China's Medtech Market at a Tipping Point

New accelerator MedTecX aims to help bring innovative medical device technologies to the rapidly changing China market.

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For a long time, Western medtech companies found a ready market for their devices in China among a top-of-the-pyramid market segment that was large in absolute terms, though small relative to the size of the Chinese population. Featuring wealthy, Western-oriented Chinese patients and physicians who were often trained in the West, this market segment preferred devices developed in the West and sold by Western companies because they were perceived to be of higher quality than anything available from local companies.

But as Chinese companies matured and their products came to market at lower prices than Western companies could afford to sell theirs at, the historical advantages Western companies enjoyed have diminished.  Reimbursement in China also tends to favor local companies since, depending on the province or geography, in many product areas, patients cover less of the cost out of pocket for locally made products.

Does this mean that China as a market will gradually become less accommodating to Western companies, which will be replaced by Chinese nationals?  Such a view may be too black-and-white. Even as China’s local industry grows, there’s still room for Western companies, according to Lifei Cheng, PhD, founder and CEO of new accelerator MedTecX, which aims to play a central role in bringing innovative device technologies to China.

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“People have a sort of nationalism, that pride that comes from promoting local companies,” the former Medtronic plc executive says. “But multinationals have led development of new therapies with global reach and made tremendous contributions to the China healthcare system. Without those imported products, local industry would never have developed in the first place.”

More to the point, Cheng argues that there will always be 20% or so of Chinese patients and physicians who will favor Western companies “regardless of price just because of the perception of quality and reliability,” he says. “It’s a status thing.” For Cheng, the way to view the Western vs. local dynamic is as collaborative not adversarial, not coincidentally an important part of MedTecX’s strategy.

Cheng argues that China’s local medtech industry has gone through several generations, all in a relatively short period of time (see Figure 1). Generation One saw the emergence of several strong local/national players, most notably companies developing drug-eluting stents, which have been successful in all but shutting out foreign multinationals. Today, three Chinese companies, MicroPort Scientific Corp., Blue Sail Medical Co. Ltd. (which inherited its DES business when it acquired BioSensors), and Lepu Medical Technology (Beijing) Co. Ltd account for the vast majority of the DES sales in China. “It used to be that local companies had 20% of the market and 80% were imports,” he says. “Now actually, the local companies are taking 80% and imports are only 20%.”

Cheng concedes that most of the generation-one products were “simply knock-offs of imported products,” he says. [Chinese companies] came up with something that Western companies were importing and sold them at significant discounts to those imports. Such a dynamic, however, is far from widespread—Cheng notes that similar dynamics have played out in some orthopedic and surgical instrument lines and are expanding across the board but is far from covering all product lines. Still it does show how effective Chinese companies can be in controlling the local market. Indeed, it was the success of the local Chinese DES companies that sparked Medtronic’s strategy of taking a local approach via acquisition, joint venture, and local manufacturing, the first of which was the 2012 acquisition of orthopedics company Kanghui. (An earlier joint venture in orthopedics with Shandong Weigao Group Medical Polymer Co. did not prove successful.)

For Cheng, the second generation of China’s medtech industry has involved new, more advanced technology developed in the West, though not through simple knockoffs but rather with novel innovation coming from Chinese companies. The best example: transcatheter aortic valves or TAVR. Just in the past year or so, two Chinese companies, Venus Medtech and Suzhou Jiecheng Medical Technology Co. Ltd., have received approval to sell TAVR devices in China, before Edwards Lifesciences Corp. and Medtronic, both of whom have been on the US and European markets for almost a decade. Cheng calls such approvals “a game changer” in its implications for how the Chinese medtech market is evolving. In the past, he notes, Western companies would be the first to enter the market with innovative technology, only to see local Chinese companies follow and, in selected cases, take share away with so-called knock off products. “This is the first time the local companies got to the market first,” he notes. Just as importantly, being first to market, Chinese companies going forward will have the advantage of incumbency and won’t have to offer dramatic discounts or prove clinical superiority as they establish a foothold and build their business.

The third generation of Chinese medtech, as Cheng sees it, has just started and will entail novel innovation on the part of local companies but benefiting from a more systematic approach to technology development—a kind of grassroots innovation born within China’s expanding engineering and clinical communities. But while the second generation of China’s medtech community largely pitted Chinese companies, developing technology on their own, against Western rivals in selected product areas, the third generation will feature what Cheng calls “cross border collaborations that will jump-start innovation” because they don’t depend for their success on Chinese companies inventing everything by themselves.

“The third generation of Chinese medtech will feature what Cheng calls “cross border collaborations that will jump-start innovation” because they don’t depend for their success on Chinese companies inventing everything by themselves.

Given his background at two US-based companies, Merck & Co. and Medtronic, Cheng has seen first-hand how cross border collaborations work and argues that the next generation of Chinese companies won’t simply rely on “market savvy,” to fuel success, but will begin earlier, creating “development hubs,” that can “localize and optimize product to tailor” products for the China market.

Key to this next generation: a hunger in China for novel technology to address the needs of China’s expanding healthcare system. According to this view, Chinese companies and investors are less interested in looking outside, trying to create companies with global reach, than looking inside, searching for advanced technologies to serve in Chinese patients. In such a scenario, Western companies, both big multinationals and small start-ups, aren’t competitors but potential partners, and Chinese companies and investors “don’t have to start from scratch” in their search for innovative technologies, says Cheng. “They can begin with what has been developed in the US and Europe but really help accelerate that” for the China market. And that’s where MedTecX comes in.

By David Cassak, Editor-in-Chief, MedTech Strategist