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The China Medical Device Market: Opportunities & Challenges

January 14, 2010

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The materials contained in this document are intended to supplement a discussion with L.E.K. Consulting. These perspectives are confidential and will only be meaningful to those in attendance.

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China medical device market overview

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China Medical Device Market Overview.

China medical device market overview

Like nearly all markets in China, medical devices have seen explosive growth over the past decade; this trajectory is expected to continue
China medical device market Historical market value* (2001-08)
Billions of US dollars
10 8.8 8 7.1

CAGR% (2001-08)

China medical device market Projected market value* (2008-12F)

Index to 100 = $8.8B (2008)

CAGR% (2008-12F) Analyst reports Case #1 25% Case #2 24% Case #3 20%


6 4.1 4 2.9 2 1.7 2.0 2.4



2001 02







100 2008





Note: * At price to dealers, including both equipment and consumables Source: Goldman Sachs, UBS, L.E.K. analysis
China Medical Device Market Overview. 2


China medical device market overview

The diagnostic imaging segment remains the largest, with strong growth coming from implantable devices
Chinas medical device market, by product segmentation (2009)
Percent 100 90 80 70 60 50 40 30 20 10 0 39% Diagnostic imaging Catheters Syringes X-ray machines MRI 20% 2% 13% Dental products Orthopedic and implantable products Consumables 27% Other Cardiovascular

ECG Heart lung machines Incubators Ventilators


Dental implants

Pacemakers Stents

Source: Espicom Business Intelligence,

China Medical Device Market Overview. 3


China medical device market overview

Underlying market growth is attributable to an aging population, increasing rates of disease incidence and prevalence, and rapid increases in wealth
Driver Impact on growth Commentary
The patient base is expanding due to:

Changing patient population

- 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 Access to care in China is fueled by:

Access to care

- 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

Economic growth

Source: L.E.K. analysis China Medical Device Market Overview.


China medical device market overview

Many of the worlds largest companies are building a substantial presence; there are also some up and coming Chinese players
Rank 1 2 5 6 7 8 10 Company J&J Medical GE Healthcare Medtronic Baxter International Philips Healthcare Covidien Abbott Laboratories 2008 revenue (Worldwide) $23.1B $17.4B $13.5B $12.3B $10.7B $8.9B $7.2B 2008 revenue (US$M) 547 200 61* 59 58 2008 revenue (China) $500M $700M $300M $200M $1.1B** $65M* Unclear^ Year of China entry 1994 1991 1989 1988 Unclear^ Unclear^ 1995

Sam p dom le of for e esti c pl ign & aye rs

Rank 1 2 3 4 5

Company Mindray Medical Shandong Weigao Microport Yueyue Medical Lepu Medical

Employees 5,500 9,800 650 1200 500

Launch Year 1991 1988 1998 1999 1999

Note: *2007 revenue; **Includes other key emerging markets; ^Unreported entrance date / revenue from China Source: Medical Product Outsourcing, LEK interviews and analysis
China Medical Device Market Overview. 5


China medical device market overview

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 devices trade (2003-2008)
Billions of US dollars

5 4 3.1 3 2 1 0 12 10 8 6 4.1 4 2 0 3.2 5.3 2.5 3.7 3.8

5.3 0.6 4.3 0.2

Chinese medical device imports are mostly high-value medical technology Consumables Medical dressing Healthcare products Dental supplies Medical technology

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:


11.1 Exports
8.4 6.9 1.9

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

3.1 2.3 0.2


Chinese medical device exports are mostly low-value disposable products

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

2003 04





Source: General Administration of Customs, China Now: Medical Products, LEK analysis
China Medical Device Market Overview.

China medical device market overview

However, against countries with mature markets, Chinas medical device market is still undeveloped considering its population
Medical device markets*, by country (2009)
Billions of US dollars 100 100 20 20 15 10 5 0 U.S. Japan Germany France UK Italy Brazil Canada Spain Switzerland 8M $513 India Mexico China
9 8 8 7 6 5 4 3 8 2


Population Per capita, Market size

304M $329

127M $157

82M $223

62M $139

61M $138

60M $138

192M $34

33M $173

46M $107

1.1B $3

106M $18

1.3B $6

Source: Espicom, Global Data, DeviceLink, L.E.K. analysis

China Medical Device Market Overview. 7


China medical device market overview

China has just announced major new reforms designed to dramatically expand healthcare access
Increase medical insurance coverage By 2011, 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 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 China aims to increase investment in lower level medical infrastructure to upgrade ~13K medical institutions by 2011, expanding basic care for the wider population 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 Reforms to the administration, operation and supervision of public hospitals are expected, which will including transforming some public hospitals into privately-owned institutions

Build a basic medicine system

Upgrade grassroots medical institutions

Equalize services in rural & urban areas

Public hospital reform programs

Source: State Council, The Economic Observer Online, L.E.K. analysis

China Medical Device Market Overview. 8

China medical device market overview

This major infrastructure expansion will drive significant growth in the medical device market
Repositioning of medical institutions
Top hospitals

Top hospitals Mid-scale hospitals

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

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

Source: State Council, UBS, L.E.K. analysis

China Medical Device Market Overview. 9


China medical device market overview

To be successful in the Chinese medical device market, companies need to be mindful of the following points
Complexity of market Huge socioeconomic diversity of Chinas population & healthcare infrastructure 1 Wide variations in awareness and adoption rates 2 Wide variations in insurance coverage and ability to pay 3

Operational challenges 4 Intellectual property protection: active management is required Changing procurement, pricing, and regulatory policies 5

CONFIDENTIAL China Medical Device Market Overview. 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

50 40

Tier 1



Tier 2

Tianjin Wuhan Harbin Chongqing Xian Shenyang Chengdu Lanzhou


20 10
Tier 3 0 500

Hangzhou Nanjing Jinan Shenzhen Wenzhou Dongguan








Annual urban resident per capita disposable income (2007, US$)

Tier 1 cities Tier 2 cities Tier 3 cities

Source: China Healthcare Yearbook 2009, China Statistics Yearbook, L.E.K. analysis
China Medical Device Market Overview. 11


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)
Percent 100 80 60 40 20 0 Average of Tier 1 cities Average of Tier 2 cities Average of Tier 3 cities

XXX diagnosis rates, by city tier (2009E)

Percent 10 8 6 4 2 0 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, L.E.K. analysis
China Medical Device Market Overview. 12 CONFIDENTIAL

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
Development stages, select medical devices
fi ir

Device penetration rates, by city tier

pq o ^q


fs b


pq o


fs b

Device adoption in China

Newer products include various stents, ports, etc. Mature products include various catheters, needles, etc.


Mature stage products Introduction-Expansion stage products



Introduction stage

Expansion stage

Mature stage

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: L.E.K. interviews and analysis
China Medical Device Market Overview. 13 CONFIDENTIAL

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 (2007) 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$150 US$100-150 US$70-100 <US$70 Suzhou Jinan Tier 3 cities Jinhua Nantong 0 Not reimbursed Not reimbursed Not reimbursed 20 40 60 80 100


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 Source: China Healthcare Yearbook 2009, L.E.K. case experiences
China Medical Device Market Overview. 14 CONFIDENTIAL

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* (2008-2009)
Country score
7 6 5 4 3 2 1 0 3.9 6.3 6.2 5.8 5.4

Trade secrets are protected by Chinas Unfair Competition Law (1993), prohibiting all who engage in commercial operations from falsely obtaining technology 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

Singapore Australia

New Zealand

Hong Kong


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) Source: World Economic Forum Global Competitiveness Report 2008 - 09
China Medical Device Market Overview. 15


Patent Law specifics

China medical device market overview

Chinas Patent Law was revised through the Third Amendment (October 2009), impacting how companies will compete for patents
Ongoing challenges
Historically, China maintained loosely monitored patent laws, as patent infringement and counterfeiting was a commonplace occurrence 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 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

Key changes in Chinas Patent Law

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) 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 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
Note: *Patent applications are reviewed by the State Intellectual Property Office (SIPO) Source: China Business Review, Jones Day Commentary, Medical Device Network, L.E.K. analysis
China Medical Device Market Overview. 16


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 Separate functions within local operation so that no single person has all the technology Contracting Specify payment or performance terms, scope of grant, and provisions for audits Ongoing monitoring 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

Conduct background checks Ensure proper legal closure steps when contract is on key personnel, Chinese signed partners, and reputation of local area Include non-compete covenants for partner and Evaluate the property or key personnel, complete assets being included as with specific compensation contributions by local for covenants Chinese partners

CONFIDENTIAL China Medical Device Market Overview. 17

Regulations & policies

China medical device market overview

Finally, the industry faces additional hurdles in tendering, pricing, technological restrictions, and other regulatory challenges
Central tendering
In 2007, the Ministry of Health (MOH) created a mandate to strengthen central control of medical device sourcing for state-owned nonprofit hospitals MOH is planning to establish a formal evaluation and selection system for medical devices, by applying qualification standards

Price controls
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 This would result in suppliers of imports having less flexibility to achieve adequate margins to cover the cost of distribution

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

Regulatory challenges
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, L.E.K. interviews and analysis
China Medical Device Market Overview. 18


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China Medical Device Market Overview.