The Best Opportunities in China’s Medical Devices Industry

September 9, 2013. China’s medical devices market is expected to grow to US$53.7 billion by 2015, according to data released at the 2012 Medical Device Industry Development and Investment CEO Summit. The market currently only accounts for 14% of the country’s total pharmaceutical industry and has the potential to grow to over 40% of total market share, which is the average level in a developed country. What are the real risks and opportunities in China's medical devices market?

To win in China, medical devices companies must be nimble enough to overcome its market complexity and operational challenges.

Diverse business landscape

China’s healthcare infrastructure and institutions reflect the uneven economic development in the country over the past 30 years, with the eastern coastal areas developing faster than the western regions.

While those living in developed regions have access to adequate healthcare services, some of those living in underdeveloped regions may have very limited access. This has an impact on people’s awareness of diseases and their treatment. For example, the diagnosis rate in Tier 1 cities is 20% higher than that of Tier 3 cities. Similarly, differences in physician and patient awareness drive varying adoption rates of medical devices, with Tier 1 cities representing the more mature devices adopters.

Varying levels of income and insurance

Other factors that add to market complexity are the varying levels of income and insurance found across the country.

Consumers Tier 1 cities such as Shanghai, Beijing, Hangzhou and Suzhou spend more than US$150 on medical devices a year, according to 2012 estimates from the Ministry of Health, compared to the US$100 average spend of those living in lower Tier cities.

China’s medical insurance system can also appear to be complex to the uninitiated. Different cities have their own social welfare schemes and levels of coverage. For example, the majority of outpatient fees can be reimbursed with the Basic Medical Insurance schemes in Tier 1 cities such as Shanghai. In Tier 2 cities such as Nantong however, a lower percentage or even none of a patient’s outpatient fees can be reimbursed.

Moreover, each province has different reimbursement categories. If a pharmaceutical company wants to enter a provincial drug reimbursement list, it has to be approved by provincial officials.

Operational challenges

Patent protection is still a critical issue, even though China joined the World Trade Organization in 2011. The strength of patent protection is relatively low when compared with more developed countries, as Patent Law language remains far from clear, allowing for ambiguous rulings.

It is common for local players to ignore product patents and quickly adapt high value-added imported medical devices to local needs and aggressively promote their own products in order to gain significant local market share and “˜first-mover’ advantage.

Where the opportunities are

Despite of this, China is still a very attractive market. International medical devices companies hedge against market risks in a number of ways.

Many invest heavily in due diligence, monitor their local operations on an ongoing basis and conduct audits. The functions within local operation are often separated so no single person has all the technology. Background checks on key personnel and partners, careful legal procedures and security protocols are all commonplace.

China has four main medical devices market segments. Within each of these are sub-segments representing various levels of competition and opportunity.

Segment Products Targets Channels Status
Medium & Large Equipment a) Image Documentation Equipment: ultrasound, DR, MRI, CTb) Clinical Examination Equipment: biochemistry analyzer, urine analyzer, blood cell analyzer

c) Patient Monitor & Curing Equipment: electrocardiogram monitor, respirator, defibrillator, radiotherapy

Small hospitals (which have been growing
in number recently), primary healthcare institutions
Distributors, government funding and hospital tenders* after-sales services, training and technical support important factors Demand is stable, with insignificant growth
Consumable Operation & dressing materials: gloves, transfusion systems, needles, catheters, medical textiles Hospitals Distributors Fierce competition, overcapacity in general. Growth mostly in from high-end market
Implants a) Orthopedics Material: bone lamella, screw, boltsb) Artificial Internal Organs: artificial esophagus, artificial skin, artificial cornea

c) Stent: Intravascular stent, prostrate stent, biliary tract

Hospitals Distributors Dominated by multinationals, with some domestic enterprises producing imitation products against imports
Domestic Medical Devices a) Treatment Equipment: RA therapeutic equipment, LF equipment, Spine Retractorb) Domestic Test Equipment: Sphygmomanometer, Blood glucometer, thermo finer

c) Health Care: Electric massage product, air cleaner

d) Rehabilitation Nursing Equipment: Breathing monitors, oxy-generator, and polysomonography

Hospitals, doctors in charge of chronic disease Retail stores,
and distributors for pharmacies, hospitals and medical rehabilitation institutions.
Fastest-rising segment

Lower value-added consumables, such as operation and dressing materials, face surplus production capacity in China. On the other hand, products such as pacemakers, artificial cochlea and artificial livers, represent under-tapped but high-risk markets.

The sectors that have attracted the most interest today are light inspection machines, plastic ampule production lines, orthopedics, meninges tablets and cardiovascular stents.

In addition, advanced medium and large medical equipment and user-friendly family medical devices are sectors that are growing at impressive rates.

We expect that China’s domestic medical device segment will realize its high growth potential, due to its aging population and increased incidents of chronic disease. Within the implant material segment, domestic companies will experience exceptional growth but the risks in this area will remain relatively high.

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