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Current & Critical

China's Directives Set to Reshape Orthopaedic Market

The Chinese government has prioritized medical device development, as well as local and international investments by domestic device companies. Whether you’re a leader in the Chinese market or thinking of entering, it’s important to understand the trends and government initiatives shaping the country’s orthopaedic industry. We asked Helen Chen of L.E.K. Consulting for a market primer. Our conversation follows, starting with basic market and player questions.

 
Helen Chen, Managing Director and Partner, Head of China Life Sciences, L.E.K. Consulting  

ORTHOKNOW: Who are the top orthopaedic device manufacturers in China? What is your estimation of the size of the market.

Chen: It’s a surprise to many that the top orthopaedic device manufacturers in China are actually the international brands. Johnson & Johnson’s DePuy Synthes, Medtronic, Smith & Nephew, Stryker and Zimmer Biomet are all among the leaders. Weigao (or Wego) is the top Chinese brand, and is closing in on the internationals. Kanghui (owned by Medtronic) and Trauson (owned by Stryker) are also notable brands in trauma.

The orthopaedic device market was about RMB 20 billion (~US $3 billion) in 2016, with about 1.3 million surgeries. The international brands collectively still take the majority of value. Due to the price differences—domestic products are often sold at a 30% to 50% discount of international brands—the Chinese products have the majority share in volume.

(Note: Ms. Chen's definition of orthopaedics only includes implantables.)

ORTHOKNOW: We’re seeing more U.S.-headquartered contract manufacturers opening facilities in China. What is the attraction for these companies?

Chen: Contract manufacturers want to be close to their customers. This often means following them to their international markets; this also demonstrates a globally competitive footprint.

China is the fourth largest medical device market globally, after the U.S., Japan and Germany. Having a footprint in the expanding Asian markets is preparing for the future. Expansions have occurred in the past two years (such as that from Autocam Medical), though many component manufacturers had made the investment much earlier. Paragon Medical, for example, set up shop in Changzhou, just outside of Shanghai, in 2008.

In addition to supporting their international customers, I expect that the U.S. contract manufacturers would have a lot to offer to the Chinese orthopaedic companies, as well. The Chinese companies are in a race to advance their technologies and go global; experienced contract manufacturers are in a position to support these initiatives.

Among the State Council’s Made in China 2025 initiatives for medtech (see sidebar on page 3) are goals which target the creation of national technology transfer platforms and innovation centers, as well as medtech demonstration bases. Clusters of medtech R&D and manufacturing facilities, as might be anchored by these contract manufacturers, would allow the hosting local governments to claim credit in supporting the national initiative, and thus be highly welcomed.

ORTHOKNOW: An onslaught of buzzwords are used when discussing the U.S. market: innovation, additive, robotics. What are the recurring themes you’re hearing in China?

Chen: Innovation is a buzzword everywhere! For orthopaedics in China, it’s about local innovation and local manufacturing. These are strong themes throughout the government directives for both R&D and in hospital procurement.

China’s 13th Five Year Plan covering 2016-2020 lists promotion of R&D of advanced medical devices, which includes orthopaedic implantables. This was then echoed in State Council’s Guidance on Promoting the Development of Healthcare Industry released in March 2016, which extends from R&D to commercialization.

Since the Special Review Procedure for Innovative Medical Device was released by the CFDA in May 2014, 91 medical devices have been approved for expedited review, including eight imported multinational products. There were five orthopaedic products on the list, all from Chinese companies. Requirements for this “green channel” process is a China patent and a developed prototype with fully traceable research data.

Multiple approaches to enhance innovation, including in medical devices, are encapsulated in the State Council’s Made in China 2025 policy. This includes different funding and promotion mechanisms for innovation, and encouraging Chinese companies to acquire overseas technology.

Specific medtech targets in Made in China 2025 include share of domestic components in medical devices used in China (60% in 2020 and 80% in 2025), and number of internationally famous brands (5+ in each product area by 2025).

Beyond the local innovation theme, device manufacturers are also addressing the local clinical trial requirements*, “sunshine procurement” processes and the likely distribution channel changes from the potential “two invoice”** and GSP (good sales practice)*** implementations, and shifting patient demand from the “tiered healthcare” drive.

ORTHOKNOW: What market forces should orthopaedic companies be aware of in 2017? Any advice on how they should respond?

Chen: Companies should plan for intensified competition from their international peers and from Chinese domestic companies.

We estimate downward pricing pressures of about 10% in orthopaedics. This is due to more restrictive provincial tendering demands and price referencing (sunshine procurement), as well as secondary negotiations at the hospital level post-provincial tenders. We suggest that companies consider a focus on areas in which they have clear clinical advantage over the Chinese brands. Launching a broader product portfolio can provide greater flexibility and choices to react to tendering requirements.

Policy implementations affecting the distribution channel would be harder to manage for most device companies, given that a multi-tiered, dealer-based go-to-market model is the norm in China. All of the medtechs know that they have to address this, but few are truly prepared. Some form of distribution consolation is no doubt warranted.

ORTHOKNOW: What questions should OEMs and suppliers be asking themselves, as they do business in China?

Chen: The orthopaedic market continues to grow in the mid- to high-teens, and increasingly rewards those who put development and manufacturing into China. As indicated by The American Chamber of Commerce in China’s 2016 Business Climate Survey, 69% of responding businesses suggest that the quality of China’s investment environment for R&D-focused companies is improving or staying
the same.

The questions differ, depending on whether you are already in China vs. still sitting on the sidelines.

For those already commercial in China, it’s about addressing and staying ahead of the changing environment:

  • How well am I managing my distributors? Am I prepared for the two invoice policy?
  • Do I need to get a GSP?
  • Is my portfolio set up for the tiered health implementation? For the tender process?
  • Am I taking advantage of the green channel system for innovative product registration? Will I be eligible for the high priority reviews? 


For those still contemplating China entry, it’s about readiness to take that first step:

  • What is my tolerance for risk, and for investment ahead of the curve?
  • Am I willing to transfer my technology to China and allow manufacturing there?
  • Am I willing to educate to create and grow the market?
  • Does my China business need to look the same as the one in the U.S., or can it be different?

 

ORTHOKNOW: Where should companies go for reliable medical/ortho market data on China?

         


China Sets Goals for Domestic Innovation

China’s State Council launched Made in China 2025, a major policy initiative to enhance innovation that was modeled after Germany’s Industry 4.0. The four approaches to enhance medtech innovation are:

  • Promoting commercialization and application of innovative medical device by government procurement
  • Expanding the fund to invest in innovative technology via central government’s investment and attracting social capital
  • Promoting financial institutions to provide loans and other financial support to companies that are implementing the program
  • Encouraging capable domestic companies to acquire technology by outbound investment


Medtech goals for 2020 include:

  1. Market size of medical device to reach RMB 600 billion
  2. Mid- and high-end domestic medical device usage to reach 50% by volume in county-level hospitals
  3. Market share of domestic core components of medical device to reach 60% in China
  4. Build 5+ national technology transfer platforms and innovation centers
  5. Establish 20 medtech demonstration bases
  6. 3+ international famous brands


Medtech goals for 2025 include:

  1. Market size of medical device to reach RMB 1,200 billion
  2. Mid- and high-end domestic medical device usage to reach 70% by volume in county-level hospitals
  3. Market share of domestic core components of medical device to reach 80% in China
  4. Build 10+ national technology transfer platforms and innovation centers
  5. Establish 6 provincial industry clusters with revenue over RMB 100 billion
  6. Establish 30 medtech demonstration bases
  7. 5+ international famous brands in each major product area
     
   

Chen: Information about China comes in bits and pieces, and requires a fair amount of context to interpret. I wish I could point to a single useful comprehensive source – there is nothing like that in Chinese, let alone in English!

On the regulatory front, some law firms (e.g., Ropes & Gray) and registration agents (e.g., Brandwood) provide regular summaries of the policies. There are China medtech market reports available to purchase on the web; these are fine for an introductory overview. The equity analysts (e.g., Goldman Sachs) follow the public companies, and their treatises on the company, specific segments of the market and competition, are generally reasonable.

The China Healthcare Statistical Year Book issued annually has some basic overall data on the healthcare infrastructure, diseases and procedures. Select diagnosis and specific procedure data, generally in Chinese and relatively spotty, can be purchased from some of the data vendors. Companies on the ground often have their distributors report back and/or audit firms track their own.

There is, of course, L.E.K. When we do our work, we piece all of these together, plus add in our own primary research, typically interviews with physicians, distributors and regulatory agencies, to inform our views.

*China's clinical trial requirements state companies selling most Class II and Class III devices must conduct clinical trials within China.

** China's "two invoice" system limits the number of invoices between the medical device manufacturer and hospitals to a maximum of two, essentially decreasing a manufacturer's number of distributors to one. The program is only in select provinces.

*** Good Sales Practice applies quality controls to distribution



Helen Chen is the go-to person on China medtech and investments. L.E.K. Consulting is a global management consulting firm. Ms. Chen heads L.E.K.’s China practice and has been on the ground in China since 2000. She is based in Shanghai, and can be reached by email.