Professional Documents
Culture Documents
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 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.
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.
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
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.
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.
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.
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.
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.
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
• 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:
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.
1 per 20,000-
30,000
1 per 3,000-5,000
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.
References:
2. 2008 data compiled from tariff and trade data from the U.S.
Department of Commerce
and the U.S. International Trade Commission
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