expanding in china's medtech market: navigating market access and tendering

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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August 7, 2013

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Expanding in China’s Medtech Market: Navigating Market Access and Tendering

CONFIDENTIAL1

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

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, PartnerHead 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, PrincipalLeader in Life Sciences

Introduction

2

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

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

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

5.15.5

6.3

8.4

8.9

13.314.0

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 EIUSource: 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

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


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

CONFIDENTIAL

Hospital

Consumables Equipment

Low-end High-end Low end High endSyringe, scalpel, suture, forceps, etc.

Implant/ invasive and surgicaldevices

ECG, PoC diagnostic devices, etc.

CT, 3D ultrasound colour doppler, etc.

Level 3hospital

Imports preferred when

possible


possible


possible


possible

Prefecture city Level 2 hospital

Mixed preference

Mixed preference

Mixed preference


possible

County Level 2 hospital Mostly local Mostly local Local preferred


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


7

CONFIDENTIAL


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

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

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’ dutiesinclude− 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 procuremente-platform

Can only purchase from manufacturer finalists

Medical consumables in mandatory product listInstitutions that need to comply with the regulation


How should medtech companies prepare for the new tendering rules?

Source: L.E.K. analysis 10

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? FailNo

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

YesPrice > 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

NoWinners

50% votes FailNo

Yes

Winners

Fail

Fail

FailManufacturerProvincial Tender Center

Key activity participant

Source: Beijing tender documents, L.E.K. research and analysis

Product categorization


When in a group of 3+ contenders, the manufacturer can adjust their prices to avoid being the first or the second highest in the groupManufacturers 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 contendersWhen 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

criteriaWeigh by category Measurement Weight

Quality 57 Clinical efficacy 12Quality 20Brand 10Packaging quality and practicallevel of the product

4

Scale of manufacturer 11Credibility / after service

7 Historical credibility of manufacturer

4

Historical credibility of delivery 3Innovation 6 CE approved or FDA approved

products or the manufacturer is registered as Chinese Innovation Demonstration Enterprise

6

Price 30 Bidding price 30Total 100 100

Expert panel scoring criteria and weight (Beijing)

11

CONFIDENTIAL

The review process and criteria vary by province, but the “Technical” element, which includes quality, is in general an important consideration


Source: Provincial tender documents, L.E.K. analysis

“Technical” criteria weighting for provincial tender

<50%

50% – 70%

>=70%

No scoring criteria disclosedNo 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

CONFIDENTIAL

Examples of bid-winning stents show that MNC and domestic products have similar chances for success


Note: * TW = Technical criteria weightingSource: 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 MNCMicroPort Domestic Vascore DomesticBiotronik MNC Zhongke Tiancheng DomesticAbbott MNC Lepu Medical DomesticOrbusneich Medical MNC Biotronik MNC

Medtronic MNCAbbott MNCJohnson&Johnson MNC

Drug Eluting Stents (DES)

Sino Medical Domestic Essen Domestic Lepu Medical DomesticEssen Domestic Sino Medical Domestic MicroPort DomesticJW Medical Domestic MicroPort Domestic Abbott MNCLepu Medical Domestic JW Medical DomesticMicroPort Domestic Bimedical Material DomesticMedtronic MNC Lepu Medical DomesticBoston Scientific MNC Boston Scientific MNCB.Braun MNC Medtronic MNC

Abbott MNCB.Braun MNC

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

Com

plet

ed

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

Ong

oing

Shaanxi 2

Sichuan 2

Liaoning N/A

Finished or ongoing tender Potential future tender

Provincial tender timeline (2010-14F)


14

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 stakeholdersMNC 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



We welcome your input and ideas!

15

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


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

CONFIDENTIAL17

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 [email protected] to receive these articles, or Go to our website directly

www.lek.com/China_Publicationswww.lek.com/medtechwww.lek.com/life-sciences

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