Is China Still A Good Opportunity For Device Manufacturers?

This article was first published on MedTech Intelligence. 

Everyone knows China has a large medical device market. Over the last 30 years and up until a few years ago, opportunities for device sales in China were good for many Western device companies. However, new policies have made the opportunities more difficult and success harder to achieve.

In the past, foreign device companies could register their products in China relatively easily, reimbursement was possible, multiple distributors were ok, and there were fewer local Chinese competitive products. Today, the situation is different.

First, registration in China today is a lot more difficult and time-consuming. Over the last few years, product registration requirements have expanded, more documentation is needed, and more standards have been put in place. Local type testing, a key step in the registration process, is now three to six months whereas before it took only about three months. Local type testing fees have also doubled. The time to register a Class 2 exported device is now 12¬–18 months, while previously it was about nine months.

Second, generally, reimbursements have been reduced, and Chinese government money for healthcare has become a lot tighter. In the past, hospitals made money by marking up the prices of the devices, drugs and treatments they sold. Those days are over. Today, hospitals make money by reducing their expenses, tightening up their budgets, improving their internal procedures, etc. Tenders, volume-based procurement (VBP), diagnostic related groups (DRGs), and diagnostic intervention packets (DIPs), have all been put in place or are currently in pilot schemes.

Provincial tenders, reducing product prices, are more common in China. Such tenders often do not include foreign-made products and sometimes domestic players receive subsidies from the local governments to win bids.

VBP is more prevalent for high-priced, high-volume sales of device products. Over the last few years, VBP has reduced the prices of cardio stents and hip and knee implants by 80-90%. Next on the expected VBP list are products like spinal implants, CVC catheters, interventional cardio products, and neuro devices. While winning companies do not need to spend as much money on marketing or administrative costs if they win a bid via VBP, the lower winning prices reduce overall profits.

DRGs and DIPs are both schemes to incentivize hospitals to provide relatively decent quality at lower costs and shorten hospital stays. DRGs create patient groups according to disease, age, gender, etc. There are now more than 385 DRGs in China where payment amounts are fixed. In this situation, it is not easy to introduce new technologies, drugs, etc.

DIPs are both similar to and different from DRGs. DIPs, under a regional budget, are case-based payment schemes. They use big data to help determine the pay for diseases. Under the 1,350 DIP systems in place now, each DIP is assigned a point and the value of each point changes depending on the regional budget. Monetary payments are decided afterward, not in advance. Generally, the DIP system is a more exact reimbursement scheme than the DRG system, it also has more groups and deals with a larger variety of conditions. The DIP system encourages hospitals to fight for more procedures in a specific area, so they can get more compensation.

Finally, domestic device competition has increased dramatically over the last few years. Seven years ago, the drug-eluting stent market was controlled by big Western device companies that had a 75% market share. Five years later, 75% of the market share was taken over by domestic Chinese stent makers. Also, one of the reasons it was tough to develop complicated devices in China, was the lack of venture capital. This, however, is no longer a problem since venture capital has emerged as a big business in China over the last five years and there is plenty of capital to go to new, medical technologies. The bottom line is, going forward, more and more Chinese device companies will sell high-quality devices made in China to the West.

Given the above, how can foreign companies win in China? The best way to succeed in China is to focus on selling unique products there; unique products that are needed, where the reimbursements are still relatively good, and VBP will not reduce prices, yet can still yield large sales. Western brands are still perceived as higher quality than locally made products, and are popular with Chinese patients as long as the pricing is reasonable. Other strategies to be successful in China include licensing or selling your technology since there is more Chinese capital available these days. Another improved factor, although still not great, includes better intellectual property protection in China. Some Western companies are also making more of their products in China, which can help the company to be closer to their customers, in some cases make registration easier, and may reduce manufacturing costs.

Given the geopolitical situation and recent COVID-19 situation in China today, Western companies sourcing in China are getting more nervous. From a supply chain perspective, companies that source and import devices and components from China are experiencing long delays due to shutdowns at Chinese factories, due to COVID-19. Many Chinese factories are not currently fully staffed, and many Western medtech companies are complaining about this issue. Some device companies are looking to diversify their device and component sources, and are looking at other Asian markets like Vietnam, India, Thailand and Indonesia. Outside of Asia, we have heard of companies looking to source more from Mexico, Turkey, Eastern Europe and other places. The problem with this strategy is that it is not always easy to find other reputable sources with decent quality devices or components quickly. Also, we still find that if you need high volumes of certain devices or components, very few others can match the high-level production capabilities in China.

All in all, China is not going away. It is not in their best interest to reduce international trade. Sales and sourcing can still be done successfully, but doing your homework in advance is now more important than ever.