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The China Medical Device Market:

Opportunities & Challenges
January 14, 2010

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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.

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China medical device market overview

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CONFIDENTIAL

China Medical Device Market Overview.

China medical device market overview

Like nearly all markets in China, medical devices have seen explosive
growth over the past decade; this trajectory is expected to continue
China medical device market
Historical market value*
(2001-08)

CAGR%
(2001-08)

China medical device market

Projected market value*
(2008-12F)

Billions of US dollars

Index to 100 = $8.8B (2008)

10

250

8.8

CAGR%
(2008-12F)
Analyst reports
Case #1 25%

26.5

Case #2 24%
8

Case #3 20%

7.1
200

5.4
4.1

4
150

2.9
2

1.7 2.0

2.4

2001 02

03

04

05

06

07

08

100
2008

Note: * At price to dealers, including both equipment and consumables

Source: Goldman Sachs, UBS, L.E.K. analysis
China Medical Device Market Overview.

09F

10F

11F

12F

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China medical device market overview

The diagnostic imaging segment remains the largest, with strong growth
coming from implantable devices
Chinas medical device market,
by product segmentation
(2009)

Cardiovascular

Percent
100
90

27%

Other

2%

Dental products

13%

Orthopedic and
implantable products

20%

Consumables

60
50

Heart lung machines

Pulmonary

80
70

ECG

Incubators
Ventilators

Dental implants

Pacemakers
Stents

40
Catheters

30
20

39%

Syringes

Diagnostic imaging

10

X-ray machines
MRI

Source: Espicom Business Intelligence, DeviceLink.com

China Medical Device Market Overview.

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China medical device market overview

Underlying market growth is attributable to an aging population, increasing

rates of disease incidence and prevalence, and rapid increases in wealth
Driver

Impact on
growth

Commentary
The patient base is expanding due to:

Changing
patient population

- an aging population, as the population aged 50+ is expected to

increase from 21% in 2005 to 32% in 2020

- increasing incidence / prevalence rates brought by changing

lifestyles, e.g., prevalence rate of cancer in urban China increased

from 25% to 33% since 2003
Access to care in China is fueled by:

Access
to care

- expanded insurance coverage

- public & private healthcare investment
- urban population growth

China is one of the worlds fastest growing major economies

- China has achieved GDP growth of ~9% p.a. for the past 20+ years

Economic growth

Source: L.E.K. analysis

China Medical Device Market Overview.

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China medical device market overview

Many of the worlds largest companies are building a substantial presence;

there are also some up and coming Chinese players
Rank

Company

2008 revenue
(Worldwide)

2008 revenue
(China)

Year of China
entry

J&J Medical

$23.1B

$500M

1994

GE Healthcare

$17.4B

$700M

1991

Medtronic

$13.5B

$300M

1989

Baxter International

$12.3B

$200M

1988

Philips Healthcare

$10.7B

$1.1B**

Unclear^

Covidien

$8.9B

$65M*

Unclear^

10

Abbott Laboratories

$7.2B

Unclear^

1995

Rank

Company

2008 revenue
(US$M)

Employees

Launch Year

Mindray Medical

547

5,500

1991

Shandong Weigao

200

9,800

1988

Microport

61*

650

1998

Yueyue Medical

59

1200

1999

Lepu Medical

58

500

1999

Note: *2007 revenue; **Includes other key emerging markets; ^Unreported entrance date / revenue from China
Source: Medical Product Outsourcing, LEK interviews and analysis
China Medical Device Market Overview.

Sam
p
dom le of for
e
esti
c pl ign &
aye
rs

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China medical device market overview

Higher value devices have historically been dominated by foreign imports,

although now that is changing due to both market and non-market forces
China medical devices trade (2003-2008)
Billions of US dollars
6

Imports
5
3.7

3.8

5.3
0.6
4.3 0.2

3.1
3

2.5

High-end equipment is mostly imported to

China, while domestic manufacturers
produce most mass-market equipment

Imports are growing slower than the overall

market as foreign suppliers are increasingly
establishing a local Chinese presence

Going forward, these foreign suppliers are

expected to meet unique challenges:

4.3

Consumables

Medical dressing

Healthcare products

12

11.1
Exports

10

1.9

Dental supplies
Medical technology

8.4

6.9

3.1

5.3

2.3
0.2

4.1
4

Chinese medical
device imports are
mostly high-value
medical technology

3.2

Chinese medical
device exports are
mostly low-value
disposable products

05

06

07

Healthcare reforms limiting expenditure

on foreign-produced devices

Process and technology regulations on

sales of high-end medical devices

Top quality technologies to deal with

developed nation diseases like
diabetes and heart disease

08

Source: General Administration of Customs, China Now: Medical Products, LEK analysis
China Medical Device Market Overview.

Price caps on imported products

However, the market is expected to see

growing demands for high-end technology

3.6

2003 04

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China medical device market overview

However, against countries with mature markets, Chinas medical device

market is still undeveloped considering its population
Medical device markets*, by country
(2009)
Billions of US dollars
100
100
20
20

18

15
9

10

8
7

8
6

0
U.S.

Japan Germany France

UK

Italy

Brazil Canada Spain

Population

304M

127M

82M

62M

61M

60M

192M

33M

Per capita,
Market size

$329

$157

$223

$139

$138

$138

$34

$173

Source: Espicom, Global Data, DeviceLink, L.E.K. analysis

China Medical Device Market Overview.

Switzerland

India

Mexico China

46M

8M

1.1B

106M

1.3B

$107

$513

$3

$18

$6

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China medical device market overview

China has just announced major new reforms designed to dramatically

expand healthcare access
Increase medical
insurance coverage

By 2011, China is expected to cover 90% of the rural and urban

population with basic insurance coverage through increased subsidies,
driving demand for lower-end medical services

Build a basic
medicine system

China plans to create a system to drive demand for medicines included in

the Essential Drug List, to be purchased through open tender and unified
distribution channels

Upgrade grassroots
medical institutions

China aims to increase investment in lower level medical infrastructure to

upgrade ~13K medical institutions by 2011, expanding basic care for the
wider population

Equalize services in
rural & urban areas

Efforts are expected to increase rural area public health services to equal
existing level of service in urban areas; expansion of basic programs and
major projects will be driven by change in grassroots medical institutions

Public hospital
reform programs

Reforms to the administration, operation and supervision of public

hospitals are expected, which will including transforming some public
hospitals into privately-owned institutions

Source: State Council, The Economic Observer Online, L.E.K. analysis

China Medical Device Market Overview.

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China medical device market overview

This major infrastructure expansion will drive significant growth in the

medical device market
Repositioning of medical institutions
Key Implications

2020

2008

Top
hospitals

Top
hospitals

Top hospitals will continue to handle

advanced procedures; remain a main
customer of advanced devices

Mid-scale
hospitals

Initial demand for basic medical

devices from development of a larger
base of lower tier hospitals

Lower level
hospitals
Community
health centers
Grassroots
medical
institutions

Ongoing demand for consumable

devices at country level institutions
due to increasing patient base

Rural healthcare system

Current system:

Future system:

Patients treated in
crowded top hospitals

Initial treatment in
rural or community level

Companies focus efforts

selling to top hospitals

Utilization of different
levels of medical services

Source: State Council, UBS, L.E.K. analysis

China Medical Device Market Overview.

However, future regulations and

government funding support may have
adverse impact on foreign suppliers

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China medical device market overview

To be successful in the Chinese medical device market, companies need to

be mindful of the following points
Complexity of market

1 Huge socioeconomic diversity of Chinas population & healthcare infrastructure

2 Wide variations in awareness and adoption rates

3 Wide variations in insurance coverage and ability to pay

Operational challenges
4 Intellectual property protection: active management is required

5 Changing procurement, pricing, and regulatory policies

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China Medical Device Market Overview.

10

Socioeconomic diversity

China medical device market overview

Overall, existing resources are highly concentrated in the more developed

cities, which has implications for suppliers sales and marketing efforts
Number of 3A hospitals vs. Urban resident disposable Income,
by City
(2008)

50

Beijing

Tier 1

40
Guangzhou

Shanghai

Tianjin

30

Wuhan
Harbin
Chongqing
Xian
Shenyang
Chengdu

Tier 2

20
10

Lanzhou

Hangzhou
Nanjing
Jinan

Shenzhen
Wenzhou

Tier 3
0
500

1,000

1,500

2,000

2,500

3,000

Annual urban resident per capita disposable income

(2007, US$)

Dongguan

3,500

4,000

Tier 1 cities
Tier 2 cities
Tier 3 cities

Source: China Healthcare Yearbook 2009, China Statistics Yearbook, L.E.K. analysis
China Medical Device Market Overview.

11

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Awareness & adoption rates

China medical device market overview

Future growth will also be highly impacted by a variance in socioeconomic

development, which creates significant discrepancies in disease awareness
YYY diagnosis rates,
by city tier
(2009E)

XXX diagnosis rates,

by city tier
(2009E)

Percent

Percent

100

10

80

60

40

20

2
0

0
Average of
Tier 1 cities

Average of
Tier 2 cities

Average of
Tier 1 cities

Average of
Tier 3 cities

Average of
Tier 2 cities

Average of
Tier 3 cities

Suppliers educational efforts, especially for physicians, has been and continues to be vital in
expanding disease awareness and thus the addressable markets
Source: China Healthcare Yearbook 2009, China Statistics Yearbook, L.E.K. analysis
China Medical Device Market Overview.

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Awareness & adoption rates

China medical device market overview

Differences in physician and patient education drives varying adoption rates

of medical devices across product categories and city tiers
Development stages,
select medical devices

Device
adoption
in China

fi

ir

Device penetration rates,

by city tier
pq
o

^q

Percent
fs
b

Newer products
include various
stents, ports, etc.

ir

pq
o

40

^q

30

Mature stage products

fs
b

Introduction-Expansion
stage products
20

Mature products
include various
catheters,
needles, etc.

Introduction
stage

fi

Expansion
stage

10

Mature
stage

Tier 1
City

Tier 2
City

Tier 3
City

Device development stage

Professional medical education by suppliers could accelerate adoption curves for newer products
Source: L.E.K. interviews and analysis
China Medical Device Market Overview.

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Insurance coverage & ability to pay

China medical device market overview

Imbalanced income levels and a complex medical insurance system have

also created varying degrees of affordability, constraining market
development of some high value medical devices
Annual per capita medical spending,
urban residents by province
(2007)

Drug reimbursement rate of Basic Medical

Insurance* for outpatients
(2008)
Tier 1
cities

Shanghai
Beijing
Hangzhou

Tier 2
cities
Per capita annual
medical spending

Tier 3
cities

>US$150
US$100-150
US$70-100

Suzhou
Jinan

Not reimbursed

Jinhua

Not reimbursed

Nantong

Not reimbursed
0

<US$70

20

40

60

80

100

Percent

City-specific insurance programs differ widely in device coverage and reimbursement rates, as
well as annual reimbursement caps
Note: * The main insurance program in China covering urban employees
Source: China Healthcare Yearbook 2009, L.E.K. case experiences
China Medical Device Market Overview.

14

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IP protection & trade secrets

China medical device market overview

IP protection in China remains an issue compared to some more developed

countries, who offer IP protection comparable to the West
Strength of IP protection, by country*
(2008-2009)

Trade secrets are protected by Chinas

Unfair Competition Law (1993),
prohibiting all who engage in
commercial operations from falsely
obtaining technology

Country score
7

6.3

6.2

5.8
5.4

Technology owners also have rights

under various IP laws and the Civil
Law, whereas technology contracts are
required to contain confidentiality
provisions

5
3.9

4
3
2

The New Employment Contract Law

(2008) also allows confidentiality
provisions for trade secrets and
intellectual property

1
0

Singapore Australia

New
Zealand

Hong
Kong

China

China has made improvements, particularly in urban areas, although enforcement can still be a
concern, especially in developing countries
Note: *Scores based on responses from executive survey. Executives from 130 countries were asked to rate IP
environment in their country on a scale from 1 (weak / not enforced) to 7 (strong / enforced)
Source: World Economic Forum Global Competitiveness Report 2008 - 09
China Medical Device Market Overview.

15

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Patent Law specifics

China medical device market overview

Chinas Patent Law was revised through the Third Amendment (October
2009), impacting how companies will compete for patents
Ongoing challenges

Key changes in Chinas Patent Law

Historically, China maintained loosely monitored

patent laws, as patent infringement and
counterfeiting was a commonplace occurrence

Patent invalidation will be tougher to prove, as

the law will allow for public use evidence outside
of China to be applicable (i.e., absolute novelty)

In 2001, when China joined the World Trade

Organization, it appeared to be an initial step
towards correcting the structure supporting
intellectual property rights to spur additional
investment in high value products

Patent litigation will be tougher to enforce as

international exhaustion clauses will allow for
legal importation of products outside of China,
regardless of any remaining domestic patents

However, despite best effort appearances, the

Patent Law language remains far from clear,
allowing for future potential for ambiguous rulings

Going forward, the laws language will also allow

for the government to force compulsory licenses
(e.g., during public health crises)

Additionally, there also remains continued

potential for local protectionist biases within
regions of China, which might result in push back
against central legislative efforts

Finally, revised rules on the patent application*

process (i.e., order of domestic vs. foreign patent
application submissions) will force companies
with local R&D centers to ensure their strategy
does not invalidate their patent applications

Despite recent changes to Chinas Patent Law, foreign-based suppliers should use proper
caution and diligence in developing strategies based on patent protection
Note: *Patent applications are reviewed by the State Intellectual Property Office (SIPO)
Source: China Business Review, Jones Day Commentary, Medical Device Network, L.E.K. analysis
China Medical Device Market Overview.

16

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IP protection & trade secrets

China medical device market overview

Market entry strategies must be driven by careful planning, due diligence,

and contracting, plus ongoing operational monitoring
Planning &
due diligence
Separate functions within
local operation so that no
single person has all the
technology

Contracting
Specify payment or
performance terms, scope
of grant, and provisions for
audits

Conduct background checks Ensure proper legal closure

steps when contract is
on key personnel, Chinese
signed
partners, and reputation of
local area
Include non-compete
covenants for partner and
Evaluate the property or
key personnel, complete
assets being included as
with specific compensation
contributions by local
for covenants
Chinese partners

Ongoing
monitoring
Ensure proper security
protocols in place for lab
work, data, and trade
secrets
Consider installation of
firewalls, surveillance
equipment, or onsite
representatives
Conduct training on
professional ethics,
confidentiality, and security
measures

CONFIDENTIAL
China Medical Device Market Overview.

17

Regulations & policies

China medical device market overview

Finally, the industry faces additional hurdles in tendering, pricing,

technological restrictions, and other regulatory challenges
Central tendering

Price controls

In 2007, the Ministry of Health (MOH) created

a mandate to strengthen central control of
medical device sourcing for state-owned nonprofit hospitals

NDRC* is reviewing regulations to further

reduce the mark-up caps on implantable
devices, forcing prices below the competitive
price rates required for foreign suppliers

MOH is planning to establish a formal

evaluation and selection system for medical
devices, by applying qualification standards

This would result in suppliers of imports

having less flexibility to achieve adequate
margins to cover the cost of distribution

Technological restrictions

Regulatory challenges

The MOH also requires approval from the

government before hospitals can purchase
high-value medical devices
This process can result in biases towards
established or favored medical devices, and
can deter physicians from proactively
educating themselves on new equipment

NDRC is looking to expand a policy requiring

direct sales for all medical devices in China

The introduction of this policy would heighten

competitive barriers for foreign suppliers, who
would be forced to make significant
investments in domestic direct sales networks

Note: * NDRC: National Development and Reform Commission

Source: China Business Review, Ministry of Health, SFDA, Goldman Sachs, L.E.K. interviews and analysis
China Medical Device Market Overview.

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China Medical Device Market Overview.

19

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