China, Brazil, and India: Crashing the gates of the top ten IVD markets

PHOTO BY JUPITER IMAGES.

This year, the mature IVD markets, North America, Western Europe, and Japan, will represent seven of the top ten slots on the list of the world's most important IVD markets. These markets will spend about $22 billion on their suppliers of IVD products in 2008. But growth in these mature markets will remain modest, while margins will continue to be squeezed. Breaking into these markets is particularly difficult for new IVD companies, as they are the home turf of the major multinationals.

A very different story can be told about the countries that hold three spots on the roster of the top ten IVD markets: China, Brazil, and India. These three rapidly developing countries are now spending more than $2.5 billion per year on IVD products. With double-digit annual growth, this sum will likely double to $5.1 billion in 2015.

China, Brazil, and India are currently ranked sixth, ninth, and tenth, respectively, among IVD markets worldwide. By 2015, they will be ranked third, seventh, and ninth. For producers of IVD instrumentation, these three countries hold a disproportionate importance. There are 52,000 clinical labs in these three countries, only 16,000 of which are automated at present. This year, they will buy more than 8000 automated hematology systems, more than 4000 automated routine chemistry systems, and nearly 2500 automated immunoassay systems.

These three markets have some very interesting similarities and differences. This article compares China, Brazil, and India with regard to the following: market value and accessibility for overseas IVD companies, number and character of their clinical labs, competitiveness of indigenous producers, distribution challenges, and product registration challenges.

Focusing on China, Brazil, and India

In 2000, China, Brazil, and India added up to just $900 million in annual IVD spending, and most IVD companies operated in them opportunistically. But with seven years of growth in the 15-20% range, these three countries are of strategic importance to most IVD firms. China is the world's sixth-largest IVD market, generates annual revenues worth $1.5 billion, and is only a bit smaller than Italy and France. Brazil is ranked ninth in the world, and is slightly smaller than the United Kingdom at $750 million per year. India is the tenth-largest at $340 million per year.

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Figure 1. (click to enlarge [5]) Projected growth for the IVD markets in a) China, b) Brazil, and c) India. Source: McEvoy & Farmer.

Since 2000, IVD markets in these three countries have been growing at annual rates in the teens (see Figure 1 [5]). Market growth has been brisk in these countries, and the outlook for the future is promising. Between 2008 and 2015, average annual growth rates of 14% in China, 11% in Brazil, and 16% in India are expected. Under these assumptions, by 2015, China will surpass Germany to become the world's third-largest IVD market at more than $3 billion. China is already the second-ranked market in the world for nearly every category of IVD instrumentation, having surpassed Japan, Germany, France, and Italy. By 2015, Brazil will surpass the United Kingdom and Spain to become the seventh-ranked IVD market at $1.4 billion. India will by this time also surpass the United Kingdom to become the ninth-largest IVD market at $915 million per year.

There are several reasons to be optimistic about near-term growth in China, Brazil, and India. These three countries have nearly three billion people among them, a small fraction of whom currently consume IVD tests, and many of whom are now gaining the prosperity to pay for better medical coverage. All three economies are in good shape, with ample foreign exchange. The Economist is predicting GDP growth of 10.1% for China, 7.8% for India, and 4.5% for Brazil in 2008. All three currencies are in good shape, and inflation is modest in each country: 3.0% in China, 4.1% in Brazil, and 5.2% in India.

Clinical Labs and Diagnostic Medicine

Brazil and India are similar in that they both have long histories of stratified access to medical services. The less fortunate have endured poor services delivered by government clinics and hospitals. The public sector labs that serve these people are strapped for cash and have always been less-than-ideal customers for international IVD firms. Selling to public-sector labs has frequently involved shady practices, so international firms tended to focus on the private hospitals and commercial labs, where the self-serving decisions of on-site management are more rational.

Well before the advent of automated laboratory medical technologies during the 1960s, both India and Brazil had many private clinics and hospitals that catered to the more affluent classes. By the time the 1970s arrived, with the semiautomated batch analyzers of those days, there were plenty of small-scale, mom-and-pop commercial labs. Since private medicine was always legal in Brazil and India, entrepreneurial biochemists and pathologists had the legal security to make substantial investments in capital equipment.

Today, Brazil has many highly automated commercial lab chains. India is a few years behind Brazil in this process. Private commercial labs have been around for many years in India, but only recently have chains of private labs become common in Brazil. The commercial labs in India may be every bit as well automated as the leading Brazilian commercial labs, but they are not yet running such big daily workloads.

China, however, had no tradition of private medicine in any form. Prior to 1949, there were plenty of private medical practices, but the government took over responsibility for the provision of healthcare in the early 1950s. There has never been any legal framework in China that would give the entrepreneurial Chinese biochemists and pathologists the confidence necessary to make the capital equipment purchases necessary to run a viable commercial lab.

The government medical services provided in China may have been underwhelming, but there was never any private outlet for those who could afford to pay for premium healthcare, as was the case in Brazil and India. Today, there are very few private labs in China, and these have difficulty attracting specimens away from government hospitals. There are a few private hospitals in China, but these are small and cater to the very wealthy. Once the government clarifies its position on regulation of private medicine, there should be a boom in the commercial lab business.

Chinese labs have always been owned by government entities, such as the health ministry, the armed forces, the provinces, and the municipalities. Despite the fact that they are all government owned, China's hospital-based clinical labs are very commercially sophisticated and very protective of the revenue stream that labs provide. They usually bring in profits for their hospitals, second only to the profits brought in by the hospital pharmacies.

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Table I. (click to enlarge [6]) There are very large numbers of active clinical labs in China, Brazil, and India.

In China, Brazil, and India, there are currently very large numbers of active clinical labs (see Table I [6]). In addition, these countries will take delivery of a huge share of the world's new instrumentation in 2008 (see Table II [7]).

The Impact of Indigenous Producers

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Table II. (click to enlarge [7]) In 2008, China, Brazil, and India will take delivery of a huge share of the world's new instrumentation.

While China is a far bigger market than either Brazil or India, a far lesser share of China's domestic market is at this point accessible to multinational firms (see Table III [8]). China and Brazil are comparable in terms of the value of their IVD products supplied by multinational firms. India offers for now about one-third the opportunity for multinational IVD manufacturers of China or Brazil.

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Table III. (click to enlarge [8]) Sales of indigenous and outside IVD companies in China, Brazil, and India.

China has nearly 200 indigenous manufacturers of IVD products that collectively supply about 60% of the domestic market. Perhaps 25-30 of these firms are also actively exporting. By 2015, several Chinese IVD companies will be large contract manufacturers for today's multinational manufacturers that will move more of their reagent and consumables production to China. Other Chinese companies will build successful international brands of their own, with both instrumentation and reagents. A number of the owners of these firms will be cashing out during the next few years. Other companies will be making their own acquisitions in Europe and North America to build distribution for their brands.

In Brazil, 15-20 local firms supply 10-15% of the local market. Nearly all of these firms are reagent companies, and none are competitive outside Brazil. While there are several competent local producers in Brazil, they have been treated somewhat more charitably by the local regulatory environment, so they never had to be quite as competitive as the Chinese and Indian firms. Consequently, there are no Brazilian IVD companies that are in a position to expand overseas.

In India, like Brazil, there are only about 15-20 important indigenous manufacturers. However, these 15-20 companies control a very significant one-third of the domestic market in India, and several are successful exporters as well. There is one important instrumentation producer among them, and the rest are primarily reagent companies. The Indian IVD companies were outward-looking earlier than the Brazilian and Chinese producers. They are more comfortable buying and selling in North America, Europe, and Japan, and most of them have business relationships with the mature markets going back 20 years and more. A few of the companies will likely be acquired by American, European, Japanese, and Chinese IVD firms during the next seven years.

Some IVD products are more easily imported than others, and each market has its isolated quirks. But generally speaking, given the capabilities of the indigenous producers, the following is a list of what can be profitably exported to China, Brazil, and India: fully automated/big menu chemistry, hematology, immunoassay, coagulation, and critical-care chemistry systems, esoteric immunoassay, esoteric coagulation, esoteric nucleic acid test, reagents, and esoteric blood screening and typing reagents.

However, without a system in place in China, Brazil, and India, the following products cannot be exported to these countries: routine chemistry, hematology, coagulation, and urine reagents. In addition, the following products cannot be exported at all to these countries: semiautomated instrumentation and low-end semi-automated/manual chemistry instruments, routine blood screening and typing reagents, and routine nucleic acid test reagents.

Distribution Challenges

How does an IVD company optimize its reach into these three markets? A company has to recognize that all sales are local, usually consummated in local dialects, so an ample margin must always be allocated for local agents. As noted above, these three countries have a total of 52,000 clinical labs. No IVD company can service so many far-flung customers.

China has more than 100 cities with a population of one million or more. India has 30-40 cities of this description, and Brazil has 12-15. These three countries have at least 150 urban markets with a population of at least one million, all of which have local markets adequate in size to sustain a profitable local service infrastructure.

The reach of local dealers varies greatly in these three countries. In Brazil and India, there are far fewer IVD dealers than in China. Nearly every company that does business in the field is run by skilled specialists who understand their products. But no dealer in any of these countries can effectively serve the entire country. Picking dealers requires some knowledge of where in each country each dealer is strong or weak.

Product Registration Challenges

Product registration is a serious headache in China, Brazil, and India. Characteristics of the process that are the same in all three markets include the following:

• A local company must hold the registration. The local entity can be either a branch office of an overseas firm or that firm's local agent.

   

• The registration process for products already registered in Europe, North America, or Japan takes at least nine months, if every document submitted is perfect the first time. Since few applications are perfect the first time, many get kicked back out for corrections that can add several months of delay each time.

   

• Registration fees are $500-$5000 in Brazil and India, and $6000-$12,000 in China.

The product registration process in China is also different from Brazil and India in two other important ways. First, a local clinical trial ($40,000 and up) is required in China, in addition to the registration fees cited above.

Second, in Brazil and India, everyone more or less plays by the rules. But in China, enforcement of registration requirements is spotty and known to be so by the local firms. Large international manufacturers are scrutinized, but smaller local dealers and manufacturers commonly promote, deliver, and invoice products that are not yet registered, because they have so far had no need to fear the consequences of doing so. Dealers far from the big cities routinely promote products for which applications have been submitted but not approved. In Brazil, such activity is specifically banned, with adequate enforcement. In India, such activity also happens, but far more rarely.

As in any sophisticated market, there are local expeditors in each country that can accelerate the process and decrease the chances that an application will get kicked back out for revisions, causing further delay. Still, it would be a very unusual event for a first-time application to be approved within nine months. One year would be a more reasonable expectation for all three countries, assuming the applicant is not too sloppy the first time.

Implications for Multinational IVD Companies

Any IVD company hoping to succeed in China, Brazil, and India must ask whether it has a product that is unique or special in some way. If a company's product cannot be distinguished from a comparable local product, it should stay focused on its backyard and stay away from these three huge, complex, and demanding countries. These markets are most unkind to me-too products, lately introduced.

For the well-established international IVD firm that has had a local presence for some years in these countries, the following strategies are suggested for the next seven years:

• Add as much value locally as possible in all three markets. There is plenty of technical competence in all three countries.

   

• Start shopping soon for local acquisitions in China and India before they get too expensive. By 2015, Chinese manufacturers will be making much of the world's commodity IVD products, just as they are now making most of the world's other manufactured commodities. The best of the Indian IVD producers will be doing the same. The Brazilians however will likely be staying focused on their home front.

   

• Be on the lookout for local research and development assets, particularly in academic settings. China and India are churning out enormous numbers of skilled, educated, technically-trained young people. Their universities and biotech startups are already working on projects that will affect worldwide IVD markets within the next seven years.

   

• Design systems for the small/mid-sized labs in these countries. The instruments needed in these countries during the next 5-7 years may not be the same as required by the mature markets. But where else in the world will there be 38,000 labs that are not yet automated?

The overseas IVD firms that are not yet entrenched in China, Brazil, and India should keep their distribution options as open as possible for as long as possible. They should also never give a dealer national distribution rights, and should assign exclusivity only for regions or provinces. India and China are every bit as diverse as Europe, so no distributor in either market can be the best option nationwide. Brazil is less diverse, but full of enough regionalism to still warrant regional dealers. IVD companies may have to manage a large number of local dealers, but they should remember that all sales are local.

Carl McEvoy is a partner at the market research firm McEvoy and Farmer (Seattle). He can be reached at carl@ mcevoyandfarmer.com [9].		Michael Farmer is a partner at the market research firm McEvoy and Farmer (Seattle). He can be reached at michael@ mcevoyandfarmer.com [10].