Expanding in China's MedTech Market: Navigating Market Access and Tendering


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L.E.K.'s Helen Chen presented at the European Union Chamber of Commerce in China at the Pharma and Healthcare Equipment Joint Working Group meeting. Learn more about the MedTech market in China by viewing her presentation.

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Expanding in China's MedTech Market: Navigating Market Access and Tendering

  1. 1. The materials contained in this document are intended to supplement a discussion with L.E.K. Consulting. These perspectives are confidential and will only be meaningful to those in attendance. iKbKhK=`çåëìäíáåÖ=iáãáíÉÇI=cäççê=PQI=`fqf`=pèì~êÉI=NNSU=k~åàáåÖ=oç~Ç=tÉëíI=pÜ~åÖÜ~á=OMMMQNI=`Üáå~ íW=USKONKSNOO=PVMM===ÑW=USKONKSNOOKPVUU===ïïïKäÉâKÅçã August 7, 2013 Auckland Bangkok Beijing Boston Chicago London Los Angeles Melbourne Milan Mumbai Munich New Delhi New York Paris San Francisco Shanghai Singapore Sydney Tokyo Wroclaw Expanding in China’s Medtech Market: Navigating Market Access and Tendering
  2. 2. CONFIDENTIAL 1 Objectives of today’s discussion  Introduce L.E.K. speakers and our experiences in China life sciences  Recap China medtech market landscape  Discuss market access and tendering regulations and challenges  Highlight parallels and differences between pharma and medtech in government’s actions  Share and discuss implications for multinationals and best practices Introduction We’re pleased to share and exchange our perspectives with the EuroCham members
  3. 3. CONFIDENTIAL L.E.K.’s speakers have extensive hands-on experience in China life sciences and medtech  Helen Chen is a director and partner of L.E.K. Consulting and is the co-head of the China practice based in Shanghai. Helen has over 20 years of healthcare consulting and industry experience in the US and Asia, and has resided in China since 2000  Helen is the head of L.E.K.’s China life sciences practice  She is on the Editorial Board of PharmAsia and is a frequent speaker and author on the opportunities and issues in the China healthcare and life sciences  Prior to joining L.E.K., Helen held senior management roles at technology companies in the US and China. She was an associate director of finance at Genentech and a sales planner at Abbott Laboratories. In her corporate roles, Helen designed sales territories, quota and incentive systems and sales effectiveness tools  Helen has an honors degree in applied mathematics from Harvard University Helen Chen, Partner Head of China Life Sciences  Justin Wang is a Principal based in L.E.K.’s Shanghai Office. He has 10 years of strategy consulting experience and has led numerous strategy development projects for corporates in pharmaceutical, medical device, retail, industrial, and energy sectors  Justin’s key assignments in the life science and medtech sector include: - five-year China strategic planning for a major multinational medical device company - commercial due diligence and strategic value assessment of a leading Chinese cardiovascular equipment manufacturer for a global client - China strategic planning for a multinational specialty pharmaceutical company - Asian market opportunity assessment and out- licensing strategy development for a U.S.-based pharmaceutical company’s new drug for cancer supportive care  Justin has been with L.E.K. since 2003 and worked on a 6-month secondment in the London Office. Justin is fluent in both Mandarin and English and has a BA in Economics from Fudan University in China Justin Wang, Principal Leader in Life Sciences Introduction 2
  4. 4. CONFIDENTIAL L.E.K. Consulting is a leading global strategy firm with extensive experience in life sciences Global Capability MedTech Experience & Expertise  22 offices worldwide, including 2 in China  Founded in 1983 in London; 15 years in China  1000+ consulting professionals; 100+ partners  Advised 20% of largest 200 companies globally  Highly differentiated from peer consultancies in analytically driven decision-making  Leading advisor to life sciences companies around the world with over 2,300 engagements; advised the top-5 medical device companies, top-5 biotechs and top-10 pharmas  More than US$120B in transactions in life sciences  Awarded Healthcare Sector Adviser of the Year 2010 by Acquisitions Monthly, Consultant of the Year at the 2011 Health Investor Awards, Management Consultant of the Year 2012 by Independent Healthcare  Other honors include Unquote” British Private Equity Awards Specialist Due Diligence Provider of the Year 2012, City A.M. Professional Services Firm of the Year 2011, The Queen’s Award for Enterprise: International Trade 2007  On the ground capabilities and experiences in China; over 50 projects each year in China life sciences and medical devices Introduction 3 Chennai Sao Paulo Seoul
  5. 5. CONFIDENTIAL Industry trends and evolution Policy analysis and response Growth opportunities analysis Strategic planning Therapeutic area diversification Sector diversification International expansion Portfolio planning and strategy Innovation strategy Outsourcing strategy Whitespace opportunities Shareholder value creation Target screening & identification - companies - products - partners Bidder screening and identification Vendor due diligence Commercial due diligence Fairness opinion Litigation support Negotiation & term sheet support - deal terms analysis - dynamic valuation tools Post-merger integration Market sizing and segmentation Product evaluation - attribute testing - target profile development - market share assessment - performance thresholds - revenue forecasting - financial modeling (NPV) - scenario and sensitivity analysis Competitive positioning Pricing and reimbursement Launch planning Commercialisation options Sales force optimization Brand management Lifecycle management Global expansion Corporate strategy Product & franchise strategy Transaction support* Note: * Transaction types include: M&A; partnerships (discovery, development, commercial); joint ventures; divestitures / spinoffs; and royalty monetization Performance improvement - relative cost position - business processes - turnarounds - organization and design - operational effectiveness - measurement & incentives Cost reduction - overhead / SG&A - inventory optimisation - sourcing and procurement Supply chain management - role of technology - planning and execution - alignment with channels - globalization - distribution / cold-chain mgmt Operational excellence Our clients call on us to address key strategic issues and deliver value-creating growth Introduction 4
  6. 6. CONFIDENTIAL China is the world’s fourth largest medical device market, and is expected to continue its 20%+ annual growth over the next five years China medtech market recap 2.3 3.4 3.5 4.7 5.1 5.5 6.3 8.4 8.9 13.3 14.0 23.2 31.5 5 30 35 12525 1202015100 Brazil Spain Russia Switzerland Mexico India UK France Germany Italy Canada Billions of US$ China Japan USA 120.4 Medical device market size by country (2012) Note: * Forecasts assuming exchange rate at US$1=RMB5.5 by 2017, according to EIU Source: Espicom, EIU, L.E.K. analysis China medical device market size* (2007-17F) 0 5 10 15 20 25 30 35 40 13F 14F 15F Billions of US$ 082007 CAGR= 20.2% CAGR= 23.1% 17F16F1009 12E11 5
  7. 7. CONFIDENTIAL Historically most MNCs focused on a small number premium “big city big hospitals” though some have or are now expanding to a broader set of value hospitals China medtech market recap Source: China hospital database, L.E.K. analysis Number of hospitals 9,0008,5008,0007,5007,0006,5006,0005,5005,0004,5004,0003,500 China hospital landscape by average annual inpatients surgeries and hospital segments (2012) Thousands of inpatients surgeries 50 40 3,0002,5002,0001,5001,0005000 County c.3 T3, C2 c.2 T2, C2 c.3 T1, C2 c.7 T3, C3 c.13 T2, C3 c.20 30 20 10 0 Tier 1 City, Class 3 Hospital c.50 Traditional MNC target Expanding MNC target 6
  8. 8. CONFIDENTIAL Hospital Consumables Equipment Low-end High-end Low end High end Syringe, scalpel, suture, forceps, etc. Implant/ invasive and surgical devices ECG, PoC diagnostic devices, etc. CT, 3D ultrasound colour doppler, etc. Level 3 hospital Imports preferred when possible Imports preferred when possible Imports preferred when possible Imports preferred when possible Prefecture city Level 2 hospital Mixed preference Mixed preference Mixed preference Imports preferred when possible County Level 2 hospital Mostly local Mostly local Local preferred Imports preferred when possible Level 1 hospitals Mostly local The rise of domestic companies, encouraged by Chinese government policies, increasingly poses a threat to foreign medical device companies as they improve product quality and push into mid-high segments Source: SeriChina, L.E.K. case experience Medical device and consumable market share by brands in China Percent 100 80 60 40 20 0 Domestic brands Foreign brands Low end segment High end segment Foreign companies need to defend their dominance in the high-end segment while seeking to expand into lower tier cities and lower level hospitals to capture further growth opportunities China medtech market recap 7
  9. 9. CONFIDENTIAL China medtech market recap To be successful in this changing landscape, MNCs need to consider a range of commercial and operational issues that will affect the go-to-market approach on the national and local levels Product range Sales and distribution strategy Tendering and other areas Expansion to “value segment” Pricing Service requirements and differentiation Direct vs. dealers Sales force roles and incentives Dealers roles and incentives Distributors and dealers consolidation Tendering roles and responsibilities Likely changes as a result of new regulations Regionalization of sales force Customer segmentation Account potential Current and future sales Which areas of the go-to-market model can be optimized? Which areas should be reviewed to meet the market challenges highlighted previously? Today’s focus Today’s discussion will focus on tendering strategies and implications for the MNC medtech 8
  10. 10. CONFIDENTIAL Chinese government has issued a number of policies, intending to regulate the practice and price in medical device market Source: L.E.K. analysis China medtech market access and tendering Pricing and mark up Tendering Payment and budget control  In 2004, MOH initiated a pilot program for centralized procurement for high-value consumables in eight cities including Beijing, Tianjin and Shanghai  In 2009, MOH launched a pilot program of provincial tender for all provinces, but this was later suspended to focus on centralized procurement for phama  Since 2010, provincial centralized tendering have been selectively rolled out  In December 2012, MOH issued regulation mandating all public hospitals to participate in provincial centralized tendering for high- value medical consumables and the scope of tender products is largely widened  In 2006, NDRC proposed a first draft of price markup schedule of 25-50%. An interim version was later published in 2007 to decrease the price markup ceiling to 15-20%  Healthcare reform in 2009 stated that the use of implantable medical devices by public hospitals would be regulated by restricting price mark-ups in distribution channels  NDRC released a draft regulation in 2009 to regulate the price of medical devices (including high value medical devices)  Regulation of national healthcare services pricing was published in 2012 (limiting extra service fees and control pricing of consumables) 2001 Current - 2013  Since 2001, single disease payment (SDP) initiatives have been launched in China as a potential payment model to lower fees  In 2004, MOH officially launched the first SDP pilot in seven provinces  In 2006, global budget was officially implemented in all community health centers in Shanghai  MOH started a second effort on promoting SDP in 2009 to encourage hospitals and local Governments to actively expand the scope of SDP disease and number of pilot hospitals  A full diagnosis related group (DRG) reimbursement was implemented in 6 hospitals in Beijing in 2011 and all 3A hospitals in Beijing will adopt this system if the pilots are considered successful  As of 2011, all level 2 and 1 hospitals in Shanghai are reimbursed via the Global Budget and plans are being made to extend the pilot to all level 3A hospitals in Shanghai 9 2004 2006 2009 2010 2011 2012
  11. 11. CONFIDENTIAL The December 2012 draft regulation issued by MOH mandates all public hospitals to participate in the provincial centralized procurement process Draft bidding rule for high-value medical consumables – issued by MOH in December, 2012 Procurement agencies Healthcare institutions Device manufacturers Category Items (included but not limited to) Vascular Intervention  Catheters, balloon catheters, stents and auxiliary materials Non-vascular Intervention  Same as above, but for respiratory and digestive tract, bladder, rectum Orthopaedics  Artificial joints, fixed plates, artificial bone, patches Neurosurgery  Intracranial implants and fillers Electrophysiology  Guiding catheters, ablation catheters Pacemakers  Permanent and temporary pacing catheters, defibrillators Cardiopulmonary Bypass, Blood Purification  Artificial heart and lung material, dialysis kits, filters, blood cell segregators Ophthalmology  Intraocular lenses and implants Dental  Maxillofacial trauma repair, implants, root canal Others  Prosthetic valves, artificial patches, artificial blood vessels, polymer materials  Medical device procurement agencies are the same as that of pharmaceutical procurement  Centralized procurement is conducted at the provincial level  Procurement agencies’ duties include − draft procurement plan − organize and conduct procurement process − monitor & supervise  Medical device manufacturers or distributors are required to go through the tendering process and comply relevant regulations  Manufacturers are not allowed to provide high- value medical consumables to medical institutions if not included in the final list  All public hospitals required to participate in the provincial process  Procurement of high-value medical devices only via the province procurement e-platform  Can only purchase from manufacturer finalists Medical consumables in mandatory product listInstitutions that need to comply with the regulation China medtech market access and tendering How should medtech companies prepare for the new tendering rules? Source: L.E.K. analysis 10
  12. 12. CONFIDENTIAL Medtech companies can enhance their success rates by carefully working on key steps during the provincial tendering Announce tender policy / products Submit application materials Manufacturer qualified? Fail No Set ceiling price Submit price (1st round) Yes Submitted price lower than ceiling price? Yes Price < 500 Price negotiation with the Expert Panel No Winners Yes Price > 500 Bidders >=3? No 0-2 with the highest bidding price? Yes No Submit price (2nd round) Scored by expert panel 0-2 with the lowest score? Yes No Winners 50% votes Fail No Yes Winners Fail Fail Fail ManufacturerProvincial Tender Center Key activity participant Source: Beijing tender documents, L.E.K. research and analysis Product categorization China medtech market access and tendering When in a group of 3+ contenders, the manufacturer can adjust their prices to avoid being the first or the second highest in the group Manufacturers do not have to have the lowest price in the group to win the tender Manufacturer can target (e.g. to adjust the product descriptions, or to lobby the expert panel) to put products in categories with fewer than 3 contenders When there are 1-2 contenders in a group, the contender(s) win the tender as long as with prices lower than the ceiling prices Beijing medical device tender process Scoring criteria Weigh by category Measurement Weight Quality 57 Clinical efficacy 12 Quality 20 Brand 10 Packaging quality and practical level of the product 4 Scale of manufacturer 11 Credibility / after service 7 Historical credibility of manufacturer 4 Historical credibility of delivery 3 Innovation 6 CE approved or FDA approved products or the manufacturer is registered as Chinese Innovation Demonstration Enterprise 6 Price 30 Bidding price 30 Total 100 100 Expert panel scoring criteria and weight (Beijing) 11
  13. 13. CONFIDENTIAL The review process and criteria vary by province, but the “Technical” element, which includes quality, is in general an important consideration China medtech market access and tendering Source: Provincial tender documents, L.E.K. analysis “Technical” criteria weighting for provincial tender <50% 50% – 70% >=70% No scoring criteria disclosed No tendering plans announced Technical criteria weighting in the overall assessment for provincial tenders (综合评审) Technical criteria  Technical criteria typically includes quality, clinical efficacy, brand reputation, scale of manufacturer, credibility and after service, packaging quality, and etc.  The scores are given based on objective assessment (e.g., product quality for CE/FDA approval) or subjective opinions of the experts (e.g., brand reputation) Price criteria  The bidding price submitted would be the hospital purchase price (including distribution costs and relevant taxes) in RMB  Provinces could have different criteria but the process typically would be determining whether the price is reasonable (compared to other bidders) and whether it is low (compared to historical prices) Hunan Beijing 12
  14. 14. CONFIDENTIAL Examples of bid-winning stents show that MNC and domestic products have similar chances for success China medtech market access and tendering Note: * TW = Technical criteria weighting Source: Drug and Medical Device Procurement Platform of Zhejiang, Gansu, Jiangxi and Guangxi, L.E.K. analysis Cardiovascular stent tendering winners in selected provinces (2011-12) 13 Stent type Zhejiang (TW*=50%) Gansu (TW*=N/A) Jiangxi (TW*=N/A) Guangxi (TW*=N/A) Company Type Company Type Company Type Company Type Bare Metal Stents (BMS) Beijing Fisun Tech Domestic Beijing Fisun Tech Domestic Liaoning Biomedical Materials R&D center Domestic Vascore Domestic Bimedical Material Domestic Medtronic MNC MicroPort Domestic Vascore Domestic Biotronik MNC Zhongke Tiancheng Domestic Abbott MNC Lepu Medical Domestic Orbusneich Medical MNC Biotronik MNC Medtronic MNC Abbott MNC Johnson&Johnson MNC Drug Eluting Stents (DES) Sino Medical Domestic Essen Domestic Lepu Medical Domestic Essen Domestic Sino Medical Domestic MicroPort Domestic JW Medical Domestic MicroPort Domestic Abbott MNC Lepu Medical Domestic JW Medical Domestic MicroPort Domestic Bimedical Material Domestic Medtronic MNC Lepu Medical Domestic Boston Scientific MNC Boston Scientific MNC B.Braun MNC Medtronic MNC Abbott MNC B.Braun MNC
  15. 15. CONFIDENTIAL All provinces are expected to centralize high value consumable procurement, though not all have yet started Source: Provincial Tender Center, L.E.K. research and analysis Valid time (Year) 2010 2011 2012 2013 2014 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Completed Beijing 2 Hebei >=1 Anhui 1 Jiangxi N/A Henan 2 Hunan 1 Guangdong 1 Gansu 1 Xinjiang N/A Inner Mongolia 2 Guangxi 2 Yunnan 2 Zhejiang 1 Ongoing Shaanxi 2 Sichuan 2 Liaoning N/A Finished or ongoing tender Potential future tender Provincial tender timeline (2010-14F) China medtech market access and tendering 14
  16. 16. CONFIDENTIAL Successful provincial tendering and overall market access requires thoughtful coordination across company functions, as well as greater manufacturer involvement with the government and other stakeholders MNC actions  Align strategy on a national basis – pricing consistency, guidelines, quality differentiators, communications points  Align strategy and tactics on provincial basis – understand the criteria and the timelines, design product line up and pricing based on provincial criteria and competitive landscape  Actively publish and demonstrate technical and clinical quality of products  Prepare for or support distributors in the provincial tenders; ensure sufficient baseline resources as well as swing resources to cover peak demand  Maintain relationships with national and local expert panels to better manage the potential award of subjective points (e.g. brand reputation)  Maintain relationships with tendering agencies to ensure fair scoring of products, resist pricing pressures and monitor competitive moves on tenders  Influence government on quality categories, e.g. to allow innovation participation for multinationals, either directly as a company or with industry associations Source: L.E.K. analysis China medtech market access and tendering We welcome your input and ideas! 15
  17. 17. CONFIDENTIAL While not always the same, there are some parallels in the government regulation and control of pharma and devices in China  Have been required for all innovative drugs and imports Source: L.E.K. analysis China medtech discussion Clinical trials “Green channel” registration Domestic manufacturing Price cap Mark up control / monopolistic pricing Reimbursement Tendering and listing  Continued debate on necessity for imported products and re-registration  Generally perceived to be lower hurdle than drugs Pharma Medtech  Introduced in 2009 for domestic (now domestically manufactured) innovative drugs for unmet needs  Began discussions in 2013 for innovative product registration or re-registration  Not explicitly required, though might benefit from alternative registration pathways (including green channel)  Not explicitly required except for CHC tenders  May enjoy higher reimbursement  Controlled by NDRC; periodic review and retail price cap reductions  NDRC technically without authority to cap medtech  Have outlined policy in previous drafts  Periodic review  2013 audit of 60 companies (27 mfg. and 33 dist.)  Debate on potential price reform  Periodic drafts on mark up control  Alternative approach is direct sales  Active court action in 2013  Provincial tendering is an entry hurdle, with select benefits for imports or high quality  EDL tendering is winner takes all  Hospital limited to 2 brands per product  Provincial tendering re-introduced, key is to not lose  CHC tenders require domestic manufacturing  No regulatory limit on brands in hospitals  National and provincial lists  Some exception lists at local city level  New programs, e.g. critical illness, being introduced  May already be included in services fee or DRG  Need to specifically apply at the local level if not included in surgery, with differential between import vs locally mfg’ed 16
  18. 18. CONFIDENTIAL 17 We are happy to further discuss market access, pricing and commercial issues to support your life sciences strategy and strategy activation China medtech discussion Examples of published insights on life sciences (2013)  Expanding in China MedTech Market: Where To Go From Here, In Vivo  Customer Excellence: Business Model Innovation for MedTechs  Investing in Health, EuroBiz  Looking After China’s Elderly, China Business Review  Tackling China’s EDL Challenge: Navigating the Changes and Planning for Success, PharmAsia Newsletter  Hospitals Adopt New Strategies to Boost Profitability, but Still Face Deep Challenges: A New Imperative for MedTech  Biopharma & Life Sciences Outlook 2013 Please email us at lekchina@lek.com to receive these articles, or Go to our website directly www.lek.com/China_Publications www.lek.com/medtech www.lek.com/life-sciences
  19. 19. CONFIDENTIAL Los Angeles Chicago Boston San Francisco London Paris Milan Singapore Tokyo Beijing Shanghai Bangkok Melbourne Munich Sydney Auckland New York Mumbai New Delhi eÉäÉå=`ÜÉå iKbKhK=`çåëìäíáåÖ pÜ~åÖÜ~á ÜKÅÜÉå]äÉâKÅçã HUS=ON=SNOO=PVMM äÉâKÅçã Sao Paulo Chennai Seoul