China’s in vitro diagnostic (IVD) market has experienced significant growth in the past 5 years. Yet, it still has plenty of room to continue growing. With the world’s largest population of 1.382 billion people and 58% of its citizens living in urban areas, the country’s CAGR is expected to be 15% for 2017 – 2021. Although China is home to one fifth of the world’s population, the Chinese market for IVD reagents in 2016 was approximately US$2 billion, representing only 3% of the global market. Despite slower growth in the upcoming years for the Chinese economy as a whole, a more affluent middle class and a health system looking towards preventive strategies, the diagnostic market will continue to grow rapidly.
China is in a unique position as it deals with chronic diseases associated with developed countries (e.g. diabetes, cancer, and hypertension) while it also battles diseases associated with developing countries (e.g. hepatitis B and C virus and tuberculosis).
Approximately one third of IVD sales in China are immunoassays. This sector is expected to be the largest sector of the market for the next few years. Clinical chemistry encompasses about a quarter of IVD sales, making it the second largest sector.
The 2000s experienced a surge in domestic competitors entering the Chinese market. This did not significantly impact MNCs as they continued to enjoy dominance in the marketplace. Most of the domestic companies that formed during this time sought the low-hanging fruit, such as developing rapid tests, immunoassays or focusing on reagents. This allowed for them to penetrate lower level hospitals. China’s hospitals are rated at the levels I, II, and III, with each level further rated as either A, B, and C. Class III A hospitals are considered to be the best. These hospitals are well funded and actively seek out the best equipment and reagents. Therefore, foreign companies such as Roche and Abbott maintained market share by offering easy-to-use, fully automated diagnostic systems.
Post 2010, the Chinese domestic market began to evolve. The low hanging fruit was more difficult to compete over, and companies sought to penetrate the market nationally. Companies began to develop their own automated systems for Class III hospitals while developing semi-automated systems for Class I and II hospitals. The foreign companies took a big hit in market share as the domestic companies became more competitive. In a field with thousands of registered domestic diagnostic companies, key players began to emerge. One of the earliest companies to rise to international standards is the Shenzhen-based company called Mindray. Mindray manufactures medical equipment and diagnostics.
Distribution within China is complex as each hospital routinely performs laboratory tests in house. Foreign companies typically struggle to reach the second and third tier cities due to the complexity of the distribution network. Instead of trying to reinvent the wheel, some foreign companies are looking to expand into the market by acquiring Chinese companies. For instance, when Medtronic wanted to expand its network for medical devices in 2012, they acquired China Kanghui Holdings for US$816 million. This move allowed for Medtronic to piggyback on Kanghui Holding’s distribution network that at that time covered greater than 80% of China’s Class III hospitals and 30% of its Class II hospitals.
A wheel and spoke business model incorporating commercial laboratories is slowly taking root in order to ease the workload for the hospitals. Yet, commercial laboratories currently only share 2% of the IVD market. There is no LabCorps of China yet. Although, within this sector of the market, KingMed Diagnostics is positioning itself to be just that as it is currently the largest independent clinical laboratory in China. KingMed Diagnostics, ADICON, DIAN Diagnostics, and DAAN Gene together control approximately 70% of the independent clinical laboratory market share in China.
Betting on the Future
China realizes that it has entered the diagnostic market late. However, it has not been shy in its attempts to catch up, particularly in genetic and cancer testing services. China already owns a significant percentage of the world’s next-generation sequencers. China currently occupies 20 – 30 percent of the world’s sequencing capacity. This market sector offers plenty of opportunities for foreign and domestic companies. BGI is at the forefront when it comes to the domestic market. This year, they are utilizing sequencing technology from its 2013 acquisition of Complete Genomics for the first time. BGI states is has further developed the technology and will start evaluating this in its internal research projects later in 2017. Rival companies in China have been emerging. Companies looking to rival BGI’s dominance include Novogene, Yikon Genomics, WuXi NextCode and Berry Genomics. Berry Genomics largely utilizes Illumina’s machines. Illumina continues to enjoy comfortable profit margins within China. As a global leader, many laboratories look to Illumina when purchasing machinery. Although more competition is entering the arena, BGI still claims to have the world’s largest sequencing capacity and remains bold as it stated in early 2017 that it is shooting for a “US$100 genome.”
The market is being driven by a US$9.2 billion, multi-year precision medicine initiative by China in response to the United States’ similar initiative. This is also helping push forward more advanced diagnostics. The diagnostic market for oncogenes is gaining momentum. China has approximately 5% of the global market for cancer testing services. The growth in this field has spawned a number of servicing companies looking to capitalize on this heated market space. There are restraints though as many of these companies offer private services that are usually difficult to receive public insurance reimbursement. China is continuing to reform its insurance policies and seeking to allow reimbursement for accredited private providers. China’s hospitals are beginning to roll-out genetic testing technology to approximately 100 hospitals. Noninvasive prenatal screening has been the most widely performed test; however, cancer tests are increasing rapidly. In 2021, sequencing services as a market is anticipated to be valued at US$1.5 billion, with the submarket for clinical sequencing services for cancers valued at US$437.1 million.
The Chinese diagnostic market offers opportunities as it matures. Government reforms are allowing for novel devices to enter the marketplace at a more accelerated pace. Regulators are increasing oversight on medical institutions while Beijing also looks to the private sector to ease the burden for the public sector.