BRIC by BRIC
Lots of opportunity is seen in “developing” markets, but companies are taking a measured approach to exploiting them.
U.S. firms are building their presence in emerging international markets, often one BRIC at a time.
That’s BRIC as in Brazil, Russia, India and China, the keystones of today’s emerging-market strategy.
A survey released earlier this year said the global medical devices sales market is expected to see healthy gains over the next five years, due to an increase in demand from these emerging markets.
According to the survey by Emergo Group, a global medical device regulatory consulting firm based in Austin, Texas, U.S. device manufacturers also expect the international sales rate to continue to outpace domestic business this year. Of the more than 2,600 medical device firms surveyed, 53 percent reported increased international sales in 2011, compared with 42 percent of respondents who reported growth in domestic sales last year.
More medical device firms said they would pursue global business development in the BRIC countries that are expected to have the highest five-year growth potential.
Tim Durst, a principal with the PricewaterhouseCoopers (PwC) PRTM Management Consulting unit, says the opportunities for U.S. medtech companies in India are huge, but urged a “quick, well-thought-out” response to the market opportunity in India. “The opportunities are real,” he said, but “given the dynamic nature of the Indian healthcare market, companies will need to reassess their business and operational strategies on a regular basis.”
Damon Canfield, a principal in NPI, a Columbus, Ohio-based consultancy that specializes in helping U.S. medical product firms launch into the Chinese market or establish manufacturing there, sees plenty of opportunities for U.S. firms in China—both in selling and manufacturing there —but warns: “You’ve got to know what you’re doing. If you don’t know what you’re doing, or you don’t go well-informed or with the right plan, then you might as well stay home.”
And even with a “yes” answer to all those factors, there’s nothing even remotely easy about the process.
“I’ve been saying as a rule of thumb over my 20 years of working there that everything in China is difficult, but everything’s possible,” Canfield said, adding that rule No. 1 is to be committed to China for the long term.
“If you’re not able to commit to some fundamentals, it’s a tough thing,” he said. “But if you do it the right way, there are really big opportunities.”
Medtronic Inc.’s CEO, Omar Ishrak, has made clear his view that emerging markets are going to be a growth engine for the Fridley, Minn.-based device company going forward.
At the annual shareholders meeting last August, just weeks after joining the company, Ishrak said that marketing its products to countries where emerging middle classes are demanding higher-quality medical care is less of a risk than the R&D costs of coming up with new products to serve a flat domestic market.
The new CEO said that having a growth target of the growing middle class in China, India and other emerging countries may be “potentially less risky than creating new products for the flat U.S market. The biggest long-term opportunity will be to meet the needs of billions of people who have no access to healthcare at all.”
Saying that the population in emerging markets “is tenfold that of developed countries,” Ishrak added that “these statistics are further compounded by the fact that the U.S. market is essentially flat, [so] reaching the global middle class opens up opportunities to us beyond anything we’ve ever seen before.”
He said, for example, that there already are 200,000 to 300,000 people in the middle class in India who could afford many of Medtronic’s technologies right now, with millions more as possible users by helping to build the healthcare infrastructure in that country.
Ishrak noted that the Chinese market could be larger than the U.S. by the end of the current decade. Combining those markets with opportunities in Brazil, Russia and other emerging markets, he set a goal of reaching 25 million patients by 2020.
In order to advance the growth metric, he said Medtronic is looking for acquisitions abroad to bring the company’s technologies to local markets. The company is going to do things “organically as quickly as we can,” Ishrak said, “but to the extent that we can accelerate the process through acquired platforms outside the U.S., we’ll do that.”
As part of the reshaping plans, Medtronic created eight distinct geographic regions that give added emphasis to the attention on developing markets. They include the United States, Western Europe/Canada, Latin America, Greater China, Asia (including Japan), India, Middle East/Africa and Central and Eastern Europe. Medtronic officials predict that the company will double the number of its Chinese employees in the next four years.
Smith & Nephew plc, the London, United Kingdom-based orthopedic powerhouse, which ranks as the world’s fourth-largest orthopedics firm, in early May singled out Brazil as a developing country that is of particular interest. CEO Olivier Bohoun told investors that, as part of its new push in the emerging markets, Smith & Nephew is looking to increase business in Brazil sevenfold.
Bohuon said the company’s revenues are growing at a 20 percent clip in China and India, and that the firm is eyeing Brazil as its next big growth driver.
“BRIC [sales] are growing more than 20 percent, and this is mainly given by China and India.” He said the company is “very active” in these two countries, [but] Brazil is [just] starting. He said Brazil potentially is more than $150 million in revenue annually, and forecast “strong development” there.
He said Smith & Nephew does about $20 million in sales in Brazil currently, but is planning to make local investments to spur substantial growth. Having recently hired a general manager for Brazil, the company plans to expand its presence in that country over the next several months.
“Now that we have the general manager, the strategy will start to happen,” Bohoun said.
“Manufacturing is a big plus when you can do it locally.”
Smith & Nephew last year launched a plan to realign itself for a focus on growth, with a big commitment to the BRIC countries, where it hopes to grow sales from $120 million to $500 million in the next five years. In a December 2011 interview with Chicago-based independent investment research firm Morningstar, Smith & Nephew’s head of corporate affairs, Phil Cowdy, acknowledged the company’s elevated interest in the BRIC countries.
“With emerging markets, we certainly believe that there are significant opportunities. I think the size of the population, [and] their wealth is very well-documented,” Cowdy said. “In addition to that, those populations are clearly aging. Those countries’ populations are demanding high levels of healthcare, and the governments are putting more money into it.”
So how is Smith & Nephew addressing these markets?
“Well, we’re investing more,” Cowdy said. “We are very much focused on the BRIC countries—China, India and Brazil, and Russia to a lesser extent. We are putting in place more sales teams. We have stepped up the amount of medical education we do by a very significant degree. These countries have many trained doctors, but they may not be trained in orthopedics. So, if we offer that training, they both benefit, and they get used to our products and the Smith & Nephew brand. Hopefully, they become loyal customers after that.”
He said that in order to be competitive in those markets, his company is looking to tailor the products that it sells.
“We are developing a range of products we would call good-quality products, but they come at a price point more appropriate to the mass market,” he said. “If we deliver that, then we believe that we will get the growth that is clearly there.”
Cowdy noted that Smith & Nephew really just entered China “seriously” two or three years ago.
“We have a business now there of just under $100 million,” he explained. “We have a small business in India and a small one in Brazil. We aspire during the next five years to increase that to $500 million.”
Other orthopedic firms are following similar paths to fortune in the Far East. Late last year, Zimmer Holdings Inc. of Warsaw, Ind., opened a research and development center in Beijing to create new technologies designed specifically for the Asian market.
Current sector top dog Stryker Corp. has a three-way plan in China that includes a manufacturing facility in Suzhou, an orthopedic learning center at the Chinese University in Hong Kong, and a mobile training unit that toured 10 Chinese cities last year. The key piece is the university-based program, with some 1,500 surgeons being trained over the past decade.
The mobile training effort involves a truck equipped with medical devices and other tools, which goes to many regions with very limited access to advanced medtech and educational resources. With the truck’s visits, local healthcare workers are able to receive hands-on training with Stryker products.
“Healthcare resources are primarily concentrated in China’s largest cities,” William Jin, managing director, Stryker Greater China, said. “Surgeons and other healthcare professionals in smaller cities lack access to advanced medical technology and the opportunity to learn new clinical techniques due to deficiencies in funding and facility space. Stryker is the first medical technology company in China to provide a mobile training solution.”
Peter Hughes, of Check Capital Management, said in a research report that Stryker “will benefit from fast-growing middle classes in developing countries. Demand for these treatments will almost certainly continue to grow in China, India and other emerging markets.”
Stryker is represented in 120 countries, generating some $7.32 billion in revenue.
And Johnson & Johnson, the New Brunswick, N.J.-based medical product powerhouse whose DePuy business is the second-largest global player in the orthopedics space, has just reported acquiring its first Chinese company. JNJ bought Guangzhou Bioseal Biotech for an undisclosed amount. The company has developed a sealant used to control bleeding during surgery, the only porcine plasma-derived fibrin sealant approved for use in China.
While the acquisition made news, it didn’t mean an entirely new area of business for the company—J&J has been conducting business in that country for more than a quarter-century. It launched a medical device and diagnostics innovation center there just last year.
Xie Wen Jian, president of JNJ’s Chinese medical business, said the transaction “reinforces our commitment to China and delivering innovative medical device solutions to the Chinese market.”
Here’s all you really need to know about the attractiveness of India as one of the world’s next big medical markets: The middle class in that country is forecast to grow from roughly 50 million people just five years ago to 580 million by 2025. That’s right, 580 million—nearly twice the entire population of the United States.
With the medtech markets of most Western countries either slightly down, flat, or meagerly on the plus side, it is little wonder that American medical-device companies, including the major orthopedic players, are busy developing their plans of attack on the “I” in the BRIC matrix.
In a new report from PricewaterhouseCoopers, “Taking Advantage of the Medtech Market Potential in India,” Durst said that the way U.S. firms approach India would change.
“Currently, survey respondents view India primarily as a market for importing and selling their current mature market products, which are mostly developed and manufactured outside of Asia,” he said.
That approach means some 75 percent of medical devices used in India were imported into the country.
Some of the other numbers rolled out in the report speak to the breadth of the opportunity. India has the highest projected annual growth rate in the sector, pegged at 16 percent during the next five years.
It’s starting from a base of a $3 billion medical device market, which trails all the other BRICs (Brazil, $3.5 billion; Russia, $5.1 billion; and China, $7.8 billion), but at that rate of growth will do a lot of catching up on its “developing” brethren. India also has the highest population growth rate of the BRIC complement, as well as what PwC terms “the highest contribution from local medtech suppliers, which indicates a robust supply base and technical capabilities.”
Durst added that most of the respondents surveyed for the report, which was previewed at last fall’s AdvaMed conference but just released in its entirety in early May, “have not seen India as a primary low-cost labor destination or center of excellence for certain business operations.” But as companies turn their attention to innovating specifically for that market, Durst said they “will increasingly use India as a manufacturing and R&D base as well as a source for materials.”
Saying that breakthrough product and business model innovation among medtech companies in India “has been scant to date,” Durst did give shout-outs to GE Healthcare and B. Braun for their efforts to date.
One important strategy, according to the PwC report, is that “some medtech companies are establishing and integrating their India operations with their global low-cost R&D and manufacturing organizations to attain higher quality than local Indian players, but with comparable cost structures.”
Durst said only 40 percent of survey respondents do any manufacturing in India, and 70 percent use third-party local companies as their primary distribution channel. He said the next step beyond these “opportunistic” strategies is to customize or tailor existing products “to address unmet needs and differentiate from those of local and other international competitors.”
Doing so may involve removing “less-valuable” features and substituting with less costly but comparable materials. He cautioned that success over the long run will hinge on a company’s ability to “adapt business models to the priorities of chosen markets.”
Only two of the 18 companies that responded to the PwC survey said they are currently innovating on both the business model and product axis, with six other companies saying they are planning to do so and another six saying they are “optimistic” on both dimensions.
Durst wrote that when it comes to manufacturing, more than 55 percent of the companies surveyed plan to have a manufacturing presence in India in the next three to five years.
Also important is establishing an innovation model that addresses the needs of India and other emerging markets, with an emphasis on understanding market dynamics and customer needs. He cited the example of an unnamed orthopedic trauma device firm that customized its pedicle screws after gathering feedback from Indian surgeons.
“The redesigned device required fewer instruments during surgery, thereby reducing the cost of the loan-sets provided to surgeons,” he said.
A third key, according to Durst, is to strengthen commercial operations “in ways not practiced in developed economies,” including elevated attention to training and medical education.
“The country lacks a standard protocol for therapy,” he said, “and many doctors have little hands-on experience using medical devices.”
NPI’s Canfield, whose firm has offices in Shanghai and Guangzhou, China, as well as Hong Kong, said the most significant barrier for American companies seeking to operate in China “would be a lack of understanding of the process.”
Part of that understanding would be distribution, a challenge everywhere but a really difficult task in a huge country such as China.
“You can’t pick just one distributor,” said Canfield. “There are no clear national distributors in the device sector; the distribution channel has something like 10,000 distributors, sub-distributors and agents. You have to have a regional distribution strategy.”
The potential payoff is obvious.
“It’s easy to get an idea of how big the market opportunity is,” he said. “Just break down the China market by segments, meaning people over 55, people with obesity, people with diabetes, people with heart disease—every one of those segments is growing as a percentage of the population. When you break down the demographics and apply numbers to them, every one of those segments is almost equal to the entire population of the U.S., and it’s growing.”
Even though it’s clear that for the orthopedics sector, the “Big Five” are leading the way, Canfield said the opportunity isn’t limited to the big guys.
“You can be small or midsized” and enter the Chinese market, he said. Small or large, however, reimbursement issues abound.
“There are two things you need to know about reimbursement,” Canfield said. “One is that there is a hospital charge list, and that is how much a hospital can charge a patient for diagnosis or treatment.
Then there’s the reimbursement list, which is how much the patient can get reimbursed for a diagnosis or treatment. You have to be conscious of both of those.”
Insurance packages are built around the reimbursement lists, and insurance varies from province to province in China, so the reimbursement list is not standardized.
“You have the huge populations in sophisticated cities like Beijing and Shanghai and a few others, but then as you get further and further west and you get the lower and lower income of the more rural areas, reimbursement is far more limited,” Canfield said.
With price being far and away the most significant market driver, Canfield said, “You have to understand that before you ever take that first step into the (China’s) State Food and Drug
Administration (SFDA). You don’t even start at SFDA, which could be a two-year process, until after you have a good sense of price versus cost.”
Another key driver is that in China, the average medical device is more than 25 years old.
“So there are a lot of things that are pushing the opportunity for U.S. companies,” he said. “Because it is so far behind, China wants the very latest, most modern technology because it has to catch up.”
Michael Winegar, vice president of regulatory affairs for MedPace Medical Device Inc. in the firm’s Minneapolis, Minn., office, said that at least some of the BRIC countries offer great potential as clinical trial sites for U.S.-based firms.
Speaking during the early-May MedTech Investing Conference in Minneapolis, Winegar noted that none of those countries are found on the list of the top international sites for conducting clinical trials, a list overwhelmingly tilted toward the United States and Western European strongholds of medical technology business. But he said there are lots of reasons Brazil, China, India and Russia might be given more consideration in the future.
Not the least of those is cost, an increasingly important consideration as companies shape their trials. Clinical trials conducted in India, for example, cost a little more than one-third—36 percent—of what they do in the United States. For Russia, the figure is 41 percent, while Brazil and China ring in at 50 percent, according to Winegar’s figures.
He framed his discussion by noting the pros of conducting trials in the United States, leading with the quality of research, accessibility to trial sites and certainly not least, the credibility of the data collected.
That is offset on the cons side by costs—the United States is the leader in that regard—along with dealing with the U.S. Food and Drug Administration and the scrutiny trials get from instant public visibility.
He singled out India and China as having the potential to become much larger players in clinical trials. For both countries, he said the pros include much lower costs, large populations from which to draw study participants, and what he characterized as “motivated researchers.”
On the down side, Winegar said both China and India share data use and credibility issues, regulatory barriers (including whether such results would lead to approvals to export to the United States) and varying standards of care. Additionally in China, he said it can take a long time to get trials approved.
Nonetheless, it’s apparent that some of the world’s largest new markets also have potential for expanding their roles in clinical trials.
Jim Stommen, retired editor of industry publication
Medical Device Daily, is a freelance writer focusing on the medical product sector.