IN PERSON
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Carl McEvoy is a partner at the market research firm McEvoy & Farmer. (Seattle). He can
be reached at carl@mcevoyandfarmer.com |
With such incredible prosperity, it's no wonder that IVD manufacturers have been watching China's progress with a keen interest. To learn more about the opportunities and challenges for diagnostics companies in the world's most populous country,
IVD Technology editor Richard Park spoke with Carl McEvoy, a principal at the market research firm McEvoy and Farmer (Seattle).In this interview, McEvoy talks about strategies for staking out territory in the country's burgeoning testing market. He also discusses the idiosyncrasies of product registration in China, and the role played by the government in laboratory testing.
IVD Technology: What is the current size of the IVD market in China?
Carl McEvoy: The last report by McEvoy and Farmer on the IVD market in China came out at the end of 2004. At that time, we estimated the market for the segments we cover to be $703 million. The segments that we follow include chemistry, critical-care chemistry, immunochemistry, hematology, urinalysis, coagulation, and molecular testing.
If you add about 15% for the segments we don't cover, such as microbiology, clinical pathology, and psychology, then the market would be around $808 million. Then, taking into consideration the two years of growth since the report was published, the market today is roughly $1 billion and growing.
What factors are driving this growth? How much do you expect the IVD market in China to grow during the next 5–10 years?
There's quite a bit of variation in the growth rates between the market segments but, in general, the market is expanding at around 15% per year. The main driver of this growth is the increasing prosperity of the population. The economy has been growing at 8–10% per year for the last two decades. As people become more wealthy, they tend to seek out better healthcare.
There has also been growth in the population itself, which is increasing at just under 1% per year, and a migration from the countryside to the cities, where more-advanced healthcare is available. In the past, companies have focused on the main cities on the coastline. But there is a lot of growth inland, as well as in medium-sized cities.
In addition to these demographic trends, there has been the introduction of new tests and the promotion of health checkups, which until recently were uncommon in China.
McEvoy and Farmer has been following China's IVD market for just over 10 years, and it's been growing consistently and rapidly during this entire period. As long as the country's economy stays on track, there's no reason why the growth rate should slow in the next 5–10 years.
Even at $1 billion, the per-capita spending on diagnostics in China is only about 75 cents. If you compare this with the $18–$22 per person that it takes to diagnose a European or a U.S. citizen, there's obviously plenty of room left for growth.
Most services in China are run by the state. Does the government recognize the need for improving healthcare and the role that better tests and diagnostics serve in achieving this goal?
Nearly all of the customers for IVD products in China are government entities. It's not a simple system; labs are run by all different levels of government, whether it be by the city, the county, or the province. So, although they are government owned, they behave like private enterprises. They generate their own funding, for the most part, and are diligent about maximizing their revenues. In fact, the hospital laboratories of China represent significant profit centers.
The government of China is very aware of the need for better healthcare. This is an area of growing dissatisfaction among the population. In the past, healthcare was generally supported by the state. However, the government had been trying to shift the costs of healthcare more to private citizens and to companies. This is a transition that has been painful for some people, but there is a clear awareness within the government that improving these systems is a key priority.
Which product areas dominate the Chinese IVD markets?
The relationship between the market segments in China is roughly similar to those of other developing countries, with the exception of molecular testing, which is surprisingly large. My firm has been following 17 domestic firms with a large and growing market in polymerase chain reaction (PCR) testing for infectious diseases. The labs have found this testing to be profitable, which is the reason for its growth.
Almost all of this PCR testing is dominated by domestic companies. Very few international firms—with Digene Corp. (Gaithersburg, MD) being the exception—are getting any of the molecular market because the prices for PCR-related kits are extremely low.
As for areas of future growth, the important characteristic to remember is that while China's IVD customers are owned by government, they behave like private businesses. We expect there to be growth in any area that offers profitable testing to these laboratories. Molecular diagnostics has lagged behind its expectations in many regions of the world. Why do you think it has caught on in China?
The simple answer is that it's profitable. The largest hospitals have found that there is a very profitable niche in PCR testing for infectious diseases. And with the price of reagent kits being relatively low from domestic suppliers, this is an economically viable, if perhaps not a medically necessary, technique. The retail price for molecular testing kits in China is below the wholesale price of tests sold by international firms.
In addition, it is often the individual patient who pays for testing. In China, there is very little medical insurance coverage. As the government tries to become less and less involved in paying for healthcare, the costs often come out of the pocket of the patient.
Made in China
How would you characterize the domestic IVD industry in China?
Every two years, when we update our report on China, we find more local manufacturers. We find that these companies are making more-sophisticated products as well as exporting them.
In our 2004 report, we profiled 100 local manufacturers; that number will be up by at least 20% for our 2006 study. In the past, most of these companies were making basic chemistry reagents, enzyme immunoassay kits, or semiautomated instruments.
Today, there are 22 local companies making chemistry analyzers, of which 11 have small automated systems. There are eight domestic firms making automated three-part differential cell counters, and we know of two with plans to make a five-part differential instrument. China has also become the home of high-volume rapid-test production, much of which is exported.
We believe this is only the beginning of a trend, and that China will evolve into a major IVD manufacturer and exporter. However, it will likely be a very long time before Chinese companies become innovators. They will remain diligent copiers of existing technologies for the foreseeable future.
To where do Chinese IVD manufacturers primarily export their products?
If they have gone to the trouble to get FDA or CE clearance, then they're exporting to Europe and the United States. There are also products that they don't register, which go to other markets. A large number of Chinese companies are now exporting to India, Mexico, or Brazil.
Do you think that the manufacture of IVDs in China will ever become as ubiquitous as that of common consumer goods?
I do, but I think it will be similar to the "Made in China" label you often see. It's not that the core technologies will be produced in China, and certainly not the innovative manufacturing technological processes, but rather that their assembly and final production will be completed in China. We're on the way toward that now.
Of course, in addition to contract manufacturing, there are also companies like Shenzhen Mindray Bio-Medical Electronics Co., Ltd. (Shenzhen, China), which is developing its own technologies and seems to be independent of foreign technological assistance.
Who are some of the other big players in the Chinese IVD market that will continue to play an even bigger role in the future?
I think that Mindray, as an instrument company, is certainly the country's leader. It is a major force in hematology instrumentation right now and is exporting and growing very rapidly. It's one of the companies I mentioned that have plans to produce a five-part differential hematology analyzer. Fosun Group (Shanghai) is another company with a broad product range that is doing a good job.
And then there's a host of companies in the rapid-test business such as Acon Laboratories Inc. (San Diego) and InTec (Xiamen, China), which are in China and are exporting their products widely around the world.
How would you characterize the state of diagnostic technologies being developed in China? Are there a number of companies involved in developing their own diagnostic technologies?
It's difficult to know from the outside where exactly the technology has come from. There clearly are a lot of joint ventures, as well as products emerging from these.
In instrumentation, for example, it seems that there are a large number of companies associated with Italian instrument makers, but these things are often kept fairly quiet. So, although I suspect that not much of the technology resulting from these collaborations is homegrown, it's difficult to know for sure.
There is a keen interest among many Chinese companies in developing their own technologies. There are also IVD companies that have affiliations with local institutions of higher learning and presumably are getting technological benefits from these relationships.
Doing Business in China
How many U.S. and European IVD companies are currently doing business in China? Have they been successful?
In 2004, McEvoy and Farmer profiled 27 foreign companies with offices in China. This list includes companies from both the United States and Europe, as well as four from Japan and one from South Korea. Although we don't know how profitable they've been, all of these companies have experienced good growth rates, and more and more international firms are setting up offices in China every year.
So we think these two things are pretty good indicators of success. We also track the distribution of roughly 120 IVD manufacturers that don't have offices in China but work through local distributors. This number is also increasing.
What are the keys to success for IVD companies doing business in China?
As I mentioned earlier, offering a profitable product for the laboratories is the most important key to success. Because local companies make basic tests of acceptable quality for very low prices, the best strategy for a foreign company is to introduce a test or methodology that offers advances not already on the market.
Also, IVD companies that are going to be working with distributors in China should get to know them very well first. They should be careful of extending credit to either distributors or customers, as it's very difficult to enforce agreements in China.
Does this create a difficult situation for IVD manufacturers trying to enter the Chinese market? For example, if they set test prices to recoup higher development costs and generate an acceptable return on investment, could they be pricing themselves out of the market?
Sure, but the important question is whether the test that an IVD company is offering is profitable to a laboratory. China has a system of price lists that could be construed as reimbursement lists except for one major difference: It is often the patient who is paying. So, while these lists do form the basis for reimbursement for the small number of people who have insurance policies, or for when the government is paying, they more often serve as guides for what a hospital or laboratory can charge a patient.
If a company can lobby to create a reimbursement for a specific test at a level where it becomes profitable for the laboratory, the test will be run. As a result, even though the test may be more expensive than its alternatives, if it is more profitable for the laboratory, it will be successful.
Would you advise IVD companies wanting to do business in China to form alliances or joint ventures with Chinese companies?
There's a long history of outside firms forming joint ventures with local firms in China. For many years, this was almost the only way to get your products into the market.
Frequently, at the end of these joint ventures, local companies would continue making products that were remarkably similar to those brought to the venture by the foreign company. This has happened often enough to make outsiders reasonably skeptical of joint ventures.
With China's accession to the World Trade Organization (WTO) in December 2001, it has become much easier to establish a foreign company in China, and most international companies are now opting for fully owned legal entities.
So, while there are local firms that would be interested in joint ventures, that path is somewhat out of favor.
Can doing business in China provide additional opportunities for IVD companies to conduct business in other parts of Asia? Or is it easier for IVD companies already involved in other parts of Asia to make inroads in the Chinese market?
China makes sense as a manufacturing base for exports and contract manufacturing, but not as a place to manage your regional business. Tokyo and Singapore are probably better options for that. After all, if a company has gone to the trouble of hiring a Mandarin-speaking staff and has an office in Shanghai or Beijing, it should really be looking after the domestic market.
What have been the experiences in China of the major IVD companies such as Roche Diagnostics (Indianapolis), Abbott (Abbott Park, IL), and Beckman Coulter Inc. (Fullerton, CA), which have the money and ability to take such risks?
All of the companies you mentioned have experienced rapid growth. They are taking China seriously and are working through their own independent offices. They're not working through joint ventures.
However, the majority of the 120 foreign companies working with Chinese distributors have also been successful. This strategic path seems right for a small- to medium-sized IVD firm.
The Challenges Ahead
What unique challenges do IVD companies encounter in trying to do business in China?
I would highlight two things—the legal system and corruption. Before opening to the West, China's command-style economy had no need for commercial law. Central planners made the decisions on what would be produced and by whom.
So the idea of contractual commitments and the impartial enforcement of these in the courts is a relatively new concept. The evolution toward the rule of law is anything but complete. As a result, companies should not expect contracts to work in China the way they do in other countries.
In addition, corruption is endemic. It is part of the marketplace. There's no way to avoid it except to sell through local distributors. In this case, the distributor will take care of the problem for you.
Another difficulty is product registration, which remains very time-consuming and expensive. This process is something that is supposed to be streamlined under China's WTO commitments, but there hasn't yet been much progress toward this goal.
The State Food and Drug Administration (SFDA) of China is the main body that companies must work with, although there has been a bureaucratic battle over who should have predominance in the registration process.
I met with some SFDA officials last year, and they told me that they had just been on a tour to Europe to see how other countries handle the IVD registration process. They said that there would be some movement toward simplifying the process in China, but that this reform would probably take two years.
How serious are piracy risks to an IVD company doing business in China? What legal recourses are available to stop illegal copying?
When China joined the WTO in 2001 they also agreed to the Trade-Related Intellectual Property Agreement. However, implementation has been slow and spotty. Frankly, a company should assume that every part of its technology is at risk. As a result, it should structure its decisions around this consideration, as well as around the reality that there's no real recourse.
Are there Chinese companies that have the capability and knowledge to reverse-engineer complex technologies such as molecular diagnostics and distribute them illegally?
Probably, but at the same time, a company's technology is equally at risk, even if it doesn't introduce its products into China. It's simply the existence of the technology that makes it able to be copied. It's not being in China that puts it at additional risk.
The instances of IVD piracy that I've heard of have involved mostly low-end technologies—for instance, instrumentation that is very similar to other existing instrumentation. In general, this occurs with simpler products.
How can IVD companies overcome these challenges?
By becoming a student of China. Read widely about the history and culture of the country, keep up with current events. Most of all, work with people who have an in-depth knowledge of the country. Beware of the "two-trip China experts" and seek out employees and consultants with enough on-the-ground experience to guide you. Also, expect it to take more time to enter the Chinese market than you would typically expect in a new market. It's just not a country that you can approach in a hurry.
The Next Frontier
With such potential problems and frustrations, is pursuing China still worth it for IVD companies?
With 27 foreign firms having set up offices there, 120 more working through distributors, and these numbers growing every year, it seems that the prize is worth the pain.
What about the companies that have not found success?
I have run into a small number of companies that have retreated from the market. My suspicion is that they had a bad individual experience—perhaps the wrong distribution partner or the wrong commercial contacts. Of course, not all companies will succeed, but I would say that, taken in total, the bulk of Chinese business stories are stories of success, not of failure.
For the past few years, China has been regarded as the next frontier and the next big growth area for IVDs. However, such promises have not yet come to fruition, to the point where some have become skeptical about the country's potential. How would you respond to such assessments?
I think this characterization of China would have been accurate about 10 years ago. At that time, there were a lot of companies that had lost money chasing after the idea of one billion customers, without realizing that China was a very challenging business environment.
But rapid long-term growth is something that has actually become a reality. If there are any skeptics, I would suggest they take a quick trip to Shanghai, walk along the Bund waterfront, and look up at the skyline of the Pudong district.
The transformation that I've seen taking place there in the last decade is just remarkable. There's a sparkling new downtown center. There's virtually nothing old left.
