Medtronic PLC is broadening the number of low-cost medical devices it sells in China and is looking for deals there, as local competitors put increasing pressure on the industry’s big foreign names.
The maker of heart valve technologies and other devices is adding to its portfolio of what it calls value products for a critical growth market full of patients who still can’t afford its high-end offerings, Medtronic Chief Executive Omar Ishrak said in an interview. The company is moving into community hospitals outside China’s big cities to sell surgical tools, pacemakers and cardiac and spinal implants that cost less than its premium lines, he said.
The Dublin-based company is eyeing China’s domestic medical device companies for potential acquisitions, Mr. Ishrak said. He declined to comment on whether the company is in talks with any local firms.
“We’re completely bullish on China,” said Mr. Ishrak. Despite challenges including sudden regulatory shifts and a health-care system rife with corruption, Mr. Ishrak said he sees China’s rewards outweighing its risks. “It’s a numbers game,” he said. “This will be the largest market and it’s not a debate. It’s a matter of when.”
Medtronic aims to increase its annual sales growth in emerging markets to 15% at constant currency rates from the current 12%, Mr. Ishrak said. Medtronic’s China sales are about 5% of the company’s global revenue, which reached $20.3 billion in the fiscal year ended in April, a Medtronic spokesman said. The company doesn’t break out its sales figures for China.
The Chinese medical-device market is soon expected to become the world’s third largest, estimated to reach $18 billion by 2018, up 29% from 2014, edging out current No. 3 Germany, behind the U.S. and Japan, according to London-based consulting firm L.E.K.
The medical-device market is also shifting drastically. A decade ago, premium products were top sellers, but now 70% of sales come from midrange and value products, according to consultancy McKinsey & Co.
“China’s health-care reform initiatives have significantly expanded the lower tier of hospital infrastructure and payment, and the economic growth and urbanization has opened up the value segment,” said Helen Chen, a director and partner at the Shanghai arm of L.E.K.
Chinese leaders are pressuring medical companies to lower prices to make health care more affordable and accessible. At the same time, the country’s domestic players are snapping up market share with sales of more affordable devices. Chinese makers of drug-eluting stents, drug-coated devices to prop open arteries and keep blood flowing, now hold an 80% market share in the country, while multinational companies hold the other 20%, according to McKinsey. A little over a decade ago, multinationals dominated with more than 80% share.
Chinese companies are moving into multinational companies’ high-end turf, said Andrew Chen, a China-based practice leader of PricewaterhouseCoopers’s medical-devices division. Foreign companies also have a new regulatory hurdle, as China has enacted new regulations requiring imported invasive devices, such as implants or life-supporting devices, to pass clinical trials in China. Previously, companies like Medtronic could waive China’s lengthy clinical trial procedures by using U.S. or European Union trial data.
Mr. Ishrak said the new regulations wouldn’t affect Medtronic, which is also likely to expand manufacturing in China to feed market demand.
“This is one of the few countries in the world where the local market potential itself and the volume it can generate will justify itself,” he said.
Medtronic owns hospital-supply company Covidien, which has a significant presence selling surgical supplies in China, and Chinese orthopedic implant maker China Kanghui Holdings Inc.
By Laurie Burkitt