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Key Take-Aways From Emerging Markets Forum
Growth Opptny Significant--Hurdle To Success Relatively High • Summary. We hosted a MedTech Emerging Markets Investor Forum on Sept 30 to provide investors with an understanding of the opportunity for western medical device companies in Emerging Markets. We estimate the size of the Emerging Markets to be around $30-40B, which constitute about 10% of the global medtech market today. We expect Emerging Markets growth of 10-13% over the next four years to exceed the global growth rate of approximately 5%. We forecast that the Emerging Markets share will increase to 13% of the global Medical Devices and Diagnostics (MD&D) market by 2014. Moreover, by our analysis, approximately 25% of global medtech growth over the next four years is expected to be due to the contribution from Emerging Markets. For major US companies, the exposure to Emerging Markets varies with ABT at the high end having approx 20% of total medtech sales come from Emerging Markets and BSX at the low end with a low single digit contribution. As we detail in Figure 1, for a company like ABT, its above average exposure to Emerging Markets boosts 2010-2014 CAGR by about 80 bps (assuming 5% global CAGR and 11.5% Emerging Markets CAGR), whereas for a company like BSX with below average exposure to Emerging Markets (~3%), the 2010-2014 CAGR is lower than average by about 50 bps. We summarize the various speaker presentations in the body of this note. • Emerging Markets are diverse and require solutions uniquely tailored to their needs. Many speakers outlined how the value proposition that makes sense in the western world does not necessarily apply to Emerging Markets. Companies entering Emerging Markets need to cultivate local expertise and develop products and business processes that are compatible with the business dynamics in Emerging Markets. To this end, companies entering Emerging Markets need to identify appropriate market segments where they can effectively compete, hire and retain local talent, broaden their product portfolios in response to local market needs, customize their commercial and business models and pursue local M&A, research and manufacturing. • Emerging Markets are generally price sensitive but operating margins can be comparable to those in the west. Although price sensitivity is relatively higher in Emerging Markets leading to lower gross margins, the R&D and SG&A costs are also lower resulting in operating margins that are comparable to those of medical device companies in the US and Europe. Companies can realize cost savings by developing a supply chain that utilizes local infrastructure and talent to manage the design, engineering, manufacturing, sourcing and logistics functions. • Investments in healthcare infrastructure are driving growth of medical devices in Emerging Markets. China announced a massive $124B investment plan in 2009 that is expected to drive a multi-year period of growth and increase access to medical technology in that country. Beyond the widely discussed BRIC countries, the ASEAN member states are also expected to see robust growth in their medical device markets as governments increase hospital and healthcare related investments in response to the needs of their increasingly affluent populations.
Larry Biegelsen, Senior Analyst ( 21 2 ) 2 1 4 -8 0 15 / l a r r y. b i e g e l s e n @ w a c ho v i a . c o m Narendra Nayak, Associate Analyst ( 21 2 ) 2 1 4 -8 0 3 8 / na ren d ra.n a y ak@ w achov ia. co m Lei Huang, Associate Analyst ( 21 2 ) 2 1 4 -8 0 3 9 / le i. hu an g@w achov ia. c om
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2 $4.Medical Technology WELLS FARGO SECURITIES.2 $7.0% 0. EM likely will comprise about 13% of the global market. the recent investments by BSX and MDT to expand their presence in EM. Figure 2: Emerging Markets Share of Global MD&D Markets in 2010 and 2014 2010E MD&D Market Global MD&D Market Total Emerging Markets Emerging Markets Share of Global MD&D $368B $37B ~10% $447B $54-$60B ~13% 5. Figure 1: Growth Impact of Emerging Markets Exposure Company ABT ACL COV BAX BDX AGN STJ JNJ EW SYK ZMH MDT BCR COO BSX EM Exposure (2010) 20% 19% 11% 11% 11% 10% 10% 10% 10% 8% 8% 7% 6% 6% 3% Global Medtech 2010-2014 CAGR Revenue in Impact Due to EM 2010 ($B) Exposure $9.4 $7.3% -0. At the other end of the spectrum a company like BSX would see its global growth come in about 50 bps below industry average due to its below average exposure to EM.0 $1.8 $7.3 $7.3% -0.1 $23.8% 0. Overview Emerging Markets (EM) currently comprise approximately 10% of global MD&D sales.2% -0.0% 10-13% -2014E 2010-2014E CAGR Source: Company reports and Wells Fargo Securities.1% 0.1 $7.1% 0. the exposure to EM varies with ABT at the high end having approximately 20% of total medtech sales come from EM and BSX at the low end with a low single digit contribution.1% -0.1% 0.8 $5. then ABT’s global growth in 2010-2014 would be boosted by about 80 bps because of its higher than average exposure to EM. We assume that the global MD&D market grows at a CAGR of 5% from 2010-2014 and EM grow at 11.7% 0.0 $2.7 0.5% Average 10% Source: Company reports and Wells Fargo Securities. The EM are about 10% of the global market with size estimates ranging from $30B to $40B.0% 0. Below we outline a simple model which outlines the impact to overall growth due to exposure to EM (Figure 1).0% -0.1% -0.0% 0. Growth in EM (10-13% CAGR) in 2010-2014 is expected to outpace global growth (5% CAGR) and by 2014. If the companies included in our analysis were to grow only as fast as the market. This put into perspective. LLC EQUITY RESEARCH DEPARTMENT I.3 $16. LLC estimates 2 .5 $0.7 $1.5% in the same period. LLC estimates We estimate that the global MD&D market in 2010 will be approximately $368B. Among major US companies.1 $8.
o As a party to the Patent Cooperation Treaty (PCT) – an international patent law treaty. • Examples of BRIC nations demonstrate that opportunities and challenges are unique by individual country: o In Brazil. while Russian government’s national health project is targeting to reduce poverty population. there is a patent application backlog. companies need to tailor strategy and operating model to account for differences in IP. • Companies need to continually assess IP landscape as patent law/regulations evolve. 3) broaden product portfolio by adopting highlow strategy. while countries like Brazil have well developed IP system. • EM government views healthcare as a solution to many societal challenges and are investing to improve the overall system – i. as compared to trend in pharma.0% 11. 2) be an insider – keep it local. However. However. where copycat device is still prevalent. PhD. Legal Perspectives: Acquisition of Intellectual Property Rights in Emerging Markets Jane Love. extend life expectancy and social services. 5) customize commercial model.Key Take-Aways From Emerging Markets Forum WELLS FARGO SECURITIES. Chinese Increasing government plans to spend $125B by 2011 to focus on rural coverage and accelerate hospital reform. LLC EQUITY RESEARCH DEPARTMENT Figure 3 below shows the expected dollar contribution of EM to global growth through 2014. LLC estimates II. the existence of the first to file principle is a plus to innovators. the country does not offer data protection. • M&A in EM is less likely in medtech. Partner and Vice Chair of Intellectual Property – WilmerHale • Strong intellectual property (IP) protection is crucial for companies to recoup investments in EM. government role. India accepts patent application filings under a unified PCT procedure. Figure 3: Contribution of Emerging Markets to MD&D Growth 2010-2014E MD&D Market Growth in Global MD&D Market Growth in Emerging Markets Emerging Markets Share of Global MD&D growth $79B $20B ~25% 5.e. 3 . patent and other IP enforcement continue to be difficult in markets like China and Russia. further hindered by relatively inexperienced application examiners. etc. the lack of method patenting is a disadvantage. Emerging Markets as a Key Growth Driver Ramesh Srinivasan. supply chain. partly due to the fragmented nature of the business and more limited cost saving and synergy opportunities.5% -CAGR 20102014E Source: Company reports and Wells Fargo Securities. Director – McKinsey & Co • EM growth fueled by economic growth and increased government investment in healthcare infrastructure. • While EM GDP is expected to grow at double the rate of developed markets through 2018. However. Key take-aways from each of the eight speakers at the meeting. We estimate approximately 25% of growth over the next 4 years will be from EM ($20B of $79B in absolute $). 4) customize product line to meet local needs and affordability. 6) find talent by providing challenging opportunities. • Key success factors to win in EM include: 1) market segmentation to ensure appropriate targeting. o In China.
of the implants.K. The Asian Med Device Manufacturer Perspective Chris Holt. 4 . The market is expected to be in the range of $30-$40 billion by 2015. However. Most of these producers are exporters and have the ability to rapidly adapt to changing environment. 80% of doctors and 60% of hospitals are in urban locations. CAGR of 15-50% and largely run by founder. • This creates an opportunity in Asia to produce high quality.Medical Technology WELLS FARGO SECURITIES. LLC EQUITY RESEARCH DEPARTMENT Overview of the Medical Device Landscape in China Helen Chen.6 doctors for every 1K people. • Medical spending varies by province and about a third of the payment is out of pocket.E. • Like many other EM. 41% for joints and 14% for spine. with local companies accounting for 75% of the business.E. price rather than product quality is the main criteria in India. invest in specific hospitals and determine reimbursement strategy. low cost medical supplies that can offer 10-20% immediate savings. • While India’s population is nearly 4x that of the US. accessible and affordable solutions that can potentially address diverse needs. Partner and Head of China Life Sciences . while 76% of the devices are local and only 24% were imported. o While Asian suppliers produce quality products. CEO – Tiger Medical Group • US and European healthcare providers face thin margins that continue to shrink. Consulting • Although China is amongst the top 5 medical device markets in the world. current Western device manufacturers and supply chain are designed to focus on service and innovation. ($11B in 2009 per L. • An ageing population and changing lifestyles are driving the growth in the patient base. Increased exports and government spending are among key growth drivers. low IP protection and technology awareness. • Different strategies needed for products in different stages of life cycle. For mature products low cost and distribution infrastructure critical. • In 2007.K. offering portfolios are usually limited and most suppliers still lack credibility to sell directly overseas. total healthcare spending was <5% of US HC spend in 2009. • Challenges in India include inadequate regulatory environment. companies need to invest in sales and training. • The opportunity is to create effective. For early stage products companies need to cultivate KOL’s. Overall supply shortage with 0. • There are currently 12K medical device companies in China worth $11B. 45% was for trauma. not cost reduction. 94% of joint implants were imports and only 6% were locally supplied.L. and general acceptance of inadequacies (in products and services) – these are changing and there is growing awareness of the need to improve. Largest Indian Orthopedic Manufacturer Ajay Pitre. • Capital Equipment is the largest segment. estimates) it has plenty of room to grow on a per capita basis. mostly in low-end categories. Managing Director – Sushrut / Adler Group • There is a mismatch India’s healthcare supply/demand – while 70% of the population is in rural areas. China committed to a 3 year investment of $124B to improve healthcare access and infrastructure. thus we believe affordability of medical therapy is a key consideration. For newer products. • In 2009. Implantable devices have robust growth rates. and need to reduce cost through the supply chain. • Typical Asian device manufacturer is a privately-held company with up to $100MM annual sales.9 bed and 0. although execution consistency is generally poor. India’s orthopedic market consisted of 82% implants and 18% instruments.
Singapore and Indonesia) is expected to grow at a CAGR of 9% through 2014.8 billion medical market opportunity. • Due to cost advantages. • Key growth drivers include emergence of a higher income middle class. • Approximately 75% of healthcare coverage in Brazil is through the public system and approximately 22% is through private insurers. 5 .Pacific Bridge Medical • The medical device market comprising of the ASEAN states (Burma.5B and is expected to grow to $3B by 2012. Principal . The size of the Brazilian market is estimated to be $4. Co-founder – Opto Circuits (India) Limited • With a 2. Some challenges include the lack of adequate healthcare funding compared to EU and lack of consistency among different reimbursement systems. and significant unmet medical needs. • In Eastern Europe. Australia.7B total population. Asia is also emerging as a destination for conducting R&D and clinical trials The Emerging Markets Opportunity – BRIC Thomas Dietiker. South Korea and India. Vietnam. • The Indian medical device market currently stands at approximately $2. ophthalmologic and in-vitro diagnostic devices are expected to see strong demand. • Brazil is the 10th largest medical device market ahead of Switzerland. • In general. Overview of Various Medical Device Markets in Asia Ames Gross. BRIC nations represent a $10. Cambodia. Eastern European markets offer high growth potential driven by significant unmet clinical needs and growing patient awareness. Orthopedic. the medical device spending in Russia.Key Take-Aways From Emerging Markets Forum WELLS FARGO SECURITIES. increased awareness of and demand for advanced medical technologies. Philippines. increased government spend on healthcare and greater acceptance of minimally invasive procedures. cardiovascular and ophthalmologic devices are key products in this market • Medical device companies need to set up local operations to lower costs and tailor products to meet local needs. High end devices like cardiovascular. Poland and the Czech Republic is forecasted to exceed $5B by 2014. partly offset by infrastructure and distribution network limitations.Hull Associates • Every market is different in terms of clinical needs and reimbursement dynamics and hence products need to be customized for different markets. • Companies need to tailor product offering to meet needs and cost threshold of different EM while expanding overall product offering. with per capita spend range of $2 (India) to $17 (Russia). Brunei.e. Laos.5B and is expected to grow at around 10% in 2010. LLC EQUITY RESEARCH DEPARTMENT Overview of the Medical Device Market in Brazil and Eastern Europe Stephen Hull. imports play a majority role in the medical industry in Russia and India while multi-nationals and locals dominate in Brazil and China. Class I and II medical devices are presently manufactured in Asia and in the future Class III devices will be manufactured there as well. President . Thailand. Malaysia. • Competitive dynamics differ among the BRIC nations – i.
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