A Surgical Strike into Emerging Markets

2/7/2014

Lu Fang Maura Hickey

Michael Rowland Karen Wellman

Lili Zhao

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BACKGROUND

GENICON, founded in 1998 in Orlando, FL by Gary Haberland, began as an Original Equipment Manufacturer

and produced products for larger medical device firms with their own brand labeling. GENICON offers

premium-priced high-quality disposable devices. GENICON took the initiative to bring product directly to the

surgical market in the U.S. and abroad and hasnt looked back since. Currently GENICON distributes medical

devices within Western Europe, the U.S., Central and South America, as well as through several countries in

the Pacific Rim and the Middle East. Most of GENICONs future growth is expected to come from these

international markets which are growing at a faster pace than the U.S.

OVERVIEW

Haberland knew that GENICONs success had come from its international distribution strategy; he also knew

that the minimally invasive surgery (MIS) device market in the U.S. was the largest in the world but

international markets were expected to grow at a much faster rate.

Haberland and his team have narrowed the list of potential markets to Brazil, Russia, India and China. The

question remains, which market should GENICON enter into and what is the best method of entry? The

following analysis on each country will provide insights on the elements most important to GENICON such as

taxes/tariffs, government regulations, exchange rates, corruption and the ease of doing business. Each

country will be evaluated and rated on economy, technology, social, political, and regulatory considerations.

Because GENICON is relatively small compared to the competition and the fees/cost of entry into new

markets, it is critical the team choose the right county.

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INDIA

India is the fastest growing country in terms of population growth. The importation of medical devices in India

has reached almost 75% according to a report released by the Indian Chambers of Commerce and Industry

(FICCI). The report adds that India still faces a fragmented healthcare system; the majority of the population

has limited or little access to quality healthcare while high-quality health care is offered for middle-class and

medical tourists who come to India for medical treatment. The cost of major surgeries in India is much lower

than the same surgery in many more developed countries. Yet the cost of treatments for the Indian

population are still largely unaffordable; almost 80% of urban households and 90% of rural households are

estimated to find average cost of in-patient treatment to be almost half of their annual household

expenditure. India faces a deficit in the medical care infrastructure and a shortage of human resources. The

government recognizes the need to improve as evidenced by this report; however they have been somewhat

slow to react. (See figures 1 - 2) The Medical Device Regulatory Authority (MDRA) was dissolved and India is in

the process of implementing new regulations. A critical problems facing India's economy is the sharp and

growing regional variations among India's different states in terms of income, poverty, availability of

infrastructure and socio-economic development.

METHOD OF ENTRY

Healthcare is delivered via the private and public sector, the private sector is growing at a faster pace.

Currently there is relatively little to no restrictions on foreign investments: final procedures and guidelines

have not been established yet. The government purchases are bureaucratic and the process can be lengthy

but the private sector usually has a faster purchasing process. Many U.S. hospital equipment/supply

companies have opened operations in India to support the growth occurring there. We recommend exporting

as there is loose regulations and potential to partner with these U.S. companies for distribution.

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The advantages of entering India are as follows:

India is the fastest growing population and 2nd largest medical device market in B.R.I.C. countries.

Medical tourism in India is expected to increase to 3.9BN in 2014.

India has a great need for medical devices; there is opportunity as India imports are at almost 75%.

The Indian government has undertaken initiatives in the public health sector, focusing on improving

infrastructure, health facilities, encouraging foreign investment for by having fewer restrictions.

Rising incomes, increase in lifestyle diseases, more affordability and accessibility of health insurance

continues to fuel growth in India.

Best currency exchange rate for imports into the B.R.I.C. countries at 62.28 to 1.

The disadvantages of entering India are as follows:

Public expenditure on health is lower than the other B.R.I.C. countries.

Ranked last in B.R.I.C. countries for ease of doing business at #134.

Potential political instability leading up to the general elections next year according to Reuters.

Although the process of registering medical devices has improved without official laws it is still

ambiguous. The public sector process is still largely bureaucratic.

Low priority by the government: ~4% of the fiscal capacity is allocated to health (only 9 countries out of

the 191 covered report a lower number).

Concern that growth in medical device market will not be sustainable if improvement is not made to the

medical infrastructure and investment is not made in increasing human capital.

Price sensitivity/currency exchange might cause India to turn to cheaper suppliers (China) as we are

premium priced disposables.

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FIGURE 1- INDIAS IDENTIFIED KEY HEALTH ISSUES AND RATE OF PROGESS

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FIGURE 2 CURRENT INDIAN INFASTRUCE DEFICIT

FIGURE 3- MEDICAL DEVICE MARKET IN INDIA

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CHINA

China has become the worlds second largest market for medical devices imports at 12.6BN and is expected to

grow at an avg of 20% for the next three years (the U.S. Commercial Service medical device market is valued at

30BN). China currently has the largest GDP and growth of the B.R.I.C. countries. China has a large population,

with many of them aging. Much like India, China faces issues with uneven economic development, levels of

insurance, access and peoples awareness. The health care system is highly centralized but the private sector is

on the rise with the Ministry of Health promoting these institutions to aid with the shortage of resources. The

government has been investing since 2009 to improve the healthcare system. Currently, the U.S. is the largest

importer of medical devices in China (see figure 4 below). The strength of patent protection is relatively low

when compared with more developed countries, as Patent Law language remains far from clear, allowing for

ambiguous rulings. The Chinese view foreign medical device companies are more credible. Domestic suppliers

provide low to mid-range products while imports provide the high-end products. Some Chinese firms are

starting to consolidate and improving their quality to compete in the middle tier device range. Currently

Siemens, Phillips and GE export to China.

METHOD OF ENTRY

The Chinese Food and Drug Administration have a system for device registration but are stricter on medical

devices than the U.S. The process can take from one to three years. We suggest importing at this time and

possibly looking at some Chinese companies competing in the middle tier for joint ventures in the future. The

countries distribution channels are fragmented into the North and the South so it may be necessary to work

with multiple distributors which may require more man hours and investments.

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The advantages of entering China are as follows:

China has the largest population of the B.R.I.C. countries and fastest growing GDP.

China was ranked #96 in the ease of doing business better than Brazil and India.

China has worlds second largest medical device market.

Government investment in health care improvement/reform since 2009 and increased promotion of the

private sector.

Political/corruption risk is relatively low.

The disadvantages of entering China are as follows:

Increased competition from domestic producers on price. And major U.S. players already present.

Patent protection - It is common for local players to ignore product patents and quickly adapt high value-

added imported medical devices to local needs and aggressively promote their own products in order to

gain significant local market share and first-mover advantage.

Can be extensive delays in the registration process with the CFDA.

Shortage of medical personnel and infrastructure might impact growth in this market.

Low population growth expected for China.

Need to work with multiple distributors to cover the country.

Yuan is 2nd weakest in B.R.I.C. countries and is okay against the dollar for imports.

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FIGURE 4- MEDICAL DEVICE MARKET IN CHINA

FIGURE 5- CHINAS IMPORTATION OF MEDICAL DEVICES

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BRAZIL

Brazil is Latin Americas largest medical device market and the B.R.I.C. countries second largest market valued

at 3BN. Brazils population growth is almost flat at .9% and its citizens are starting to age. It is the third largest

B.R.I.C. country in terms of GDP and has not been experiencing any growth this last year. The United States

accounts for approximately 30% of the import market, mainly by using local agents, distributors and importers

who sell to hospitals and clinics.

METHOD OF ENTRY

Per the U.S. Commercial Service Healthcare Resources Guide, For medical products, it is necessary to have a

local agent or distributor to import products from manufacturers. Because of regional economic disparities,

varying states of infrastructure, and a host of other issues, it is often difficult to find one distributor that has

complete national coverage. Either setting up a company in Brazil or acquiring an existing entity is an

investment option for Brazil. Companies are also joint venturing with Brazilian industries for final assembling

and packaging of products. This process reduces import duties and documentations that are required for

finished goods. The report also notes, Brazils business culture relies heavily on the development of strong

personal relationships. Companies need a local presence and must invest time in developing relationships in

Brazil. The U.S. Commercial Service encourages U.S. companies visiting Brazil to meet one-on-one with

potential partners. It is essential to work through a qualified representative or distributor when developing

the Brazilian market. Some firms establish an office or joint venture in Brazil. It is very difficult for U.S.

companies to get involved in public sector procurement without a local Brazilian partner. Medical products in

Brazil are highly regulated by ANIVSA, the Brazilian counterpart of FDA but they generally accept international

certifications. Tariffs on medical devices are the highest, on average 12.3%. Armed with this information we

recommend a joint venture to produce the medical devices locally.

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The advantages of entering Brazil are as follows:

There is high demand/consumption for innovative disposable and surgical products.

The medical device segment should see double digit annual growth this year.

Health care expenditure % of GDP surpasses that of China and India.

High government spending in the healthcare sector.

The product registration process can be swift taking an average of 10 months and relatively cheap.

Still a high demand for medical devices with relatively low competition from domestic producers.

Exchange rate is relatively weak compared to the other B.R.I.C. countries but can be used as a benefit with

investments involved in joint ventures (real estate costs, fees etc.)

The disadvantages of entering Brazil are as follows:

Crime/corruption is a concern with high in cargo theft for sale of black market items.

Political violence is a concern.

GDP has experienced negative growth over the last year as the economy relies highly on consumer

spending and credit.

Highly fragmented distribution and cultural norms require GENICON to find a partner for a joint venture

with (manpower hours and resources).

High tariffs if the exporting route is chosen.

Second lowest Ease of Doing Business ranking at 116.

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FIGURE 6- BRAZILS GROWTH OF DEVICE IMPORTS AND HEALTH EXPENDITURE

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RUSSIA

Russia represents the smallest medical device market and population of all the B.R.I.C. countries. It may also

be the most underserved of them all; it is estimated that only twenty percent of the population has access to

medical care. In addition, reports suggest that almost two-thirds of the medical equipment and devices used

in public clinics and hospitals are obsolete and need replacement. Two percent of all medical facilities are in

hazardous conditions. Russian medical device manufacturers are generally small and undercapitalized, and

tend to produce obsolete products; they can only compete with Western products in terms of cost. However,

Russias healthcare system is evolving rapidly and receiving increased attention from the government. In

January 2013, the government approved a strategy that will aid the development of innovative products and

their introduction into the healthcare system until 2025. Russia has a reputation for being corrupt when it

comes to healthcare policies and practices On the political front recently there has been tension between U.S.

- Russian relations. Putin has tightened restrictions on freedom and human rights.

METHOD OF ENTRY

Currently Russia imports 60% of its medical devices. U.S. equipment comprises 20-25% of Russia's imports,

indicating room for U.S. companies to grow market share. Russia became a member of the World Trade

Organization (WTO) in 2012, which is a sign of improving trade relations with the rest of the world. Russias

membership in the WTO provides significant commercial opportunities for U.S. exporters: they will have more

certain and predictable market access as a result of Russias commitment to bind all of its tariffs on medical

equipment: Russias average tariff on medical equipment will be 4.3 percent. Russia also agreed to apply non-

tariff measures in a uniform and transparent manner. Russia had to implement many trade liberalizing

obligations. All medical devices must be registered with the Federal Service of Health. The government is

looking to localize production of medical devices. We recommend exporting to reduce risk and investment.

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The advantages of entering Russia are as follows:

Unmet demand for medical equipment and devices across the country.

Ease of Doing Business ranked Russia at 92; higher than India, China and Brazil.

Has the highest healthcare spending per GDP at 6.2% of all the B.R.I.C. countries.

The Russian government is heavily investing in a national healthcare plan and developing innovative

products into their healthcare system until 2025.

Domestic firms are not innovative or high-quality presenting opportunities for GENICON.

Growing middle classes and mostly urbanized population.

Low tariffs on medical devices as a result of WTO membership.

The disadvantages of entering Russia are as follows:

Declining population growth.

Corruption and bureaucracy in government and regulatory environment

Although relatively strong compared to China and Brazil, weakening currency and instable inflation

Russian government makes all the decisions regarding medical equipment purchases.

GDPs dependency on energy (oil) makes the economy venerable.

Political relationship with U.S. and other countries at this time is a deterrent for foreign investors.

Cheap competitors from China and Pakistan have entered the Russian market in high volumes.

Significant investment of man hours to set up and maintain relationships with distributors.

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FIGURE 7- RUSSIAS GROWTH OF GDP PER CAPITA

According to EY, Russia is home to 140 million consumers and is the most prosperous of the BRIC countries. 82% of all

households in Russia will be part of the middle class by 2015. Source: Global Insight, Rosstat

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SUMMARY

GENICON has been able to thrive as a provider of premium-priced disposible minimally invasive surgery devices by

expanding into international markets. Although the B.R.I.C . countries each have attractive qualities about them, we

were able to select a country through our in-dpeth analysis. China is a massive market for medical devices and seems

very appealing at first glance, however the lax enforcement of patent laws in combination with increased quality of

domestic suppliers can be a detterent. The process of registering products can take up to three years in China, wasting

precious resources and time for a small firm like GENICON. Russia offers many benefits as well inlcuding a growing

economy and desperite need for medical devices, however due to the political instability of the government under Putin

the investment into that country deems to risky for a firm such as GENICON. India with the expected population growth

and large market for medical devices makes India a tempting choice, but the leisurely approach of the government in

solving the healthcare infastructure and talent issues risks stunting the growth in this segemt. India also ranks last on the

ease of doing business for all of the B.R.I.C. countries and has an ambiguous regulatory process . India should be put on

the watch list for future expansion. We recommend entering the Brazil market. There is high demand

and/consumption for innovative disposable and surgical products which is one of GENICONs specialties. The

regulatory process is swift and cheap, which is a critical success factor for GENICONs expansion plans, and

competition is relatively low both on the import and domestic fronts. We recommend entering via joint venture

with a local Brazilian firm. This will allow GENICON to overcome some of the culteral aspects of doing business in Brazil,

they can leverage the local firms expertise in distribution, crime avoidance and GENICON can view the relatively weak

Real as an advantage with investments involved in joint ventures (real estate costs, fees etc.). Through the

joint venture GENICON can also eliminate the high tariff costs that often increase the costs of U.S. firms

exporting medical devices. Partnering with a local firm will also reduce the difficulties in doing business in

Brazil as it was ranked the second lowest of all the B.R.I.C. countries.

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FIGURE 8 TOP 10 EMERGING MARKETS

FIGURE 9 POPULATION GROWTH THROUGH 2050

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FIGURE 10 COMPARISON OF COUNTRIES

FIGURE 11 COMPARISON OF COUNTRIES P-E-S-T-C-L ANALYSIS

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FIGURE 12 COMPARISON OF COUNTRIES GEERT-HOFSTEDE INDEX

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WEB REFERENCES GENICON WEBSITE http://geniconendo.com FICCI REPORT http://www.ey.com/Publication/vwLUAssets/Universal_health_cover_for_India/$FILE/FICCI-EY_Report_2012.pdf http://www.buyusainfo.net/docs/x_682756.pdf http://export.gov/industry/health/index.asp http://export.gov/brazil/doingbusinessinbrazil/index.asp Healthcare Technologies Resource Guide http://1.usa.gov/1fQyOvl Emerging Medtech Markets http://www.wsgr.com/news/medicaldevice/pdf/latam.pdf http://www.espicom.com/russia-medical-device-market http://country-facts.findthedata.org http://www.nationsencyclopedia.com/economies/Americas/Brazil http://data.worldbank.org/indicator/IC.TAX.TOTL.CP.ZS/countries http://brazilhealthcaremarket.blogspot.com/ http://data.worldbank.org/indicator

https://www.osac.gov

http://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_003453.pdf

http://www.usrussiatrade.org/documents/Sector%20Profile%20-%20Healthcare-Pharmaceuticals%20(2012-06).pdf

http://www.pmlive.com/pharma_intelligence/opportunities_in_the_medical_devices_sector_in_india_469843

http://www.globalintelligence.com/insights/all/the-best-opportunities-in-china-s-medical-devices-industry

http://blogs.reuters.com/breakingviews/2013/01/02/india-braces-for-last-year-of-political-stability/