FLANDERS INVESTMENT & TRADE MARKET SURVEY

THE MEDICAL DEVICE

MARKET

IN CHINA

“The Chinese medical

device market”

December 2016

Sunny Wang, Assistant

Economic Representation of Flanders

c/o Embassy of Belgium

6, San Li Tun Lu

CN – 100600 Beijing

beijing@fitagency.com

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Content

Content .................................................................................................................................................... 1

Summary of Opportunities ...................................................................................................................... 2

Chinese Market Overview ....................................................................................................................... 2

Industry Prospects ................................................................................................................................... 2

Sub-Sector Best Prospects ................................................................................................................... 3

Regulations on Medical Devices .............................................................................................................. 3

Background .......................................................................................................................................... 3

Classification ........................................................................................................................................ 4

Registration ......................................................................................................................................... 5

Clinical Trials ........................................................................................................................................ 5

Relevant Governmental Department .................................................................................................. 6

Hospitals in China .................................................................................................................................... 6

Types of Hospitals ............................................................................................................................... 6

Numbers of Hospital ............................................................................................................................ 7

Military Hospitals................................................................................................................................. 8

Geographical Spread ........................................................................................................................... 8

Hospital Procurement ............................................................................................................................. 9

Overview.............................................................................................................................................. 9

National Level Centralized Purchasing .............................................................................................. 10

Provincial Level Centralized Purchasing ............................................................................................ 10

Military Hospitals Purchasing ............................................................................................................ 11

Supply Chains & Sales channels ............................................................................................................ 12

Challenges ......................................................................................................................................... 12

Opportunities .................................................................................................................................... 12

Relevant Organizations, Trade Shows, Magazines ................................................................................ 13

Organizations ..................................................................................................................................... 13

Trade Shows ...................................................................................................................................... 13

Magazines & Websites ...................................................................................................................... 13

Conclusions ............................................................................................................................................ 14

Source & Reference ........................................................................................................................... 14

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Summary of Opportunities China has been one of the fastest growing economies in the world with a GDP of 7.7 percent in 2013. China’s medical device market is ranked second largest in the world. Driven by both an increase in discretionary income and a population that is aging faster than any other nation’s population, the market has been growing at about 20 percent since 2009. It is expected to maintain this pace over the next three to five years, far exceeding the predicted growth rate of the global market. By 2020, China will have 400 million people who are 60 years-old or older, and 100 million older than 80. By 2050, a third of the 1.4 billion Chinese will be at least 60.

Chinese Market Overview China is one of the biggest medical device markets in the world. The sales of medical device in China have increased rapidly in recent years, reaching a total value around CNY 300 billion in 2015. Following the economic development in China, more and more investment and expenditures are going into the health care industry. It is expected that the health care sector is expected to continue to expand in the coming years, including the medical device sector. At present, the competition in this market is rather fierce. Foreign companies are mainly competitive in the high-end segment and Chinese companies occupying the mid-to-low end section. As for the import & export, according to customs statistics, the total trading value has reached USD38.5 billion with a 7.53% of increase comparing with 2014. Amongst, the export is USD21.2 billion with an increase of 5.73%; import is USD173 billion with an increase of 9.81%. In 2015, China imported medical device from about 108 countries and regions. Europe is the biggest import source to China, which accounting for 37% of the total import. North America is the second biggest supplier accounting for 33%. The third one is from the Asian exporters taking up to 24% or so. Currently there are around 12,279 companies located in China engaged in medical device import, amongst about 291 companies’ import volume exceeded USD10 million and 27 of them had imported more than USD100 million.

Industry Prospects China has over 16,000 hospitals, 85% of which are publicly-owned. The Chinese hospitals consider European and U.S. products to be of superior quality as well as the most technologically advanced and they particularly welcome medical equipment and products with high-technology content. At the same time, domestic medical device companies are consolidating, upgrading quality, and beginning to compete in medium- level technology niches. With the government policy to align to supporting and encouraging medical device innovations, some domestic manufacturers such as Shenzhen Mindray are growing stronger and are already competing with foreign suppliers.

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Sub-Sector Best Prospects The best-selling prospects in the medical device sector include: • In vitro diagnostic equipment and reagents: Clinical and diagnostic analysis equipment, diagnostic reagents, medical test and basic equipment instruments, and point of care testing (POCT). • Implantable and intervention materials and artificial organs: Interventional materials, implantable artificial organs, contact artificial organs, stent, implantable materials, and artificial organ assisting equipment. • Therapeutic products: Tri-dimensional Ultrasonic-focused therapeutic systems, body rotary Gamma knife, simulator, linear accelerator, laser diagnostic and surgical equipment, nuclide treatment equipment, physical and rehabilitation equipment. • Medical diagnostic and imaging equipment: Black & white and coloured supersonic diagnostic units, sleeping monitor, digital X-ray system, MRI, CT, DR, and ultrasound equipment. • Surgical and emergency appliances: Anaesthesia ventilation systems and components: high frequency surgical equipment, high frequency and voltage generators. • Healthcare Information Technology related equipment and products: Medical software, computer-aided diagnostic equipment, and hospital information systems (HIS, CIS, and HLT). • Medical equipment parts and accessories.

Regulations on Medical Devices

Background Companies interested in entering the Chinese market should realize they must overcome existing barriers in an uncertain and changing regulatory environment. Recently, China’s State Council announced changes in the Regulation for Supervision and Administration of Medical Devices (Order 650), slated for implementation on June 1, 2014. Order 650 is the revision of the old regulation Order 276 which was implemented in 2000. As the regulator of medical devices, China Food and Drug Administration (CFDA) is expected to issue a number of technical documents on June 1st for implementing this new regulation. Compared with the old regulation, noticeable changes include extending validity of the registration certificate to five years; adopting a notification system to replace the registration system for all Class I products; requiring Chinese language on the product manual, labels, and packaging labels; requiring clinical trials inside China for the Class II and Class III medical devices that are not on the CFDA’s exemption catalogue. Additional issues and challenges that the foreign exporters will face include pricing, tender, and bar code systems that are delaying entry into the Chinese medical device market.

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Classification In China, medical devices are divided into three categories: Class I, Class II and Class III based on the risk level of the device (determined by the purpose, structural features, whether it comes into direct contact with the body, methods and status of use). Classifications are used predominantly for risk management. Therefore different classes of medical devices are governed by different rules. For example: Class I medical devices are deemed to have low levels of risk, for which safety and effectiveness

can be ensured through routine administration; Class II medical devices are deemed to be of a medium level of risk, for which further control

is required to ensure their safety and effectiveness; Class III medical devices have high levels of risk, where special measures must be taken to

enforce strict control and administration regarding safety and effectiveness. According to the Regulations for the Supervision and Administration of Medical Devices, (issued in March 2014), the CDFA implemented product filing management for Class I medical devices before they can be distributed in China. For Class II and Class III medical devices, manufacturers are required for further approval from the CFDA. As for judging the category of the medical device, please refer to the Appendix (Criteria for Medical Devices Classification). In the Appendix, the concepts of active and passive are mentioned. A medical device can be divided into four categories according to its structural characteristics (powered/active or non-powered/passive) and whether it touches the human body. See below the definition:

Based on above 4 categories, there are also some sub-categories divided, please refer to the followings:

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Remarks:

1.) If a medical device can be categorised into two or more sub-categories, a higher level classification shall be applied. If a medical device package contains several devices or types of device, the highest level is applied. Sterile medical devices are not permitted to be classified lower than Class II.

2.) It must also be noted that some medical devices may be required to gain China Compulsory Certification – CCC certification by CNCA (Certification and Accreditation Administration of PRC).

Registration All imported medical devices must obtain, from the CFDA, a medical device registration

certificate. Overseas manufacturers must entrust a registered representative in China to apply for a

registration certificate on their behalf. The registered entity could be the branch office of the manufacturer or a Chinese registration service provider.

For finishing the whole registration, technically, Class II needs about 98 working days and

Class III needs 128 working days, period for clinical trial is excluded. However, according to common experience, the registration could last from 6 month to 2 years in most cases. So choosing a good qualified registration service provider is crucial, which will make you going through the registration process much efficiently.

CFDA charges the registration fees for Class II is RMB210,900 and RMB308,800 for Class III,

clinic trial and registration service fee are excluded.

Clinical Trials Class I is not required for clinical trial before getting certification registration. Class II & III devices are required to undergo clinical trials in China theoretically. However, some medical devices under following situations will not be required for clinical trial:

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1. The operation principle is clear, same kind of devices have been on sold in the market for years without any serious accident records.

2. The product has been proved to be safe and effective through non-clinical trial evaluation. 3. The product has been proved to be safe and effective through evaluation based on the

same kind of product clinical trial or the data collected through clinical operation. Remarks: Each year, CFDA will update and release the list for medical devices, which do not require clinical trial. If your product is not on the list, you can also provide related documents for explanation, by which your product could be considered to be registered without being asked for clinical trial.

Relevant Governmental Department China Food and Drug Administration (CFDA)

(W) http://eng.sfda.gov.cn/WS03/CL0755/ CFDA is responsible for drafting the regulations and supervises the safety and management of drugs, medical devices and cosmetic products in China.

Centre for Medical Device Evaluation (CMDE) (affiliated with the CFDA) (W) http://www.cmde.org.cn/CL0001/ CMDE is responsible for the technological evaluation of medical devices.

Certification and Accreditation Administration of PRC (CNCA) (W) http://english.cnca.gov.cn/ CNCA is the authority in charge of the issuance of 3C certificates for medical devices.

Hospitals in China

Types of Hospitals

1. Hospitals a. General hospitals:

Level III, general or comprehensive hospital at national, provincial or city level (Main users of imported medical devices);

Level II, hospital of Medium size city, county or district level;

Level I, township hospital. b. Specialized hospitals:

Dental hospitals, tumour hospitals, children’s hospitals, mental hospitals, infectious diseases hospitals, dermatosis hospitals, plastic surgery hospitals and Rehabilitation hospitals (Some of these hospitals in the big cities are also the main user of imported medical devices);

c. Hospitals specialized in Traditional Chinese Medicine (TCM)

2. Community health centres

3. Health centres

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4. Outpatient departments

5. Clinics

6. Village clinics

7. Women and children care agencies

8. Specialized disease prevention & treatment institutions

Numbers of Hospital

By grade Number (Oct 2016)

General Hospital (total 28584)

Level III 2,194 Level II 7,807 Level I 9,090 Ungraded 9,493

(Source: http://www.moh.gov.cn/mohwsbwstjxxzx/s7967/201612/6300bd3cfa6148adb2b15a76dfdf4b48.shtml) Level III hospitals are regarded the best hospitals and level I is regarded as having the lowest capabilities. Most of the famous Chinese doctors work in Level III hospitals in China. When purchasing medical devices (no matter is big equipment or consumable), price is NOT a problem to them in most cases. Quality and service are always the prior consideration by these Level III hospitals for the following reasons:

1. Many of them have to face huge amount of outpatients every year. E.g. Sino-Japan Friendship Hospital’s outpatients in Beijing reached 2.55 million/year in 2014. Therefore equipped with reliable devices is necessary.

2. Almost all the level III hospitals are public and funded by the Chinese government, which

make them be able to invest for expensive imported devices.

3. Foreign branded medical devices are well-known in the industry. The public image of a hospital is often got enhanced by its ownership of imported medical devices.

4. Feedback from doctors suggests that foreign branded medical devices are more user-

friendly.

5. Some doctors are also under the impression that foreign branded medical devices are better than domestically produced brands.

Besides the general hospitals, clinics and community care medical institutions tend to have the most basic equipment/medical devices. In China, private hospitals have been expanding rapidly in recent years. Since 2015 there are more private hospitals than public hospitals. Please refer to the following sheet:

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By type Number (Oct 2016) Public hospitals 12,786 Private hospitals 15,798 Disease Control and Prevention Centre 3,485 Women and children care agencies 3,067 Specialized disease prevention & treatment institution 1,209 Family planning institutions 17,946

(Source: http://www.moh.gov.cn/mohwsbwstjxxzx/s7967/201612/6300bd3cfa6148adb2b15a76dfdf4b48.shtml) Although private hospitals are not yet the main users of imported devices, especially of big medical equipment, such as Gamma Knife, PET-CT etc.., it is predicted that their purchase capability on imported medical devices will increase fast in next decade. Following the increasing health-care demand of constantly expanding Chinese middle-class group, more and more private investment is attracted and absorbed into this sector.

Military Hospitals In China, military hospitals are also one of the main consumers of imported medical devices. Almost all the military hospitals located in urban area are open to ordinary patients with their fame of specialized medical treatment and strong financial capability. Including the hospitals belonging directly to Health Department of the General Logistics Department of the People’s Liberation Army [PLA], the hospitals belonging to military areas, and the hospitals belonging to the Armed Police, there are about 337 hospitals, amongst, there are 150 big sized (over 300 beds) multipurpose military hospitals. The PLA has four military medical universities, one higher medical college and 10 higher professional schools of medical education.

Geographical Spread According to statistics, the geographical spread of hospital is like this:

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From the chart, we found:

1. East China takes 25.15% of the hospitals of China, which includes the provinces of Shandong, Jiangsu, Anhui, Zhejiang (Shanghai), Jiangxi and Fujian. This is also the most economic developed area in China.

2. Central China takes 18.2%, which includes the provinces of Henan, Hubei and Hunan.

3. North China takes 17.27%, which includes the provinces of Hebei (Beijing & Tianjin), Shanxi,

and Inner Mongolia. Above 3 areas are the main consumption areas for imported medical devices. Shanghai has been the biggest import port on medical device business for many years, which takes about 44% of the total import volume in 2015. Most of the big traders/manufacturers are located or have presences in Shanghai, such as Johnson & Johnson, Medtronic, Roche, Olympus and etc. These multinational branches in China are also the main importers of China.

Hospital Procurement

Overview For procurement of large medical equipment, open bidding is normally adopted by most of the hospitals, especially via centralised online purchasing agents in accordance with relevant national or regional regulations. Within a hospital, procurement decision is normally made based on following process:

1. Directors in relevant departments make their purchase plans based on the needs of their departments;

2. Directors submit their plans to hospital Directors for approval;

3. After obtaining approval, the purchases can be made according to the plan(s). Most hospitals have specific procurement teams, which are responsible for handling the procurement procedures.

1. For medical equipment valued under certain amount (dependent on the hospitals’ limits), some hospitals and clinics can submit an application and gain approval from the head of the equipment department.

2. For equipment which is valued over a certain limit to be used in this year, an application should be submitted at the end of previous year, and a bidding process is conducted within the hospital. Some hospitals also require public bidding for certain items.

Centralized procurement of medical devices aims to lower purchasing prices to reduce cost, while improving the quality of medical devices.

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At present, centralized procurement is required for public hospitals, especially on the expensive big scale medical devices. NHFPC (previous Ministry of Health, National Health and Family Planning Commission of the PRC) - http://en.nhfpc.gov.cn/ is in charge of the centralized procurement of Class A large-scale medical equipment such as Gamma Knife and high-cost medical consumables such as cardiac pacemakers and cardiac intervention devices. Provincial health departments are in charge of Class B large-scale medical equipment and high-value medical consumables except cardiac pacemaker and cardiac intervention devices. China's NDRC (National Development and Reform Commission) has strengthened controls of high cost medical devices, and mark-ups for interventional medical devices will be set in the distribution channel in future.

National Level Centralized Purchasing The centralized procurement of medical devices for government-invested projects comes under the auspices of the NHFPC. International Health Exchange and Cooperation Centre (IHECC, http://www.moh.gov.cn/zhuzhan/zsylxdw/201310/74a4a9c83657494aa8072094d479e29a.shtml) under the NHFPC, an independent legal institution in charge of non-governmental international medical exchanges and co-operation, is responsible for conducting bidding procurement for medical devices in China. The NHFDC's centralized bidding process usually involves 3 rounds:

Analysis of technical specifications - done by an expert panel; Price negotiation - done by hospitals' selection committees; Quantity negotiation with individual hospitals - there will be no negotiation on prices and

both sides will have a number of days to sign a contract on quantities and delivery details. According to the NHFPC, hospitals will commit to a quantity, based on the consumption patterns of previous years.

Provincial Level Centralized Purchasing Provincial health departments are in charge of Class B large-scale medical equipment and high-value medical consumables except cardiac pacemaker and cardiac intervention devices. The provincial health departments are also asked by the MOH to conduct biddings on other medical equipment and medical consumables in accordance with the situation on the ground. Medical devices that are not listed in the procurement category but the one-time purchasing value of which is high, would also follow centralized procurement, the quota of which would be decided by provincial level health departments. Significant disparities exist in the bidding/procurement procedure among different provinces in China. Most of the bids are organized at the district or municipal level, while few bids are carried out at provincial level.

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For medical devices purchased with government funds for grassroots medical institutions, such as X-ray machines, B ultrasound machines and electrocardiographs for township hospitals, a centralized bid at the provincial level is adopted. Usually, the bidding procurement of medical consumables is carried out on the biding platform for drugs in a given region. For example, Beijing made use of its drug bidding procurement platform to conduct a centralized bidding for medical consumables and in-vitro diagnostic reagents. The provincial level bidding procurement of medical consumables is carried out once a year, in principle. The situation is different for active medical devices in China. Few centralized biddings are hosted at the provincial level, and a hospital usually entrusts a bidding agency to conduct bidding procurement of active medical devices. China is undergoing a development of bidding procurement system for a more effective regulatory system. Remarks: In most cases, provincial health departments organize the biddings of medical devices and high-cost medical consumables over RMB 2,000,000. And the health departments at the city or prefecture levels are in charge of the bidding of medical devices priced between RMB 5,000 and RMB 2,000,000.

Military Hospitals Purchasing There is not much information or official documents available to the public about military purchasing procedures. There appear to be 3 levels of management responsible for purchasing in military. From top to the bottom: general logistics department, regional logistics department and individual military unit logistics department. Purchasing for military general hospitals is managed by the General Logistics Department of PLA. There are 7 military regions in China and purchasing for military hospitals in each region is carried out at military region level. Each region has a supply department which manages all the supplies of the region including medical supplies. They either publish purchasing information on certain appointed or approved websites (www.plap.cn and http://ml.emedchina.cn/index.asp) or media and either do the whole bidding themselves or hire an appointed agency to deal with the whole process.

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Supply Chains & Sales channels In China, the common supply chain of medical devices is organized like the following:

Most of the time, imported medical devices are supplied and distributed through distributors/agents, except some big scale medical equipment, which are purchased directly from the manufacturers through the organization of IHECC of NHFPC. As most of the Class III hospitals are still state-owned, they have been required to follow the procurement procedure. It requires that the distributors/agents should be very familiar with the related government policies and different procurement procedures of different hospitals

in different cities. In China, most agents/distributors are dedicated to one sector, one imported brand and one type of product. These companies are normally small scale. There are hardly any ‘general’ agents/distributors of imported medical devices. Therefore it is suggested to participate some professional fairs as the first step to enter this market. Apart from the traditional sales channels for medical devices, e-commerce is developing very fast in China. At present, low and mid-end domestic devices are still the main products being sold online. However, there is still space for imported ones, if appropriate marketing strategy could be adopted.

Challenges At present stage, the imported medical devices are facing more challenges than previous time due to the following factors:

1. In recent years, encouraged and supported by the Chinese government with preferential policies, more and more Chinese companies start putting more investment on R&D, which enabled their products taking more market shares that previously were dominated by imported products, especially in the section of mid and low-end market.

2. Centralized procurement and open bidding are widely adopted, that has efficiently reduced

the procurement price. So that resulted more and more Chinese domestic products are purchased.

Opportunities According to studies, China is expected to see its medical device industry growing on average by over 15% until 2018. It will provide enormous opportunities for overseas players based on the following situations:

1. Chinese government has abandoned the “birth control policy” since 2014, which will result the growing demand for related medical devices in the future years.

2. Chinese society is becoming an aging society. It is reported that there will be more than

300 million people aged over 65 years old by 2025, which will cause the increasing demand

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for medical devices dedicating to chronic diseases, such as heart disease, high blood pressure and diabetes.

3. With the fast development of China’s economy, the middle-class group is expanding very

fast. The middle-class group is the main customer of high-quality medical device. In recent years, the plastic surgery is getting more and more popular in China, the demand for related medical devices are therefore growing fast.

Relevant Organizations, Trade Shows, Magazines

Organizations China Assoc. for Medical Devices Industry [CAMDI] (W) www.camdi.org/en/aboutcamdi.jsp

China Medical Equipment Association

(W) www.came-online.org/ China Medical Pharmaceutical Material Association (CMPMA)

(W) http://www.cmpma.cn/Pages/100.html# China Hospital Association

(W) www.cha.org.cn/eng/index.htm

Trade Shows

China International Medical Equipment Fair (W) http://en.cmef.com.cn/

China Med

(W) www.chinamed.net.cn/en/Generalinfo.asp

Magazines & Websites Magazine China Medical Instrumentation Information | (W) www.camdi.org/en/publications.jsp Websites (W) www.cmdi.gov.cn/cmdi/lmewen.nsf

W) www.maydeal.com/enindex.html

(W) www.51ylqx.com.cn/en/index.jsp

(W) www.interchinaconsulting.com

(W) http://eng.sfda.gov.cn/WS03/CL0755/

(W) http://madb.europa.eu/mkaccdb2/indexPubli.htm

(W) www.camdi.org/

(W) http://english.mofcom.gov.cn

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(W) www.trademap.org

(W) http://trade.ec.europa.eu/doclib

Conclusions

1. Chinese medical device market will keep a high growth rate for the next decade based on the economy development.

2. There will still be space and opportunities for foreign medical products, although it’s going to be more and more local products compete with imported ones in certain sectors.

3. Contributed by the fast development of E-commerce in China, new distribution channel provides opportunities for overseas players in health care sector.

Source & Reference (W) http://www.cmdi.gov.cn/english/publish/default/

(W) http://eng.sfda.gov.cn/WS03/CL0755/

(W) http://madb.europa.eu/mkaccdb2/indexPubli.htm

(W) http://english.mofcom.gov.cn

(W) www.trademap.org

(W) http://www.eusmecentre.org.cn/

(W) http://trade.ec.europa.eu/doclib

(W) http://www.mitc.com/