MedTech in Asia: A host of challenges but opportunities abound

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Why MedTech Firms Need to Focus on Asia-Pacific, McKinsey report analyzes

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Source: McKinsey&Company http://bit.ly/1M3YXTQ

The Asia-Pacific region is home to more than half of the world’s population. With such high population density, it is currently facing a rapid rise in disease burden from aging and lifestyle changes. With increasing awareness of healthcare, it is evident that healthcare demand will far exceed the supply in the near future.

Medical Technology (MedTech) companies in the region that are actively involved in raising healthcare standards are also facing numerous obstacles as the patient pool is rapidly rising. However, these obstacles are only bound to increase over the course of time, thereby the companies need to adjust accordingly to meet the demands of the region. Successful companies will help address a broader range of the region’s healthcare needs, at the same time secure a leading position in what is poised to become the second-largest market for MedTech.

With the support of the Asia Pacific Medical Technology Association (APACMed), McKinsey&Company presented the white paper report which has examined and analyzed the opportunities and challenges facing the medical technology industry in the region and recommends areas where the industry can collaborate to drive change.

As a part of their research they have interviewed and surveyed about 150 executives from 30 leading MedTech companies active in Asia-Pacific. They have also assembled case studies to help identify the best practices and measures companies have taken to bring medical technology to a wider range of patients in the region.

In this article, we present the major take-home points from their report.

Demands and Challenges

By 2020, Asia-Pacific is expected to pass the European Union as the world’s second-largest MedTech market. The market demands in the Asia-Pacific region is highly diverse even within a single country. Partly as a result of the region’s complexities and also because of extensive opportunities elsewhere, leading MedTech companies have lagged behind other industries in serving the region, creating gaps in patient services and bypassing significant opportunities.

The demands for healthcare needs can be attributed to the large and rising population, urbanization, aging society especially in the case of Japan, baby boom, affordability and morbidity due to disease burden in the region.

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The market for MedTech in Asia-Pacific is estimated to have reached almost $90 billion in 2015, about a quarter of the global total. Growth is forecast to continue, with the Asia-Pacific market more than doubling over the next ten years to about $190 billion, potentially accounting for approximately a third of global sales. Growth rates for individual national markets will vary considerably, though.

The major challenge that MedTech companies face in the region is the crippling market diversity, which is governed by democracies, monarchies, and autocracies. There is also extreme regional diversity in terms of

  • Age: Japan, with a median age of 46, has one of the world’s oldest populations, while the Philippines, where the median age is 23, represents the opposite extreme.
  • Urbanization: In Australia, 89 percent of the population lives in cities, compared with just 32 percent in India.
  • Income: Singapore’s GDP per capita stands at $55,000, ten times that of Vietnam’s $5,500.

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Realities faced by MedTech Industry

Due to various countries that are still at the developing stages, Asia-Pacific is undoubtedly an extremely demanding region for business leaders.

Asia-Pacific made up only about 22 percent of the global MedTech market, just behind pharmaceuticals. While MedTech is a much more regulated industry than others, which limits its share in Asia-Pacific, the MedTech market shows significant room for growth: the region has more than 50 percent of the world’s population, more than 50 percent of the world’s chronic disease burden and nearly 60 percent of the world’s ageing population.

There are currently five major challenges faced by MedTech companies in the region.

Frugal Spending Habits: Since most of the Asia Pacific countries are still in the developing stages, consumers and Governments in Asia-Pacific are generally more frugal than those in the more developed markets. In 2013, annual healthcare expenditure per capita in China was $367, in Indonesia $107, and in India $61. This compared with annual expenditure per capita of $9,145 in the United States and $3,598 in the United Kingdom. As the region’s economies grow, they will certainly spend more on healthcare, but the share of GDP earmarked for healthcare will probably never reach the levels seen in many European markets, let alone in the United States. Pressure to keep spending down will continue as governments fight to fund universal healthcare plans, private hospitals become larger and more sophisticated in their procurement practices, and new investors in healthcare provision demand appropriate returns.

Multi-segment Markets: The immense size of the Asia Pacific market is bound to create multiple market segments. Even within national markets, disparities in income, culture, disease profiles, and other metrics have led to sub-markets that must be better understood.

Additionally, MedTech companies have difficulty addressing market segments with very different needs. Many hospitals, and especially the larger urban ones, tend to serve both the premium and broader, more value-focused segments, but most MedTech companies have focused solely on the premium segment. It is the need of the hour that companies find their own balance between the two, while keeping local and global strategies in harmony.

Inadequate infrastructure: The relative scarcity of trained medical personnel and infrastructure is another major cause of concern. For example, in 2012 there were 12 physicians for every 10,000 people in the Philippines, 7 in India, 4 in Thailand, and 4 in Indonesia (info). All four countries are well below the OECD average of 28 physicians per 10,000 people.

Furthermore, the services offered by the companies are not designed according to the infrastructure available in the regions. This adds to further complication for implementation.

Regulatory and reimbursement complexity: MedTech companies also struggle with a patchwork of regulatory regimes and reimbursement systems, each with different capacities, levels of sophistication, and policy priorities. Adding to the burden, the landscape is changing swiftly as governments work to improve access to healthcare.

Four characteristics of the regimes in Asia-Pacific are particularly challenging: fragmentation, support of localized industry, capacity, and reimbursement systems.

Intense Competition: Competition comes from ambitious new local companies that are often adept at creating market-appropriate products and services, as well as global companies moving in from other sectors, like Google, Samsung, and Tencent.

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SOURCE: Bloomberg; McKinsey analysis

In China alone, an estimated 15,000 companies are serving the MedTech market. While many may not survive, some could mount a strong challenge to established manufacturers in local and global markets. Digital technologies can help MedTech companies meet the challenges of Asia-Pacific, including cost hurdles, but as they enter the digital realm, they are also encountering competition from established enterprises and start-ups.

Approaches for Engaging in Asia Pacific

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SOURCE: McKinsey APACMed Business Sentiment Survey 2015

Most MedTech companies’ strategy are modelled based on the Europe or the American market. Unfortunately, given the demand and complexities of the Asia-Pacific region most of the strategies cannot be successfully implemented.

Companies must understand the unique characteristics of Asia-Pacific and create market-appropriate offerings rooted in innovation that appeal to a broader customer segment.

Experience and research has shown that MedTech companies engaging more fully in Asia-Pacific should craft strategies around three themes: sustainable business models, market-appropriate products and services, and tailored organizations that address market needs.

Sustainable Business Models: New business models should reflect the differing stakeholder needs that are created by a more dispersed market, including levels of support, response times, and warranty coverage.

In addition, MedTech companies will have to develop capabilities to support these changing business models. Among these are:

  • Business model innovation
  • Medical Affairs
  • Market Access
  • Health Technology Assessment

Market-appropriate products rooted in innovationReaching more people in the region will require that global MedTech companies find ways to serve the broader segment of patients who are more focused on value.

In many categories, affordability is critical to serving the broader segment. Across Asia-Pacific the middle class is expanding, but these families, as well as lower-income households, remain value oriented and cannot yet afford premium healthcare. In general, they want quality healthcare, tailored to their situation, at reasonable prices.

As global MedTech companies explore developing market-appropriate portfolios, two aspects of the transformation are crucial: internal alignment and clear insights into customer needs.

Tailored organizations: While regional leaders oversee operations for most companies, major decisions generally require approval from managers outside the region, most of whom were educated and built their careers largely in Europe and North America. MedTech companies should strive to find a better balance between local autonomy and corporate checks and balances.

Organizational models designed to extract the greatest value from Asia-Pacific should revolve around four concepts: empowering market experts at all levels, establishing regional facilities, building more R&Ds in the region, and creating trusted internal relationships.

Academic institutions and trade associations could also help provide a knowledge base shared by regulators and industry leaders to create a common understanding of healthcare objectives and policy tools. They can also help foster mutual trust and respect among regulators and industry practitioners. Finally, they could be incubators for innovative regulatory approaches suitable to Asia-Pacific. As a byproduct, these institutions would enhance the talent pool for regulatory affairs positions within the industry.

The above article is based on the insights gleaned from the white paper report published by McKinsey&Company and delivered at the APACMed conference held in Singapore on December 10th 2015.