Medtronic CEO Eyes Acquisitions in China

By Jof Enriquez,
Follow me on Twitter @jofenriq

In response to policy and market changes, Medtronic is adopting a new strategy in China, expanding its portfolio of value products instead of relying on premium device sales. The company also is eyeing potential acquisitions among local players in the Chinese device market.

Medtronic CEO Omar Ishrak recently told the Wall Street Journal that, despite recent challenges, the sheer size of China's market makes it a compelling priority for device companies.

“We’re completely bullish on China,” Ishrak told the WSJ. “It’s a numbers game. This will be the largest market and it’s not a debate. It’s a matter of when.”

China's medical device market is expected to be worth $18 billion by 2018, up 29 percent from 2014, according to London-based consulting firm L.E.K. That puts China ahead of Germany, and behind only the United States and Japan by the end of the decade.

The Hong Kong Trade and Development Council (HKTDC) estimates that the local Chinese device market was worth $34.51 billion in 2014, and a McKinsey & Co. report from last year predicts the sector expanding 20 percent annually.

Like Medtronic, other multinational device companies with an established presence in China are re-thinking their strategies in that market. For example, Johnson & Johnson recently reaffirmed its commitment to the Chinese market by inking large deals with local suppliers of its blood glucose and trauma products.

As a whole, Medtronic is ramping up its annual sales growth in emerging markets to 15 percent, at constant currency rates, from the current 12 percent, Ishrak told the WSJ. The device maker also is moving into community hospitals outside China’s big cities to sell surgical tools, cardiac devices, and spinal implants that cost less than its premium lines, the report said.

The shift to value products comes amid pressure from the Chinese government to lower healthcare costs and to pressure companies into slashing their product prices. About 70 percent of device sales in China come from mid-range and value products, according to McKinsey data cited by the WSJ. In contrast, the Chinese market was dominated by premium devices over a decade ago.

Local Chinese manufacturers, too, are aggressively expanding their market share in the value segment. For example, Chinese makers of drug-eluting stents now hold an 80 percent market share, while multinational companies hold the remaining 20 percent, according to McKinsey. The figures were the opposite 10 years ago.

Chinese device makers have been aided by recent policy changes implemented by the Chinese government. Officials there have tightened clinical trial requirements and launched anti-monopoly probes against multinational device companies, among other changes.

Ishrak told the WSJ that new regulations would not affect Medtronic, which plans to expand manufacturing in China to feed market demand. The company also is interested in buying local device manufacturers, but Ishrak declined to discuss specifics.

“This is one of the few countries in the world where the local market potential itself and the volume it can generate will justify itself,” Ishrak said in the WSJ interview.

Medtronic reportedly will leverage the large local presence of Covidien – with which it merged last year – to sell surgical supplies. The company also owns orthopedic implant maker China Kanghui Holdings.