U.S. industry growth depends on emerging markets
As domestic manufacturers experience lower profit margins, a more stringent regulatory environment, and increased pricing pressure, their focus has shifted towards growth in emerging market sales. According to Lucintel, the global market for medical devices will reach $302 billion by 2017. As U.S. device makers look to globalize their sales and tap into emerging markets, a few key export barriers may stand in their way.
International regulatory environment
A trend in developing countries is the adoption of stringent regulatory policies similar to those of developed countries. To increase product quality, safety, and effectiveness, developing countries have misguidedly begun to require burdensome amounts of paperwork before allowing a device to be imported. Manufacturers must spend significant resources to understand the requirements of each country, conduct additional testing, and pay any fees the country imposes. These practices negatively affect pricing models, driving up device pricing and lowering demand.
Many developing countries have a significantly large, aging population. Following this trend, healthcare costs are skyrocketing for these countries. To address these rising costs, developing countries have been reducing reimbursement by creating price caps, mandatory price reductions, and pool reimbursement (reimbursement using a fund with a limited amount versus payments per device). Poor reimbursement significantly deters business, as it drives down ROI (return on investment).
Intellectual property rights (IPR) violations
An increasing problem with doing business in emerging markets is the violation of IPR and the production of counterfeit devices. This is a newly emerged phenomenon, but device makers are facing increasing revenue losses as a result of this practice. IPR violations consist of using patented technologies in producing a competing device—a problem that’s more common with domestic competitors. Counterfeit devices are categorized as replicas using patented technologies. One market where this problem is increasing is China, which doesn’t strongly enforce IPR. These practices drive down ROI and revenues, ultimately affecting valuation.
Effective risk management: Key to emerging market growth
Although the device industry has seen steady growth in developed markets (like the United States, European Union, and Japan), the most promising markets lie in developing countries (notably the BRIC countries—Brazil, Russia, India, and China). Most large U.S. manufacturers have invested significant capital into emerging markets, including Medtronics, Johnson & Johnson, GE, and Stryker. As manufacturers look to capitalize in these markets, the effective maneuvering of these export barriers is key to success.