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Current & Critical

Orthopaedic Investments Not Halted by China’s Challenged Economy

By Carolyn LaWell

While China’s stock market volatility has disrupted global markets and fueled fears of a sliding economy, current events haven’t appreciably affected the country’s healthcare market and shouldn’t deter medical device investors, according to industry leaders and consultants.

The impact on the Chinese government’s devaluation of the Yuan, however, is expected to vary based upon manufacturers’ individual supply chains, with those that import to and export from China experiencing the greatest swing in costs to do business. The Chinese Yuan has fluctuated between a high and low of ¥1 = $0.161 to ¥1=$0.156 in 2015.

“In general, the five devaluations of the Yuan should have limited impact for the products manufactured and sold in China, in particular if all of the input materials are sourced in China to start with,” said Helen Chen, Co-Head of L.E.K. Consulting’s China practice. “The products exported from China, whether they are from Chinese, Japanese or Western companies, should become more price competitive in exports. Spurring exports is one of the key reasons that the Chinese government devalued the Yuan. The multinational companies (MNCs) that import their products will see the home currency revenue and the profits decline.”

JRI Orthopaedics, a Sheffield, U.K.-based company, is in the final stages of regulatory approval from China’s Food and Drug Administration (CFDA) to market its hip implant in China. JRI will manufacture the implants in the U.K. and sell them through their strategic partner in China.

A short-term impact of China’s current economic climate will be downward price pressures, said JRI’s Managing Director, Keith Jackson. Long-term, there could be an increased demand for Chinese-made premium orthopaedic implants.

Chen and Pacific Bridge Founder Ames Gross said that a weaker Yuan could mean that Chinese people will find Western medical devices, whether manufactured in China or abroad, to be more expensive to buy. This could decrease sales of MNCs’ products.

However industry leaders, including Gross, have said that they expect currency variation and prices to flatten.

“The Chinese government will manipulate the currency modulation, the number of [Yuan] in the system and the rate at which money is being lent and capital is being accessed,” said Tobias W. Buck, CEO, President and Chairman of Paragon Medical. “I think they’ll do it in such an aggressive manner that they will have to stabilize their economy.”

Paragon operates facilities for instrument and implant manufacturing and delivery systems in Changzhou, China. The supplier has not noted a volume impact and doesn’t anticipate one due to the demand that exists naturally with the amount of people in China, Buck said.

During recent conferences and earning calls, leaders of larger orthopaedic players expressed little concern over China’s current economic situation. Comments were reserved for the challenges of operating within the country at regulatory and hospital levels.

China’s total medical device sector has seen a decrease in growth in recent quarters. Medical device and equipment sales reached ¥108 BB (~US $17.4 BB) in 1H15, with an average growth rate of 12.05 percent, a decrease of 3.19 percent from 1H14,Wells Fargo analysts said, citing data from China’s Ministry of Industry and Information.

More than a dozen medtech companies, including Johnson & Johnson, Medtronic, NuVasive and Stryker, presented at Wells Fargo’s healthcare conference in early September. Despite signs of a slowdown in emerging markets like China, most companies said that they plan to increase investments in these markets and are confident that they’ll achieve robust sales.

NuVasive repeated its interest in entering the Chinese market in the next six to nine months. The expansion will most likely come through acquisition, according to company leaders.

Kevin A. Lobo, CEO and Chairman of Stryker, mentioned in the company’s 2Q15 earnings call that Stryker’s implant business experienced good performance in the first half of 2015, but saw a slowdown in capital equipment sales in China.

“Overall, we still have a long way to go in China,” Lobo said. “I would say the Trauson acquisition was a great deal for trauma and spine, and we’re expanding in China. … Inside China, I’m very pleased with that, but we don’t yet have a lower-priced hip and knee offering. That’s something that you could see in the foreseeable future; that’s something we’d want to pursue.

“We’re still not covering all of the territories in China, so we’re continuing to grow our salesforce in some of the more remote areas where we don’t have access. We’ve been growing our China business strongly over the past five or six years in both the premium segment as well as the lower-priced or mid-tier segments, but we still have a long way to go. I would say that the market potential in China is still very significant.”

Smith & Nephew’s CEO Olivier Bohuon said that one downside to the Chinese market is that the tender process has become more intense and has contributed to implant price erosion. The upside is that companies will continue to benefit from volume of sales.

Several factors are expected to slow the growth of China’s orthopaedic industry to about 15 percent during the next two to three years, experts say. When compared to three to four percent growth in the U.S. and Europe, the perspective is clear as to why manufacturers will continue to invest in China—even if growth slows.

“To the extent that long-term healthcare budgets are tied to a percent of GDP, a slowdown in GDP growth automatically means that the long-term healthcare growth will slow,” Chen said of MNCs’ concerns. “Provincial tendering, a key process in the consumables go-to market process, has been getting more restrictive and may include reference pricing and minimum expected price cuts. Hospital budgets continue to be restricted in general, so that the hospitals continue to look for places to trim their spend.”

China’s revised device regulations that went into effect in October 2014 placed a greater emphasis on product quality, which will increase costs for device manufacturers, Chen said. For example, higher value medical devices require clinical trials before submission—even medical devices that would be waived for clinical trials in the U.S. The device registration fee also increased, disproportionately hitting imported products.

“The Chinese government is interested in quality products and innovation, and they hope that the inter-national companies can support that process,” Chen said. “China, however, is not an easy market; the time to approval and market access can be long. Thus, a longer horizon is required for those who wish to participate in growth.”
 

The table below illustrates exposure in emerging markets for select device manufacturers.

Medtech Emerging Market Exposure by Company


 

Includes non-orthopaedic-specific revenue.
* Exposure for entire company, including med-tech
** Fiscal year differs from calendar year

Definitions of EM:

Johnson & Johnson: BRIC and others (all countries excluding U.S., Canada, Western Europe and Japan)
Medtronic: Asia Pacific (excluding Australia, Japan, Korea and New Zealand), Central and Eastern Europe, Greater China, Latin America, the Middle East and Africa, South Asia
Smith & Nephew: BRIC and others
Stryker: Top five and others (India, China, Brazil, Russia and Turkey; Korea, Mexico, South Africa, Poland and Saudi Arabia)
Zimmer Biomet: BRIC and others

Source: Wells Fargo Securities, LLC (Wells Fargo estimates, company reports)
 

 

Carolyn LaWell is ORTHOWORLD’s Content Manager. She can be reached by email