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China’s push to develop rural health care has created a massive opportunity for both foreign and local players

As the U.S Healthcare reform baggs the attention of the world these days, there are other economies also who started investing on healthcare. An article, originally appeared in the 'Knowledge Wharton China', analyses various trends in the medical devices industry in China. The Chinese government, with an objective of addressing shortfalls in its current health care system had announced in April 2009, an allocation of 850 billion RMB (US$123 billion) as part of its New Medical Reform Plan to improve health care through 2011. This plan  promises to cover 90% of China’s population under a universal health care system by 2010 as well as to significantly improve care facilities and expand health related infrastructure.

By 2011, the government aims at building 2,400 new urban health centers and also restructure and renovate 3,700 existing urban community health centers and 11,000 community health clinics. The major intention behind this is to  move away from an overreliance on large magnet hospitals towards smaller, more utilitarian clinics. These measures are expected to address the high patient traffic and the lack of hospital beds in the big cities, and also to bring up the development of infrastructure needed to cope with China’s aging population.

Beijing, the capital of the People's Republic of China has emphasized on improving medical services for the 800 million rural poor in China who have little or no access to basic health care facilities and poor health coverage. In order to bring clinics to every village and a hospital to every county in the country by 2011, The China Rural Cooperative Medical System has drwan comprehensive plans.  If the plan’s objectives are met, this adds up to at least 2,000 new county hospitals and 29,000 village clinics.

One of the potential beneficiaries of the proposed healthcare reform is the medical device industry of China. Episcom, a pharmaceutical market researcher forecasts, by 2014, the expected value of China’s medical device market will reach US$28 billion -- more than double the figure from 2006. The experts says that  growth in the sector is largely due to the increasing portion of the population who can afford high-quality implants or home-use devices, new regulations regarding the purchase of equipment, and the government’s growing emphasis on health coverage in rural areas.

Besides working on improving health care capacity, Beijing is also aiming at developing the level of care available at smaller clinics and Tier 1 and Tier 2 hospitals (hospitals with less than 500 beds) while reducing costs. Apart from this, the The Ministry of Health has also reinforced controls on purchases of high-priced "Group A" medical devices ( devices costing more than 5 million RMB ie, about US$710,000)on the ground that such equipment could contribute to rising medical expenses.  However the government is still encouraging spending and has allocated 8.3 billion RMB (US$1.2 billion) until 2010 for the purchase of X-ray machines, patient monitoring devices and ultrasounds for rural areas. On top of this, the government is also offering hospital equipment subsidies that favor domestically made, low-cost products -- part of its “buy China” stance when allocating stimulus funds.

Beijing is also funding money towards research and development in addition to these regulations related to the purchase of medical devices. Through the recent stimulus package, the Central Government plans to invest 62.8 billion RMB (US$9.2 billion) in technology R&D.  Chinese firms have traditionally competed for the low-end of the market while foreign firms have occupied the high-end, but government support for research and development and an ambition by many Chinese firms to become global players is changing the playing field. Meanwhile, new care facilities will need to be equipped and existing hospitals are demanding new devices, as 60% to 70% of current hardware is from the 1970s or 1980s.

While taking in to account, the domestic market for medical devices is still highly fragmented. Though China claims that it has some 3,000 medical device manufacturers, most of these have limited market share and function on a small scale with only a handful of profitable products. Among these, there are only four Chinese medical device companies that are publicly traded, with Gol Golden Meditech Co. Ltd. and Shandong Weigao Group Medical Polymer Co. Ltd. listed in Hong Kong, and Mindray Medical International Ltd. (MR) and China Medical Technologies Inc. (CMED) listed on NASDAQ.

However, domestic device makers are working to develop high-quality devices at a cost basis 30% lower than that of foreign competitors. China’s largest medical device manufacturer, Mindray Medical International, generated revenues of nearly US$550 million in 2008, growing 36% over the previous year. Current estimates peg the company’s minimum growth for 2009 at 22%. The govenrnment reforms and growth of domestic companies are asking more from foreign firms to act quickly to cement their positions in the China market. But the technological advantage that the foreign device makers posses makes them preferred by hospitals’ and consumers’.

Growing prosperity and changing dietary habits has led Chinese to confront with the same health issues that plague patients in developed nations. The top 3 most deadly diseases in China are cancer (28.53%), cerebrovascular disease (18.04%), and cardiovascular disease (16.29%). And as a result of increased awareness, people are looking out for advanced medical techniques to treat these illnesses and there is a high degree of trust and dependence on Western technology for treatments.

The technology advances in interventional cardiology, non-surgical procedures for treating cardiovascular diseases..etc are gaining mainstream acceptance in China.  And price is becoming less important to patients who are suffering from serious illnesses, and there is strong demand for high-end cardiovascular devices that are used in lieu of complicated heart surgery.  The market for angioplasty and stents, especially drug-eluting stents, is taking off and there are already several domestic companies seeking to gain market share. Every year, the number of cardiac patients is expected to grow around 20% to 30%. The stent market, on the other hand, has shown growth rates reaching up to 40%.

Foreign companies, especially large medical device manufacturers from Japan, Germany, and the USA, still have a comparative advantage in terms of technology and presently control 90% of the high-end device market. It is reported that Chinese consumers are also wary of the “made in China” label and continue to demand foreign brands when considering treatment. Though the government emphasizes on low cost devices for rural projects, major hospitals in China still demand the best foreign equipment. Surveys says that the majority of Chinese consumers trust Western medical device brands over domestic ones and are willing to pay 20% more for them because they believe them to be more reliable and less likely to malfunction. Domestic producers will have to work hard to build an image of reliability and shatter the negative connotations of the “made in China” label even within their home country. Foreign medical device manufacturers have an opportunity to take advantage of this perceived brand value to build presence in the market.

The problem that may arise for foreign device manufacturers is that they will have trouble accessing China’s rural markets with their high-end premium branded products. Domestic companies have the government behind them and will use growth in these markets to get a leg up on foreign brands. To accomodate this trend and to continue to grow in China, many foreign brands are choosing to form partnerships with domestic companies so that they can gain access to developing markets, improve sales channels, and benefit from government health care funding.

Partnerships and joint ventures may help in reducing costs, and may help to overcome sales hurdles by taking advantage of strong distributor relationships and connections to hospitals or affiliated bodies. Marketing products under a domestic company’s name can also help foreign investors benefit from the government’s new reimbursement scheme. There are few recent examples that shows such successful joint ventures and partnerships.  General Electric (GE) helped to pioneer this approach. It recently launched a program to develop low-cost products to supply rural hospitals in China. GE’s main strategy was to establish a local base in China and use Chinese resources and technology to produce low cost devices at a price 15% below imported products. To achieve this goal, it teamed up with a local partner, Shinva Medical Instrument Co., to form Shinva GE Medical Systems. The partnership of U.S.-based medical device company Medtronic (MDT) with Shandong Weigao Co Ltd. to market Medtronic’s spinal products and Weigao’s orthopedic devices is another successful venture. Likewise, other big players have also formed partnerships. In April 2008, Philips (PHG) acquired the second-largest domestic patient monitoring device manufacturer in China, Shenzhen Goldway Industrial Inc., allowing Philips to strenghten its position at both the high and low-ends of the market.

However, China’s recent health care reform and specific regulations on medical devices should provide better reimbursement for patients and lead to growing demand for the use of advanced treatment methods. China’s push to develop rural health care has created a massive opportunity for both foreign and local players, but regulations on how hospitals and clinics can purchase products and the rise of domestic device manufacturers mean that foreign companies need to act fast in order to strenghten their position in the market.

Source: 'Seeking Alpha'

You can discuss more about Chinese Healthcare reform in our Radiology in China Group