White Paper 5. China s Medical Device Market: The Battle For The Mid-Range

Transcription

1 White Paper 5 China s Medical Device Market: The Battle For The Mid-Range

2 1 / 9 Executive Summary Through China s healthcare infrastructure improvements, in and out-patient volumes have recently increased by approximately 15% year-on-year. Simultaneously due to urbanisation and westernisation, diseases requiring medical device assistance and intervention have reached epidemic proportions, creating vast opportunities in personal medical diagnostics, e.g. Blood Glucose Monitors (BGM), and in implantable medical devices, e.g. Drug Eluting Stents (DES). Companies that understand the fast developing China markets and their future will be well positioned to bolster and expand their positions. We observe the changes in market dynamics leading to the fierce medical technology MNC and domestic competition over the burgeoning mid-range segment, the battle for which is far from over. Drug Eluting Stent Market Analysis After suffering set-backs in market dominance, while still behind their domestic counter-parts MNC DES manufacturers are reclaiming lost China market share. Though MNC manufacturers maintain their image of higher quality, domestic companies still take the lion s share of the larger mid-range segment in China. Additionally, domestic players are expanding their R&D efforts and are penetrating into emerging DES markets overseas. BGM Market Analysis China, home to the world s largest diabetes population, shows increasing BGM demand. However, both the behaviours and the financial situation of this vast patient pool present challenges for BGM sales and use. MNC BGM manufacturers have established themselves as market leaders though many domestic brands provide more attractive price-value propositions that fit more aptly to these patients financial constraints. In their dominant position, a number of strategic options exist for MNCs to leverage their strengths and grow their position in the China market.

3 2 / 9 1. Overview of China Medical Device Market Presently China s medical device market stands at over 9 billion USD, representing not only the world s 6 th largest medical device market but also a rapidly expanding market with a projected CAGR of 15-20% over the next 5 years. China, home to over 1.34 billion people is, after a decade of economic development at GDP growth rates averaging over 8%, finally seeing the fruits of this economic progress reaching the pockets of the masses in such a way that China is seeing a burgeoning middle-range segment rise (Figure 1), a middle-range segment spending unprecedented expenses on healthcare. Figure 1: China s Medical Technology Evolution (% of Market Ownership) 30% 30% 40% 50% High-end (Dominated by MNCs) Mid-range: (Dominated by Domestics, 80% domestic, 20% MNC) 10% 40% Low-end: (Dominated by Domestic brands) Source: Codex analysis As for all healthcare markets, in the medical device market this growth in personal income translates into an immense growth opportunity in personal medical diagnostics and implantable medical devices. This market s growth being driven further by a combination of factors; a larger diagnosed patient pool (due to improved access to healthcare), longer life-expectancy, an increasing elderly proportion of the population, and the key to it all, increasing government investment in state healthcare insurance schemes improving healthcare, medical device as well a drug product, affordability. (please see White Paper 2: Reforms and Reimbursement). With regards the medical device market, here we look at two important and rapidly growing segments, reimbursable Drug-Eluting Stents, and non-reimbursable personal Blood Glucose Monitors (BGMs), both that are on the rise from similar factors of westernization and urbanization causing unprecedented cases of atherosclerosis, and a national health crisis in diabetes, diabetes being a rare condition 10 years ago that now has already reached epidemic proportions in China. In 2012 implantable medical devices made up over 13% of the medical device market. While BGMs made up a smaller section of the market, in 2007, the total market for personal BGM products was valued at $113.3 million, while 2008 recorded $125.7 million and 2009 witnessed revenues of $145.2 million. Neither of the above two medical conditions show signs of slowing its respective burgeoning increase in incidence nor prevalence. Medical devices for these populations save lives and are increasingly affordable, opening up huge opportunities for both MNCs and domestic manufacturers. 2. Drug Eluting Stent Market 2.1. Background More so in the Medical Device arena than the biopharmaceutical industry, the historic notion that Chinese manufacturer medical device products are clinically inferior to MNC products is changing. A typical example of this is in the Drug Eluting Stent (DES) market where 10 years ago imported DES products claimed over 70% of the market and domestics taking the remaining 30%. However, with domestic manufacturers improving their technology and holding lower-priced products, the market share ownership became reversed. Recently MNC DES manufacturers have begun reclaiming some

4 3 / 9 part of their original position such that presently MNCs take 40% of implantable medical device market share, still however quite a ways behind their China domestic counterparts, (Figure 2). Figure 2: China s DES MNC vsdomestic Manufacturer Rx Share Evolution Past (early 2000s) (% of Rx share) Domestic 30% 70% Imported 70% 30% 60% 40% 2.2. The Growing China DES Threat In recent years, through individual manufacturer and central government efforts, China s quality standards in DES medical devices has improved significantly, where now most domestic medical device manufacturers are ISO certified and an increasing number, due to government reform requirements, are becoming Good Manufacturing Practice (GMP) compliant, attaining manufacturing standards as that of the EU/USA and Japan. As well as Chinese domestic medical device manufacturers standards attaining an international level of quality, they have begun producing not only lower-tech Class I and Class II but also higher-tech Class III medical devices. In an even bigger statement of progress and determination to out-do their MNC counterparts, certain domestic DES manufacturers, previously content with merely copying MNC products and gaining relative market share, have reached a level where they have begun to aggressively fund their own R&D efforts and with the help of the Chinese government s new 12 th Five Year Plan, issued March 2012, are moving from an era of imitation to innovation, (please see White Paper 3: Imitation to Innovation). As a testament to the capability of Chinese domestic DES medical device manufacturers, a handful of domestic champions, e.g. Lepu and Microport have declared themselves a larger threat to MNCs by penetrating into overseas emerging markets and facing-off with MNC leaders in these other global and strategically significant territories MNC Strengths For Higher-Value Segment While domestic manufacturers are taking an ever larger presence in the China DES market, presently MNC s continue to dominate in areas where a greater sense of medical security and higher technology capability is demanded. In the DES market, while domestic manufacturer DES products are deemed good enough for the majority of intervention cases, imported MNC products are still preferred by patients and physicians alike for complex cases, exemplifying a continued greater trust in MNC products. Additionally, for sophisticated top-of-the-line products, MNCs currently face little competition, however many hospitals and individuals see little added benefit for the cost of top-of-the-line models, and as mentioned and of growing concern for most MNCs, with regards to the technology gap, domestic competitors are beginning to catch-up. MNC companies such as Abbott s vascular division stand to change this negative benefit-cost perception, with their new Bioabsorbable Vascular Scaffold (BVS), that biodegrades in the body over time. This breakthrough in stent technology may even come to replace current DES technology. While persevering in the higher value segment the mid-range, currently representing the largest market and which is set to grow in size, becomes a more lucrative opportunity and must not be overlooked.

5 4 / DES Market Outlook and Future Prospects From the present perceived cost-benefit ratio between MNC and domestically produced products, pricing is a key issue. For the majority of Chinese while recently gaining greater buying power and improved, though still limited, medical insurance coverage, the price-value proposition of MNC products compared to their domestic counterparts, leaves little decision for the average Chinese who will opt for the significantly cheaper but still perceived good enough domestic option. In example of the difference in cost, ultrasound machines from the domestic medical device champion Mindray are sold at 45% cheaper than similar machines manufactured by Phillips. Having outlined both the technological and pricing arguments, it becomes important for MNC DES companies to begin considering certain of the following options for sustainable China growth; 1. Because functional attributes between MNC and local brands are perceived as similar: a. Utilise increased branding focused activities to differentiate from competitors, not only on rational product attributes but to increase focus on difficult to copy emotional brand attributes. Thereby enhancing the relationship between the brand, physicians and patients on emotional together with rational levels. Codex s suite of brand services is specifically tailored to the medical device and pharmaceutical industries. (please see White Paper 6: branding in the Pharmaceutical and Medical Device industries) 2. Increase the absolute size of the Pie, primarily by penetrating into lower tier cities that have seen a boost in medical infrastructure and individual citizen buying-power. Tier II cities represent the next market for DES growth, Tier III cities still have a ways to come on physician training and infrastructure capabilities. 3. Take increased market share from competitors in both high and mid-range segments, a. High-Value segment: by further introducing new technologies & attractive marketing and branding tactics. 4. Mid-range segment: Engage attractive pricing & branding tactics for earlier generation products, and/or develop a range of products that compete with domestics in the burgeoning mid-range segment (Figure 3) 5. Acquire synergistic Chinese companies with interesting product portfolios and distribution, sales and marketing networks. 3. Blood Glucose Monitor Market 3.1. China BGM Market Background and Market Drivers China has been home to the largest population of diabetes mellitus sufferers since the 1990s. Since 2005 the number of diagnosed cases has reach over 100 million and following a 14 province-wide study, currently there are over 92.3 million diabetics in China. As a result diabetes mellitus has become a major public health issue that must be addressed, as poor blood glucose control can lead to multiple and expensive-to-treat co-morbidities such as heart disease, strokes, diabetic retinopathy/blindness, kidney failure, and poor blood circulation to limbs leading to amputations. The potential increase in these conditions signifying not only deteriorating citizen prognosis but even greater government spending than it would take to address the problem at its root by ensuring proper blood glucose control in these patients. Regardless of whether the diabetic sufferers are of Type 1 or Type 2, all are in urgent need of personal blood glucose monitors (BGMs) and test-strips allowing these patients to monitor and thus control their blood glucose levels. The change in prevalence of diabetes in China is staggering, given that just 10 years ago, a rare disease affecting 0.65% of rural residents, a most recent national survey from 2008 finds that over 8.2% of this population are presently diabetic. Since 2005, this relentless epidemic growth in diabetes at 10-12% per annum shows no signs of abating with forecasted increases at 15% new cases

6 5 / 9 per annum from China sees an increase of at least 3,000 diabetic patients daily, only 1.5% of which have a personal blood glucose monitor, comparing this to the U.S.A. and E.U. countries where the proportion of BGM ownership has reached as high as over 90% of diabetics, the China BGM market potential is staggering. Type 2 diabetes accounts for approximately 90% of diabetic cases, with Type 1 and gestational diabetes making-up the remaining 10%. Table 1 illustrates the tremendous growth in China Diabetic type 2 patient numbers. Table 1: Rapidly Growing Diabetes Type 2 Patient Pool Statistics (year) Percentage of total population (%) Diabetic Population Number (Millions) National average income (U.S. Dollar) ,261 ~6,000 Source: Adapted from Journal of Diabetes Science and Technology, & World Bank Population Indicators Once considered a marginal opportunity, China, now with its improved per capita buying power and consistent government commitment to improving healthcare is viewed as a significant and strategic opportunity with important diabetic and thus BGM market expansion. Such is the interest that MNC players previously unconcerned with BGM sales, such as Sanofi, are expanding their diabetes portfolios to include BGM products. Given the obesity epidemic and the virtual explosion in diabetes, there is likely to be strong growth in demand for BGM products for the foreseeable future BGM Technology Trends There has been a striking evolution in BGM technology. Since the world s first blood glucose monitors for self-monitoring were introduced in the 1980s. First generation meters were large, bulky and plain with few features and many confusing manual steps. These meters needed large hanging drops of blood, requiring up to a minute for results to display. In stark contrast, present day meters come in a wide variety of shapes, sizes and colours to appeal to any potential BGM user, and requiring only a pin-head sized drop of blood of as little as 3µl and results appearing in seconds. Collecting the blood sample is also less painful, where the sample can be taken from less sensitive areas than the fingertips, such as palm, forearm and thighs. These technological innovations have facilitated more frequent blood glucose monitoring among patients, primarily the insulin dependent diabetic patients that determine their correct insulin dosage need based on their current blood glucose levels. However, and somewhat ironically, despite these advancements in technology and convenience, the vast majority of diabetic patients don t test anywhere near the frequency recommended and some diabetics, particularly of the type 2 diabetes population, don t test at all. While market shares have exchanged hands many times between the following companies, the dominant players in the China BGM market are the big four comprising of Roche Diagnostics, LifeScan (a Johnson & Johnson company), Bayer Healthcare Division, and Abbott Diabetes Care. In China there are also numerous second and third tier brands that seek to gain share in this market.

7 6 / Development of China Domestic BGM Technology/Competition Regarding the China situation, while MNC products are at the front of BGM technology, we now take a look at the China domestic players and see where they are and where they may be going. The first China made BGM came approximately 10 years after the first commercialized BGM product in the west. This China BGM competition first came in the form of SENTEST from Beijing Yicheng Bioelectronics. Since then, there are approximately 20 domestic manufacturers producing essentially undifferentiated BGM products, that while feature updates have improved, the core concept has largely remained unchanged. Not only are these products largely undifferentiated but in terms of technology domestic products lag far behind their western counterparts. Along with Beijing Yicheng Bioelectronics, key domestic players are Microsense Inc, Acon Laboratories, Sinocare Inc, and the most recent domestic entrant, a dominating blood pressure monitor manufacturer, Tianjin Andon Health Co., Ltd. Such undifferentiated domestic product offerings are likely to continue Market Constraints While this diabetic population is in urgent need of BGMs, patient education on the importance of careful blood glucose monitoring is very weak, such that the vast majority of China s diabetics do not understand or value the importance of self-monitoring or BGMs in diabetes control. Historically, these patients view BGMs as costly, (BGMs are not covered by government health insurance), and inconvenient, and these patients also incorrectly understanding that a once-to-twice a week blood test at the local clinic is sufficient for them to control their daily fluctuating blood glucose levels. Fortunately for patients as well as manufacturers, while the above remains the overriding school of thought, the perception for careful blood glucose control, and therefore BGM use, not only in the clinic but at work and at home is on the rise. Thus, presenting an expanding market base for both MNC and domestic BGM brands China BGM Market Outlook and Future Prospects Considering both the greater number and the younger generation of patients with diabetes entering the diabetes patient pool, (Table 1), the need for BGMs and test-strips will become enormous. A recent survey concluded that in China, million BGMs and 2-3 billion test-strips will be needed annually before As BGMs and their test-strips are not presently reimbursable by government sponsored medical insurance, (reimbursement being the only method for the majority of Chinese to attain the financial support needed for affordable healthcare), both domestic and western BGM products will find themselves in the unsubsidized retail over-the-counter market. In a nation where the majority of Chinese earn less than $5,000 per year (Table 1), price will be a key concern, not only for BGM adoption but also for continued non-reusable test-strip purchase and usage. A 2007 survey indicated that a price of 1 RMB per test-strip would be acceptable to the majority of domestic Chinese diabetic patients. Fortunately for these patients, such pricing is becoming a reality, where domestic wholesale test-strip prices are down to yuan/strip with a final retail price of yuan/per strip. Even prices for imported brand test-strips from, for example, J&J LifeScan and Roche can be purchased online at discounted prices of 1.6-2yuan/strip. Given the similarities in technological innovations for the majority of available BGMs and the difficulty in demonstrating true differentiation, attempts by possible new players to enter the market will have little chance to succeed, therefore providing stronger opportunities for existing players to improve their positions. New technologies result in higher costs, therefore for existing MNC players, the main question in China is not necessarily, What new technology can I provide to differentiate?, but becomes How can I achieve sustained growth while maintaining adequate profit margins?. With competition so

8 7 / 9 fierce raising BGM and/or test-strips prices, the bulk of BGM usage costs, is not a viable option serving only to single-out the manufacturer. Instead, given the current diabetes explosion in China, and for that matter on a global scale, in the face of such competition, a more viable option is to take greater share of the newly diagnosed patients entering the pool, and use increased volume to offset eventual and inevitable test-strip price decline and loss in margin, this leaves 6 sources for BGM market growth: 1. Because functional attributes between MNC brands are perceived as similar: a. Utilise increased branding focused activities to differentiate from competitors, not only on rational product attributes but to increase focus on difficult to copy emotional brand attributes. Thereby enhancing the relationship between the brand, physicians and patients on emotional together with rational levels. Codex s suite of brand services is specifically tailored to the medical device and pharmaceutical industries. (please see White Paper 6: branding in the Pharmaceutical and Medical Device industries) 2. Expanding the absolute size of the BGM market pie : This may be done, by either; a. Convincing current users to increase their test-strip frequency to safe, adequate levels. b. Convince non BGM-users to adopt the technology. c. Given the relative diabetic patient:bgm user ratio, to assist in the diagnosis of the burgeoning increase in diabetics still unaware of their condition. 3. Continue the ongoing battle with MNC and domestic counterparts to take more market share away from competitors, by introducing further new technologies, attractive marketing and pricing campaigns, or most likely, use a combination of all of the above. a. In this regard, and as noted, test-strips even for MNC companies may be purchased online at mail-order discounted prices. A similar change in distribution strategy may be considered for BGMs. This may involve shifting BGM product sales from retail pharmacies to discounted mail-order suppliers. This strategy was introduced in the United States where, mail-orders now accounts for approximately 30-40% of BGM business. 4. Consider reducing prices of earlier generation products 5. Acquire synergistic Chinese companies with interesting product portfolios and distribution, sales and market networks. 6. Develop a range of products that more accurately fit the growing market s out-of-pocket buying power. Conclusion The Medical Device Battle is far from Over The present situation stands that while domestic manufacturers are enhancing their market position by targeting the mid-and lower value segments, MNC companies still have an edge when it comes to trust and technological innovation, dominating the higher-value segment and with still superior brand image. However, given that the majority of the Chinese population still earn less than USD5,000 per annum, domestic priced products will continue to dominate the DES medical device market with rapid growth, and domestic BGMs stand to take increased share in the expanding BGM market in economically less favoured regions, both situations presenting ever clearer and present danger to their MNC counterparts.

9 8 / 9 In both of the presented cases MNC companies with their higher trust and brand image have a multitude of options and resources to consider, keeping and swiftly bringing them back into the playing field. While this medical device market is forecasted to grow by 15-20% per annum for the next 5 years, with the demand for higher product/quality standards, but also lower priced products to reach the masses, and in the face of fierce competition, MNC companies should consider closely monitoring their performance, tracking their product, brand and marketing resources to meet the consumer s needs. Some may say in the current climate, it s anybody s guess to say who will be leading the medical device market. However, with clear and guided understandings of the market, its stakeholders and their drivers, MNC s can execute strategies that leverage their enhanced image to gain ever-greater market share in key territories, before local companies amass the finance and resources to become real competitive threats. Codex as your Medical Device consulting partner Codex specializes in China healthcare landscape knowledge, expertise, market research & business development capabilities with enhanced methodologies to help your business grow organically and inorganically. Codex has built an understanding of the coming reforms and future environment allowing to integrate your business decisions with the coming climate Codex operates with both MNC and Joint Venture pharmaceutical enterprises provide multilayered channels insights into market trends Codex utilises an enhanced operations methodology that keep you in control, and develops novel proprietary techniques for a clearer image and the support for confident business decisions Codex holds an integrated suite of unique Branding analytical products specifically tailored to the pharmaceutical and medical device industries, connecting you with your target consumer on both the rational and emotional level, driving great brand loyalty and sales. As is our philosophy we go the extra-mile and look forward to keeping you Ahead of the Curve. We hope you have enjoyed reading this China Medical Device Market paper. For any further questions and to discuss on our capabilities feel free to contact us at: Thomas.standring@codex-consulting.com Visit us at for additional white papers and overviews of our Market Research, Consulting and Branding services and enhanced methodology.