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Medtronic eyes expansion in China

(China Daily)
Updated: 2008-11-03 15:57

For US medical device maker Medtronic, its expansion in China in the past 12 years has been a mixture of excitement and disappointment.

Since 1996 when it entered China by opening a cardiac pacemaker production line in Shanghai, the company has witnessed an annual growth of 25 percent in the country. Nevertheless, sales generated from China are still quite disappointing, accounting for a tiny 1 percent of its total global revenues.

The reason is quite plain: the country's healthcare system has been beset by mismanagement and unprofitable business models which have hurt demand for advanced medical equipment for years.

For example, cardioverter-defibrillators (ICDs) are implanted in 150,000 heart patient cases every year in the United States while the figure in China is a mere 500, says Wang Li, business director of Medtronic, Greater China.

One of the reasons, Wang explains, is that Chinese patients have to pay most of the expenses while in the United States, most of the costs are covered by the government or private or work-related healthcare insurance.

However, Medtronic executives believe the company's patience during the past 12 years will eventually pay off as the Chinese government is breathing new life into the healthcare system and the country's medical market is entering a stage where much of the aging equipment has to be upgraded or replaced.

In early October, the National Development and Reform Commission (NDRC) released a draft plan designed to reform the country's medical system. The plan promises to build a universal medical system by 2020 and increase subsidies to the costs incurred in visiting doctors.

That is expected to trigger an increased spending for medical equipment. It is believed more than 80 percent of China's medical service institutions are "grassroots" hospitals and clinics that are still using very old equipment. Currently about 15 percent of the "grassroots" hospitals are still using medical equipment made around the 1970s and 60 percent are using those manufactured before the mid-1980s.

In some smaller community hospitals and rural clinics, "the only medical devices they have are the stethoscopes, sphygmomanometers and hypodermic syringes", says Liu Yanming, an analyst with China Galaxy Securities.

The government's increasing focus on improving the quality of healthcare, a growing desire for more advanced technologies in Chinese hospitals to survive intensifying competition, is accelerating the upgrade of medical devices.

China's economic boom and the increasing availability of healthcare insurance have made more sophisticated medical services accessible and affordable for an increasing number of people.

All these signs bode well for device manufacturers such as Medtronic.

China will become the largest market for Medtronic outside the United States within 10 years, company Chairman and CEO Bill Hawkins predicts.

The company recently introduced two new models of implantable radio telemetric defibrillators.

About 544,000 people die of heart failure each year in China but so far only 500 defibrillators have been installed in the country since its introduction in the 1990s, which means there is still a lot of untapped market potential.

In anticipation of a medical device market boom, Medtronic last December jump-started its expansion in China by acquiring a 15 percent stake at Shandong Weigao Group Medical Polymer Co Ltd, a major local medical device maker.

The $221 million deal would help Medtronic become the second largest shareholder of Hong Kong-listed Weigao, which controls 40 percent of the country's bond joint products market.

The two companies also agreed to form a joint venture to market therapies in the spine and orthopedics sector.

Hawkins says the deal would expand Medtronic's "geographic footprint" as Weigao's products compliment Medtronic's offerings.

Industry observers see the deal as part of a wave of moving manufacturing to China by the world's major medical device makers.

Philips in April acquired a company in Shenzhen, Guangdong province, that makes patient monitoring equipment, and has formed a joint venture in China that produces MRI, CT, ultrasound, and X-ray gear sold in the US.

Also in April, Johnson & Johnson started operating a manufacturing base in Suzhou, Jiangsu province, with investment in the first phrase in the project amounting to $100 million.

Xie Wenjian, president of Johnson & Johnson Medical (China) Ltd, says that the facility will become the largest one for Johnson & Johnson Medical in the world in five years. Moving the manufacturing to Suzhou would help Johnson & Johnson cut costs by one third, according to media reports.

Siemens in September opened a medical research and manufacturing center in Shanghai that will likely have 1,000 employees this year.

The Ministry of Health in 2006 said, as part of China's five-year plan, that the government would spend 21.7 billion yuan in healthcare, of which 6.8 billion yuan in medical equipment.

With the deepening reform of the country's medical system, the projected spending might increase, analysts say, which could make China a market no major device markers can afford to lose.

Late October, Weigao said it would postpone the closing date to December 31 for the deal to sell a 15 percent stake to Medtronic.

A Medtronic spokesperson says the postponement is due to unspecified legal reasons. "We are still committed to the deal," the spokesperson says, adding it will become a major driver fueling Medtronic's business growth in China.