Medtech CEOs Assess The Promises And Pitfalls Of Emerging Markets
The lure of emerging markets remains strong for U.S. medical device makers seeking to tap high-growth opportunities in countries such as Brazil, China and India. But the barriers to success remain tricky and medtech companies need to be keenly aware of the local landscape, industry leaders said in Minneapolis this month.
A panel of CEOs speaking at AdvaMed 2016 medical device industry summit, including some of the national trade group’s top leaders, told attendees that while the rewards of cracking overseas markets—such as double-digit sales growth percentages—can be substantial, the risks are also formidable if there’s insufficient attention placed on local compliance and other potential pitfalls.
There’s no question medical device makers big and small are looking to emerging markets for growth opportunities. For instance, Medtronic CEO Omar Ishrak has stated he’s aiming for an emerging markets growth rate in the mid-teens, reaching $7 billion in sales within five years. Boston Scientific CFO Dan Brennan has set a goal of increasing emerging market sales from 8 percent of the company’s total in 2013 to 15 percent in 2017.
The U.S. government is trying to help by designating medical devices as a National Export Initiative priority. American companies exported nearly $50 billion in medical devices in 2015, and Washington is working with developing countries to establish internationally recognized device regulatory standards.
But in the meantime, the AdvaMed panel said, emerging markets remain a patchwork of varying rules, regulations, cultures, corruption and crackdowns.
Vincent Forlenza, chairman, president and CEO of $10.3 billion medtech giant Becton, Dickinson & Co. (NYSE: BDX), and also AdvaMed’s board chairman, said emerging markets make up about 15 percent of his company’s total sales. The key for BD, he said, was investing heavily in “the policy side” along with basics such as setting up local sales forces.
“That was enormously important to us,” he said. “Last year, we signed our fourth memorandum of understanding with the Chinese government in terms of working with them on a number of issues, including infusion therapy and infection control, because their infection rates are so much higher than in the U.S. So partnering with them on high priorities where we could make a difference was crucial.”
Also important for BD: integrating its emerging market operations, as it added more overseas manufacturing and research and development capabilities. It helped result in emerging markets profitability on a par with that in the developed world.
“Overall, in the last five years there has been a quick payback on building the infrastructure, rapid growth, and good profitability,” the CEO said.
By far, however, the most important investment BD has made in emerging markets is its emphasis on compliance—so much so that it’s been integrated right across its global commercial organization.
“You need real-time advice on what you can and what you can’t do across the organization,” Forlenza said. “You want the right compliance so you can partner with the government, because the last thing they want is to partner with someone who’s going to get them in trouble in an anti-corruption environment. Understanding what the regulations are and how they’re interpreted can be a major issue.”
Often, he said, the rules will be described only very broadly, and there’s a lot of room for interpretation. Also, cycles of corruption along distribution networks and resulting government crackdowns are common in places like China, making it important to understand the motives of all those involved.
Kevin Lobo, president & CEO of Fortune 500 surgical instrument maker Stryker Corp. (NYSE: SYK), said that after great success in penetrating the European market, tackling emerging markets was stormier.
“They’re about six or seven percent of our sales, and we were growing very quickly there until about three years ago when Brazil went through its macroeconomic challenges and China did as well,” he said.
Stryker’s strategy in China was to tackle the key mid-market segment by buying a local company and launching new products though it rather than using the Stryker brand, which is being reserved for the higher-end market.
“I don’t know if we’re going to make money yet, to be honest, we’re kind of just going for it,” Lobo said. “To make money in the spaces were Stryker plays, we have to win in the mid-tier segment and not just live in the premium segment.”
The key word for newcomers in emerging markets like his company, he added, is “patience. We didn’t invest a lot so we didn’t get burned in emerging countries like some multinationals did, and we’re going about it cautiously and deliberatively.”
One lesson Stryker learned is not to go after too many countries at once, but rather concentrate on a few countries and “play to win” in them.
Another medtech leader taking the podium in Minneapolis was David Perez, president and CEO of Colorado-based Terumo BCT, a maker of blood collection and apheresis systems. Some 60 percent of Terumo’s growth over the next five years is going to be coming from developing markets, led by a successful acquisition in Turkey that has become a base for expanding its product line into Eastern Europe.
But each emerging market is different and holds the potential for surprises that must be adapted to, he warned.
“We had to pull out of manufacturing in China when we found we couldn’t compete for workers with the automobile makers in the city we were in,” he said. “We were losing money. We got out, and we built a new plant just outside of Ho Chi Minh City in Vietnam. That has turned out to be a fantastic investment for us. It has an excellent, low-cost labor force and we’re generating great margins.”
Like BD’s Forlenza, Perez said it all comes down to compliance when operating in emerging markets.
“You can tailor your products, and you can tailor your services to fit these markets, but what you can’t tailor is your compliance program,” he said. “It just has to be consistent and you have to back it up … with a clear code of conduct.”