China’s determination to use a centralized bidding system to trim public health spending would directly impact purchasing of “high-value” medical devices under recent draft guidelines issued by the country’s Ministry of Health.

New pricing pressures on both multinational and domestic device makers are a likely result, industry analysts say.

The Chinese Ministry of Health released a first draft proposal in March outlining requirements for county-level public hospitals to participate in provincial bidding to purchase medical devices such as stents, pacemakers, dialyzers and orthopedics. Currently, tenders for these types of equipment are mostly conducted at the city or county level.

The Ministry issued a second draft Sept. 29 seeking to expand the target list of products to include ophthalmic and dental devices, among others, and provide leeway for provincial authorities to add more categories to the list.

“The new policy signals the popularization of provincial tenders for high-value consumables nationwide,” Morgan Stanley Asia Pacific analyst Bin Li said in a March note to investors. “We expect this milestone event to have a profound impact on the device industry.”

Medical facilities would need to seek approval from provincial authorities to purchase products that are not on the list, according to the draft guidelines. Public comments on the guidelines were due Oct. 15.

Under the draft, one tender cycle would last for two years and product adjustments could take more than one year. Provincial bidding authorities that are currently responsible for drug purchasing would take charge of the proposed device tenders. Manufacturers that violate tender rules, commit bribery or submit misleadingly low bids would be barred from bidding for two years, according to the guidelines.

Different Provincial Models, Different Price Impacts

“Provincial tenders will add more pricing pressure on medical consumables in the long term,” Morgan Stanley’s Li said.

Citi analyst Richard Yeh shares that view. But the precise impact will hinge on each province’s bidding rules and the timing needed to formally roll out the process, which is still unclear, Yeh said in an Oct. 8 note to investors.

Several individual provinces have already completed device tenders of their own, offering some insight on potential price effects. Yeh cited the Gansu and Zhejiang provinces, specifically.

The Gansu province, based in the northwest of the country, completed its first device provincial bidding this April. Prices were cut roughly 1%-5% for one of the most closely watched device categories, drug-eluting stents. But the impact was much less than the anticipated 15-20% cut, noted Li of Morgan Stanley. The big three Chinese domestic stent makers, MicroPort Scientific Corp., Lepu Medical Technology (Beijing) Co. Ltd. and JW Medical Systems/Biosensors saw average reductions on drug-eluting stents of roughly 5%.

The three domestic companies account for over 75% of China’s drug-eluting stent market, according to a Jan. 6 Citi report on China’s medical device market. (See [A#28120419009].)

Compared to domestic makers, multinational device makers experienced smaller price cuts in the Gansu tender. Boston Scientific Corp., for example, saw prices decline 0.9%, while Medtronic PLC, with two winning products, had a 1.7% drop in prices compared to a 2008 tender.

Abbott Laboratories Inc. won tenders for two drug-eluting stents in Gansu for its Xience Prime for RMB 20,100 ($3,168) and the Xience TM V at RMB 18,288 ($2,882).

The quality-focused regulations in Guangxi and Zhejiang give more leverage to multinationals with better quality but higher prices, Morgan Stanley’s Bin Li said.

Price reductions in the east-coast Zhejiang province, announced in June, went deeper than Gansu, with an average drop of 15% for drug-eluting stents. The reductions were more significant largely because Gansu did not use a so-called double-envelope system like Zhejiang, analysts explained. Under the double-envelope bidding model, all companies that pass a basic technical review, the first envelope, are eligible to compete in the price tender, submitted through the second envelope.

The extra layer of quality review gives more leverage to multinationals with better quality but higher prices, Morgan Stanley’s Li said.

But the process for each province is not expected to be uniform. Some regions, like Gansu, may not include substantial quality checks, encouraging more significant price cuts, while others are expected to institute more protections.

In southeastern Guangxi province, for instance, where bidding for consumables and in vitro diagnostics is scheduled this year, the authority has established multiple quality layers, meaning high-priced and high-quality products do not have to compete with low-quality ones directly.

Multinationals Face Increasing Headwinds

With two draft guidelines versions released in six months, a new system seems inevitable, Li said.

Industry insiders said device makers now face almost the same pressure as drug makers – multinational and domestic – that may lead to some products being withheld from the market.

“MNCs may face some headwinds coming from the government in terms of reduced use of separate pricing for their products and the drive to lower health care costs,” Wharton Business School’s health care management professor Lawton Burns told local media, adding that in some cases that could mean offering less sophisticated items.

Amid the price erosion, Medtronic reported a disappointing first quarter in China, where revenue increased by 14% to $438 million, below the 20% target previously set by CEO Omar Ishrak. (See [A#28120830009].)

Seeking to diversify business and seize opportunity in high-growth areas, Medtronic has offered to buy orthopedics heavyweight China Kanghui Holdings to capture a larger share in the lucrative sector. (See Also see "Medtronic Buys Kanghui To Expand Orthopedic Market Presence In China" - Medtech Insight, 1 October, 2012..)

Medtronic in 2008 established a joint venture with Shandong Weigao Group Medical Polymer Co. Ltd. to focus on spine and orthopedic products. Medtronic has a call option to buy out Weigao’s 49% stake in September 2013.

Analysts also expect that China-based device makers such as Biosensors and MicroPort and consumables maker Weigao will be impacted by the latest provincial bidding rules, along with Kanghui and Trauson Holdings Co. Ltd. in the orthopedics space. (See [A#28120816013].)

“The gradual adoption of provincial tenders in China will enable a few winners, for example Trauson, to be better positioned to take more market share from many smaller players,” Piper Jaffray analyst Hao Zhou wrote in a July 10 note to investors.

[Editor’s note: Want to know more about how China is changing the global industry? Check out PharmAsia News: http://www.elsevierbi.com/publications/pharmasia-news.]

China’s Proposed High-Value Medical Device Tender List

Category

Items (included but not limited to)

Vascular Intervention

Coronary artery, structural and congenital heart disease, peripheral vein

Catheters, balloon catheters, stents and auxiliary materials

Non-vascular Intervention

Respiratory and digestive tract, bladder, rectum

Catheters, balloon catheters, stents and endoscope materials

Orthopedics

Spine, joint and trauma

Artificial joints, fixed plates, artificial bone, patches

Neurosurgery

Intracranial implants and fillers

Electrophysiology

Guiding catheters, ablation catheters

Pacemakers

Heart, bladder

Permanent and temporary pacing catheters, defibrillators

Cardiopulmonary Bypass, Blood Purification

Artificial heart and lung material, dialysis kits, filters, blood cell segregators

Ophthalmology

Intraocular lenses and implants

Dental

Maxillofacial trauma repair, implants, root canal

Others

Prosthetic valves, artificial patches, artificial blood vessels, polymer materials

Source: China Ministry of Health

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