by 2011, expanding basic care for the
wider population

Equalize services in
rural & urban areas

Efforts are expected to increase rural area public health services to equal
existing level of service in urban areas; expansion of basic programs and
major projects will be driven by change in grassroots medical institutions

Public hospital
reform programs

Reforms to the administration, operation and supervision of public


hospitals are expected, which will including transforming some public
hospitals into privately-owned institutions

Source: State Council, The Economic Observer Online, Monitor. analysis

This major infrastructure expansion will drive signify


cant growth in the medical device market
Repositioning of medical institutions
2020

2008

Top
hospitals

Top
hospitals

Mid-scale
hospitals

Lower level
hospitals
Community
health centers
Grassroots
medical
institutions

Rural healthcare system

Current system:
Patients treated in
crowded top hospitals
Companies focus efforts
selling to top hospitals

Future system:

Key Implications
Top hospitals will continue to handle
advanced procedures; remain a main
customer of advanced devices
Initial demand for basic medical
devices from development of a larger
base of lower tier hospitals
Ongoing demand for consumable
devices at country level institutions
due to increasing patient base
However, future regulations and
government funding support may have
adverse impact on foreign suppliers

Initial treatment in
rural or community level
Utilization of different
levels of medical services

Source: State Council, UBS, Monitor. analysis


9

To be successful in the Chinese medical device market, companies


need to be mindful of the following points
China medical device market overview

Complexity of market
1

Huge socioeconomic diversity of Chinas population & healthcare infrastructure

Wide variations in awareness and adoption rates

Wide variations in insurance coverage and ability to pay

Operational challenges
4

Intellectual property protection: active management is required

Changing procurement, pricing, and regulatory policies

10

Socioeconomic diversity

China medical device market overview

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)

50

Beijing

Tier 1

40
30
Tier 2

Harbin
Xian
Shenyang

20
10
Tier 3
0
1000

Chongqing
Chengdu

Lanzhou

2,000

2,500

Guangzhou
Tianjin
Wuhan

3,000

Nanjing

Jinan

3,500

Shanghai

Hangzhou
Shenzhen
Dongguan
Wenzhou

4,000

Annual urban resident per capita disposable income


(2008, US$)

5,500

7,000

Tier 1 cities
Tier 2 cities
Tier 3 cities

Source: China Healthcare Yearbook 2009, China Statistics Yearbook, Monitor analysis
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Awareness & adoption rates

China medical device market overview

Future growth will also be highly impacted by a variance in socioeconomic


development, which creates significant discrepancies in disease awareness
YYY diagnosis rates,
by city tier
(2009E)

XXX diagnosis rates,


by city tier
(2009E)

Percent

Percent

100

10

80

60

40

20

0
Average of
Tier 1 cities

Average of
Tier 2 cities

Average of
Tier 3 cities

Average of
Tier 1 cities

Average of
Tier 2 cities

Average of
Tier 3 cities

Suppliers educational efforts, especially for physicians, has been and continues to be vital in
expanding disease awareness and thus the addressable markets
Source: China Healthcare Yearbook 2009, China Statistics Yearbook, Monitor analysis
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2 Awareness & adoption rates

China medical device market overview

Differences in physician and patient education drives varying adoption rates


of medical devices across product categories and city tiers
Device penetration rates,
by city tier

Development stages,
select medical devices

Percent
40

Device
adoption
in China

Introduction-Expansion
stage products
Mature products
include various
catheters,
needles, etc.

Introduction
stage

Mature stage products

30

Newer products
include various
stents, ports, etc.

Expansion
stage

Mature
stage

20

10

0
Tier 1
City

Tier 2
City

Tier 3
City

Device development stage

Professional medical education by suppliers could accelerate adoption curves for newer products
Source: Monitor Interviews and analysis
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3 3 Insurance coverage & ability to pay

China medical device market overview

Imbalanced income levels and a complex medical insurance system have


also created varying degrees of affordability, constraining market
development of some high value medical devices
Annual per capita medical spending,
urban residents by province
(2008)

Drug reimbursement rate of Basic Medical


Insurance* for outpatients
(2008)
Tier 1
cities

Shanghai
Beijing
Hangzhou

Tier 2
cities
Per capita annual
medical spending
>US$550
US$300-450
US$200-300
<US$150

Tier 3
cities

Suzhou
Jinan

Not reimbursed

Jinhua

Not reimbursed

Nantong

Not reimbursed
0

20

40

60

80

100

Percent

City-specific insurance programs differ widely in device coverage and reimbursement rates, as
well as annual reimbursement caps
Note: * The main insurance program in China covering urban employees
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IP protection & trade secrets


China medical device market overview

IP protection in China remains an issue compared to some more developed


countries, who offer IP protection comparable to the West
Strength of IP protection, by country*
Trade secrets are protected by Chinas
(2008-2009)
Unfair Competition Law (1993),
Country score
7
6.3
6

6.2

5.8

prohibiting all who engage in


commercial operations from falsely
obtaining technology

5.4

5
4

3.2

3
2
1
0
Singapore Australia

New
Zealand

Hong
Kong

China

Technology owners also have rights


under various IP laws and the Civil
Law, whereas technology contracts are
required to contain confidentiality
provisions
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 a
concern, 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)

15

Patent Law specifics

China medical device market overview

Chinas Patent Law was revised through the Third Amendment (October
2006), impacting how companies will compete for patents
Ongoing challenges

Key changes in Chinas Patent Law

Historically, China maintained loosely monitored


patent laws, as patent infringement and
counterfeiting was a commonplace occurrence

Patent invalidation will be tougher to prove, as


the law will allow for public use evidence outside
of China to be applicable (i.e., absolute novelty)

In 2001, when China joined the World Trade


Organization, it appeared to be an initial step
towards correcting the structure supporting
intellectual property rights to spur additional
investment in high value products

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

However, 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

Going forward, the laws 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 strategy
does not invalidate their patent applications

Despite recent changes to Chinas Patent Law, foreign-based suppliers should use proper
caution and diligence in developing strategies based on patent protection
Source: China Business Review, Jones Day Commentary, Medical Device Network, Monitor analysis
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IP protection & trade secrets

China medical device market overview

Market entry strategies must be driven by careful planning, due diligence,


and contracting, plus ongoing operational monitoring
Planning &
due diligence

Ongoing
monitoring

Contracting

Separate functions within


local operation so that no
single person has all the
technology

Specify payment or
performance terms, scope
of grant, and provisions for
audits

Conduct background checks


on key personnel, Chinese
partners, and reputation of
local area

Evaluate the property or


assets being included as
contributions by local
Chinese partners

Include non-compete
covenants for partner and
key personnel, complete
with specific compensation
for covenants

Ensure proper security


protocols in place for lab
work, data, and trade
secrets

Consider installation of
firewalls, surveillance
equipment, or onsite
representatives

Conduct training on
professional ethics,
confidentiality, and security
measures

17

Regulations & policies


China medical device market overview

Finally, the industry faces additional hurdles in tendering, pricing,


technological restrictions, and other regulatory challenges
Price controls

Central tendering
In 2006, the Ministry of Health (MOH) created
a mandate to strengthen central control of
medical device sourcing for state-owned nonprofit hospitals

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

MOH is planning to establish a formal


evaluation and selection system for medical
devices, by applying qualification standards

This would result in suppliers of imports


having less flexibility to achieve adequate
margins to cover the cost of distribution

Regulatory challenges

Technological restrictions
The MOH also requires approval from the
government before hospitals can purchase
high-value medical devices
This process can result in biases towards
established or favored medical devices, and
can deter physicians from proactively
educating themselves on new equipment

NDRC is looking to expand a policy requiring


direct sales for all medical devices in China
The introduction of this policy would heighten
competitive barriers for foreign suppliers, who
would be forced to make significant
investments in domestic direct sales networks

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


john.gregg@monitor.com

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