Recently, I read an interview with Omar Ishrak, CEO of Medtronics, one of the largest medical device companies, in which he said that the company’s emerging market strategy was working but not yielding the goal of a 20% growth rate (it was 10% in 2014, Massdevice interview). Medtronics’ tough road reminded me of a post I put up in March 2013 on medtech companies’ strategies for entering the Chinese market. Here is a replay of that post with a bit of an update at the end.
A couple weeks ago I summarized an Economic Times article on India’s booming medical device industry that now comprises about 700 companies with $5.2 billion in revenues (“Indian Kathi”). The other big medtech boomer is China, that, according to a recent McKinsey report (McKinsey report), has a medical products market four times as large at $20 billion as of 2011. So, I appreciated several insights into that country’s health care/medtech business provided by Stephen Stevens in a posting at Massdevice.com (Simpson blog). Some of his points were:
- while 90% of the country’s 1.3 billion citizens are covered by a government insurance program that provides for basic care, access for 900 million rural Chinese is a problem;
- co-pays are high, 20-60% per procedure depending on the relative wealth of the patient’s location and 50 to 70% for medical device, imported and domestic, respectively;
- the government is starting to control device prices by pooling procurement for national or regional providers;
- domestic companies are competing with foreign companies on price with complex equipment like ultrasound machines priced at 20-35% less, devices like stents 20-50% less, and consumables as much as 65% less; however, foreign companies still garner 60-70% of device spending;
- domestic companies are also competing on product quality with a few companies making the jump to the highly-regulated the US and EU markets; and
- with the increase in access to high-quality, affordable products and government spending on health care, the annual growth in the number of procedures performed is in the teens.
The author also pointed out that several of the larger foreign companies (mentioned are Zimmer, Medtronic, and Stryker) have moved beyond just selling their products and have made strategic acquisitions of Chinese companies to obtain existing low-price product lines and access to lower-cost manufacturing, and he posited that these assets will be useful in entering and competing in other emerging markets.
Doing some positing on my own, I wondered if I were heading a US- and technology-based growth stage company with a novel diagnostics platform, what would my China strategy be? The authors of the McKinsey report implied that diagnostics, especially those that are low-cost and give patients actionable information, may be a good fit with the evolving Chinese market. The report noted that the country is becoming more urban and elderly and more middle class (defined as annual incomes of $7000-27000) with the 30% of total population in 2005 growing to 75% in 2020, hence giving individuals more money and motivation to spend on their health. Moreover, “many highly prevalent and burdensome conditions (such as cancer, depression, and respiratory illness) remain under diagnosed and under treated.”
Based on my admittedly superficial research, I’d say the big multinational diagnostic companies (the test providers like Hoffmann-La Roche and Becton, Dickinson and the service providers like Quest Diagnostics) are not good partners for my company since they have substantial investment in proprietary platforms and are cautious about doing business in China. A counter-example though is Alere, a company I wrote about last week (“Dx Rock Stars” ) that has four ventures in China, covering R and D, manufacturing, and sales (Alere China). A second category of potential partners are the major domestic companies and I found several: Auto Bio, Tecom Science Corp., and ChemClin/China Medical Devices. Without investing in a market research and analysis report, I can’t say which of these have an interest in new technology, have a competitive position, or are even accessible to contact from the US. One up-and-coming domestic company I noted is Kindstar Global, formerly Wuhan Kindstar Diagnostics (Kindstar), which provides central laboratory services to hospitals. Kindstar, as reported by Businessweek (Businessweek article), was founded in 2003, now has 2000 hospitals as customers, and has raised more than $20 million in local and foreign venture capital. One challenge for the company was the lack of a national service to shuttle samples so it built its own network that now engages half its 1000 employees. Part of its growth plan is to expand the number of tests it offers, in part through a licensing deal with the Mayo Clinic’s Medical Laboratories subsidiary.
A company I found that seems poised to enter China that both technology- and US-based is True Diagnostics (True). True “specializes in providing accurate, economical and easy-to-use advanced rapid in vitro immunodiagnostic test systems” using a lateral flow format and a reader to provide quantitative data (True press kit). While the company has about 60 tests in development, only two are approved for sale (tests for PSA and TSH) and it has a manufacturer each in mainland China and Taiwan. Of course, True itself is in the hunt for a corporate partner to adopt its platform so unless it offered a the right manufacturing capability and distribution channels it may not be a good partner for my company.
If my company’s tests were simple enough for home use, another way to enter the Chinese market is by offering over-the-counter kits, those in which a sample is taken and sent to a lab for processing or read by the user. I’m sure there are regulatory/approval challenges, but, given the growing middle class, internet access, and need, an on-line or OTC kit business may be viable. The best known tests widely available in the US are for pregnancy, ovulation, and glucose monitoring, but tests are also sold for infectious disease like HIV and hepatitis C and cholesterol, anemia, allergy, and cancer screening (see list of tests as of 2009 in a Pharmacy Times article). A few model companies are:
- Quick Check Health, a start-up based in Minnesota;
- Mode Diagnostics, a UK start-up; and
- BioIQ that includes in-home tests as one of its services for “enabling clients to measurably achieve their optimal health improvement goals.”
Yes, there is gold in them thar Eastern hills but good partners, planning, and luck will be needed to find it.
[Update on True Diagnostics: the company recently announced a marketing agreement with Merck KGaA for its thyroid stimulating hormone (TSH) test in China, an important step in positioning the company’s tests for wide use within the Chinese health care system (True Diagnostics press release).]