MDD Contributing Writer
1st of 2 parts
Damon Canfield is a principal in NPI, a Powell, Ohio-based consultancy that specializes in helping U.S. medical-products firms launch into the Chinese market or establish manufacturing there. NPI has offices in Shanghai and Guangzhou, China, as well as Hong Kong.
MDD: A panel of big-company CEOs said at a recent meeting that entry into big, emerging markets such as China is too complicated for smaller firms and should be left to the “big guys.“ Your reaction?
Canfield: I've been saying as a rule of thumb over my 20 years of working there that everything in China is difficult, but everything's possible. On one hand, they're right – it's not easy – but I have to fundamentally disagree with the “only big guys“ premise. There is an opportunity in China, but you've got to know what you're doing. If you don't know what you're doing, or you don't go well-informed or with the right partners, with the right purpose, then you might as well stay home.
If you're not committed to China for the long term, it is tough. You have to have the right partners to help you understand the importance of the opportunity in the market. You have to have somebody to help you get through SFDA regulations. You can't pick just one distributor. There are all sorts of issues around protecting your product. And you have to be able to have some boots on the street. So if you're not able to commit to some fundamentals, then there's something to what they said. But if you do it the right way, with your eyes open, with a prescription for success, there are really big opportunities.
MDD: So you can't just say, “Oh, things are tougher for us in the U.S., and even going to Europe is getting tougher, so why don't we see what we can do in China?“
Canfield: Absolutely. You can go online and in a matter of minutes get an idea of how big the market opportunity is, but it is a very slippery slope – it's full of corruption in the distribution channels, SFDA doesn't work the same as FDA, relationships are very important, you have to understand the culture.
There are many, many things that you can be naïve about when it comes to China. But if you're partnered with the right people, if you have the right plan, it is a very good opportunity. And you can be small or mid-sized. In fact, I would say that for a lot of start-up companies, when they can prove the viability of their product in China, it actually helps them raise capital in the U.S.
MDD: It's obvious that China has a huge population, making it a desirable market. What other factors apply particularly to the opportunities there for U.S. medical-device companies?
Canfield: Just break down the China market by segments, meaning people over 55, people with obesity, people with diabetes, people with heart disease – every one of those segments is growing as a percentage of the population. China is having many of the same health problems as we are; one-third of the smokers in the world live in China. So when you break down the demographics and apply numbers to them, every one of those segments is almost equal to the entire population of the United States, and it's growing.
On top of that, you have a healthcare industry where the average medical device is over 25 years old. So there are a lot of things that are pushing the opportunity for U.S. companies going into China. In addition, China loves U.S. brands. The perception of U.S. brands coming into China will always garner a higher price and a higher desire.
MDD: What are some of the more significant barriers faced by device companies wanting to do business in China?
Canfield: The most significant barrier for American companies would be the lack of understanding of the process. There are no clear national distributors in the medical-device sector; the distribution channel has something like 10,000 distributors, sub-distributors and agents. There's a lot of corruption involved. The regulatory process doesn't work the same as it does in the U.S. And intellectual property is a big challenge as well.
MDD: What's the first step for a small- or mid-sized device company that wants to do business in China?
Canfield: Here's the first step in the prescription, or the plan to get into China. We always suggest that companies make a small bet, by which we mean doing a bit of real research on China. If you're working with the right folks, research in China can be a relatively inexpensive process – I think $10,000 to $20,000, depending on the size of the research. The research I'm talking about is a combination of primary and secondary research about a particular company and a particular product into China.
You want to figure out first if anyone really wants your product in China. That research not only can give you the macro economics, it can tell you specifically down to testing your product in the field, the doctors and hospitals you would need in order to get firsthand impressions of your product, opportunities as far as advantages and disadvantages, and a pretty good idea of the price elasticity of your product. In four to eight weeks, now you have a foundation for a go/no go decision in China. I would contend that if you've made a small bet like we're talking about and the information comes back that hey, you're going to have a tough time in China, that's the best $10,000 or $20,000 you would spend.
On the other hand, if it's a positive result from the research and you understand the hurdles and obstacles around your particular product, now you have a solid foundation for building a plan going forward.
Our company is reluctant going forward representing a company interested in doing business in China if they don't want to do the research, because the process of getting a new product into China is arduous at best, and without some supporting evidence of its potential, we're very reluctant. One of the best things we can do for our clients is to help them get a little insight like that.
This also applies to new technologies and start-ups. If you ultimately want China to be part of your growth plan, the kind of information such research provides is a pretty good foundation for explaining to investors why they should invest in your company, because of the great potential in a market the size of China's.
MDD: Is the regulatory pathway through the State Food and Drug Administration substantially equivalent to that in the U.S.? What are the key differences?
Canfield: The SFDA and FDA are collaborating more and more, in that they're starting to share data, with test data able to be used on both sides. That's evolving a bit, albeit slowly.
One of the biggest differences is that there is no such concept as “substantially equivalent“ in China, or at least not yet. In the United States, you can get a 510(k) approval fairly quickly as long as there is substantial equivalence to a device that's existing in the U.S. market. But in China you still have to do the whole registration process, so substantial equivalence doesn't help you move it along.
One of the other bigger differences is that even though both have a Class 1, a Class 2 and a Class 3, it's a little more strict in China. When you bump up that class, approval takes a little longer.
It's almost proscriptive in that every “i“ has to be dotted and every “t“ has to be crossed, and if there's something in the form that isn't right, you set the clock back six months. It's a very formal process, which might be a better description.
(In Part 2 of this interview next Wednesday, Damon Canfield looks at how China's reimbursement system works, the crucial importance of protecting intellectual property, bridging the cost/price gap, and dealing with a difficult distribution system.)
Published: March 1, 2012