1、CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey&Company is strictly prohibitedNovember,2023China MedTech:Value creation in time of market uncertainties McKinsey&Company2DisclaimerThe information included in this document does not contain,nor is it for the

2、 purpose of constituting,and cannot be construed as,policy,investment,legal,tax,accounting or other regulated advice.Statements of expectation,forecasts and projections relate to future events and are based on assumptions that may not remain valid for the whole of the relevant period.Consequently,th

3、ey cannot be relied upon,and express no opinion as to how closely the actual results achieved will correspond to any such statements of expectation,forecasts or projections.This material is based in part on information that has not been generated by McKinsey&Company,and has not been subject to our i

4、ndependent verification and McKinsey.While we believe this information to be reliable and adequately comprehensive,we do not make any representations or assurances about its accuracy or completeness2McKinsey&CompanyConfidential and ProprietaryMcKinsey&Company3Contents2022-23 in the mirrorChina MedTe

5、ch:Value creation in time of market uncertainties Closing thoughts3McKinsey&CompanyConfidential and ProprietaryMcKinsey&Company42022-23 in the mirror:Eight key trends1Strong fundamentals;shaky economic recovery2MNCs reconfiguring their China strategies5Changing procurement behaviorsIncreasing collab

6、oration between MNC and local63Persistent cost containment,more rational4Globalization as a prioritywith varying progress7Accelerating innovation,with commercialization challengesInvestment gradually slows down8Confidential and ProprietaryMcKinsey&Company51.Strong fundamentals;shaky economic recover

7、ySource:IMF,S&P Global,Oxford Economics,OECD,NBS,UN World Population Prospects 2022,McKinsey Global Institute analysisChina Real GDP growth 2000-2028,PercentPopulation over 55 years old#of individuals,Mn6719211,0102812030E201020222022253378483201020222030E+105+12530691215052000202810152025Historical

8、S&P GlobalOxford EconomicsIMFOECD55+population as%of total50%65%71%84%China19%27%34%Total urban population in China#of individuals,MnUS25%30%32%Share of total populationChinaUSXXXXConfidential and ProprietaryMcKinsey&Company6Price drop cannot guarantee total volume uptake though category specifics r

9、emainFundamentals keep driving robust natural market growthVolume impactBreadth of category47 out of top 50 hospital spending categories are impactedTender formatProvincial alliance VBP is the mainstream(15+in 2022)Acts as“testing ground”to manage complex tenders Tendering rulesPrice drop is not the

10、 only factorQuality and supply are being more emphasized beyond price dropPrice drop level50%-80%in general as to hospital price dropPrice drop of some innovative categories is lower than previous commoditized products(e.g.,30-50%for EP)2.Persistent cost containment measures,becoming more rationalCo

11、nfidential and ProprietaryPotential future scenariosCost containment mechanism is evolving,e.g.,pilot of VBP-DRG interlock in BeijingVBP scope has expanded and rules become more rationalized Reward to innovation expected to be improved,e.g.,increasing procurement budget for innovative equipment and

12、AI diagnostic systemSource:Press search,regional announcements of VBP result,regional Health Care Security Administration,McKinsey analysis(Oct.23)A higher bar of innovation is expected to be applied to clinically differentiated products,e.g.,eligibility of DRG-exempted innovative products is strict

13、ly definedMcKinsey&Company73.Changing procurement behaviorsConfidential and ProprietarySource:Press search,regional announcement of public tendering and procurement,McKinsey analysis(Oct.23)Observations of procurement changes GTM model upgrade could be considered GTM efficiency improvement,e.g.,lean

14、er distribution structure Cross-portfolio key account model is becoming more important Tiered portfolio could help address various customer segments Upskilled or new capabilities are expected to be crucial Non-clinical stakeholders and key accounts engagement Health economics Clinical sales instead

15、of relationship salesChanging decision makers,more govt-led centralized bidding in capital equipment and VBP in consumable/IVDIncreasing demand for cost effective products and solutions,driven by cautious spendingMore efficiency and transparency during procurement process,e.g.,AR improvement,unified

16、 codingPotential implications to MedTech playersMcKinsey&Company84.Innovation is accelerating in terms of quantity,quality and speedConfidential and ProprietarySource:Press search,NMPA,company official website,McKinsey analysis(Oct.23)1144620192021222023 H1#FDA breakthrough designation products from

17、 Chinese local MedTech playersLocals are narrowing down the launch gap vs.MNCs in selective categories with development agility year launch advancement for PFA(Pulsed Field Ablation),2023-24E1years launch gap for RFA(Radiofrequency Ablation),before 201010vs.Innovation in“speed”Innovation in“quality”

18、#green channel approved products in 2022 vs.2020 x2Innovation in“quantity”McKinsey&Company91505301020352540Year 11Year 2Year 3Year 4Year 51.Was set as Year 1 for China(first approval in early 2017);2012 set as Year 1 for US(first approval in late 2011)2.For eligible patient onlySource:Press search,D

19、RG,CapitalIQ,McKinsey analysis(Oct.23)Confidential and ProprietaryTAVR launch curve comparison between China and US,#Total TAVR implanted in KUSChina8%1%Penetration rate of Year 52China is trailing in commercial uptake compared to developed countries2 companies granted approval in US till Year 5,com

20、pared to 6 in ChinaLocal innovative companies need more time to generate healthy financials EBIT margin SG&A to revenue R&D to revenue(80%)85%30%(6%)45%15%GlobalLocalSimilar challenge observed in other categories,e.g.,cardiovascular10 years after the companies first product launched (Innovative list

21、ed diabetes care management companies as an example)4.Local innovators face potential challenges in commercializing innovationsMcKinsey&Company105.MedTech MNCs are reconfiguring their China strategiesSource:Press search,company release,McKinsey analysis(Oct.23)Four courses of action for MedTech MNCs

22、 to consider in ChinaCurrent value at stake in ChinaIncl.China revenue/profit/growth to global,MedTech MNCs value chain in China,etc.Future Right to win in ChinaIncl.product differentiation and innovation,level of localization,value chain capability,and cost competitivenessHigh LimitedHigh to Critic

23、alLow to ModerateRenew commitmentStay heavily vested in China and double-down capital investments as necessaryDiversifyRefocus presence or streamline China operations by reallocating resourcesRationalize exposureLimit stake in China through local partnership,or exitAccelerate selectivelyRamp-up sele

24、ctively in segments with a structured advantage Potential implications to MNCsILLUSTRATIVEConfidential and ProprietaryMNCs have urgency to evaluate,and more importantly,to decide on its China strategy at both corporate and business segment levelsMaintaining access to Chinas upsides while managing co

25、mplexity will be the imperatives for MNCsPartnership is a potential strategic move in multiple quadrants Renew commitment:acquire local identity and ecosystem engagement Accelerate selectively:leverage local partnership to enter/expand market Diversify:license-out or leverage local distribution part

26、nershipMcKinsey&Company1105001,0001,5002,0002,5003,000-50510152022 China MedTech revenue(Mn USD)2019-2022 China revenue CAGR(%)5.MNC MedTech performance in China diverges,opportunity for growth remains for different scale of companiesChina 19-22 growth global 19-22 growthSource:Press search,company

27、release,McKinsey analysis(Oct.23)Confidential and ProprietaryBusiness performance of selective MedTech MNCs in China11.Only include top 20 global MedTech companies with public available China revenue in both 2019 and 2022;Eight companies in total are included in the analysisChina revenue contributio

28、n to globalRelative size=1%Scale matters in China but small/mid-scale MNCs with innovative portfolio and localization commitment can also enjoy fast growth Leading MNCs China growth can still outpace global despite challenges in 2022 due to COVID McKinsey&Company126.Collaboration between MNCs and lo

29、cals is on the riseConfidential and ProprietarySource:Press search,McKinsey analysis(Oct.23)20192021222023 H120-30407060-7060-70#Collaboration announced between leading MNCs and locals11.Leading MNC include top 15 MNCs,locals defined as Chinese counter part incl.Chinese MedTech,digital players,hospi

30、tals,govt etc.;Incl.collaborations with public news availableIncreasing number of collaborations between MNCs and localsNot ExhaustiveTrends of collaboration in recent years40%collaborations include co-R&D or enhance innovation capability as one of the major goals in 2022,compared to 25%in 2019Examp

31、le as both financial acquisition and strategic cooperation;with deep collaboration along value chain/across regionsMore focus on R&D and innovationStronger and more comprehensive bundlingMcKinsey&Company137.Globalization as a priority,with varying progressConfidential and ProprietarySource:Wind,Pres

32、s search,McKinsey analysis(Oct.23)1.Selecting companies with publicly available 2023 H1 and 2019 H1 overseas revenue,excl.distributors;Ranked by 20223 H1 revenueOverseas revenue contribution for top 10 local listed MedTech companies1,%-5%5%-8%4%-3%-6%-16%29%16%21%2023 H1 overseas revenue contributio

33、n change compared to 2019 H1,%Key learnings of successful globalizationUnderstanding fundamentals about overseas markets solidly and prioritizing across markets smartlyIdentifying the right commercial model and sourcing the right partner3623711184949948564Establishing operational and organizational

34、efficiency with robust talent supportNOT EXHUASTIVEMcKinsey&Company141.Include deals captured in IT JUZI database24520721633024481202120192018202220202023 H1 2218.PE/VC activity slows down but corporate funds are becoming actively establishedSource:IT JUZI,Press search,McKinsey analysis(Oct.23)Refer

35、ences to specific products or organizations are solely for illustration and do not constitute any endorsement or recommendation;Confidential and Proprietary Difficulty in new fund raising Poor portfolio performance especially in profitability Challenges of exit Medtronic launched China Venture Fund

36、II1.2 Bn RMB investmentMindray became the LP of leading healthcare venture FirstRed20 IVD companies set up corporate fund#PE/VC transactions in MedTech in Greater China,2018 2023 H11Selective examples of MedTech companies establishing corporate fundNOT EXHAUSTIVE14McKinsey&CompanyFactors co-leading

37、to the MedTech PE/VC new normalMcKinsey&Company158.IPO number and valuation decrease;listed companies also have challenges in scaling up1.For MedTech companies(including upstream and downstream,e.g.,Dian Diagnostics,Vazyme,iRay);listing on Shanghai Stock Exchange(STAR included),Shenzhen Stock Exchan

38、ge,Beijing Stock Exchange,Hongkong Stock Exchange and Nasdaq;2.IVD is categorized if IVD business(including life science,e.g.,mass spectrometer)has revenue contribution 50%,including IVD manufacturer,supplier,distributor and life science player;3.Incl.STAR marketSource:Wind,CIQ,Press search,McKinsey

39、 analysis(Oct.23)Confidential and Proprietary4471015265137124102062018192021222023 H16142243283#MedTech companies newly listed by year1IVD2High value consumablesOthersMedTech valuation change by year,P/S ratio at year end as example20181920212022010203040Innovative Chinese MedTech companies have str

40、uggled to build scale#HKEX 18A listed MedTech companies as example(total#as 16)2022 revenue$100 mn1Latest market cap$1 bn3High value consumablesMedTech othersIVD2All companies listed in Shanghai Stock Exchange323%42%44%15%XXDecrease%2022 vs.2021McKinsey&Company16Contents2022-23 in the mirrorChina Me

41、dTech:Value creation in time of market uncertainties Closing thoughts16McKinsey&CompanyConfidential and ProprietaryMcKinsey&Company17MedTech companies face challenges in creating valueConfidential and Proprietary2-103All MedTechs2Small-cap and midcap,high-growth MedTechs3Large-cap diversified medtec

42、hs4S&P 500=62020-231-12-23-6All domestic MedTechs6Small cap MedTechsLarge cap MedTechs%of companies generating positive TSR23%8%28%Source:S&P Global Market Intelligence,Press search,McKinsey analysis(Oct.23)Annualized total shareholder returns(TSR)CAGR,%TSR CAGR,%For global listed MedTechsFor China

43、listed MedTechsLess than 1/4 Chinese listed MedTechs managed to achieve positive TSR growthBifurcation remains in value creation Large range of TSR from-70%to+80%High TSR companies observed in almost all sub MedTech segments,e.g.imaging,implants,IVD,home use and low value consumables2020-235MNCs in

44、China also facing challenges,e.g.,share loss,decreasing in competency compared to localChallenges of MedTechcompanies faced in value creationScalability and profitability,the“invest to grow mode”is no longer sustainable and investors increasingly value profitabilityRationalized expectation and rewar

45、d on innovation/small size MedTech,and the historical“bubble”on valuation is hard to replicate in future1.As of May 2023;2.The 100 largest publicly traded MedTech companies by market cap as of May 20,2023.;3.All publicly traded MedTech companies with a market cap between$0.1 billion and$10.0 billion

46、 and with growth expectations in excess of 10%CAGR.;4.The 30 largest publicly traded MedTech companies by market cap with multiple franchises contributing at least 20%of sales,as of May 20,2023.5.The first to fourth quantiles are ranked according to the market value in July 2023.The calculation is b

47、ased on the market value at the end of the IPO year to the end of the range(for example,for a company with an IPO in 2021,calculate the TSR of the company in the range from the end of 2021 to 2023),by July 2023 6.For all listed China MedTech companies(including upstream and downstream,e.g.,Dian Diag

48、nostics,Vazyme,iRay);listing on Shanghai Stock Exchange(STAR included),Shenzhen Stock Exchange,Beijing Stock Exchange,Hongkong Stock Exchange and NasdaqMcKinsey&Company1818McKinsey&CompanyLeaders in China could consider pursuing five levers to enhance value creationActive portfolio management and ex

49、pansion1Launch excellence 2Go to market model transformation3Operation excellence4Global business build 5Confidential and ProprietaryMcKinsey&Company191.MedTech companies could consider active portfolio management to generate higher shareholders return Avg excess TSR1,%Portfoliorefreshrate230%1.5%-0

50、.5%3bn RMB);Other COGS expenses include direct labor,mfg.costs and logisticsSource:Company annual reports,WIND,McKinsey analysis(Oct.23)COGSSG&A EnablerCapEx Excellence:e.g.,mega project mgt.for on-time mass production and output ramp-up Productivity ramp-up:e.g.,OEE and processing time optimization

51、Design-to-Cost(DtC):e.g.,clean sheet,spec optimization,in product design excellence to improve COGSProcurement excellence:strategic sourcing and advanced analyticsNeed-based staffing:e.g.,productivity improvement through workflow mappingMulti-variant SC optimization:e.g.,a business optimizer for rea

52、l-time trade-off decision for efficiency,resilience etc.Digital-enabled planning:e.g.,tech/org enablers for multinational order-to-delivery operationsSupply resilience:Business continuity planning(BCP)for potential riskSmart Quality:Digitized Quality System that automates deviation detection,acceler

53、ates corrective actions follow-through and closingDesign-to-Value(DtV):e.g.,competitor tear-downSupply Network design:network for growth,cost,service,and resilienceEnabler for 5-15%product margin improvement10-30%cost saving20-50%supply chain productivity improvementEnablerExample levers in manufact

54、uring/supply chain/quality RevenueImpactConfidential and ProprietaryMcKinsey&Company255.Globalization opportunities vs.challengesGlobalization-an increasingly important strategic move for leading local players With increasing competition and pricing pressure in domestic market,leading locals need a“

55、2ndgrowth engine”Ex-China regions contribute 85%of global market,with unmet needs and under-served by leading MNCs in developing markets(e.g.,SEA,ME,India,LatAm)Challenges ahead in globalization journey In-depth understanding of overseas markets customer needs and tailored GTM model Market access:hi

56、gh registration huddle,brand recognition Value propositions:same quality at lower price?GTM efficiencies:narrow portfolio,broad(direct/indirect)coverage Lack of local talent and global organization governance.47 out of top 50 leading local MedTech stated globalization as a strategic priorityExample

57、unlocks for a globalization strategy Clear globalization roadmap with quick wins Ecosystem partnership in ex-China markets and with domestic players New business models(e.g.,CDMO,govt programs)Localized supply chain and org(“dual circulation”)Deep-dive next pageSource:Press search,company announceme

58、nt,McKinsey analysis(Oct.23)Confidential and ProprietaryMcKinsey&Company265.Globalization ecosystem partnershipPlatform buildAstraZeneca,together with 10+Chinese innovators in medtech,biotech,digital/AI,industry associations and investors,visited government officials,healthcare companies,hospital gr

59、oup heads in Middle East and Brazil for co-developing globalization opportunities Dual circulationBoston Scientific acquired a majority stake in Acotec.Collaborations along value chain include global commercialization,product development and manufacturing for both China and global marketsSource:McKi

60、nsey analysis(Oct.23)References to specific products or organizations are solely for illustration and do not constitute any endorsement or recommendation;Confidential and ProprietaryMcKinsey&Company27Contents2022-23 in the mirrorChina MedTech:Value creation in time of market uncertainties Closing th

61、oughts27McKinsey&CompanyConfidential and ProprietaryMcKinsey&Company28Closing thoughts:What will matter most for MedTech leaders in China1.China remains the second largest and one of the fastest growing markets in global MedTech,but new winning recipes are required2.With continuous price containment

62、,MedTech companies need to act now to transform GTM model for efficiency and conduct active portfolio management for sustained growth 3.MNC MedTech players need to re-assess their future right to win in China and re-confirm the strategic position of China at both corporate level and BU level4.Local

63、MedTech players need to expand product portfolio,double down on globalization,and accelerate new capability building 5.Active ecosystem collaboration(incl.MNCs and locals)to leverage each others competitive advantages will be critical for the success McKinsey&Company28Sources:McKinsey analysis(Oct.2

64、3)Confidential and ProprietaryMcKinsey&Company29For more on China life sciences and healthcareMcKinsey China healthcare leadership team(15 Partners and Associate Partners)202120192020China International Medical Equipment Fair 2023McKinsey IVDGlobalization Roundtable 202320222023Confidential and ProprietaryMcKinsey China Life Sciences Practice leadershipMcKinsey China MedTech Innovation Roundtable 2022McKinsey“MedTech Pulse”publication 2023Confidential and Proprietary