High-value consumables volume procurement is imminent; how can medical device companies break through the deadlock?

A series of national-level measures to control high-value medical consumables, in addition to squeezing out the "water" in their inflated prices. In the long run, volume-based procurement in the field of high-value medical consumables is expected to accelerate domestic substitution, creating an excellent opportunity for manufacturers of high-value medical consumables with truly independent intellectual property rights and core competitiveness to stand out.

　　Foreword

　　In recent years, thanks to China's economic development, the increasing demand for people's health, significant improvements in R&D and manufacturing capabilities, and policy dividends such as national support for innovation in domestic medical devices and encouragement of domestic substitution of imports, China has become the most promising emerging market for medical devices globally. According to calculations by the China Medical Device Research Institute, the scale of China's medical device market has grown from 43.4 billion yuan in 2006 to 530.4 billion yuan in 2018, with a compound annual growth rate of approximately 25.55%. Among them, the market scale of high-value medical consumables is approximately 104.6 billion yuan, with a year-on-year growth of 20.37%, ranking highest in the growth rate among medical device sub-sectors.

　　However, behind the opportunities also lurk challenges. In December 2018,PharmaceuticalsThe "4+7" volume-based procurement policy in the field triggeredPharmaceuticalindustry "earthquake", with the upstream and downstream industries wailing. Half a year later, nationwide volume-based procurement of high-value medical consumables is on the verge of launching.

　　I. Background

　　On July 16, 2019, Anhui Province issued the "Implementation Plan for Concentrated Volume-Based Procurement and Negotiation of High-Value Medical Consumables in Provincial Public Medical Institutions (Pilot)", which specifies that orthopedic implants (spinal) and ophthalmic (intraocular lenses) will be the first batch of high-value medical consumables products subject to concentrated volume-based procurement in the province. The procurement volume will be no less than 70% and 90% of the procurement volume of provincial public medical institutions in 2018, respectively. Two weeks later, the results of the volume-based procurement negotiations were confirmed. Domestic spinal implants saw an average price reduction of 55.9%, while imported products saw an average price reduction of 40.5%, with an overall average price reduction of 53.4%; domestic intraocular lenses saw an average price reduction of 18.1%, while imported products saw an average price reduction of 20.9%, with an overall average price reduction of 20.5%.

　　On August 7, after preliminary negotiations, bidding, and announcement procedures, the first batch of high-value medical consumables procurement alliance consisting of 55 tertiary public hospitals in Jiangsu Province clearly stated that volume-based procurement would be carried out for cardiovascular stents and pacemakers. Under the premise of ensuring a procurement volume of no less than 70%, the average price reduction for the selected manufacturer's sirolimus and its derivative stents was 51.01%, with the highest reduction being 66.07%; the average price reduction for pacemakers was 15.86%, with the highest reduction being 38.13%.

　　In fact, a week before Jiangsu Province announced the results of volume-based procurement of consumables, on July 31, the General Office of the State Council officially released the "Reform Plan for the Governance of High-Value Medical Consumables", which clearly stated that it would reduce the inflated Price of high-value medical consumables by improving the Price formation mechanism; control the unreasonable use of high-value medical consumables by standardizing medical service behavior; and encourage medical institutions to jointly conduct volume-based procurement negotiations by improving the centralized procurement methods.

　　In addition, on August 12, the National Healthcare Security Administration stated: "Next, the National Health Commission will cooperate with relevant management departments to establish a consistency evaluation institution for consumables." The attitude and determination of the national level in promoting volume-based procurement of high-value medical consumables is evident. From the experience in the pharmaceutical field, the consistency evaluation of generic drugs has become the cornerstone of implementing volume-based procurement of drugs. In the consumables field, the role of consistency evaluation is equally significant. Under the policy trend of strictly controlling medical insurance funds, the volume-based procurement of high-value medical consumables will be rolled out nationwide, it is just a matter of time.

　　The era of volume-based procurement of high-value consumables has arrived. Are enterprises ready?

　　II. Impact

　　The implementation of volume-based procurement in the field of high-value medical consumables will inevitably have a negative impact on the sales Achievements of winning enterprises in the short term under the price-for-volume model, and the profit margin will decline. However, in the long run, the few winning enterprises can enjoy more than 70% of the market share of public hospitals in the province (city), which is undoubtedly a boon for the development of industry leading enterprises with large scale, high production capacity, and strong innovation capabilities. No wonder that after the results of the Jiangsu Province's volume-based procurement of high-value medical consumables were announced at the end of July, an executive of a winning cardiovascular stent Manufacturer described his feelings as "bittersweet".

　　It is obvious that as volume-based procurement of high-value medical consumables is rolled out on a larger scale, the market share of non-winning consumable Manufacturers will be significantly compressed by winning enterprises. Moreover, since small and medium-sized consumable manufacturers often have thin profit margins, limited price reduction space, and relatively limited production capacity, these enterprises are at a greater disadvantage in volume-based procurement negotiations and are difficult to compete with large leading enterprises. In the long run, small-scale enterprises with poor innovation capabilities will easily be eliminated from the market if they do not actively seek transformation.

　　From the industry perspective, a series of recent measures to govern high-value medical consumables, in addition to squeezing out the "water" in their inflated Prices and achieving the main goal of the medical insurance cage-to-bird function, also aims to promote the development of the high-value medical consumables industry towards a more concentrated, standardized, and healthy direction through a mechanism of survival of the fittest.

　　On the other hand, domestic high-value medical consumables have a greater Price advantage compared to imported counterparts, and the ultimate goal of volume-based procurement is to control medical insurance expenditure. Therefore, volume-based procurement in the field of high-value medical consumables is expected to accelerate domestic substitution, creating an excellent opportunity for Manufacturers of high-value medical consumables with truly independent intellectual property rights and core competitiveness to stand out.

　　III. Response

　　AlthoughMedical Devicethere have been repeated calls in the industry to cautiously promote volume-based procurement, it is clear that the era of volume-based procurement of high-value medical consumables will inevitably come, and the speed has exceeded expectations. As an industry that is extremely affected by policy trends, going against the policy trend,Enterprisesprospects are probably not optimistic. I believe that only by following the trend and making early preparations can sustainable development be achieved in the severe industry. To this end, after in-depth interviews with senior market strategy and entry department heads in the field of high-value medical consumables and reviewing relevant materials, the following suggestions are extracted for reference:

　　1. Understand the trend and formulate a response strategy in advance.

　　High-value medical consumable manufacturers can obtain the latest trends on volume-based procurement in various provinces and cities through analysis reports provided by internal market entry departments or external consulting agencies, and strengthen communication and exchange with medical insurance policymakers. Based on the analysis and prediction of reliable factual information, including interpretation of local volume-based procurement models, assessment of differences in similar products, calculation of the maximum affordable price reduction and maximum production capacity, and estimation of competitors' negotiation strategies, manufacturers can learn from experience, prepare for the future, and formulate response strategies for volume-based procurement in advance.

　　2. Expand channels and actively explore "blue ocean" markets.

　　Thanks to the promotion of tiered medical treatment and the "Healthy China" series of related policies, county-level publichospitalsand non-public medical institutions have gained broad development space in recent years, with amazing market potential. Given the volume-based procurement and the saturation of the public hospital market in first- and second-tier cities, the "blue ocean" market of county-level public hospitals and non-public medical institutions deserves full attention and early layout from high-value medical consumables companies. Currently, multinational and domestic giants of high-value medical consumables, including Medtronic and MicroPort, have begun to establish new market promotion teams such as Regional Growth Initiatives, dedicated to promoting their medical solutions in county-level markets and emerging markets such as non-public medical institutions.

　　3. Independent innovation to ensure product competitiveness.

　　It is not difficult to see that cardiovascular stents and orthopedic implants, which are subject to volume-based procurement, are relatively mature and have relatively severe homogeneous competition in the market. For consumables manufacturers, the most important factor in obtaining bargaining power in volume-based procurement negotiations and maintaining a long-term competitive advantage in the industry is independent innovation capability. Driving development through innovation, ensuring diversified business layouts, or having a single product with high technological content and high added value, will have obvious advantages in differentiated competition.

　　The future is here. In the era of volume-based procurement of high-value medical consumables, opportunities are only for those who are prepared.