Upgrading medtech commercial operations in China

China’s burgeoning market for medtech, estimated at $70 billion in 2021,1 could more than double this decade if the government’s Healthy China 2030 plan stays on track. The plan projects 9 percent annual spending growth through this decade.2 This is significant. That growth would lift China’s healthcare spending as a percentage of GDP to almost equal footing with some developed economies in Europe and would lift China’s medtech market to about 20 percent of the global market by 2030.

China could remain the world’s most appealing growth market for medtech. The growth pace, however, has slowed, and uncertainties facing business leaders are likely to continue. While multinational medtech participants in China and domestic companies in this critical industry continue to deliver essential healthcare goods and services, they need to rethink—and, in most cases, restructure—their commercial operations in response to the new market dynamics.

The old model was geared for rapid (even sprawling) expansion

Many multinational companies (MNCs) and domestic companies in China’s once surging medtech market thrived under a commercial model that valued multiple layers in the sales force and sprawling networks of numerous distributors; financial rigor was secondary. The old model came into fashion when annual growth rates for the industry averaged 15 percent in the first decade of this century and more than 10 percent in the second decade (Exhibit 1).

China’s macro healthcare agenda is shifting to a new model.

This model needs to be reexamined. Medtech companies could look to redeploy resources with financial discipline in ways that sustain growth, improve efficiency, and deliver better products and services to customers and patients. They are operating in a new pricing and competitive landscape that has more diverse stakeholders and requires more discipline and innovation.

In some areas, domestic companies are markedly improving their performance across their operations. China’s 134 listed medtech companies generated $44 billion in 2021 revenues, an impressive CAGR of 36 percent since 2019—nearly triple the market’s overall rate of growth. More than five Chinese medtech companies have obtained the FDA’s breakthrough designation, which helps expedite the development, assessment and review of novel medical devices that can potentially provide more effective treatment or that diagnose life-threatening or irreversibly debilitating diseases or conditions.

Policy reforms have shifted the old model

Overall GDP growth in China slowed to 3.0 percent in 2022 and is expected to rise only modestly to 4.5 to 5.5 percent in 2023.3 The government paid high prices for medtech equipment and services, which were a factor in attracting many of the world’s leading MNCs to China in the last two decades. However, after years of generous criteria for payments, recent reforms in the government’s procurement and medical insurance programs have shifted much of the old model. For example, the price for drug-eluting stents used in cardiac surgery was cut by more than 90 percent after reforms in 2021, decreasing to $100 from a previous range of $1,400 to $2,100.4 As a result, hospitals face significant cost constraints, especially for less differentiated, commoditized products.

Five levers for transforming the medtech commercial model in China

Multinational and domestic medtech companies could consider reevaluating their commercial model to sustain or increase growth in China, focusing on five interlinked functions in operations:

  • channel restructuring to prepare for the price-sensitive environment while expanding coverage to sustain the growth
  • commercial resources reassessment to adapt to evolving strategic priorities and outperform the market
  • omnichannel customer engagement to improve sales efficiency, broaden reach, and enhance customer experience
  • ecosystem partnerships to develop new innovation engines and deliver integrated solutions to a broader customer base
  • a focus on the basics to cope with margin pressure and the rise of local players

Which of these levers is most difficult to pull? Which one can be a source of competitive advantage even for companies that have already started channel reforms or partnership scouting? There isn’t a singular answer. The optimal response will vary by segments and companies. Business leaders will need to explore suitable approaches with appropriate levels of emphasis and execution.

In our view, complex channel restructuring is most urgent for companies that relied heavily on high-markup distributors and for those whose portfolios were most affected by the government-mandated price drop (reforms known as volume-based procurement [VBP]5). That said, VBP has created opportunities to serve broader markets. To tap into them, companies will also need effective ways to acquire new customers and retain existing ones via an omnichannel approach. Moreover, innovating through license-in and partnership agreements can help propel sustainable growth in the mid to long term. As VBP and trends in the macroeconomy ease the overall pace of revenue momentum in medtech, companies need to plan now to avoid having to continually put out fires in the near term.

Companies will also need to strengthen capabilities along the levers. For example, companies that have historically focused on consumables and that are now seeking to add equipment into their portfolio will need to recruit distributors with experience in engaging nonclinical stakeholders. They will also need to reassess their sales capabilities and resource allocation.

Great companies excel in this analysis. They can assess early the development needs for each lever, precisely identify the real source of advantage, efficiently transform commercial capabilities and models, and successfully outpace market growth.

Restructuring the channels for customer touch points

In a nation with more than 36,500 hospitals to care for 1.4 billion people,6 the landscape of medtech companies and distributors has been fragmented. Distributors, together with the internal sales force of manufacturers, have largely acted as representatives to manufacturers’ customers, the hospitals, and clinics.

Two forces in the new economics of China’s healthcare system are upending these roles and responsibilities. First, VBP is sharply reducing margins left to distributors. Bidders are expected to cut price-to-hospital7 by more than 50 percent to win contracts. Second, as they pertain to medical insurance payments, reforms8 tied to diagnosis-related group or diagnosis intervention packet (DRG/DIP) have a compounding effect in reducing the profit margins of manufacturers and distributors. In certain product categories, smaller distributors that are unable to navigate these shifts profitably have already walked away. Distribution consolidation is evident. Sinopharm, for example, the largest healthcare distributor in China, reported a 21 percent increase to $17 billion for medtech revenues in 2021. Its expanding customer roster of manufacturers includes global leaders such as Medtronic, Johnson & Johnson, Danaher, Becton Dickinson, Stryker, and Smith+Nephew.

Medtech companies are responding to reforms by reevaluating their relationships with distributors. Roles and responsibilities are being reshaped as more companies are adapting to the new economics and sharply lowering payments they can offer distributors (Exhibit 2). Some have narrowed the tasks for platform distributors to only managing logistics and handling accounts receivable.

Companies’ roles and responsibilities with distributors are being reshaped as they adapt to new economics.

Since VBP reforms created the potential for larger orders and increased access to hospitals in the broader market, companies have reevaluated how to expand access. Some companies have expanded their distributor networks to create the potential for larger orders from hospitals or have invested in wider sales coverage to pursue and serve customers they previously could not reach. Others are bringing the distributor function in-house, consolidating provincial warehouse operations, and assessing distributors’ capabilities to define roles—followed by agreement on how tighter margins will be shared. Across the board, companies are more proactively managing their distributors and assessing the economics of that channel.

Reassessing and reallocating commercial resources

Despite its slowing growth pace, China’s market for medtech continues to offer huge potential. Companies that prove nimbler in redeploying management and sales resources to emerging product categories of high-growth innovation will likely outperform competitors that remain too focused on established categories.

In 2022, for example, Boston Scientific unveiled a series of innovative products, such as the Rezūm water vapor system for treating enlarged prostate glands. It also has put more resources into supporting new products.9 As another example, in response to the national VBP classifying coronary drug-eluting stents as a commodity, Abbott Laboratories pared sales staff supporting that product. Furthermore, the company’s focus on innovative continuous glucose monitors has increased annual sales for the monitors to more than $100 million.10

Divesting commoditized assets or outsourcing them for a new company to distribute is also a potential path forward. In pharmaceuticals, as companies reduce costs, they can generate revenues by licensing out their less-differentiated products that have recorded declining profits. For example, Eli Lilly sold two commodity antibiotics and its corresponding Suzhou plant to Eddingpharm, a specialty pharmaceuticals manufacturer in Shanghai. In all cases, sales force synergy, partnership feasibility, and financial potential need to be carefully evaluated. Divesting or outsourcing assets might result in lower revenue in situations where manufacturers would need to share more margin with partners. In contrast, prospects for profits might be higher if those assets are retained under the existing model.

Overall, bottom-up sales and marketing analysis is essential to reassess commercial performance, understand cost-to-serve among portfolios, and strategize how to reallocate resources and investments. These steps will need to be considered with channel restructuring because adjustments will determine the workloads of the internal sales force.

Broadening omnichannel customer engagement

Better coordination of customer engagements across different channels, enabled by data and analytics, will help make sales operations more efficient in casting a wider net and enhancing customer experience.11Omnichannel engagement in medtech: The time is now,” McKinsey, May 19, 2021.

Most medtech companies in China do connect with customers in multiple channels, both online and offline, but they rarely have coordinated engagement across channels. Efforts often are scattered among teams in marketing, sales, service, and distribution. Valuable insights created by each team from ongoing customer engagements are not promptly shared or made accessible.

To cite one common shortfall, marketing teams have made efforts in priority customer engagements involving online webinars and live streaming projects, but they often do not properly track, assess, and transfer all possible leads generated from digital marketing. Thus, they miss an opportunity to better equip frontline sales teams to follow up and be responsive to customer needs or questions.

Companies need to update and improve how their different departments communicate and work together. Crucial elements for sharpening omnichannel customer engagement include appropriately sharing data across functions and fostering collaboration among cross-functional teams to analyze the implications of that data. These changes can transform the fundamental ways an organization works.

Sales force capabilities and constraints are another challenge, especially when medtech companies expand into smaller (lower-tier) cities or markets for volume-based pricing products. Broadly speaking, companies in these circumstances need to take two important steps. First, they could learn from—and archive for easy access—intelligence from customer interactions across all the channels. Second, they could leverage data and analytics engines to better synchronize next-best actions with improved customer engagement effectiveness.

Partnering with other companies to expand possibilities

Medtech companies in China have built partnerships and combined complementary strengths to capture value along the patient journey from prevention, diagnosis, and treatment to disease management in patient homes or outpatient clinics after treatment. Through these new relationships, manufacturers benefit from the network effect as escalating ranks of participants create the potential for more appealing opportunities (see sidebar, “More partnerships, diverse stakeholders, and sources of solutions”).

However, not all partnerships will prove to be sufficiently rewarded. How can companies best balance investment decisions and benefits returned? This remains an important question. A holistic assessment and the prioritization of ecosystem projects are essential to the success of medtech companies.

Staying true to the basics of commercial excellence

The basics in commercial excellence are becoming even more important as margin pressure grows and the quality of domestic companies improves.

Setting priorities for customer segments and allocating resources creatively and with discipline are essential to strengthening market positions. To be sure, changes in the landscape of healthcare providers in China have been dynamic. Yet, in some ways, the biggest factor—the expansion of large healthcare providers for patients—has not changed. More than 3,000 Class III hospitals (with 3.2 million beds)—those that offer comprehensive levels of care and sophisticated procedures—still contribute 56 percent of patient flow.12 Recent government policies, such as tiered medical-system reforms and funding support, have diverted patient growth volume toward these large institutions in smaller cities.

Other priority basics include differentiating commercial models by product categories, optimizing sales responsibilities and coverage, and creating excellence in pricing. These fundamentals often do not get the attention they deserve. For example, capital equipment offerings should be linked to customer solutions. Leading medtech companies continue to benefit by providing educational programs with information that is valued by medical professionals, especially those featuring new products used in new procedures. Moreover, cost efficiencies are critical for products that have few differentiating elements. As mentioned above, these products often are candidates to be sold or discontinued after trade-offs are assessed.

Before starting reviews of these basics, leaders could consider a systematic value-oriented assessment: What do our distribution channels cost? Are we allocating resources in line with our strategic priorities?

Transforming the commercial model requires fundamental changes for medtech companies in China aspiring to win their share of the market’s alluring opportunities for growth. By embracing the five levers outlined in this article, they can strengthen a foundation for success in the new dynamics driving the nation’s evolving market for medtech.

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