You trained as a general surgeon but moved into the medical business. Why did you change careers?
I graduated from Shanghai Second Medical University in 1989, when China was starting the open policy. A lot of doctors like me left the so-called ‘state system’ to join hotels or multinational pharmaceutical companies. I earned about 200 RMB a month, and if you joined a multinational in China you earned about double that and you felt that your efforts would be rewarded. In my industry there are many people who are former doctors or English teachers. Now it is not like that. Not many people are leaving medicine.
Since you left medicine and joined industry, what are the three or four most significant changes that have taken place in the Chinese healthcare market?
First, there are fewer doctors joining our industry because the overall environment for doctors is improving. On the other hand, there is more competition in our industry, so fewer people are trying to jump in.
Another factor is the overall coverage of healthcare by the government, by insurance companies, or by an association like Xin Nong He, where all the farmers put money together, and if someone gets sick, it pays the bill. When I first came into this industry, less than 20 or 30% of the population was covered by the government or by an association. Now about 90 to 95% of the population has coverage, although the value is still relatively very small.
Third, market access is getting tougher. Ten or 20 years ago it was not so hard to get an import license. Now there are a lot of controls, starting from an import license, post market surveillance, tendering requirements, and now clinical trials for imported medical devices. These kinds of controls can be good for patients but can also cause unnecessary lead times. The Chinese patient may not be able to be treated with latest medical technology. There have also been many changes on the policy side, and technology today is also very different.
Looking at the future, while some forecasts see GDP growth dropping below 6% next year, we anticipate healthcare spending as a percentage of GDP will keep increasing. And healthcare costs will also increase.
Can you tell us more about the registration fee and clinical trials?
It depends on the product’s nature. Products are divided based on risk, and the highest risk level is Class Three. The registration fee alone, not including testing or samples, is about US$51,000. A big multinational company easily has 20 or 30 new products every year, so it’s a sizable payment. If the market for a product is small, it may not be worthwhile.
Class Three devices need clinical trials, and it takes five to six years to finish the registration and clinical trial. Together the registration fee and clinical trial fee can be about US$2-3 million. This is the biggest challenge for U.S. medical device companies: in our industry, average product life circle is five to six years, so as soon as something is approved here, it’s out of date in the U.S. When you start to register a new Class Three product, you need to anticipate a five to six year timeline, and you need to check with manufacturing and R&D that you will still have that product in five or six years.
Overall, the registration of medical devices is getting more and more rigorous.
Some AmCham members say it’s harder for Western medical device companies to compete with local companies because the playing field is no longer level. Is this true?
Compared with 10 or 20 years ago, that’s correct. But the government should have been doing then what it is doing now. For imported products, for example, multinational companies must now hold clinical trials. Previously only local companies were required to have clinical trials. The imported products need clinical trials even if they are U.S. FDA approved or have been trialed in other markets. If you dig into the details there are some differences, but it’s fair to say that it is now equal.
The other area to consider is market access. Ten to 20 years ago, every company enjoyed 20 or 30% growth and the provincial and municipal governments had little control over pricing and reimbursement. Now there are strict controls over pricing and reimbursement with the ‘green book’. On the pricing side, each province has a so-called ‘tender’, which is different from the western world. In the U.S., the tender means you agree on a price, and they [the hospital chain] commit to a volume and you sell the committed volume at a certain price. But in China, a tender is like a price cut. So they pick the lowest price you can sell in that particular province. Then you go to each hospital, and they negotiate with you again regarding what is the lowest price. And this process is getting tougher and tougher.
Are government healthcare policies driving these changes?
On the one hand, the government wants to protect patient safety and cure more patients; on the other hand, they want to control healthcare expenses. Additionally, there are many new start-up companies in China, and they [the government] not only want to regulate them but also help them grow.
China is trying different ways to control healthcare costs in addition to tendering, such as the DRG payment scheme, two-invoice requirement, etc.
Will the central government exert more control over healthcare in the future?
Yes, but It’s hard to anticipate how. I think that in the next five to ten years there may be more streamlining of market access regulations such as around clinical trials. If the government feels there are too many hurdles to execution, they may make adjustments, such as providing an excepted product list, accepting more clinical evaluations, etc. They may either centralize more regulations or the central government will give clearer rules to provincial governments on what they should do. This is because a lot of payments for healthcare come from the provincial government, not from the central government, so there is a lot complexity to manage.
What I am also seeing and expect, and it’s not to do with policy, is improvements in IT, robotics, and other things that will make the system more efficient.
Where do you see the biggest growth opportunities for domestic and foreign companies? Or do you think foreign companies will be forced out by local competition.
Multinationals will prevail in sectors where there are more innovative products, like in the high-technology or life-threatening areas. Locals will prevail in commodity-type products and in areas like chronic diseases. It depends on the product and the nature of the treatment. For example, the pacemaker market is dominated by multinationals because no patient or doctor wants to risk their life. There’s very high technology inside a pacemaker, it keeps being upgraded, and it’s difficult for local companies to keep up with the development pace. If you look at products like hip and knee replacements, they’re more reliant on design, on materials, and they go through many upgrades, so people want imported products.
On the other hand, stents are now almost a commodity. There’s not much design, they are very similar, and the market is now dominated by local players. Even J&J has withdrawn from the market. More and more of the trauma market is also going to the local market. This is because trauma is emergency surgery and if you get hit by a car, you have to be treated very quickly. The products used to treat you won’t be very different whether they are foreign or local. Also, local companies will prevail with diseases like diabetes or hypertension, where it’s not immediately life-threatening, but where you need something that is required every day and which needs to be conveniently reached like a consumer good.
Are western companies in this industry slower than local competitors when it comes to marketing?
If you look specifically at the China market, western companies sometimes are slower, simply because there are a lot of hurdles to entering the China market. But if you look at the global market, I think that in our industry, western companies are much more advanced and pioneering than the local companies. One of the advantages for local companies in China is simply that because they are based here, it’s easier to get to the end user market.
When Chinese companies go to the U.S., do they face similar hurdles as U.S. companies coming here?
Similar, but bringing products to China is more complicated. In the U.S. there are clear rules for companies. In China, a lot of rules are not written, so no one can give you a book and say read this and you will know the rules. And every six to twelve months, new rules come out.
Our industry associations like AdvaMed, like AmCham, all try to lobby the government about how to improve the market access for U.S. medical device companies, for example, using FDA or other western countries’ data to try to prove that this is a valid product, a good product, and to except it from a clinical trial. This has gone to the JCCT, but it’s still being discussed.
Can patients choose whether their new hip or knee joint is a foreign or domestic product? Can you say you want a particular brand?
Normally, the doctor won’t ask you which brand. The doctor normally asks you which kind of reimbursement scheme you have. For example, if your product costs RMB 10000, the government may say RMB 8000 is the maximum reimbursement it will pay if you choose the imported product, and you need to pay the rest by yourself. If you select the local product, you may get a 100% or 90% reimbursement, but the maximum may be RMB 5000. So it’s your choice. It’s the same with stents. If a guy is lying on the operating table, the doctor may come out and say to the family member: “He needs two stents; do you want local or imported?” If you select imported products, there will be different prices.
Do you ever wish you were still a surgeon?
I’m still very interested in surgery and I think being a surgeon is very good thing. But I still don’t want to be a surgeon in Chinese medical system.