Is China’s Medtech Market Still Attractive for Foreign Device Companies?

Staying Competitive Amid Rapid R&D Growth in Asia

China remains one of the most compelling markets for medical devices companies globally. A rapidly aging population, along with a growing upwardly mobile urban middle class are demanding better healthcare. In turn, this is pushing the demand for new medical products and services. This has translated into good opportunities for many Western foreign medical device companies, which have had and currently still do a strong advantage over their local Chinese counterparts with respect to sophisticated technology. There is no doubt that some foreign device companies are doing well in China. The question is will this continue going forward?

The Economist Intelligence Unit (EIU) predicts that by 2018, the annual Chinese healthcare expenditure will reach USD 680.4 billion, a 7.44% growth year-on-year. This growth will be driven not only by an increase in middle class incomes, but by the Chinese government’s commitment to meet the healthcare needs of its huge population.

2025 Made in China Initiation (MIC 2025)

The initiation of MIC 2025 in May 2015 should be worrisome. MIC 2025 was implemented in order to reduce overall imports to China by substituting Chinese manufacturing for international foreign manufacturing. By implementing this plan, China’s main objective is to become a global leader in manufacturing high-quality and high-technology products, rather than mid to low-tech products. Through several other initiatives, the Chinese government plans on reducing the dependency on foreign technologies and hopes to increase domestic innovation.

While MIC 2025 targets technologies in all industries, the specific medical devices include:

  • Medical imaging equipment
  • Medical robots
  • Wearable medical equipment
  • Mobile and remote diagnostic equipment
  • Radiotherapy equipment
  • High value medical supplies
  • New medical biomaterials and equipment
  • New biodegradable materials
  • New implant materials and implant devices
  • Medical device products based on tissue engineering technology
  • New medical biological dressings
  • Minimally invasive treatment/implant products
  • Rapid detection technology
  • Gene detection products,
  • High risk infection disease diagnosis reagents key technology
  • Key aspects of the prospective standards of research

Other Key Announcements Affecting Medical Devices

Along with MIC 2025, the Chinese government has announced several initiatives in the medical device sector:

  • March 2015 The China Association of Medical Equipment (CAME) released the first catalogue of the Outstanding Domestic Equipment Catalogue. Of the 218 products submitted for consideration by 57 companies, 95 products from 27 companies were selected. Several foreign multinational companies with local factories in China submitted applications for the catalogue, however all of the selected products were manufactured by Chinese companies. This issue covered digital x-rays, color ultrasounds, and fully automatic biochemical analyzers.
  • May 2015 The State Council issued the Notice on Deepening Healthcare Reform, stating that “publicly-owned hospitals will preferentially equip and utilize domestic medical equipment and apparatus.”
  • September 2015 Miao Wei, the minster of the Ministry of Health and Information Technology (MIIT) and Li Bin, chair of the National Health and Family Planning Commission (NHFPC) signed an agreement for the two groups to collaborate in the research and development of China’s innovation capabilities. Ms. Bin emphasized the utilization of policies and providing government funds to health institutions to participate in the research, innovation, and application of domestically produced medical devices. Additionally, a program was established to incentivize medical and health organizations to use domestically produced medical devices.
  • February 2016 The CAME issued the second catalogue of the Outstanding Domestic Equipment Catalogue. Of the 209 applications submitted, 153 products were approved, again no devices made by a foreign multinational company even with local factories in China were chosen. Sectors covered in this catalog were MRI machines, computer tomography (CT) scanners, automatic blood cell analyzers, respirators, anesthesia machines, blood dialysis machines, and automatic medicine dispensing machines.
  • March 2016 The State Council issued the Guiding Opinions on Promoting the Healthy Development of the Medical and Pharmaceutical Industry. The publication states that “where domestically produced pharmaceuticals and medical devices can meet the required need, government procurement projects…should procure domestically produced products.”
  • August 2016 The State Council released the Plan to Enhance Standardization and Quality of Equipment Manufacturing. This plan aims to spread Chinese manufacturing standards globally, particularly to countries participating in One-Belt One-Road, a Chinese initiative focused on connecting China to Eurasian countries through infrastructure, trade, and investment.

Potential Issues for Foreign Medical Device Manufacturers

Clearly, Chinese government initiatives are posing significant challenges for Western foreign manufacturers. Along with these initiatives, manufacturers may also experience the following issues:

  • Regulatory changes: in October 2014, the Chinese government announced new regulations which have significantly increased the registration timeline. Regulatory changes include a requirement for more local clinical trials for Class 2 and 3 approvals. Testing fees at local testing centers were eliminated but without financial incentives, delays at Chinese testing centers have significantly increased.
  • Hospitals forced to purchase domestic products: directives to “nationalize” China’s medical device industry have been implemented. As a result, several foreign medical devices have been prevented from competing for public procurement contracts on a level playing field. These devices often include devices manufactured in China by foreign medtech companies. Hospitals are subsequently in some cases limited by their choices and are prevented from purchasing equipment best suited for patients’ clinical needs.
  • IPR infringement: each year, approximately 5% of the US’s gross domestic product (GDP) is lost to theft, espionage, and privacy infringement. According to the Commission on the Theft of American Intellectual Property, intellectual property (IP) theft costs US businesses as much as $600 billion a year, and counterfeit Chinese products account for almost 87% of all counterfeit goods seized at the border.

Medical device companies often have a significant amount of IP, which can be easily shared through staff transfers or local partners leaking information when companies enter the Chinese market. Therefore, foreign medical device companies must be stringent in developing and implementing IP protection standards. These measures include identifying and registering all IP and diligent handling of IP during research & development and sourcing.

In addition, the Chinese government has also pledged to increase efforts to protect IP rights in the country. This pledge was released in tandem with MIC 2025, in hopes to protect domestic IP rights as well. The first state-level IP rights evaluation and certification center was established in Beijing in February 2017. Whether IP protection will improve in China’s medtech sector is anyone’s guess?

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