Keeping ahead in China means adapting to a shifting market, analysts say

China with flag overlay

Many medical device companies have their eye on China – and with good reason – but the country’s approach to healthcare is shifting, and companies that hope to capitalize on the China’s exponential growth must be prepared to change with it, according to analysts at PricewaterhouseCoopers.

China’s healthcare market is an irresistibly attractive one, given recent spikes in healthcare spending and more surges projected down the line, but "the rules to succeed in China’s new economy are changing, and companies that are able to adapt may be well positioned to realize the benefits of participating in this important market," PwC researchers said.

China’s healthcare market is booming, fueled in part by aggressive government spending on healthcare reforms to expand insurance coverage and healthcare access, as well as by an aging population with strong underlying economic growth. Patients in China are seeing more chronic disease, but they are also developing larger margins of disposable income and demanding higher-quality healthcare, PwC reported. Together, those elements represent a recipe for rapid growth and an alluring market for medical device makers.

Per-capital healthcare spending in China grew 23% between 2006 and 2009, according to there report. The market was valued at $357 billion in 2011 and is projected to his $1 trillion in 2020, and medical device makers have already spend several years and millions of dollars developing a foothold through R&D investments and acquisitions. How Chinese players determine the value of a relationship, however, may have shifted in recent years away from strongly financial motives to more strategic interests.

"Mature Chinese companies no longer want cash, but rather technologies, managerial expertise, and new markets," according to PwC. "In return, they offer resources, relationships, and knowledge to succeed in a lucrative domestic market characterized by bureaucratic complexity, diverse regulations, and varied consumer preferences."

In response, multinational companies are putting more money into sales, R&D and manufacturing in China. Sometimes that means steering away from acquisitions and opting instead for joint ventures, which can be tricky business.

Joint ventures allow the foreign companies to reap the benefits of local know-how in navigating China’s regulatory environment and establishing channels to central and local authorities, among other things, but Chinese partners may barter for control over budgets, management appointments and other aspects of the relationship, PwC analysts noted.

"Multinationals will need to weigh these concessions carefully with the value represented by access to a market expected to be the world’s largest by 2025," according to the report.

Many medical device makers have considerable stakes in China as part of their larger emerging market strategies, including medtech giant Boston Scientific(NYSE:BSX), which in the summer of 2011 committed $150 million to a 5-year plan to expand its Chinese operations.

Last month Boston Scientific Asia-Pacific president Supratim Bose told that China represents the greatest opportunity among emerging markets for medical devices, and the company is adding 100-150 employees in China each year for the next 3 years.

In January orthopedic giant Stryker (NYSE:SYK) called its acquisition of Trauson Holdings the "key component" of its emerging market strategy.

"To date, Stryker’s presence in China has been focused on the premium segment, which is dominated by multinational players. However, the value segment of the market is growing at a faster rate, with local manufacturers the key players," Katherine Owen, Stryker’s vice president of strategy, said in a conference call with investors. "We have prioritized China and the value segment of the market in particular as a critical market, given that the device segment is growing at roughly 20% annually, with the overall market expected to more than double in the next 5 years."

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