This article was originally published on MedTech Intelligence.
Approximately the third largest in the world, China’s medical device market is currently worth about $21 billion. However, given the country’s large geographic area, fragmented markets and thousands of medical device distributors, the search for the right distributors in China can be a considerably arduous task.
Today, private distribution companies in China generally distribute foreign medical devices. There are more than 13,000 private medical device distributors in the country, many of which only have access to as few as 5–10 hospitals. The supply network is often multi-tiered and managed by large or mid-sized distributors that generate relatively high margins and leave foreign device manufacturers with little sales information. Despite these challenges, the vast opportunities in the Chinese medical device market cannot be overlooked, and the distributor search remains a vital component of exporting device products.
China’s government has recognized the need to consolidate the fragmented medical device market and to improve supply chain transparency. In December 2016, China’s State Council issued the “Two-Invoice System” policy in hopes to eliminate sub-distributors and other intermediaries from the medical device supply chain. This system requires Chinese distributors to make a maximum of two transactions—one with the device manufacturer and the other with the hospital. The government hopes that intermediary players will be reduced, efficiency will be increased and Chinese hospitals will pay less for devices. The “Two-Invoice System” is currently implemented on a trial basis in 11 pilot provinces and is expected to reach full implementation by the end of 2018.
In the long term, existing large and medium-sized distributors are expected to dominate the market under the new Two-Invoice System, while smaller, domestic distributors and sub-distributors will be forced to exit. In the short-term however, small distributors remain important and the need to find knowledgeable and trustworthy distributors is crucial to your success.
Distributor Search Tips
Foreign medical device firms in China should aim to find distributors with recognizable names and national level market reach. The following are some examples:
- July 2017: Ortho Development Corporation (Drapper, UT), an orthopedic medical device company, signed an exclusive distribution agreement with China Pioneer Pharma Holdings Ltd. (CPP) for its Balanced Knee System. China Pioneer Pharma Holdings is one of the largest distributors of pharmaceuticals and medical devices in the country. The agreement allows Ortho Development to gain market representation in more than 30,000 hospitals and 100,000 pharmacies in all of China’s provinces and administrative regions.
- March 2017: Misonix (Farmingdale, NY), an SME ultrasonic medical device producer for bone and tissue surgeries, signed an exclusive distribution agreement with Shandong Weigao Orthopedic Device Co., Ltd. in China, Hong Kong and Macau. Through the agreement, Misonix was able to access Weigao’s network of more than 3,000 hospitals and 25 sales offices across the country.
- March 2016: Avita Medical (Valencia, CA), a regenerative medicine company that produces cellular suspension products to treat wound and skin defects, granted exclusive distribution rights in China to Sinopharm, the country’s largest healthcare group. Through the contract with Sinopharm, Avita was able to have product distribution in 31 Chinese provinces and administrative regions.
- March 2015: Hansen Medical (Mountain View, CA), a major producer of intravascular robotics, entered an exclusive distribution agreement with China National Medical Device Co., Ltd. (CMIC) for the Magellan Robotics System. China National Medical Device Company is a subsidiary of Sinopharm and provided Hansen Medical with market access to 20 provinces.
Foreign SME medtech manufacturers that cannot access national level distributors can employ multiple mid-sized distributors to maximize market access.
The right Chinese distributors should have expertise in the specific medtech sector that the foreign manufacturers are selling. Of course, if you find a distributor in your specific medtech sector, you need to be extra careful that they do not have a manufacturing division or partner that could copy your product and cut you out of the business.
In June 2017, SpineGuard (Paris), a spinal surgery device company, provided XinRong Medical Group with exclusive distribution rights in China, Hong Kong and Macau. XinRong Medical Group is highly specialized in the manufacturing and distribution of orthopedic surgical devices and received substantial investment from the Blackstone Group in 2014.
Needless to say, distributors should be well connected to hospitals and other medical facilities. If the Chinese distributor will register your product with the CFDA, make sure they have good in-house regulatory affairs people to avoid registration delays. Alternatively, you can have an independent third-party registration group do your registration. By doing this, the independent third party can hold your dossiers and licenses to protect your intellectual property and make it easier to switch distributors, if the first one does not perform.
Managing Distributors Relationships
Foreign medical device companies should ensure that they reach the same level of understanding as distributors before signing a contract.
Coupled with language and cultural barriers, business expectations may differ between the foreign device company and the local distributor. Contracts and agreements should be meticulously negotiated, translated and explained to ensure that both parties reach the same understanding. Beware that despite the negotiated details in the distribution contract, Chinese distributors will not always follow the contract.
It is particularly important for foreign medical device companies to develop close relationships with their distributors.
Maintaining personal relationships is not only important in Chinese business culture, but it is essential to ensuring the quality of the distributor’s services. Foreign device company representatives should thoroughly educate distributors about products and make sure that their brand name is clearly mentioned in marketing. Foreign medical device company representatives should also maintain frequent contact and regular on-the-ground meetings with distributors to ensure transparency in the relationship. Frequent in-person contacts should be made at least quarterly.
Besides developing a strong personal relationship with your Chinese distributor, you must always do due diligence to make sure they are following proper procedures. Having independent consultants or other reliable local contacts visit your distributor’s exhibit booth at an appropriate medtech conference (without saying they are working on your behalf) to ask the booth exhibitors detailed questions about your product can help. If the distributor’s sales people at the booth cannot answer detailed questions about your product, you will have a serious problem and will need to discuss this directly with the distributor’s management.
Alternatively, if you pick a random hospital to which your distributor sells, check to see if the distributor’s salesperson has a good relationship with the purchasing manager at that hospital. If the unannounced visit is very positive and your distributor’s salesperson seems to get along very well with the hospital purchasing manager, that is a very good sign. If the meeting is not very warm, then the situation may be the exact opposite. Make sure you pick which Chinese hospital to visit and not the one your distributor suggests where it has friends.
Finding the right Chinese distributor to sell your product can be done. However, the more due diligence you do before signing up the right group and then on an ongoing basis through your relationship, the more likely it is that the partnership will be successful.