When it comes to medical devices, is China turning inward?
American companies dominate the world market for medical devices—with some notable exceptions—London based Smith & Nephew, plc and Shanghai based MicroPort Scientific Corporation, for example. But the global gold standard medical device brands are Johnson & Johnson, Medtronic, Inc., Stryker Corporation and Zimmer Holdings, Inc., to name just a handful.
Doctors around the world who want the best implants and instruments rely on “Made in the USA” brands.
China would like to change all that. They are very serious.
Earlier this year the Chinese government issued a “Buy China” directive, implemented a new regulatory device approval scheme that toughens entry for outsiders, indulged in what some call anti-trust bullying, proposed a ban on brand names of orthopedic devices and allegedly, sponsored cyber-attacks on U.S. device makers and health systems to gather market and technology information.
The actions, taken together, make a powerful case that the gloves have come off in competition for China’s 300-plus million middle class orthopedic device consumers.
New Device Regulations
New rules by the China Food and Drug Administration (CFDA) which revise the country’s core medical device regulations, the Medical Device Supervision and Administration Regulation (MDR), go into effect on October 1, 2014. The new wave of regulations replaces decades-old rules that are no longer keeping pace with market growth.
One of the most prominent changes is the increase in potential fines for illegally manufacturing or selling medical equipment. The fines, which were originally capped at 5 times the value of the goods, could reach up to 20 times the goods’ value. Violating the rules could bring a five-year ban from applying for operating licenses.
The new rules will operate on a tiered scale of severity, based on the exposure of risk to patients. There will also be reinforcements made to the monitoring and recall systems.
“In recent years, we’ve seen some issues of illegal behavior, and the legal foundation for striking back has not been clear enough. To resolve the problem, we needed a complete revision of the existing legislation, ” said government officials in a document published on the State Council’s website.
“The heightened scrutiny of the health care sector, which is expected to continue in the coming months, will make the China market more complex, ” said Xiaoqing Lu Boynton, director of the international strategy company Albright Stonebridge, in a recent Morning Post article. “It is important for foreign companies to focus on their compliance efforts to minimize risks.”
In addition, Katherine Wang, an attorney with Ropes & Gray LLP, located in Shanghai, told us that China CFDA’s newly created fast track approval mechanism for innovation devices is reportedly in favor of domestic products.
Wang says she sees increasing tension between the foreign business community and the Chinese stakeholders. “However, I won’t necessarily call it a trade war. The government’s existing reimbursement and tendering policies may create market access hurdles for foreign companies, but the intrinsic hurdle is the vast price difference between imported and domestic devices.”
The new rules are separate from China’s medical device Good Manufacturing Practices and its proposed medical device Good Supply Practices, which are both the subject of ongoing rulemakings.
“Buy China” Strategy
In mid-August, the country’s health ministry in Beijing said in a statement posted on its website that it intends to promote wider use of local products to, “effectively control unreasonable increases in the cost of medical care and reduce the burden on patients.”
With annual growth rates of around 20% expected over the next few years, protectionism concerns are being raised by global companies. Device makers from the U.S., Europe and Japan now dominate around three-quarters of China’s medical device market, according to published reports. That amounted to $34.51 billion last year, according to figures from the Hong Kong Trade and Development Council (HKTDC).
These compete with local companies such as Mindray Medical International Ltd and China Resources Wandong Medical Equipment Co Ltd.
“We want to strongly advocate health ministry organizations to use domestically-made medical devices, especially pushing top level class III hospitals to use domestically-made products, ” said Li Bin, the head of China’s National Health and Family Planning Commission in published reports.
Miao Wei, the head of China’s Ministry of Industry and Information Technology (MIIT), reportedly said that China needed to raise the level and quality of its homegrown medical devices and create incentives for medical institutions to use locally-made products.
Hospitals are the biggest distribution channel for medical devices, accounting for almost 80% of the market, according to HKTDC figures. There were around 13, 400 public hospitals in China last year, and a further 11, 300 private hospitals, according to a June report from Deutsche Bank.
Shanghai-based Kinetic Medical—which sells percutaneous kyphoplasty (PKP) devices to treat spinal compression fractures—is one of the upstarts trying to compete with foreign companies. Co-founder and Chairman Jay Qin, who formerly worked with Medtronic, recently told Forbes that they can offer their devices at much lower prices to local distributors.
“Some multinationals are still trying direct sales in China, which is an impossible approach, ” Qin said in the interview with Forbes. “Kinetic hires distributors to establish connections with hospitals long before the product is launched.” The company sells to 600 Chinese hospitals in all mainland provinces aside from Tibet through a network of 200 distributors.
“While the government acts as the primary payer and hospitals are predominantly state-owned, these highly priced imported products will inevitably face tremendous challenges on market access. Having said that, the government is also loosening its involvement in healthcare services. The growth opportunity for imported medical devices may very likely lie in the private sector, ” added Wang.
“Dynamite Panda” Cyber Attacks
Medtronic recently disclosed that in 2013, hackers tapped into its computer systems that stored patient records. The company said it believed that hackers from Asia carried out the attempt and that it also affected two other large, unnamed medical device manufacturers.
The San Francisco Chronicle reported earlier this year that China hackers were behind the attack and that Boston Scientific and St. Jude Medical were the other two companies that were targeted.
In July, Community Health Systems, Inc. confirmed that they were hacked in April and June 2014. The company said it believes the attacker was an “Advanced Persistent Threat” group originating from China who used highly sophisticated malware and technology to attack company systems.
Federal authorities told the company that the intruder has typically sought valuable intellectual property, such as medical device and equipment development data. However, in this instance the data transferred was non-medical patient identification data related to the company’s physician practice operations and affected approximately 4.5 million individuals.
Reuters reported that security experts said the hacking group, “APT 18” or as some have called them, “Dynamite Panda, ” may have ties to the Chinese government. The cyber security firm, CrowdStrike, Inc. which has also been monitoring “APT 18” for about four years, said that, based on the targets they have chosen, it believes the hackers are either backed by Beijing or work directly for the government.
In May, a U.S. grand jury indicted five Chinese military officers on charges they hacked into American companies for sensitive manufacturing secrets. China has denied the charges.
Anti-Trust Bullying
The U.S.-China Business Council (USCBC) said in early September that companies facing antitrust investigations in China have been pressured to admit guilt, appear without legal counsel and make statements without being informed of the grounds for investigations.
Last year, we reported that companies have been warned by aggressive regulators not to use external lawyers during investigations.
The Chinese government rejects complaints about its three antitrust regulators and says investigations by the National Development and Reform Commission (NDRC), the Ministry of Commerce, and the State Administration for Industry and Commerce (SAIC) are conducted according to law.
“Some of the NDRC monopoly investigations involve overseas multinationals, but that does not mean that we are targeting them, ” Xu Kunlin, head of the anti-monopoly bureau under the NDRC, was quoted as saying.
Ban the Brand
A draft rule issued by the China Food and Drug Administration would prohibit the use of personal, company or brand names to label medical devices marketed in that country. The proposed rule would instead mandate that such products be given generic names in the Chinese language.
In effect, replacing Western script with Chinese language symbols.
A medical device industry spokesperson told us that many global medical device regulators, including the FDA, require the use of generic device naming in certain situations. For example, the FDA’s UDI database requires companies to enter Global Medical Device Naming (GMDN) nomenclature and/or codes.
He said the use of generic names helps with data exchange between manufacturers, regulators and healthcare authorities; exchange of post-market vigilance information; supporting inventory control in hospitals and purchasing and supply chain management.
“We understand that the CFDA draft regulations would outline guidelines on the use of generic device naming in similar circumstances, and that they would not preclude the use of trade names on the product label, advertising or IFU, ” added the spokesperson.
U.S. and Device Industry Response
In an April letter to U.S. Secretary of State John Kerry and Treasury Secretary Jacob Lew, the U.S. Chamber of Commerce urged Washington to get tough with Beijing on its use of competition policy, which it said had been seized upon by China to advance its industrial agenda and nurture domestic companies. The issue was raised at high-level strategic talks between the countries in July.
U.S. orthopedic device companies have been busy getting ahead of the potential problem of protectionism by partnering, acquiring or merging with Chinese companies.
Medtronic acquired China Kanghui in 2012, which was the most competitive orthopedic device maker in China.
In September 2011, MicroPort entered into the market by purchasing Suzhou Best and acquired Wright Medical Technology, Inc.’s OrthoRecon business for $290 million in January 2014
Stryker also got into the game by acquiring Trauson, China’s largest trauma products maker, in January 2013.
In December 2010, Zimmer Holdings acquired Beijing Montagne Medical Device Co., one of the largest orthopedic implant manufacturers in China.
Which orthopedic devices go into Chinese patients will probably not cause much concern to the shareholders of the publicly traded, and for now, U.S.-based orthopedic companies. The concern lies with the workers in Warsaw, Kalamazoo, Memphis and other U.S. cities where most of the world’s orthopedic devices have been manufactured.
The Dynamite Panda has taken off the gloves. What will Uncle Sam do?
