Chang-Hong Whitney05.19.08
After a turbulent 2006 and subsequent adjustments in 2007, the Chinese medical device market looked forward to a calmer 2008. A review of activities for the first quarter shows a collective and managed approach from various players on the market, although some uncertainties still loom on the horizon. Following are four developments of interest to those working in China’s healthcare industry.
Regulatory Development: New Product Recall Policy
Device manufacturers should take note that on March 18, the State Food and Drug Administration (SFDA) released its first draft of a new regulation on medical device recalls. This regulation categorizes product recalls into three classifications: A Class I recall means the use of the medical device could result in serious damage to health; a Class II recall implies that use of the medical device could induce temporary or recoverable health damage; and a Class III recall indicates that use of the device generally does not inflict danger to health, and other factors most likely led to the recall. Based on this new regulation, companies would have to file recall reports with regulatory agencies within one day after initiating the recall for a Class I recall, three days for a Class II recall and seven days for a Class III recall. The proposed regulation also stipulates requirements for mandatory recalls authorized by the SFDA.
According to People’s Daily (China’s official government newspaper), there were 12,374 reports of adverse incidents in 2007. Most Chinese manufacturers, unable to afford the financial and logistical burdens of recalls, would rather settle issues of this nature with relevant parties. This explains why most of the recalls implemented in China were by international companies, such as Johnson & Johnson (glucose meter), Baxter (infusion pump) and Omron (digital thermometer).
The lack of an official recall policy prior to this new draft clearly contributed to the SFDA’s inability to ensure control products on the market. Based on the agency’s objectives in 2008, the recall policy is expected to become law by end of the year. The agency currently is accepting public comments on the draft of this regulation.
A Reorganization Shakes Up the SFDA and MOH
Just as device manufacturers are faced with changes in their operations as a result of SFDA mandates, the agency itself will be undergoing some changes as a result of recent actions by the State Council. During the National People’s Congress held in March, the State Council announced a reorganization of its ministries—some ministries were combined to form a new one, while others were directed to report to a different ministry.
The SFDA, which was separated from the Ministry of Health (MOH) in 1998 to form what’s now China’s top regulatory agency (equivalent to the US FDA), was ordered to report to the MOH once again as part of the reorganization. As such, the MOH will take back full responsibility for overseeing food safety and formulating top-level food regulations. The shift won’t be of major impact, though, given that the MOH did take part in these activities in the past. The SFDA, meanwhile, will continue to be responsible for certification and supervision of providers of food products, along with its oversight of drug research and development; manufacturing and distribution; as well as drug safety. Other functions and detailed responsibilities of the SFDA are being reassessed and reassigned as well and could change as a result.
This shift, as explained by the central government, is intended to streamline management of both food and drugs in China. However, many people inside the administrations and in medical industries believed that the demise of Zheng Xiaoyu, the SFDA’s former chief who was executed last year after being found guilty of corruption and dereliction of duty, severely weakened the agency’s standing within the State Council and, thus, led to the SFDA’s loss in the political fight between the MOH and SFDA that has been waged ever since they separated in 1998. It is unclear at this time how the SFDA will evolve as a result of the latest reorganization. Although the initial changes only pertain to food products (and drugs), the device industry could be impacted by any additional changes that may come forth as a result of the reorganization.
Investments in Devices and Healthcare Are Heating Up
Given the enormity of China’s healthcare market right now, foreign and Chinese investments in the healthcare industry—particularly in the medical device sector—have been quite active lately. In spite of any turbulence the financial markets have faced, these industries are showing growth: In 2007, the Chinese medical device industry reported revenues of $7.8 billion (54.8 billion Chinese Yuan), representing 22% growth compared with revenues in 2006.
Venture capital and other short-term investment firms have been especially active. By August 2007, approximately 12 companies had received venture capital funding totaling about $1.2 billion. These investments were poured into three major healthcare markets: medical device, medical software and IT services. Along with medical devices, medical service providers such as dental or health clinics received increased attention.
In general, venture capital funds in the Chinese medical market are interested in five areas:
• Computer-related technologies—eg, computer-aided diagnostic instruments, artificial intelligence instruments, medical robots, bio transmitters and device network systems
• Home use or personal health instruments—eg, self-monitoring and diagnostic devices, home use personal treatment and remote diagnostic products
• Minimally invasive medical products—eg, non-invasive or minimally invasive devices, medical imaging, micro devices, laser treatments, robotic surgery and non-implant transducers
• Organ transplants—eg, manmade bones, heart valves, heart pumps, skin and muscle or neural stimulators, etc.
• Medical services—eg, specialty hospitals, innovative health service models and medical outsourcing services
In the first quarter of 2008, the medical market already demonstrated that investors continue to be attracted to these markets. Seven investments amounted to $84 million.
Medical and healthcare markets have remained China’s second hottest investment area since the fourth quarter of 2007. With the upcoming healthcare reform and re-establishment of basic healthcare systems in China, the medical service industry in particular should continue to enjoy rapid growth and remain a focal point for investors.
A Note About Healthcare Reform Policy
By now, regular readers of this column know that just about every healthcare official in China has spent the past two years speaking about the need to revive the basic healthcare system and provide a safety net for ordinary citizens. In recent months, however, their speeches have begun to reveal more details about how officials intend to achieve these goals, and these presentations may be offering a preview of the content of future healthcare policies.
For example, at the 2008 national healthcare conference, Chen Zhu, China’s minister of health, explained his expectations for healthcare reform, specifically noting that public hospitals need to stop relying on drug sales as a means of improving profits. Traditionally, hospitals have sold drugs along with treatments to patients. Thus, patients often have been forced (or coerced) to buy high-priced drugs. Because hospitals cannot charge market prices for treatment due to policies in place, they have to rely on drug sales to survive. By separating drug sales from hospital revenues (and allowing patients to buy drugs from pharmacies outside the hospitals), patients would benefit from reduced drug costs and face fewer burdens related to their healthcare.
To counter the burden that hospitals subsequently would face without counting on these sales, Zhu suggested that government subsidies be increased for public hospitals to make these facilities truly non-profit operations; at the same time, he proposed raising prices for health services to offset losses from drug sales. Furthermore, he indicated that all medical facilities, regardless their ownership nature and administrative levels, should be supervised by local healthcare agencies.
Meanwhile, Wang Guoqiang, vice minister of health and director of the State Chinese Medicine Administration, mentioned two areas of focus in the healthcare reform: 1) to push reform of the existing health provider structure—particularly reform of public hospitals to make them better suited to serve public health interests; and 2) to establish financial subsidies to hospitals using Chinese medicine as a means of promoting the advantages of using traditional Chinese medicine, which often is less expensive than the newest “blockbuster” drugs on the market.
According to official reports, the objective of the upcoming healthcare reform is to establish a basic healthcare system by 2010, providing a universal healthcare service for all the spectrums—ensuring that cities and villages, and the farmers and executives who live in them, would be relieved of some of the difficulties they have faced in obtaining sufficient health services. By 2020, the healthcare system is expected to cover all citizens around the country.
Despite its highly publicized status, an official announcement regarding the new healthcare reform plan has been delayed several times. The previous rumor circulating in the industry was that the plan would be released after the National People’s Congress, but that obviously hasn’t happened. The most recent speculation is that officials will announce their reform plan after the Olympics. The media has made no secret of its suspicion that political fighting between stakeholders, agencies and ministries is the real reason for the delay.
From this perspective, it appears the governments of the United States and China may be operating rather similarly these days.