China healthcare exports need marketing, quality push after acquisitions: L.E.K.

Shanghai-founded MicroPort, or fellow China-based Mindray Medical ($MR), are not exactly household healthcare names--but along with other players they are China's leading device and healthcare service firms abroad and are a growing competition to multinational and local companies.

Joined by names such as Shenzhen-based BGI, Kanghui Medical Innovation of Jiangsu, the companies form part of the new backbone of health care products exported from China that grew at a clip of 18% annually to reach $12.8 billion in 2014, according to an article published in the Nikkei Asian Review by L.E.K.'s Shanghai-based arm.

Of particular note, according to Helen Chen, head of the China life science practice and co-head of the China practice of L.E.K. and colleague Stephen Sunderland, a big part of the story of the exports is the growing reach into emerging markets --much of which was driven by acquisitions of Western firms, or vice versa.

L.E.K. China life science head Helen Chen

"Mindray gets almost 45% of its sales in emerging markets other than China," the authors noted. "The Shenzhen-based medical device provider became the third largest company in the patient monitoring devices sector after it acquired Nasdaq-listed Datascope in 2008."

Later this month, a management-led offer could see Mindray leave the public markets.

L.E.K. said that like Mindray, MicroPort got a boost through buying U.S.-based OrthoRecon from Wright Medical ($WMGI) of the U.S. while BGI, the top genomic center for high throughput sequencing bought California's Complete Genomics. Both deals happened in 2013.

On the flip side Kanghui was bought by U.S.-based Medtronic ($MDT) the same year, allowing both firms to expand into new sales channels, L.E.K. noted.

But L.E.K. said that any advantage based on cost for these firms will not be enough--with quality a prime determination of who wins a tender.

Citing a study it carried out of physicians and distributors, L.E.K. noted that when asked about medical device brands from multinationals medical technology companies, local and Chinese firms--a wider insight could be drawn.

"Not surprisingly, physicians and hospital administrators in most countries view multinational brands as benchmarks in terms of quality and reliability. To compete with these brands, Chinese producers would have to establish an extensive track record and demonstrate their safety and reliability over time," L.E.K. said.

"However, physicians and market participants are generally positive toward Chinese brands in relation to local competitors because they see a need for products that provide adequate quality at a reasonable price. These characteristics play to traditional Chinese strengths, although our results suggest that while Chinese brands are widely perceived to be competitive with local brands on price and quality, they are viewed considerably less favorably on value and reliability."

Overcoming that perception, L.E.K. said means establishing a commitment to quality--as well as better marketing--which has proven to be a major challenge.

"Unfortunately, too many Chinese companies leave their international markets to their local distributors and express limited interest in establishing strong, long-lasting, quality-product brands," the authors write.

"This may be because many companies that have chosen to explore international markets are relatively small and focus only on the incremental revenue they can gain by exporting."

Still, the authors note, for both Chinese pharmaceutical and medical device companies the new connections abroad are changing the pitch, and "it will be only a matter of time before Chinese health care brands will be as strong in the U.S. and Europe as their counterparts in consumer electronics."

- here's the article in the Nikkei Asian Review