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 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 22,842 24,717

Centers

1 per 20,000-
30,000

Sub-centers 137,311 148,303

1 per 3,000-5,000

Community health 3,043 7,415

centers

1 per 100,000
 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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