Medtech volume-based procurement update and responses

On March 2, 2023, Zimvie announced plans to remove its spine business from the China market—an announcement that would have been unthinkable five years ago—due to continued revenue and margin pressures. The China medtech industry continues to face significant disruption through the rollout of volume-based procurement (VBP), a tender policy that puts a significant portion of the China market’s volume up for tender in exchange for lower prices. It has left many medtech multinational companies (MNC) wondering how they should adapt existing go-to-market models and whether they should explore new models, such as local partnerships, moving forward.

VBP continues to expand in scope with product categories. While VBP initially focused on commoditized products with strong local alternatives, VBP has now pushed into categories that were previously viewed as not feasible for VBP tenders, such as electrophysiology for cardiology and immunoassays for IVD.

At the same time, as VBP expanded into areas with a strong MNC presence and differentiation, we also have seen a moderation in price cuts. ZS analysis comparing the average VBP tender price cuts relative to the estimated MNC share indicates that stronger MNC share is inversely correlated to the magnitude of price cuts.

In March 2022, we predicted VBP would inevitably lead medtech players to streamline their commercial organizations and resources, following the footsteps of many of their pharma peers. In addition, there would be a shift toward the commercialization of new products and portfolio expansion. We have generally seen this trend emerge, though companies differentiated their operational adjustments on the magnitude of VBP and their pipeline opportunities.

Clients continue to ask us what impact VBP will have on their commercial team investment. We generally recommend evaluating their portfolio along three dimensions:

• Price cut and margin impact: As price cuts have moderated in certain categories, there remains sufficient margin to continue promotion for VBP products and potentially capture the upside of volume gain due to additional access.
• New product pipeline: For companies with a significant portfolio and overlapping customers, there often is a strong case to maintain that presence in the specialty and bridge toward the new product with strong growth and margin opportunity.
• VBP allocation rules: Finally, not all VBP tenders are designed equally. While some tenders are volume-based in name, they often continue to require manufactures to maintain a team with secure access at the hospital level for implementation.

Take Company X, for example. It had multiple portfolios affected by VBP, and its responses have been different based on the magnitude of its price cut, strength of its pipeline and implementation requirements. Take portfolio category A, which experienced a price cut of approximately 90% and a limited pipeline. Company X downsized its field force by 80% to 90%, retaining only managerial functions to focus on distribution management. On the other side of the spectrum, portfolio category D experienced moderate price reductions of approximately 40% due to strong MNC differentiation. It maintains a field force with some streamlining of teams, in part to fulfill future hospital-level servicing requirements. Portfolio category D also has taken into consideration the several innovative pipeline launches that will require field force pull-through.

We have also observed a growing appetite from major MNCs to explore partnerships with local medtech companies. These partnerships are increasingly viewed as a measure to address the multitude of challenges brought by VBP, including alleviating margin pressures by tapping into a local partner’s lower cost structure and offsetting revenue loss in an accelerating manner by in-licensing or co-developing a product. In addition, it’s also viewed as a way to hedge its portfolio against the growing risk that “buy local” policies such as Document 551 (i.e., Auditing guidelines for Government Procurement of Imported Products [政府采购进口产品审核指导标准]) jointly issued by the Ministry of Finance of the People’s Republic of China and the Ministry of Industry and Information Technology of the People’s Republic of China in 2021 and other applicable regulations pose to imported products.

Take IVD, for example. We’re seeing increasing interest in a partnership with local players to de-risk its business model, improve margins, diversify its revenue base and maintain hospital access.

VBP is increasing the revenue and margin pressure MNCs face and forcing them to rethink their go-to-market models in China, including options that were previously unthinkable. While China remains a “must-win market” for the majority of MNCs, we should expect business models to continue to evolve and adapt.

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