Medical Devices Industry in India

Term paper part 2: Medical Devices Industry Analysis

Contents High-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 References:

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 Entry The 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 Suppliers Powerful 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 Substitutes The 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 Conduct Within 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 stateowned. 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 massmarket 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 reexported 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

Primary Health Care 22,842

Required 24,717

Centers 1 per 20,00030,000 Sub-centers

137,311

148,303

1 per 3,000-5,000 Community health 3,043 centers 1 per 100,000

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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