The Chinese Medical Device Market Opportunities ......Chinese vs. German medical device market size...

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Strategy and Transaction Advisors For Healthcare and Life Sciences

The Chinese Medical Device Market Opportunities, Challenges, Strategies Prof. Gert Bruche, Managing Partner February 2015

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BGM Associates & my background

Prof. Gert Bruche | Managing Partner

Previous positions include: Managing Director China & Hong Kong, Global Head Diagnostic Marketing for Schering AG, Vice President & Dean of Berlin School of Economics and Law (HWR)

Friedrich Gause | Partner

Previous positions include: Senior Bayer Representative in Korea, Head of Marketing & Sales China, Managing Director Intendis Dermatology GmbH, Interim COO Piramal Imaging

Prof. Hans Maier | Managing Partner

Previous positions include: President of Bayer Diagnostic Imaging, Managing Director for Schering AG in Japan and Korea

Our founders About BGM Associates

Regional Scope

Global with Emphasis on Asia

Industry Focus

Healthcare & Life Sciences

Functional Practices

Strategy Consulting Partnering & Transactions

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Contents

The medical device market 2

Strategic go-to-market challenges 3

Chinese healthcare in transformation 1

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China’s healthcare transformation is driven by China’s historic return on the world economic stage

Source: Angus Maddison (2006), University of Groningen, OECD, IMF

Regional shares of global GDP 1820 – 2010; PPP-adjusted

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ted Immunization

in % of total population

20

40

60

80

100

2013 2000 1983

TB DTP HepB Measles Polio

Chinese epidemiology shows spectacular achievements…

Sources: World Bank (2014), WHO (2014)

Life expectancy at birth; in total years

43.5 40

50

60

70

80

1960 1970 1980 1990 2000 2010

75.5

Child mortality rate under 5 years; per 1,000 live births

113.2

0

20

40

60

80

100

120

1970 1980 1990 2000 2010

12.7

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…but also serious challenges ahead

Sources: WHO (2014), World Bank (2014), ESC (2014), IDF (2014)

Cardiovascular diseases

Chinese with cardio-vascular diseases

heart attacks every year

of population with high blood pressure

Diabetes in million patients

Obesity* Chinese male youth

-

50

100

150

2000 2006 2011 2020e 0%

10%

20%

30%

1985 1995 2005 2014 2025e

Causes of death

45%

23%

11%

2% 6%

5% 8% Cardiovasuclar diseases

Cancer

Chronic respiratory diseases

Diabetes

Other non-communicable diseases

Communicable conditions

Injuries

*Overweight: BMI > 25, Obese: BMI > 30; Youth: 0-20 years

Overweight & obese

Obese

230m

2m

30%

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The world’s largest healthcare system is evolving towards an inclusive approach

* = estimates Sources: BGM Research, China National Health and Family Planning Commission

Population with health insurance in 100 millions

55

595

1.230

2000 2014* 2020*

“China’s villages now have more than 880,000 rural doctors, about 110,000 licensed assistant doctors and 50,000 health workers.”

- Kalam / Singh, 2011

Total healthcare expenditure in bn USD

Per capita healthcare expenditure in USD

+17%

43

427

859

Medical workers and rural doctors have dramatically improved access to health care in China’s countryside over the last few decades.

2000 2014* 2020*

+16%

2000

2014*

2020*

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China has a hospital-based healthcare delivery system with an unbalanced structure

* PLA = People’s Liberation Army Source: China Statistical Yearbook 2013 (rounded figures)

§  More than 90% of China’s heal thcare services are delivered via hospitals

§  Top 1,300 hospitals, owned by centra l & prov inc ia l governments and the PLA*, cover more than one third of all in-patients

§  Tier II hospitals, a huge number of township hospitals and small rural community centers are in the focus of the o n g o i n g r e f o r m a n d upgrading efforts

Level # of sites share of all in-patients

Tier III >500 beds

Tier II 100-500 beds

Tier I Small facilities with limited service

36%

64%

1,300

7,000

12,000 other hospitals 40,000 community centers

Key points

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Absurd hospital funding – 45% of revenues from drug and medtech sales

Wrong incentives – kickbacks and ‘red envelopes’

Lack of treatment protocols – for many common diseases

Lack of medical qualification – especially at lower tier levels

Complex regulatory system – fragmented: central, province, city; intransparent

Inefficient distribution – fragmented, intransparent and inefficient

Healthcare reform must overcome myriad challenges…

Source: BGM Research

Members of a police SWAT unit instruct nurses and doctors how to defend themselves against attackers at a hospital in Ningbo, Zhejiang province.

An average of 27 attacks by upset patients per year is recorded in Chinese hospitals

Examples…

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China’s healthcare reform addresses a number of these challenges

Source: BGM Associates

Government Reform House

§  Include 100% of Chinese citizens in basic insurance

§  Reduce out-of- pocket payments

§  Introduce ‘Catastrophic Disease’ coverage

§  Eliminate ’drug dependency’ of hospitals, e.g. through DRGs

§  Develop primary

care at level I (grassroots)

§  Facilitate private hospital investmt.

§  Expand National Essential Drug system

§  Expand tendered purchasing

§  Rationalize distribution

§  Fight monopolistic practices & corruption

§  Promote seven strategic indus-tries (e.g. bio-medical)

§  Develop 8-10 top medtechs, support 40-50 innovative more

§  Go-out policy support

Economic development as base

Cost control Industry policy Funding reform Healthcare delivery

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Reduction of the out-of-pocket funding share is one of the successful reform results

Changing composition of healthcare expenditure as % of total expenditure

0

10

20

30

40

50

60

1990 1995 2000 2005 2010 2015e 2020e

Out-of-pocket

Social

Government

Forecast

Sources: China Statistical Yearbook 2013, BGM Research

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China’s remarkable healthcare achievements over the last 50 years will be under strain from a

massive increase in non-communicable diseases.

While the broadening of access to healthcare through an inclusive strategy shows impressive results, the funding

and operations of the hospital system still need far reaching reforms in order to tackle the upcoming

challenges.

Conclusions on the transformation of the Chinese healthcare system


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Contents




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The Chinese medical device* market has been growing from an ‘also-run’ to a ‘must be’ market

*includes medical devices and IVD Source: BGM Research

United States United States United States

Japan Japan China

Germany Germany Japan

France China Germany

United Kingdom France France

Italy United Kingdom United Kingdom

Russia Italy Brazil

China Canada Italy

Spain Russia Canada

Canada Brazil Russia

China’s medical devices market in comparison by market size

Chinese vs. German medical device market size in bn USD

25 55 6

2000 2014e 2020e 2008 2014e 2020e

29 35 12

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0

2

4

6

8

10

12

14

16

18

2008 2012 2016f 2020f

Consumables Diagnostic imaging Dental products Orthopaedics & prosthetics Patient aids Other medical devices IVD sales

While all segments will keep growing, in-vivo and in-vitro diagnostics maintain the lead


Chinese medical devices market key subsegment sales; in bn USD

8.9

6.0

1.9

15.5

10.0

4.0

Diagnostic imaging

In-vitro diagnostic

Orthopaedics & prosthetics

Projected growth rates of key subsegments CAGR 2013 - 2020

+14%

+12%

+21%

Forecast

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The Chinese medical device market is still dominated by imports, …


Import 73%

37%

19% 11% 5%

28%

USA Germany Japan Switzerland Others

Import share in the Chinese medical devices market 2013; without IVD

Minimally- invasive surgery

Healthcare IT

Market shares of foreign companies in selected segments 2013 estimates

Diagnostic imaging

In-vitro diagnostics

Orthopaedics & prosthetics

Consum- ables

90% 10%

“We want to strongly advocate health ministry organizations to use domestically-made medical devices, especially pushing top level class III hospitals to use domestically made products.”

- National Health and Family Planning Commission (NHFPC)

20 August 2014

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…but key MNCs localize their operations and consolidate the market through M&A, …

Source: CEIBS (2012)

Top MNCs in China – The ‚usual suspects‘

Case Study: Medtronic – Penetrating the Chinese market

1970s

1991

1996

2007

2011

2012

2013

2015

2016

Export entry

First assembly and sales JV (Ningbo)

WOFE for pacemaker assembly (Shanghai)

Acquisition of 15% of Weigao + JV for distribution of orthopaedics (reduced to 11%, and JV dissolved in 2013) Prioritization: Regional HQ for Greater China & large R&D center in Shanghai

Acquisition of Kanghui Medical, China’s leading orthopaedic implant maker for USD 816m

Strategic alliance with LifeTech, Shenzhen (19% shareholding) to co-produce pacemakers for the Chinese market

Acquisition of Covidien; second large R&D center in Shanghai & local manufacturing

First haemodialysis production line in Chengdu (key parts & assembly for global market)

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… while domestic players are ‘trading up’ and competing with foreign companies

* includes hospital business revenues Source: BGM Research

Mindray 1.200

Neusoft 1.100

Shandong Weigao Group Medical 580

Sinocare 550*

Shandong Xinhua Medical Instrument 480

Jiangsu Yuyue Medical Equipment 210

Shanghai Kehua 180

Lepu Medical Group 160

Microport 150

Golden Meditech Holdings Ltd 140

Ten prominent Chinese players by 2012 or 2013 revenues; in m USD

Case of the coronary stent market

Chinese coronary stent market in bn USD

Revenues of local companies in China 2010; by number of stents implemented

29%

23% 22%

22% 4%

Lepu Medical

Other Chinese Companies Foreign companies

JW Medical

MicroPort Scientific

2002 2016 2009 0,0

0,5

1,0

1,5

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China’s medical products market will continue to grow fast and will become the global #2 market by 2020 at the latest. Growth will be

seen across all segments, with particular strong dynamics in orthopedic implants.

The import share varies by segment from as high as 90% to as

low as 10%.The high import share will gradually come down in the next 5-8 years to be replaced by products manufactured in China.

Who will be the eventual winners in this ‘import substitution game’,

foreign megaplayers or Chinese companies, is still an open question.

Conclusions on the state and dynamics of the Chinese medical devices market


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Contents




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To be successful in the changing landscape several strategic issues should be considered

Product-Market Strategy

Premium vs. midmarket

Continental proportions

Market Access Approach

Regulatory development

Tendering, pricing

Hospital procurement

Distribution Partner Choice

The ‘wild east’

Typical strategic issues

IP Protection

Need for protection

Options to act

Strategic issues for foreign exporting SMEs

Reimbursement


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What geographic focus to achieve in a country with continental proportions?

Sources: Tier structure: Adaptation from Chevalier / Lu (2010); Urban clusters: McKinsey (2010)


Cluster are grouped by size, based on average 2015 urban GDP as % of national urban GDP (in 2005 CNY)

Tier structure of China’s cities Urban clusters and their hub cities

Beijing, Shanghai,

Guangzhou, Shenzhen

Tier 1: The ‘big four’

Tier 2a: The ‘Climbers’ Chengdu,

Chongqing, Foshan, Hangzhou, Jinan, Nan-

jing, Shantou, Shenyang, Tianjin, Wuhan, Xi‘an

Tier 2b: ‘Niche’ Dongguan,

Ningbo, Wenzhou,

Zhongshan, (+6)

Changsha, Dalian, Fuzhou, Qingdao, Taiyuan, (+ 131)

Tier 3a: ‘New frontier’

Tier 3b: ‘Poor Cousins’

Baotou, Huizhou, Lanzhou, Linyi, Nanchang, Urumchi, Xiangfan,

Xuzhou, Zaozhuang, (+127)

Dongying, Jinhua, Jinzhou, Jixing, Nantong, Quanzhou, Quzhou, Shaoxing, Yueyang, Zhoushan, (+474)

Tier 2c: ‘Mainstream’

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In which vertical segment will our product be positioned?



2000 2014 Forecast 2020

Premium

Value (20%)

Low-end

Foreign companies

Chinese companies

Chinese medical device market by segments and foreign/local share for illustration only

40%

60%

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Execution of Zheng Xiaoyu, Director of China’s SFDA (‘China’s Thalidomide / Contergan’)

►  Increasing regulatory activities ►  SFDA people afraid of making

mistakes ►  Slow down of processes

First comprehensive Medical Device Regulation (MDR)

Why has market access for medical devices become a major challenge in the last decade?

2000 2007 2014

First major revision of MDR since 2000 ►  From 300 to 650 pages ►  Some simplification,

generally tightening (e.g. clinical trials)

►  All only in Chinese, still opaque and unclear parts

►  Flurry of complementary regulations


Selected developments for illustration


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§  Which class?

§  Which testing center for conformance testing with standard?

§  Need for clinical trial?

What are the initial strategic registration issues to be solved?

Legal agent Legal responsibility/ liability for devices, adverse events, product recalls

Regulatory agent Coordination of registration process, registration holder

After sales service agent Technical & maintenance support

Which initial partnering configuration? Which regulatory pathway?

Class III

Class II

Class I

Ris

k po

tent

ial

Subject to the strictest controls for safety & efficacy

Require moderate control to ensure safety & efficacy

Require only routine administration for safety & efficacy



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Which market access challenges do we have to overcome – now and in the future?

Selected trends Key areas

§  Selective simplification, general tightening §  Prioritized review of innovative products Product registration

§  Horizontal expansion: inclusion of more provinces §  Vertical expansion: inclusion of growing product range Tendering

§  Roll-out of ‘packaged pricing’ pilots? §  Increasing attempts to control ‘channel mark-up’ Pricing

§  Horizontal hospital alliances §  Vertical alliances Hospital procurement

§  Basic health insurances will slowly broaden benefits (focus: ‘major disease insurance’)

§  Large differences between regions, cities and counties §  Private insurance will take longer time

Reimbursement



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Why is Chinese medical device distribution still the ‘wild wild east’?

Medical devices distribution largely independent hospital procurement – fragmented and relationship-driven – regulation in early stage

~120,000 distributors

Mark-ups along the distribution channel illustrative case of an imported consumable

Pharma distribution regulations stipulate tendering at province level – declining channel mark-ups – consolidation in full swing

~28,000 distributors

1€

1.2€

1.8€

9€

+ 22.5% import tax

Main distributor: + 50% Services include import, warehouse, subdistributor management & training, reporting

Subdistributor: + 400% Often limited customer access, but need to cover basic costs.

Services include tendering, hospital listing, marketing & sales, customer training, financing of long payment durations



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What are typical strategic issues in the collaboration with main distributors?

§  Role assignment (import – registration - legal – logistics - sales agent)? §  One-partner or multi-geographic partner strategy?

Configuration

§  Geographic reach, established sub-distributor network? §  Service capabilities? Scope of services

§  Number, quality & trainability of staff (English cap’s)? §  Ethical stance, reputation? Training & Ethics

§  Trustworthiness & reliability? Track record? Licence holder? §  Transparency (ownership structure, procedures, staff)? Trust/Credibility

§  Transparency of end-customer prices? §  Working capital resources & management Ongoing business


Selected issues Key areas


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§  Technical documentation for registration and testing

§  Training of employees, distributors, staff, etc.

§  Theft of data files through hostile IT access

§  Reverse engineering

Do we need to protect our IP?


§  Is our product attractive to imitate?

§  Is it easy or difficult or impossible to imitate?

§  Do we want to prevent imitation (at all)? “If your IP has value, and if it can be copied with

minimal effort, it will be copied and you should be

prepared for this”

- China Law Blog, August 2014

IP Protection

Key questions to any IP holder

Typical pathways for loosing your IP

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What can we do to protect our IP?

Legal options Strategic options

§  Patents

§  Trademarks

§  Copyright protection

§  Trade secrets Work relatively well against large scale infringement, but small infringements difficult to prevent

§  Contracts (e.g. NDAs, licensing agreements, tech transfer agreements) IP protection is local: requires inter alia to be effective: Chinese court, Chinese law, Chinese language (out of China jurisdictions unenforceable)

§  Outpacing Always one-step ahead in innovation

§  Product selectivity Only difficult-to-imitate products

§  Segmentation / modularization Core IP vs. generic parts of technologies

§  Technical controls Mobile phone use, encryption, Chinese walls

§  Employee retention

IP protection


IP Protection

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The times of ‘opportunistic market entry’ and of chasing for lucky windfalls are largely over.

A prerequisite for success in the Chinese medical products

markets of today and tomorrow is a strategic product-market fit.

An in-depth preparation, significant resource commitment and management attention are necessary to work out a market access

and distribution strategy. This includes a geographic coverage approach, a sustainable configuration of partners, and, above all, a workable distribution partnership. Where needed, an IP protection

concept should also be developed.

Conclusions on go-to-market challenges (for relative newcomer SMEs)


Pictures copyright: p.5: XiXinXing/shutterstock.com p.6: imtmphoto/shutterstock.com p.7: junrong/shutterstock.com p. 9: South China Morning Post p.15: Torwaiphoto/shutterstock.com,

angellodeco/shutterstock.com, goodnewsnetwork.org

p.24: executedtoday.com

Publisher: BGM Associates GmbH Am Großen Wannsee 7 14109 Berlin Germany Managing Partners: Prof. Dr. Gert Bruche, Prof. Dr. Hans Maier Any use of this material without permission by BGM Associates is strictly prohibited.

Literature references: p.7: Kalam/Singh (2011): “Target 3 Billion”, Penguin Books

India, New Delhi p.9: Pinghui (2013): “More doctors and nurses being assaulted

by disgruntled patients and relatives”, South China Morning Post, 28 November 2013

p.16: Jourdan/Driskill (2014): “China calls for greater use of homegrown medical devices”, Reuters, 18 August 2014

p.22: McKinsey (2010): “2010 Annual Chinese Consumer Study” Chevalier/Lu (2010): “Luxury China – Market Opportunities and potential”, John Wiley & Sons (Asia), Singapore

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Contacts

Partners Prof. Dr. Gert Bruche Office +49 (0)30 814 871 26 Mobile +49 (0)151 6111 7526 [email protected] Prof. Dr. Hans Maier Office +49 (0)30 814 871 26 Mobile +49 (0)151 6111 7505 [email protected] Dipl.-Ing. Friedrich-W. Gause Office +49 (0)30 814 871 26 Mobile +49 (0)151 6111 7334 [email protected]

Berlin Office Visitor address: Babelsberger Straße 14-16 D-10715 Berlin Postal address: Postfach 15 02 04 D-10664 Berlin Office +49 (0)30 814 871 26

Asia Liaison Office Dr. Park Kwon | Managing Director Mobile +82 (0)10 3784 0222 [email protected] Address: #703, DaeWoo Elrose County 1467-3, Seocho-3-Dong Seocho-Gu Seoul South Korea

For more information www.bgmassociates.com

The Chinese Medical Device Market Opportunities ......Chinese vs. German medical device market size...

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