Running in concert with this week’s JP Morgan Healthcare Conference is the OneMed China Forum III. You can find previous coverage of the 2012 event here, and a pre-amble to this year’s event here. Between last year and 2013, what changed was the emphasis on less top-level market analysis and more practical questions about how to go-to-market as a mid-sized medical device, pharmaceutical or diagnostic company in China. Where last year had a heavier emphasis on the Anhui Model, the early results of China’s healthcare reforms, and how these were all combining to alter the landscape (for the better, and for the worse), this year was focused on execution. At some level this is likely a change in focus for the OneMed organizers; at another, it also may reflect awareness by everyone that with the dynamic changes taking place in China’s healthcare market, policy analysis is interesting, but profiling companies who are successful executing is compelling.
A notable exception to this was the opening remarks offered by Dr. Bin Li, the Managing Director and Senior Research Analyst for China Healthcare at Morgan Stanley. While his analysis focused predominantly on the pharmaceutical sector and publicly listed domestic Chinese pharmaceutical companies, his market analysis reinforced the size and growing importance of the Chinese market: it remains the biggest emerging market for pharma, the 3rd biggest overall after the US and Japan, with an overall growth rate over the last five years between 25-30% a year. Pharma remains a challenging market in China. As Dr. Bin pointed out, “the pharmaceutical market is highly fragmented, there are tightened regulation and price controls, fierce competition in low-end generic market, and an over-reliance on hospital sales.” While transitioning from his pharma discussion, Dr. Bin made an interesting comment: “In my view, perhaps the most exciting sector in the next 10 years is the healthcare service industry.” What does this include? Private hospitals specifically, but also senior care, and home healthcare.
The device market is growing in importance, largely because the upside potential for device sales is so high. Dr. Bin pointed out that “drug versus device sales are 9:1 in China now versus 3:1 in the US today.” Devices may be where the pharma market was a decade ago: early into their broad adoption by healthcare providers and consumption by new healthcare consumers. This will change, and price pressures will mount, but for the time being, device manufacturers may benefit from bigger game being hunted (i.e. pharma). He added, “Devices also have lower regulatory and technical hurdles in China compared to drugs. Devices are likely to grow faster than pharma.”
One final point that Dr. Bin made which I found important: domestic Chinese drug pharma companies are moving up the value chain. This is the result of several factors, not least of which is China’s concerted efforts as part of their national economic planning to create technology transfer protocols that entice multinational pharma to develop technology for the Chinese market in the Chinese market. He noted that the “old view of Chinese domestic pharmaceutical companies was that they do not have innovation capabilities … they are on their way to becoming a R&D powerhouse.” Specifically, Dr. Bin pointed to 30 class 1 (novel) drugs brought to market between 2003 and 2010. He added, “furthermore, there are about 220 class 1 drugs currently in clinical trials … 40 are first in class, the balance are ‘me-too.’”
After Dr. Bin’s keynote, two panels were convened with a varied degree of industry practitioners. Each panel wrestled with a handful of different case studies that involved an American company who either was seeking to sell products into, develop technologies within, create partnerships for, or raise capital in the Chinese market. The products in question were devices, diagnostics and pharma. Reflecting on the case studies in general, several points are worth drawing out. First, the tension between strategic and opportunistic business deals in China. Westerners tend to think of Chinese as highly strategic, when the business dealings of most Chinese firms are enormously opportunistic. What that means is your Chinese counterpart is more comfortable, and in many cases may even negotiate for, relationships and obligations that are ambiguous and allow for enormous fluidity. I remember a comment a friend once made about doing business in China, something along the lines of “a Chinese businessman always wants to know what you are interested in before they give you a business card, just so they can decide which business card to give you.” Especially in a market like healthcare where so little structure exists and so many reforms are early in their development and implementation, being able to live with these gray areas is critical.
The other way the “opportunistic versus strategic” paradigm presents itself in China is when medical companies stumble across a potential partner, typically the by-product of a fortuitous trade show meeting, and mistake their new Chinese friend, a business whose success has likely been opportunistic versus strategic, for a strategic partner. Of course, these meetings do happen. Stars do align. Trade show hook-ups do matter. But the best way to be sure these relationships are the right ones is to head into the trade show with a strategy of your own. One of the panelists channeled Ronald Reagan and suggested that even in the most fortuitous relationship that presents itself, you want your contracts to be built around the idea of “trust but verify.”
One of the panelists pointed out that a common mistake companies make is they conduct what he saw as top-level only market research (how many potential consumers, potential distribution channels, profiles of existing entrants, competitors, etc.) and did not do enough actual one-on-one interviews and market research with actual Chinese doctors. In his mind this sort of market research is essential for a company to conduct early into their exploration efforts because the insights your actual customers may provide could well significantly adjust your product offering, pricing or other strategy element that would not be vetted if only top-level market analysis is conducted.
Another case study profiled a medium sized UK IVD company with very strong R&D, 8 million USD in revenue and only 13 employees. They had partnered with a small Chinese diagnostic company who was generating roughly 15 million in revenue. Distribution and sales channels between the two companies were well aligned and a relationship was in the process of being created. The question for the panelists was what sort of relationship this should be – exclusive versus non? Interestingly, opinions were divided. One panelist suggested you wanted to conduct a thorough due diligence of their sales, marketing, product support and distribution channels, and that if they aligned with yours, you should be willing to execute an exclusive agreement. The other panelists strongly disagreed with this, as do I. The primary push-back against an exclusive relationship is that almost any company – from the smallest to the largest – who want to go to market in China (and this is especially true for healthcare, but it would be appropriate for other non-healthcare products as well), do not want one distributor. China is simply too big a place, too many small regional markets exist, and it is too difficult to determine the actual efficacy of your Chinese distributor partner prior to actually executing a strategy. One panelist who did not approve of an exclusive agreement noted that the only conceivable way this might be worth entertaining (and here he was not suggesting this would be the prudent choice), was to set a very aggressive sales target for the first 3 years, after which you can mutually exit or during which you can also exit if goals are not achieved.
Let me end on what might be a surprising note given the topic of this forum: the one question that was not asked, that I believe needs to be in particular for SME enterprises eager to go to China, is whether they should do so in the first place. The decision to go to China is as much about financial resources as it is the ability to live with regulatory uncertainties, highly fragmented markets, and the inevitable period of time that elapses between when a company first enters China to when they begin to operate profitably in China. Not every healthcare company should go to China; certainly not now, and maybe not ever. Having someone you can work with who will explain the complexities of entering China and structures your internal decision making process to give space to your team to say “no” or “not yet” is as important as finding the right SFDA consultant, the best market research firm, or the ideal local partner.
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