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Term paper part 2: Medical Devices Industry Analysis
ContentsHigh-tech Industry Development in India.............................................................................................2
Medical Devices Industry: India and World...............................................................................................3
A. Medical Devices Definition.............................................................................................................3
B. Medical Devices Industry Structure:...............................................................................................3
C. Medical devices Markets................................................................................................................4
1. Barriers to Entry...............................................................................................................................6
2. Bargaining power of buyers.............................................................................................................8
3. Bargaining Power of Suppliers.......................................................................................................10
4. Threat of Substitutes......................................................................................................................10
5. Rivalry Conduct..............................................................................................................................11
D. Medical Devices Industry in China:...............................................................................................13
E. Indian Medical Device Industry:...................................................................................................17
6. Recommendations:...........................................................................................................................30
References:................................................................................................................................................31
High-tech Industry Development in India
Since last 3 decades, high-tech manufacturing has been growing at a rapid pace and has claimed
increasing share of world GDP. Despite the opportunity, India has been considerably behind the other
Asian giants in this area. In India, the share of High-tech manufacturing in the total manufacturing value
added grew from 4.3 percent in 1985 to 8.6 percent in 2005. In China, during the same period, the share
of high-tech manufacturing in the total manufacturing value added went up from 8.4 percent to 29.4
percent. South East Asian countries of South Korea and Taiwan too have extracted considerable growth
from this sector.
Source: Chandrasekhar, C.P. and Ghosh, Jayati, “India’s hi-tech lag”, The Hindu Business Line, Sep 9, 2008
Electronics industry that forms the major portion of the high-tech manufacturing is estimated to be
more than double the size of industries like oil, petrol, and minerals; chemical and plastics; food,
beverages and tobacco. During the period 1980-2006, global electronics industry achieved a CAGR of 7.5
percent, compared to global GDP growth at 3 percent. Interestingly, the share of electronics industry
worldwide in the world GDP increased to 4.3 percent in 2006 from 1.5 percent in 1978. Analysts put the
global electronics hardware production in 2005-06 at $1,300 billion with China leading the production
graph with a share of 18 percent followed by Germany (14.5 percent) and South Korea (8.7 percent).
Compare this with India which had a negligible share of 0.9 % of global GDP production. Also it is no
surprise that this industry contributes significantly to the respective country's GDP with China at 13.1 %,
Germany at 8.8 %, and South Korea at 15.8 %. The electronic industry accounts for 1.7 % of India's GDP.
BoP impact: The lack of a strong electronic manufacturing in the country also has a detrimental effect on
our balance of payment. India is largely an importer country with a deficit of $12.4 billion ($1.6 billion
exports against $14 billion imports in the year 2004). On the other hand, countries like China ($180
billion export against $148 billion import), Taiwan ($42 billion exports against $34 billion import), and
Japan ($124 billion export against $73 billion import) are enjoying a sizeable surplus. The imports are
rising at an increasing rate every year which means that there will be further pressure on the Current
Account Deficit.
Medical Devices Industry: India and World
A. Medical Devices Definition
Medical devices are defined as any healthcare product that does not achieve its primary
intended purpose by chemical action or by being metabolized. Medical devices include
electro-medical equipment and related software, furniture, supplies and consumables,
orthopedic appliances, prosthetics and diagnostic kits, reagents, and equipment. Medical
devices are generally divided into class I, II and III, based on the level of risk to
users/patients, corresponding to logical risk evaluations conducted by the FDA. Class I
devices are the lowest risk classification and include general controls such as crutches and
band aids, while class II controls are more specialized, such as wheelchairs. Class III devices
require pre-market approval, as they are known to present hazards requiring clinical
demonstration of safety and effectiveness. Devices in this category include heart valves,
catheters, cardiopulmonary resuscitation (CPR) devices and various implants.
B. Medical Devices Industry Structure:
Medical devices are generally divided into class I, II and III, based on the level of risk to
users/patients, corresponding to logical risk evaluations conducted by the FDA. Class I
devices are the lowest risk classification and include general controls such as crutches and
band aids, while class II controls are more specialized, such as wheelchairs. Class III devices
require pre-market approval, as they are known to present hazards requiring clinical
demonstration of safety and effectiveness. Devices in this category include heart valves,
catheters, cardiopulmonary resuscitation (CPR) devices and various implants.
C. Medical devices Markets
The medical devices industry has witnessed a rapid expansion and though the
traditional markets of US, EU and Japan contribute the major chunk of revenues, there has
been a rapid growth in most of the developing markets. The increasing prosperity and
income across the developing countries especially in Asia, easier access to healthcare
coupled with the ageing population, advances in the medical technology and establishment
of public health insurance has resulted in a phenomenal growth in the medical devices
industry. Marked increases in the average age of U.S. and foreign populations has already
influencing the direction of the medical device industry through the changing health needs
of senior citizens and shifts in thinking on how and where they will be treated. As pressures
mount to contain costs, expensive and/or extended stays in healthcare facilities will be
discouraged and healthcare will be increasingly delivered in alternative settings such as
nursing homes, hospices, and, especially, the patient’s own home. Home health-care is one
of the fastest growing segments of the industry, and is branching out into new areas. What
used to be limited to only the lowest technology products is now encompassing a
proliferation of high technology medical devices that are intended to be used by unskilled
health care workers or patients. In addition, demographics and technological advances will
continue to increase demand for advanced medical device products (such as pacemakers
and defibrillators) well into the 21st century.
The biggest market for the medical devices is United States which with a valuation of
100 billion USD constitutes 42% of the global market. United States is not only the major
market but also the dominant supplier in the devices market. There were approximately
5,300 medical device companies in the U.S. in 20071, mostly small and medium-sized
enterprises (SMEs). The dependence of the Medical devices industries , such as
microelectronics and biotechnology has resulted in the concentration in specific regions
like California, Florida, New York, Pennsylvania, Michigan, Massachusetts, Illinois,
Minnesota and Georgia. In 2007, the medical device industry employed more than 365,000
people in the U.S., earning an average annual wage of approximately $60,000. With 16 of
the top 25 firms being US based and considering the large R&D expenditures by each of
these dominant players the US medical devices industry is expected to remain highly
competitive globally. With the expansion of global markets for the medical devices, an
increasing number of these firms are seeking regulatory approval for selling their products
in the global markets. They are using both organic and inorganic growth measures to
expand their reach beyond the regular strongholds of the devices industry.
Japan is the second largest medical device market in the world Its total medical
device market value is estimated at $23 billion for 2008. As its elderly population grows and
the overall contribution to Japan’s national healthcare system decreases as a result of its
shrinking population, the Japanese Government will be forced to take additional measures
to contain healthcare spending. These cost-containing measures coupled with the unique
costs of Japan’s approval system are forecast to cause a contraction in Japan’s medical
device market of approximately 0.9 percent through 2013. However, medical devices used
to treat age-related diseases should see steady growth in demand. These include
equipment to assist bio-functions such as pacemakers, cardiac valve prosthesis, and
orthopedic implants. Because there are very few domestic manufacturers in Japan in these
areas, market opportunities for these products will continue to be promising for U.S. firms
in the foreseeable future.
The U.S., European Union (E.U.), Japan and Canada are extremely large and lucrative
medical device markets; however, they are mature markets with stable but relatively low (3
– 5 percent) annual growth rates. In order to facilitate expansion, medical device companies
recognize that they must look increasingly at developing countries to drive future growth.
For example, demand for medical devices in China and India is growing at double digit
growth rates compared to developed countries, albeit from a low base. For the medical
device industry to fully realize its potential in developing markets, standards and criteria for
regulatory approval, risk management, and quality must be improved and most importantly
harmonized to meet global international best practices based upon Global Harmonization
Task Force (GHTF) guidance documents. To that end, the Global Harmonization Task Force
(GHTF), a voluntary organization comprised of regulators and industry with five Founding
Members (U.S., Canada, Japan, E.U., and Australia) has its core objective of streamlining and
harmonizing regulatory practices.
International joint venture designed to develop health care technologies and
establishing local research and development capabilities have also grown in size and
significance. Asia – notably China and Korea – have been the site of a number of
collaborations with U.S. firms. Some firms are also gravitating toward a launch in Europe
followed by a move to the U.S. or perhaps a move to China or India. It definitely adds a level
of complexity to the development process
A detailed analysis of the medical devices Industry using Porter’s Five forces framework
gives us the following interesting characteristics of the Industry.
1. Barriers to EntryThe Medical Industry typically has high barriers to entry in the form of high research and
development expenditures, regulatory restrictions, and legal obstacles. In addition, smaller
manufacturers have difficulties competing with larger healthcare supply manufacturers due
to various factors such as purchasing power, sales forces, and advertising expense.
Significant R&D expenditures are required for product development and innovation. As
shown in the graph below the average spending on R&D among US manufacturers has been
in the range of around 10% which offers a natural barrier for an established player against
new entrants in the field. Small and Medium Scale Enterprises are generally reliant on
Venture capital funding for their initial R&D expenditure. But the recent economic crisis
took a toll on the valuation of the start-ups in this industry. This coupled with the greater
uncertainty and liquidity dry up led to large scale withdrawal of capital from early stage
investing thus further increasing the barrier to entry.
Diverse and stringent regulatory requirements across the world, varied reimbursement
payment environments and increasing incidences of IPR infringement and counterfeiting are
some other challenges which add to the difficulty of establishing oneself in this highly lucrative
industry. There is a high degree of brand royalty resulting in low levels of acceptability for a new
entrant product. Product tests involve costly animal and human tests which can last for years
and cost millions of dollars. Patent rights and potential litigation also create barriers to new
entrants. The use of patent is a common practice to protect one’s proprietary products.
However, since patent specifications are generally less precise for medical devices and there
have been more than 75,000 medical device patents filed with the US Patent and Trademark
Office over the past 30 years, there is evidence of litigation throughout the industry.
The medical device industry is an industry for which reliability and safety are very critical. For
example, a current leakage of as little as 10µA (10-6 A) on a pacemaker will cause a microshock
to patient, which will eventually bring death to the patient in minutes. Hence, Product liability
and Insurance Reimbursements are major concerns within the industry. The primary end
markets within the industry are hospitals, outpatient centers, and physicians’ offices, which rely
on third-party insurers for payment. Securing reimbursement contracts for a particular device
with insurance agencies is as good as securing the market due to the high costs for liability and
lack of reliability. This involves efforts on the part of device makers to convince insurance
makers of the safety, cost efficiency and marketability of their devices in order to secure.
Therefore, medical device makers have to make great efforts in convincing insurance
companies that their devices are safe, necessary, and cost-efficient in order to secure
reimbursement at lower premiums.
2. Bargaining power of buyers Medical devices Market is primarily a Business to Business market and prices are primarily
driven by buyer-supplier negotiations. Due to the price discrimination there is also lack of
transparency among the market players as far as prices are concerned. This results in a
predominance of the bargaining ability of the buyer in determining the price and the
subsequent profitability for the supplier. This is especially relevant in the European market
where the customers for medical devices are primarily governments running national health
programs. But, there are other factors which also influence the bargaining power of the buyers
Frequency and quantity of purchasing brand
Health related products are not the type of products that are frequently purchased in large
quantity, compared to the the routinely demanded products, such as pharmaceutical products.
In this sense, bargaining power does not work effectively. The number of brands marketed in
the industry is few. The importance attached to quality and reliability due to the critical nature
of the product also leads to lower switching probability. Additionally, these products are not
standardized. Therefore, the cost of switching to other brands is high.
Seller’s market / Buyer’s market
Sellers' market power derives from several sources. First, most of the medical devices though
made for the same function possess a lot of differing features. Second, patents may protect
some of these features, permitting the seller to extract a premium from the buyer. Third, lack of
compartive information due to price discrimination and high switching costs because of long
term relationships with specific manufacturers, generally the result of the preferences of
physicians lead to prevention of standardization and channelizing of purchases to specific
manufacturers. Such relationships retard the ability of group-purchasing organizations to
standardize and channel hospital device purchases to specific manufacturers, thereby
upholding sellers' market power.
Product quality or performance
In most cases, the hospital is not the real buyer of advanced medical devices. Rather, the
decision to buy is heavily influenced by the attending physicians who are the end users for the
device and have a range of preferences of their own. These preferences may be shaped by
patients' preferences but considering, the complexity of these devices and costs associated
with their failure, more likely reflect physicians' familiarity with a particular device model,
personal opinion of the product features and attributes, preferences for specific vendors, and
close ties with vendors' sales representatives.
These preferences are sticky and remain in place for years, often extending back to a surgeon's
residency training.
The hospital's demand for devices is thus the quintessential "derived demand," dependent on
patients' demand for admissions and procedures, patients' preferences for particular physicians
and products, and especially physicians' preferences for the number and type of devices they
are comfortable using.
3. Bargaining Power of SuppliersPowerful suppliers capture more of the value for themselves by charging higher prices, limiting
quality or services, or shifting costs to industry participants. In case of Medical devices, the
supplier group is highly focused on the medical industry and most of times on supplying for a
particular product. Manufacturers tend to cluster in certain locations, depending on
specialization. They include not only the makers of the devices themselves, but the plastic,
metal and electronics that go into them. In the Milwaukee area, for example, GE Healthcare
leads, with X-ray and other imaging and scanning equipment manufacturing. According to
Timothy Sheehy, president of the Metropolitan Milwaukee Association of Commerce, that
supply base is 11,000 companies, most of which are in the greater Milwaukee area. The bulk of
the value of the company’s products is created in the manufacturing process; consequently,
profits are well insulated from price swings of raw materials. Due to low switching probability
and patent protection, the chances of any of the suppliers vertically integrating and being a
competitor are very low.
4. Threat of SubstitutesThe medical device Industry tends to evolve in fits and starts rather than in a slow, gradual
fashion. Thus, a particular device market tends to chug along till it is replaced by a game
changing technology that revolutionizes the market. Hence, there innovation is a constant
driving factor in the medical devices industry with a focus on meeting unmet clinical needs or
improve existing medical methods to gain a competitive advantage. So, in general because of
the lack of gradual and continuous innovation, the threat of substitutes is very low. As we have
already seen in the previous part of the article, the medical devices market is characterized by a
dominance of the end physician’s preferences and as a result results in lower chances of
product switching. Hence, even the presence of slightly better substitutes may not be an
enough incentive for change in the buyer’s preference.
Another factor that results in a lower threat of substitutes is the patenting and licensing
systems. There is a high reliance on patents to exclude competitors and attract investments.
Healthcare products companies as J&J have low to moderate threat of substitute products due
to patenting and licensing. A patent allows a company to keep out other companies from using
the development in their researches. The only way to get desired inventions under your own
name is to acquire the company which has the patent. For many companies, it is almost
impossible to make substitute products in today’s medical devices market due to difficulties to
find basic building materials. Many chemical companies, such as Du Pont and Dow Corning
discontinued selling necessary materials to new medical device companies. Chemical
companies fear the possible lawsuits from patients when new medical devices developed by
new companies that would cause medical problems to patients. This situation has overall
chilling effects on innovations. Many new companies are troubled looking for new materials or
spending money on research and development of new substitute materials for their products.
They are worried that other commonly used materials or newly developed materials may be
restricted, which creates a high degree of uncertainty. Many healthcare products companies
prefer to buy or merge with other successful companies to be able invest and develop new
products and avoid possible lawsuits.
5. Rivalry ConductWithin the industry, which is the healthcare supplies and equipment industry, there are over
300 firms in the industry and competition is moderate to high (Christina, Ram Fund Research).
Some big-name firms include Baxter International Inc. (BAX), Guidant Corp. (GDT), Boston
Scientific Corp. (BX), etc. With high competition in this industry, better strategies for Research
and Development and better products are essential. Although R&D is an extremely costly
process, if a company finds a way to better identify R&D goals and objects and make the
success rate higher in long-term development, the company can gain huge in terms of future
profits. Also, Companies who can craft and develop products that suit consumers’ and patients’
needs are those who can survive. Industry growth is expected to remain strong, product
differentiation exists (with patents providing protection from copying), and sunk costs are
relatively small compared to profits (high ROA). All these factors serve to reduce the intensity of
rivalry.
D. Medical Devices Industry in China:
China with its large population and the new found prosperity has come to occupy the third
position in the Medical Devices market space. It is not only a major market but also a major
supplier with a production that contributes 34.4% of the Asia-Pacific market’s value. With
an estimated worth of USD 10.2 billion in 2008 and expected to grow to USD 23.2 billion in
2011, it has become a major growth driver for the whole industry in general.
Market Structure:
Most of the medical device market in China has been traditionally concentrated
around Shanghai and Beijing. But with rapid development, increasing purchasing power and
high receptiveness and acceptability of technology and foreign products, the demand has
shot up even in Tier 2 cities like Tianjin, Nanjing, Shenzhen, and Chongqing. With a client
base of 19,852 hospitals, 80,500 urban and rural health centers, and 3,585 Centers of
Disease Control, the potential for this sector in the country is immense.
The Chinese medical devices market is mainly a price and quality driven one. With a
rapidly ageing population and increase in exports due to greater efficiency in production,
the contribution of China to the medical devices market is bound to increase at a rapid
pace.
Overall population in China has been growing and substantial growth is expected among the
number of individuals above the age of 60. This will have a direct impact on the medical
equipment market as growing number of senior citizens will lead to major demand for
medical devices such as pacemakers. Care and rehabilitation equipment market in China is
also expected to boom.
Global Comparison of an ageing population
In China, the total number of hospitals stands at 19,852 with a large fraction being state-
owned. Before 1978, all hospitals in China were state-owned. These hospitals were
monopolizing the market. Private hospitals were permitted after reforms; however, people
still prefer state-owned hospitals. The country has seen a substantial rise in hospitals with
an average of 322 new hospitals built each year during 1990 – 2007 and is expected to rise
to 400 annually in the next 10 years. About 30% of total investment in new hospitals is used
for purchasing medical equipment. Governmental entities own and control most of the
hospitals, however, recent healthcare. System reforms have resulted in a trend of greater
operating autonomy at local levels. Hospitals in China rely less on governmental funding and
are generally expected to earn enough revenues on their own to cover 70-90% of their
operating expenses. This has given regional hospital administrators the authority to make
decisions towards equipment purchases in order to achieve higher efficiencies and
improving services.
Over 80% of high-tech medical equipment purchased in China is through imports. In 2008,
large share of imports of medical device were high-end equipment used for meeting the
ever demanding needs of the rapidly prospering populace while domestic manufacturers
produced most mass-market equipment. Imports are growing slower than the overall
market as foreign suppliers are increasingly establishing a local Chinese presence. Going
forward, these foreign suppliers are expected to meet unique challenges: Price caps on
imported products, Process and technology regulations on sales of high-end medical devices
and Healthcare reforms limiting expenditure on foreign-produced devices.
The Chinese medical devices market displays a moderate degree of buyer power. Customers
include hospitals, medical centres and wholesale distributors. Brand identity is of little
importance to buyers, who are more concerned with product quality and price, which
combined with negligible switching costs favours buyer power. The threat of new entrants
with respect to this market is strong. The rapidly growing Chinese economy is driving
parallel increases in living standards and access to healthcare, which in turn is providing
significant opportunities for medical device manufacturers. Competition is fierce in the
medical equipment and supplies market in China. Locally owned production and
development of high-tech medical equipment remains largely small-scale but there is a
small, but growing number of manufacturers that produce high quality, high-tech goods in
China. A large number of multinationals have established manufacturing facilities in China.
However, few have attempted to establish wholly-owned enterprises. Most pursued joint
ventures or technology licensing, but one major company, Medtronic, has created a wholly
owned subsidiary in China. While most companies establish manufacturing facilities in China
as a way of accessing the local market, some firms, in particular Japanese firms (eg. Aloka,
Hitachi), have established operations in China to take advantage of lower production costs
than in their home country. In these cases, production is usually re-exported to the home
country. There are other problems that a medical device manufacturer in China faces. One
of the major problems is the protection of the quality in exported goods. The issue of
import safety came to the fore in 2007, as certain products imported from China, including
some medical devices, raised safety concerns. In December 2007, HHS and China’s State
Food and Drug Administration (SFDA) signed a product-safety Memorandum of Agreement
(MOA) in which China agreed to adopt approaches to import safety based on risk-
management, transparency, and rigorous science-based international standards. The MOA
was renewed in September 2009 with the same fundamental principles and will extend until
December 10, 2011. USFDA officials have been stationed in China since late 2008 to provide
advice and assistance to the Government of China as well as function as an oversight
conduit to the U.S. Government for products under their purview. In addition, the U.S.
Department of Commerce (USDOC) and China have engaged in bilateral discussions since
1996 through the U.S. – China Joint Commission on Commerce on Trade (JCCT)
Pharmaceuticals and Medical Devices Subgroup that facilitates a forum for both regulators
and industry to discuss non-tariff barriers in China.
Another area of concern is the protection of Intellectual Property Rights. Historically, China
has maintained loosely monitored patent laws, as patent infringement and counterfeiting
was a commonplace occurrence. Foreign device manufacturers attending trade exhibitions
would often report of Chinese engineers blatantly "reverse engineering" their product
designs. According to some companies, Chinese engineers would attend trade exhibitions
and attempt to sketch product designs on scrap paper, often right in front of the exhibitors
as the patent infringers knew that no real remedies existed for patent holders. Moreover,
the products could easily be counterfeited and resold at a reduced cost. While still occurring
in some parts of China, this patent problem is less prevalent these days. With the explosion
of the Chinese economy, as well as the population, lawmakers have come to the realization
that authentic and necessary changes were needed to garner the respect of the world
community. An important first step took place in 2001 with China joining the World Trade
Organization. Since then, the government has taken the initiative to crack down on
infringement and counterfeit products. But, despite best effort appearances, the Patent Law
language remains far from clear, allowing for future potential for ambiguous rulings.
Additionally, there also remains continued potential for local protectionist biases within
regions of China, which might result in push back against central legislative efforts.
E. Indian Medical Device Industry:
India today on account of the rapid economic development, increasing trade liberalization,
growing acceptance for advanced, technological products and an expanding healthcare
segment is a lucrative market for medical devices industry. Most of the big players have
established a permanent base in the country either through R&D facilities, manufacturing or
trading offices. As of 2009 the size of Indian Medical Devices market stood at 2777.9
million$ and is expected to reach 6409.9 million$ by 2013, a CAGR of 23.2% over the period.
The Indian Medical Devices Industry can primarily be divided into the following segments. They
are:
Medical Disposables
Surgical Equipment
Diagnostic Equipment
Laboratory Devices and Diagnostics
Dental Equipment
Ophthalmic Equipment
The segmentation of the Indian market across this segments is as follows:
Rapid technological advancement is leading to improved, innovative medical devices, better
therapies and medical solutions. These innovative devices provide enhanced deliverability and
conformability. In the future, such technological advancements will continue to drive further
innovation within the Indian Medical devices market. Following are the other key opportunity
areas for the Indian Medical devices market:
1. Growth in Indian Medical Devices Industry: The Indian Medical devices market is
witnessing increased demand for quality and affordable healthcare. Further, with the
advancement in technologies and increased affordability by patients, the market is
expected to grow potentially in the future. There is a gradual shift from treatment for
chronic illnesses to lifestyle related ailments. Among the various segments,
cardiovascular devices and orthopedic devices are expected to grow in double digits.
Also, the Indian market holds tremendous potential for diagnostic kits (especially blood
glucose monitoring systems), which represents one of the high growth segments.:
2. Advancement in Research and Development: Much of the brainpower was being used
by the Indian government in the R&D institutions (national labs, universities, and
institutes) that it funds. As a result, most of India's technological accomplishments have
come in aerospace, communications, computers, defense, and energy. Government
funding of medical device R&D comes primarily from four agencies: the Department of
Science and Technology, the Department of Biotechnology, the Indian Council for
Medical Research, and the Council for Scientific and Industrial Research. Because
economic reforms have squeezed R&D budgets, government-supported institutions are
now actively seeking industry contracts and placing greater emphasis on product
development and innovation. Similar changes are occurring in the 1300 or so corporate
R&D laboratories in India. Because the companies traditionally have manufactured
goods designed elsewhere, these labs have in the past focused on troubleshooting and
process development. Now, slowly and steadily they are shifting towards development
of new, innovative and affordable products for the Indian masses.
3. India Growing as an Outsourcing Hub for Manufacturing: The need to reduce
operational costs and gain access to the local Indian markets is compelling many US and
European medical companies to outsource their business operations. Further, India is
becoming a hub for manufacturing medical devices. Availability of skilled technologists
and expertise and low manufacturing costs are some of the advantages of outsourcing
processes to India. The different areas of outsourcing include product design,
component manufacturing, research & development, and services such as supply chain
management, product maintenance, regulatory consulting, etc. Also, the emergence of
high-quality Contract Manufacturing Organizations (CMO) has led to the establishment
of a new relationship between a Medical device company and CMO.
Establishing relationships with Indian partners can provide U.S. device
manufacturers with both short-term and long-term competitive advantages. The R&D
groups in both countries can talk to each other using available computer-based
communications and development technologies such as E-mail, computer-aided design,
computer-aided manufacturing, and computer-aided engineering. Because India and the
United States are on opposite sides of the globe, R&D work can proceed around the
clock. India also offers the advantage of lower labor costs, although the wage gap
between the United States and India should narrow considerably over the next decad.
With the recession and the shift towards the emerging markets there has been a gradual
change with the issue shifting from “performance to price” to “price to utility”. To make
this strategy work to international companies need to look at the 'design-to-cost' factor
to make medical devices cheaply. This is where global majors will now have to look at
design and manufacturing hubs in Asia and India, in particular, to tap the quality-cost
advantage which will help improve gross margins. There is need for innovative thinking
and India is now building its capability to be a platform for such prospects.
4. Growth in Healthcare Expenditure: The Indian Medical devices market is witnessing the
demand for quality care and high tech medical devices. This can be attributed to the
rapidly growing Indian economy and middle class population. This, in turn, has led to an
improvement in the living standards of people, resulting in increased access to quality
healthcare. Further, with the increase in healthcare expenditure and affordability of
private services, the demand for medical devices has also increased. Thus, such factors
are creating potential opportunities for the medical device manufacturers.
Source: MGI India Consumer Model V1
5. Growing Medical Tourism in India: With the increasing healthcare costs in developed
countries like the US and the UK, India remains attractive for low-cost medical and
surgical procedures. The emergence of India as a destination for medical tourism
leverages the country’s well educated, English-speaking medical staff, state-of-the art
private hospitals and diagnostic facilities, and relatively low cost to address the spiraling
healthcare costs of the western world. India provides best-in-class treatment, in some
cases at less than one-tenth the cost incurred in the US. Benefits such as cost savings,
medical specialists, and high-quality of care are resulting in increased medical tourism to
India. Indian medical tourism was estimated at $350 million in 2006 and has the
potential to grow into a $2 billion industry by 2012.4 An estimated 180,000 medical
tourists were treated at Indian facilities in 2004 (up from 10,000 just five years earlier),
and the number has been growing at 25-30% annually. India has the potential to attract
one million medical tourists each year, which could contribute $5 billion to the economy
Further, India also offers traditional ayurvedic treatments, which is gaining importance.
Thus, these medical services are offered to the patients at very affordable cost, which
has led to the growth in medical tourism in India.
6. Increasing Privatization in Healthcare Sector: In India, healthcare is delivered through
both the public and private sectors. The total healthcare financing by the public sector is
dwarfed by private sector spending. In 2003, fee-charging private companies accounted
for 82% of India’s $30.5 billion expenditure on healthcare. This is an extremely high
proportion by international standards.3 Private firms are now thought to provide about
60% of all outpatient care in India and as much as 40% of all in-patient care. It is
estimated that nearly 70% of all hospitals and 40% of hospital beds in the country are in
the private sector. Further, the intense competition among private hospitals and the
demand for high standard medical treatments by affluent patient base is increasing the
demand for advanced medical equipment. In turn, this is leading the private healthcare
sector to invest in expensive high end medical devices, thus, improving the healthcare
infrastructure and driving the growth of the Indian Medical devices market.
7. Improving Quality Standards in Healthcare: The growing economy and increase in the
living standards of people has resulted in the demand for quality healthcare by the
patients. This has resulted in the revamping of the medical infrastructure such as
building, etc both at the private and government sectors. Further, with the increased
competition for healthcare delivery, private hospitals are applying for accreditation from
the international bodies. The new export emphasis is awakening a competitive
awareness throughout Indian industry that it previously lacked, which has led to an
increase in the number of companies obtaining ISO 9000 certification, for example. A
nationwide system of technology parks is also being set up, and many of the buildings
within them allow resident companies to communicate globally via satellite hookups
and dedicated high-speed phone and data networks. This is expanding the local demand
for quality healthcare, and is likely to continue to further drive growth in the Indian
Medical devices market.
8. Aging Population and Prevalence of Chronic Illness: The increasing aging population
and the prevalence of chronic & age related illnesses (such as cardiovascular diseases,
cancers, diabetes, etc) are driving the demand for medical devices. As Indians live more
affluent lives and adopt unhealthy western diets that are high in fat and sugar, the
country is experiencing a rise in lifestyle diseases such as hypertension, cancer, and
diabetes, which is reaching epidemic proportions. Over the next 5-10 years, lifestyle
diseases are expected to grow at a faster rate than infectious diseases in India, and to
result in an increase in cost per treatment.
9. Growing Consumer Awareness on Healthcare: Availability of better medical and health
information has increased health awareness in people. Therefore, a majority of
Indians are becoming aware of their health and giving a high priority to preventive care.
Further, regular health checkups and continuous monitoring of health information by
patients are driving the uptake of consumer medical devices. With such increasing
consumer awareness, there exists a potential for tremendous growth in the Indian
Medical devices market.
In order to achieve the optimum utilization of the breadth of opportunities presented by the
medical device industry, it will be necessary for the country to achieve optimum utilization of its
inherent strengths such as:
1. A large, domestic user base: India is the 2nd most populous country in the world. The
population provides a steady and dynamically expanding domestic market for the
medical devices manufacturers. The Indian healthcare market was estimated at US$35
billion in 2007 and is expected to reach over US$70 billion by 2012 and US$145 billion
by 2017. In the mid-1990s, health spending amounted to 6% of GDP, one of the highest
levels among developing nations
However, because of the low penetration, government apathy and enduring
poverty, medical care is available only to a selected few. As per the statistics (2006) bed
per thousand population ratio for India stands at 1.03 as against an average 4.3 of
comparable countries like China, Korea and Thailand (2002 data). Hence in spite of the
phenomenal growth in the healthcare infrastructure, we are likely to reach a bed to
thousand-population ratio of 1.85 and in a best-case scenario, a ratio of 2 by 2012. Beds
in excess of 1 million need to be added to reach a ratio of 1.85 per thousand. This
provides a tremendous base for the medical devices industry to build on.
2. Strength in product Development: India is well placed in the contract design,
development and manufacturing space because of its engineering capabilities in a wide
spectrum of areas. Typically, there are two market opportunities in contract design and
development of medical devices. One is that companies in the US and Europe can
offload a whole range of existing medical device products to India to maximize the cost
advantage. India has been proving to be a reliable and dependable source for this
capability. The second is that global companies can look at India as a hub in the Asian
region to undertake contract design, develop, manufacture and package the medical
devices. The country has a sound record in adherence to IPR which is vital for medical
devices because it follows English law which is also referred to as the contract law of the
Commonwealth countries.
3. Available of Cheap, skilled workforce: India's increasingly skilled workers are one
attraction for the medical devices companies. According to the recent Global
competitiveness Index report, the country ranks an impressive 3rd for the availability of
scientists and engineers. Trained in all technological disciplines, India's approximately 3
million scientists and engineers form the second largest pool of technical personnel in
the world. Many have been educated and employed abroad, are computer literate, and
speak and write English fluently. Many are also underutilized and underpaid. There is
multi-disciplinary R&D efforts and engineering capability in multiple sciences of
electronics, chip design, software mechanical and medical engineering which
supplement the medical device development.
There are still a few areas which are lagging as far as development is concerned and may
potentially derail the advancement of the medical device industry.
1. Low per capita expenditure: India spends just over 5 percent of its $1-trillion-GDP
annually, largely in primary healthcare focusing on basic needs such as immunizations
and common illnesses. The per capita expenditure is less than a third of what China
spends, while the private sector accounts for about 80 percent of total spending in
India's healthcare. Average BRIC per capital medical device expenditure was US$3.1 in
2005. There is a wide variation between countries, however. Brazil’s market equated to
US$16 per capita, while India spent barely US$1. Expenditure in Russia and China is
around US$13 and US$2 respectively. In relation to the G6, these per capita levels are
tiny. The USA spent US$276 per capita in 2005, while Italy, the lowest-spending of the
G6, spent US$77.
BRIC Summary Medical Equipment Market per capita by Country, 2005 (US$)
2. Developing government policies and infrastructure: In India there is essentially very
little regulation of the medical device industry; even less by way of quality-, or benefit-
cost assessment. This is in the area of ensuring some order in the medical device market
- to distinguish fly-by-night operators from more reliable sellers of devices, to ensure
that sellers of equipment provide adequate levels of spare parts and technical training,
to maintaining price lists and the like. Presumably, the effectiveness of this effort may
require working in collaboration with the buyers of such equipment and its sellers. In
particular information on the different sellers and their terms and conditions ought to
be available at this regulatory agency. This could be linked to some compulsory
registration mechanism, again developed in consultation with the sellers of equipment
and purchasers. The medical device industry as discussed is subjected to price
discrimination and the involvement of a regulatory agency will bring some amount of
transparency to the pricing process.
3. Untapped rural markets : In India, healthcare facilities are unevenly distributed with
many rural areas having no access to healthcare provision. The geographic diversity and
low level health awareness can be accounted for low level penetration in these rural
areas. This has resulted in poor or no healthcare infrastructure.
Rural health services infrastructure 2000-2001
Service Existing Required
Primary Health Care
Centers
1 per 20,000-30,000
22,842 24,717
Sub-centers
1 per 3,000-5,000
137,311 148,303
Community health
centers
1 per 100,000
3,043 7,415
According to the NCAER, in nearly 20% of cases rural households travelled more than 10
km for treatment. In Meghalaya, in 54.56% of rural illness cases and in Orissa in 33.47%
of rural illness cases, patients travelled more than 10 km. Even when patients do get to
the health centre there is no guarantee that the staff will be present. According to a
survey by the Jan Swasthya Abhiyan, only 38% of all PHCs have all the critical staff. A
survey by the International Institute of Population Sciences found that only 69% of PHCs
have at least one bed, and only 20% have a telephone.
Penetration of health insurance has been slow and halting, despite the huge
market. The expansion of Health Insurance in India is impacted by reasons like lack of
regulations and control on provider behavior leading to difficulty in proper underwriting
and actuarial premium setting, lack of data sharing leading to risks of moral hazard,
unaffordable premiums and high claim ratios, high administrative costs (over 30%),
delay in reimbursements, acute shortage of supply of services in rural areas and a high
number (22%) of claims for communicable diseases leading to co-variate risks and a
subsequent high insurance premium.
4. Excessive dependency on imports: The domestic production of medical devices largely
consists of low technology devices such as disposables, surgical appliances, etc. Thus,
the Indian Medical devices industry is heavily dependent on imports of high-end devices
from countries like the US, UK, Germany, Japan, etc. Imports constitute over 50% of the
market. Most imported products have high gross margins. Currently, the high value
imported products include cancer diagnostic, medical imaging, ultrasonic scanning,
plastic surgery equipment and polymerase chain reaction technologies. The current
system places a greater duty on imports of finished medical device products than on
imports of medical device parts. This duty concession applies to more than 100 types of
medical devices and thus reduces the competitiveness and potential growth of the local
medical device industry.
Also, high cost of obtaining the required documentation for these regulatory
submissions continues to be a matter of concern for medical devices importers. The
importer has to pay USD 1500 towards the registration of the manufacturer from whom
he is importing. A fee of USD 1000 is paid for registration of a single medical device and
an additional fee of USD 1000 for each additional device. The high fee could become a
burden for smaller manufacturers and also affect the available range of products in India
as the sales per device are usually quite small.
5. Lack of Sufficient operational expertise and funding: Certain advanced medical systems
(such as implantable cardiac devices, digital radiography etc), being complex, require an
understanding of device mechanism and its parts for effective use. Thus, interpretation
of the data obtained from the system may sometimes be difficult without adequate
training. Moreover, this involves assignment of skillful medical professionals for the
appropriate use of these systems. These factors are thereby hampering the growth of
the Indian Medical devices market.
Also, Medical equipments are becoming costlier to procure and maintain. Also,
the maintenance of portable medical devices that follow strict standards and
regulations are becoming expensive. Further, owing to frequent changes in
technologies, these devices poise connectivity and interfacing problems that increase
the set up complexity. Therefore, these factors are becoming barriers for future
acceptance of new system.
6. Recommendations:
Develop institutional support for R & D
Establishment of Incubators and development of R & D clusters
Development of Institutions for training and creating trained professionals.
Variety of testing facilities required –Material & Biological testings and Clinical
evaluation
Single VAT system for medical devices across the states and efforts to bring in more
price transparency especially in imported products.
Special packages for SMEs -access to sector specific infrastructure and facility.
Higher import duties on low end medical products to encourage development within
the country.
Make health Insurance compulsory and incentivise its spread throughput the nation.
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