In 2021, China frequently dominated global headlines as digital technology regulatory changes disrupted the marketplace in areas such as financial technology, online education and transportation. The valuations of companies such as DiDi Global Inc. and Ant Group were wiped out, seemingly overnight. In medtech, we also are undergoing policy disruptions that are significantly altering portfolios and business models for local and multinational medtech companies alike.
First piloted for pharmaceuticals and now extended to medical devices, volume-based procurement (VBP) began rolling out in China for medical devices in 2019. VBP aims to lower the price of medical consumables by tendering the market volume of cities, provinces or the country to manufacturers with the lowest price. With the entire market’s volume up for tender, the stakes are high, and the message is clear: Medtech companies are either in with significantly lowered prices, or they are out—completely.
Results thus far have been significant. The top 10 high-value medical consumable companies have all undergone VBP tenders at the provincial level, with median publicly reported price cuts of approximately 70%. For coronary stents and joint replacements, the only categories so far to undergo a national-level tender, price cuts were 93% and 82%, respectively. Having seen the benefit of these price cuts, the government continues to expand the VBP categories and encourage more provinces to participate.
What does VBP mean for medtech? With significantly reduced revenue and margins among legacy products, medtech companies are being forced to rethink how they go to market. We have summarized five key commercial model changes for medtech players in China to consider.
Due to high growth and strict new product registration requirements, medtech companies have focused on driving growth among their existing legacy portfolio and paid less attention to commercializing new products. With VBP disrupting commoditized products, players must now accelerate the pre-launch registration and post-launch commercialization of innovative pipeline products. This shift already is occurring in pharmaceuticals and is gaining traction in medtech.
With highly specialized product lines globally returning some of the highest gross margins, China historically has taken an invest-first-and-business-will-come approach. Despite a broad range of affordability concerns and clinical needs between hospital types and cities within China, less thought has been put into whether the appropriate level of commercial resources are allocated to the right segments.
With significantly lower margins in VBP-impacted portfolios, companies must better leverage portfolio synergies and increase efficiencies in how commercial resources are deployed. In pharma, which already has undergone several rounds of national VBP tenders, we have seen these changes take effect. A top multinational pharmaceutical company combined its primary care portfolio across therapy areas after its product entered the VBP process and reduced headcount through natural turnover. Similarly, another major multinational pharmaceutical company combined a specialty care and primary care team and, in the process, reduced headcount by approximately 40% through headcount rationalization and transfers to its broad market team.
For medtech, we believe optimizing its account and customer targeting will be essential moving forward. When possible in lower-tier cities and hospitals, medtech companies will want to consider increasing the number of products reps carry in their bag.
With significantly reduced prices, the traditional distributor-driven model will no longer be sustainable as companies can no longer offer the same margins to their channels. After VBP, we expect companies to consolidate distributor layers and numbers to achieve better economies of scale. The roles and responsibilities between distributors and manufacturers also will be redefined. Distributors will increasingly focus more on logistics to “deliver the box,” while a larger share of customer engagement and service will be brought in-house.
Because the responsibility for implementing VBP primarily falls on the shoulders of hospital administrators, we will see further acceleration in the shift from clinicians driving the decision-making for medtech products to hospital administrators making purchasing decisions. As a result, we expect procurement conversations will increasingly focus less on the clinical outcomes of individual products and more on the overall value of a product portfolio and how it will minimize costs.
We already have observed several medtech companies, along with a shift toward offering a wider range of products, move their field sales efforts from clinical departments to hospital administration stakeholders or establish separate administrator-focused roles. However, in addition to organizational changes, this will require medtech companies in China to also develop the talent and commercial organization to support a portfolio- and account-level management strategy.
One benefit of China’s zero-COVID strategy has been a quicker return to face-to-face customer engagement and less impact on field engagement with customers. With more constrained resources after VBP, investment trade-offs must be made in tail-end hospitals and remote cities. The time may be ripe for broader adoption of remote engagement channels, including inside sales and digital channels.
Medtech, like tech, is being significantly impacted by policy changes in China. The necessity to transform business models will intensify as VBP broadens in scope. However, unlike tech, the impact of VBP will be felt gradually at the category and provincial levels, not overnight. With some headway, now is the time to pilot future business models to prepare for conducting business in China in a post-VBP market.